WTO Flashcards
What is the aim of WTO?
To liberalise trade.
What are the WTO principles?
Countries cannot discriminate between their trading partners. For example, a reduction in a tariff for one country must be extended to all.
Imported and locally produced products must be treated equally once the foreign goods have entered the market. This encourages fair competition between domestic and foreign goods.
Freer trade through negotiation. Lower trade barriers (customs duties/traffic, quotas, import bans) to encourage free trade.
Predictability: through binding and transparency; agreements not to a raise trade barriers give business a clearer view of their future opportunities. This predictability and stability fosters investment.
Encouraging development: Developing countries receive special assistance and trade concessions.
What are the conflicts between the WTO and trade blocs?
WTO promotes economic development, yet some trade blocs discriminate against developing countries (EU and agriculture).
Word trade becomes fragmented as excluded members retaliate and create their own trade bloc. This conflicts with the most favored nation principle which outlines tariff reduction should extend to all nations.
What factor influence ToT?
Inflation: exports become more expensive, so although terms of trade improves, the economy is actually damaged by inflation.
Economic growth abroad can lead to higher demand for UK exports. Rapid Chinese growth 2000-08 led to commodity prices rising.
Exchange rates: External value of the currency.
Primary product dependency: Countries which are dependent upon exporting commodities. Commodities usually have price volatility, leading to rapidly improving/worsening terms of trade. 74% of Zambia’s exports of copper.I
Productivity: If UK productivity rises, then cost of production fall. Reducing export prices.
What does the impact of ToT depend on?
(PED)
PED and the trade balance (X-M): when import and export prices change, the overall value of (X-M) depends upon the response of demand.
If UK exports are elastic, and the price increases. then the trade balance will decreased.
If the price of exports rises, the quantity demand will fall by a proportionally a large amount.
This results in the overall value of the UK’s export falling.
Therefore, the overall impact of a changing terms of trade depend upon the PED of imports and exports.
What does the impact of ToT?
(unemployment and GDP)
If an improving trade was caused by a rise in export prices, then this can lead to fall in the volume of exports sold. This can lead to fall in economic growth and a rise in unemployment, for workers employed by exporting firms.
What does the impact of ToT?
(unemployment and GDP)
Inflation: If the terms of trade worsens, as a result of increasing import prices, then cost-push inflation can rise. As many raw materials and component are imports.
Alternatively, if the price of exports increases and the terms of trade improves, then this could lead to an improvement in (X-M), thereby leading to an improvement in AD which stimulates economic growth. Despite this, economics growth can lead to demand pull inflation.
What is a monetary union?
When two or more states share the same currency. A single currency requires a common monetary policy throughout - the European Central Bank sets interest rats for all Eurozone member states.
Crucially, member states do still set their own fiscal policy (government spending and taxation).
What are the benefits of monetary unions?
Price transparency: easier to compare to compare prices.
Exchange rate certainty: no cost fluctuations, increasing confidence - important for investment.
This would lead to higher FDI, more firms would invest in a country, where many of their customers would also use the euro (there is total price transparency).
Lower transaction costs: exchanging currencies have been estimated at 0.4% GDP.
What are the disadvantage of a monetary union?
Loss of monetary policy control: most significant factors - no control over interest rates.
Changeover costs: changing accounting systems, new shop labels, new payment systems.
UK housing market structure: large amount of house ownership in UK, with variable mortgages. The UK is therefore very sensitive to interest rates. In the UK, 63% of the population ‘own’ their house (higher than average and many have mortgages with a variable interst rate. This means a small increase in interst rates has a big effect on consumer spendin.g
Eurozone debt crisis: Greece defaulted on their loans.
Why does a monetary union not suit all member states?
If member states cannot control their own interest rates or QE, then a ‘one size fits all’ approach does not accommodate different economies. For example, if one member has high inflation - they would want high interest rates. In contrast, if a member had weak growth, they would want to lower interest rates.
Why does QE not suit certain housing market structures?
UK housing market structure: large amount of house ownership in UK, with variable mortgages. The UK is therefore very sensitive to interest rates. In the UK, 63% of the population are ‘own’ their house (higher than average and many have mortgages with a variable interest rate. This means a small increase in interest rates has a big effect on consumer spending.
EU house ownership varies significantly, but on average below - Germany 40%. Rents tend to be more static compared to mortgages.
