Y2 - International economies

Question 1

Define globalisation

Answer 1

The increased integration between countries; economically, socially and culturally

Question 2

What are the characteristics of globalisation?

Answer 2

• More trade
• More FDI
• More capital flows

Question 3

Define FDI

Answer 3

When a company in one country establishes operations in another country and acquires physical assets/stakes in overseas countries

Question 4

Define capital flows

Answer 4

The movement of money between countries due to investment flows in/out of countries around the world

Question 5

What are the causes of globalisation?

Answer 5

• Lower transport costs
• Less communication costs (internet)
• Less trade barriers
• More trading blocs

Question 6

What are the negative impacts of globalisation?

Answer 6

• Country with no competitive advantage = relies on imports = deterioration of current account of BoP
• Also more inequality

Question 7

Define transfer pricing

Answer 7

When a TNC manages accounting of transactions to show highest profits in countries with lowest corporation tax

Question 8

What are the impacts of globalisation (6 groups)

Answer 8

• Country = more trade
• Governments = more corporation tax (but transfer pricing)
• Producers = economies of scale and more competition (but must remain competitive)
• Consumers = lower prices/more choice (higher surplus)
• Workers = more opportunities (but more inequality)
• Environment = more pollution (negative externalities)

Question 9

Define absolute advantage

Answer 9

When a country can produce more of a product than another country with the same amount of resources
- Can be influenced by specialisation/skill of labour/capital

Question 10

Define comparative advantage

Answer 10

When a country can produce more of a product at a lower opportunity cost than another country (relative advantage at producing product)
- Countries should specialise in comparative advantage, regardless of absolute advantage

Question 11

What are comparative advantage law assumptions?

Answer 11

• Constant returns to scale (PPF straight line)
• No transport costs
• No trade barriers
• Perfect mobility of FoP
• All externalities are ignored

Question 12

What are the limitations of the law of comparative advantage?

Answer 12

• Free trade not necessarily fair trade (rich countries exploit monopsony power- Based on unrealistic assumptions
• If opportunity costs the same = no benefit from specialisation and trade

Question 13

What are the advantages of specialisation and trade?

Answer 13

• Higher living standards
• Lower prices and more choice
• Economies of scale
• Domestic monopolies have less output

Question 14

What are the disadvantages of specialisation and trade?

Answer 14

• If a country is uncompetitive = trade deficit
• Dumping = surplus is dumber (problem for domestic firms)
• Unemployment
• Unbalanced development - also sometimes no diversity of economy
• TNCs become global monopolies

Question 15

What are some problems for developing countries?

Answer 15

• Infant industries unable to compete
• Monopsony power of firms in developed countries = producers have to accept lower prices
• Declining terms of trade if dependant on primary products

Question 16

Define sectoral imbalance

Answer 16

An imbalance in the 3 main economy sectors (primary, secondary, tertiary)

Question 17

What are the factors influencing patterns of trade?

Answer 17

• Comparative advantage
• Trading blocs
• Relative exchange rate
• More importance of emerging economies as trading partners
• Growth in exports of manufactured goods

Question 18

Define terms of trade

Answer 18

Measure the price of a country’s exports relative to the price of its imports

CALCULATION = index of export prices/index of import prices x100

Question 19

What are the factors influencing terms of trade?

Answer 19

• Rate of inflation (relative to other countries)
• Productivity (relative to other countries)
• Tariffs
• Exchange rate

Question 20

Define trading bloc

Answer 20

Groups of countries that agree to reduce or eliminate trade barriers between themselves

Question 21

What are the 4 types of trading bloc?

Answer 21

1. Free Trade Area (barriers removed between members, but individually against non-members) = NAFTA
2. Customs Union (free trade and common external tariff) = EU
3. Common market (same as CU + FoP free movement) = ECC
4. Monetary union (same currency) = Eurozone

Question 22

What are the disadvantages of regional trade agreements?

Answer 22

• Trade diversion (away from low-cost producers outside bloc)
• Distorts comparative advantage

Question 23

What are the advantages of regional trade agreements?

Answer 23

• Trade creation
• More FDI
• Higher economic power

Question 24

Define trade diversion

Answer 24

Occurs when trade is diverted from a more efficient exporter towards a less efficient producer

Question 25

Define trade creation

Answer 25

Occurs when trade is created as a result of the formation of a trading bloc between different countries

Question 26

What are conflicts between WTO and RTAs?

Answer 26

- RTAs restrict trade with non-members = conflicts WTO | - But both want to promote free trade

Question 27

What are the types of trade barriers?

Answer 27

- Tariffs - Quotas - Subsidies to domestic producers - Non-tariff barriers

Question 28

Define tariffs

Answer 28

A tax imposed on goods | - Artificially raises price of imported goods

Question 29

Define quotas

Answer 29

Limits on the quantity of a product imported | - Price to domestic consumers increases and domestic output rises

Question 30

What are examples of non-tariff barriers?

Answer 30

- Health/safety regulations - Environmental regulations - Bureaucracy

Question 31

What are reasons for resitricting free trade?

Answer 31

- Correct deficit - Prevent dumping - Increase employment - Limit TNCs monopoly power - Protect infant industries/limit monopsony power

Question 32

Define balance of payments

Answer 32

A record of all financial transactions between one country and the rest of the world

Question 33

What is the current account?

Answer 33

``` Shows country's day-to-day transactions - Trade in goods - Trade in services - Investment income - Current transfers (- minus payments abroad) ```

Question 34

What are the capital/financial accounts?

Answer 34

Show long term investment and short term capital flows - FDI minus investment by UK companies abroad - Portfolio investment minus purchase of foreign share/brands - ST capital flows = flows into minus flows out

Question 35

What are the causes of current account deficits?

Answer 35

- Low productivity - Relocation of manufacturing industry - high exchange rate

Question 36

What are some measures to reduce a country's current account imbalances?

Answer 36

``` DEFICIT = Devaluation/depreciation of currency, reduce AD (expenditure reducing policies) = deflationary fiscal/monetary, barriers SURPLUS = supply side ```

Question 37

What are the types of exchange rate system?

Answer 37

- Floating = determined by market forces - Fixed = fixed against other countries - Managed = floating but controlled by government policies

Question 38

What are the types of changes in exchange rate?

Answer 38

``` Revaluation = increase under fixed Appreciation = increase under floating Devaluation = decrease under fixed Depreciation = decrease under floating ```

Question 39

What are the factors influencing floating exchange rates?

Answer 39

- Interest rates (higher = more money into banks = increase) - Inflation (high = decrease) - FDI = demand increases - Speculation = more = depreciation

Question 40

What are the government intervention methods in the currency market?

Answer 40

- Foreign currency transfers = aim to decrease by CB selling currency (increase S = decrease value) - Interest rates (decrease = decrease demand)

Question 41

What are Marshall-Lerner conditions?

Answer 41

States that devaluation of currency will only improve trade balance if sum of PED for imports and exports are greater than 1

Question 42

What is the J-curve effect?

Answer 42

When a country's trade balance initially worsens following devaluation = only improves in LR

Question 43

What are the impacts of exchange rate change on BoP?

Answer 43

FALL - More imports domestic - Increases competitiveness = BoP current account increases

Question 44

What are the impacts of exchange rate change on economic growth and employment?

Answer 44

- Devaluation/depreciation = increase AD = less real output (more employment(

Question 45

What are the impacts of exchange rate change on rate of inflation?

Answer 45

- Increase price of imported commodities = increase production costs = cost-push inflation

Question 46

What are the impacts of exchange rate change on FDI?

Answer 46

- More FDI = cheaper to invest

Question 47

Define international competitiveness

Answer 47

A measure of the cost of a country's goods/services exports relative to other countries - Can be price or non-price competitiveness

Question 48

What are the measures of international competitiveness?

Answer 48

- UNIT LABOUR COSTS = measures average cost of labour per unit output and calculated as ratio of total labour costs to output - Relative export prices = more than other countries = less competitive - Global competitive index = composite index based on macroeconomic stability, labour market efficiency, infrastructure and health/education

Question 49

What are factors influencing international competitiveness?

Answer 49

- Unit labour costs - Productivity - Real exchange rate - Labour taxes/subsidies - Government regulation/laws

Question 50

What are the advantages of competitiveness?

Answer 50

- Increase current account BoP - More employment - More economic growth - More FDI

Question 51

What are the disadvantages of uncompetitiveness?

Answer 51

- More unemployment - Deficit of current account BoP - Depreciation in exchange rate = inflation