Unit 6 Flashcards
what is globalisation
the process of interaction and integration among the people, companies and governments of different nations
what are MultiNational Corporations
businesses which have their operations in more than one country
advantages to home country of MNC’s
Creates opportunities for marketing the products throughout the world
creates employment opportunities
aids and encourages economic growth
helps to maintain favourable balance of payments
advantages of MNC’s to host countries
provides employment and training
transfer of skill and expertise
adds to the host countrys GDP through spending
Competition from MNC act as an incentive to domestic producers
extend consmer and business choice in the host country
bring efficient business practices,technologies and standards which influence industry
source of significant tax revenue
disadvantages of MNC’s to home country
they transfer capital from the home country to host country
may not create employment opportunities to home country
they can neglect the home industry and economic development
disadvantages of MNC to host country
domestic businesses may not be able to compete with MNC
may not act ethically or in a socially responsible way
may be accused of imposing their culture
profits earned by MNC may be remitted rather than reinvested
may use tax avoidance measures to reduce the amount they pay
what is free trade
when there are no restriction for trade between economies
advantages of free trade
allows countries to benefit from specialisation
increases consumer choice
increases competition and efficiency
creates new business opportunities
enables firms and economies to benefit from the best workforces,resources and technology
increases economic interdependency
disadvantages of free trade
may reduce opportui
disadvantages of free trade
may reduce opportunities for growth in less developed economies and threaten jobs in developed economies
cause rapid resource depletion
exploitation of workers and their environment
income inequality worsens
what is protection
involves the use of trade barriers by governments to restrict international market access and competition
what are the types of trade barriers
tariffs
subsidies
quotas
embargo
excessive quality standards
explain tariff
indirect taxes imposed on imported or exported goods to discourage consumer demand
explain subsidies
given to domestic producers so that prices for their goods are reduced and demand increases
explain quotas
limit on the number of imports allowed into a country in a given period of time
explain excessive quality standards
imports may only enter a country after extensive quality checks which are costly. foreign producers will be discouraged and imports are reduced
what are reasons for protection
to protect infant/sunset industries
protect strategic industries
limit overspecialization
protect domestic firms from dumping(predatory pricing)
correct a trade imbalance
consequences of protection
restrict consumer choice
restrict new revenue and employment opportunities
can cause cost push inflation
protect inefficient domestic firms
other countries may retaliate with their own policies
what is the foreign exchange rate
the value or price of a currency expressed in terms of another currency
how is foreign exchange rate determined
by the market demand and supply of the currency
when does demand for a currency exist
when foreign consumers want to buy and import goods and services from the country.
overseas companies will buy the countries currency to invest in the country
when does supply for a currency exist
when domestic firms buy foreign currencies to invest abroad/ buy and import foreign goods.
the domestic currency is being supplied abroad
what is the equilibrium market foreign exhange rate
the price at which demand and supply of the currency equals
what does increased supply and decreased demand mean in foreign exhange rate
it causes the exchange to fall
what does decreased supply and increased demand mean in foreign
exchange rate
causes exchange rates to rise
what is specialisation
when a nation concentrates its productive efforts on producing a limited variety of goods and services
what is absolute advantage
when one country can produce more efficiently than others
what is comparative advantage
when a country can produce with a lower opportunity cost
what are the advantages of international specialisation
economies of scale and efficiency
job creation
allows more international trade
revenue for the government
wider markets
consumer sovereignty
disadvantages of international specialization
structural unemployment
overexploitation of resources
threat of foreign competition
risk of overspecialisation
strategic vulnerability
how do changes in demand and exports and imports affect foreign exchange rate fluctuations
when a country’s import value is greater than the export(deficit), more currency is being supplied than demanded. the exchange rate for the currency will fall
if theres a surplus, the exchange rate will rise
how does inflation cause foreign exchange rate fluctuations
if the inflation in a country is higher than that of other countries, the price of that countries goods in the international market will be higher
the demand for the country’s goods will fall so currency demand will fall, causing a fall in exchange rate
how do changes in interest rates affect foreign exchange rate fluctuations
if a country’s interest rate rises, overseas residents may be keen to save or invest money in that country
demand for the currency will rise and the exchange rate will rise
if interest rates fall below that of other countries, currency will fall in value
How do MNC’s cause foreign exchange rate fluctuations
investment in overseas production plants require the use of foreign currency
how does speculation cause foreign exchange rate fluctuations
foreign exchange traders and investment companies move money around the world to take advantages of higher interest rates and variations to make a profit. can cause exchange rate fluctuations
if there is lack of confidence, demand will fall
how does government intervention cause foreign exchange rate fluctuations
central banks can sell reserves in the foreign exchange market to increase its supply and cause a fall in its value
what are the consequences of foreign exchange rate fluctuations
fall in the exchange rate causes import prices to rsie and export prices to fall
a rise in the foreign exchange rate causes import prices to fall and export prices to rise
when will a fall in foreign exchange rate improve the trade balance
when the PED is elastic , a fall in foreign exchange rate will improve the trade balance by reducing the deficits as exports rise relative to imports
when is a rise in the foreign exchange rate worsen the trade balance
when the PED is inelastic, a rise in the foreign exchange rate will worsen the trade balance as imports will rise relative to exports
what is a floating foreign exchange rate
an exchange rate that is determined by market demand and supply conditions
will fluctuate regularly
what is appreciation of currency
the rise in the value of one currency against others, on a floating foreign exchange rate
what is depreciation of currency
the fall in the value of one currency against others is known as depreciation
what are the advantages of floating exchange rate
automatic stabilization( any disequilibrium in BoP will be fixed by exchange rate)
frees up internal policy
insulated from external changes
government doesnt need to hold too much foreign reserves
what are the disadvantages of floating exchange rate
uncertainty(investor lose confidence)
lack of investment( due to uncertainty)
speculation
lack of discipline( short term problems may be ignored until a crisis)
what is a fixed foreign exchange rate
exchange rate that is fixed and controlled by the central bank
they will intervene in the market by buying and selling its currency in the foreign exchange market
what is devaluation
a deliberate fall in the value of a fixed exchange rate
what is revaluation
a deliberate rise in the value of a fixed exchange rate
advantages of a fixed foreign exchange rate
certainty
stability encourages investment
keeps inflation low
Balance of Payments stability
disadvantages of fixed foreign exchange rates
can conflict with other macroeconomic objectives
less flexibility
risk of overvaluation or undervaluation
what is the Balance of Payments
the balance of payments is a record of all the monetary transactions between residents of a country and the rest of the world over a given period of time
What are the components of the Balance of Payments
current account
capital account
financial account
what does the current account record
visible trades(goods)
invisible trades(services)
net income recieved or made in payment for the use of factors
net current transfers(involves payments for non productive activities)
what is a current account deficit
when the financial outflows in the current account exceed the financial inflows
cause of a current account deficit
higher exchange rates( currency is overvalued, imports will be cheaper which increases imports. exports will become uncompetitive and there will be a fall in exports)
economic growth
decline in competitiveness
inflation
recession in other countries
borrowing money
consequences of a current account deficit
low growth
unemployment
lower standards of living
capital outflow
loss of foreign currency reserves
increased borrowing
lower exchange rate
what is the effect of low export growth
unemployment
how can current account deficits be corrected
nothing because a floating exchange rate will correct it
contractionary fiscal policy
contractionary monetary policy
protectionist measures
what is a current account surplus
when exports are more than imports
what are the causes of a current account surplus
improved competitiveness
growth in foreign countries
high foreign direct investment
depreciation
high domestic savings rate
closed economy
consequences of a current account surplus
economic growth
appreciation of currency
employment
better standards of living
inflation(demand pull)
correcting a current account surplus
do nothing because a floating exchange rate will correct
expansionary fiscal policy
expansionary monetary policy
remove protectionist measures
