14 The International Economy: globalisation and international trade Flashcards
(387 cards)
1
Q
A firm invests in a plant in the UK. This counts as…
A
FDI, and will drive up exchange rates
2
Q
PTA
A
Preferential Trading Area (preference area)
- SOME protectionism is removed, potentially only for SOME products
3
Q
What is Globalisation?
A
The processes that integrate all or most of the world’s economies, increasing interdependence between countries.
4
Q
What is Internationalisation?
A
Transactions across borders, but NOT NECESSARILY THE SAME AS GLOBALISATION. Globalisation was reciprocal. For instance, colonial development is internationalisation, but not globalisation
5
Q
How has globalisation been facilitated?
A
Developments in IT such that it is now cheaper for firms to operate in a globalised sense.
6
Q
What are the 6 key characteristics of modern globalisation?
A
TFT DMD
- Trade 2. Factor mobility 3. TNCs 4. Deindustrialisation and subsequent offshoring 5. Mobile service industries 6. Deregulation (e.g., tariffs end)
7
Q
Which body has been responsible for some of the increases in international trade attributed to globalisation?
A
World Trade Organisation (WTO).
8
Q
Eval on factor mobility as a characteristic of globalisation?
A
Capital controls and immigration rules can restrict
9
Q
What are remittances? How can they indicate globalisation?
A
Payments sent back from workers in developed countries to their families/friends at home
Indicative of globalisation through immigration
Indicative of globalisation through immigration.
10
Q
What evidence is there that remittances are on the rise?
A
In 2021, remittances globally reached $589bn, a 5.5% increase from pre-pandemic levels.
11
Q
How can technology advances bolster globalisation?
A
Increase the ability of firms to operate overseas.
12
Q
What is an MNC?
A
Multi-national corporation - businesses with branches worldwide and a head office somewhere
13
Q
What does the phrase ‘the death of distance’ refer to?
A
A phrase used to describe ICT advances and globalisation.
14
Q
What is outsourcing?
A
A process, associated with deindustrialisation, of moving production overseas.
15
Q
What is Coca-colonisation?
A
The process by which globalisation (or more specifically capitalism’s entry into emerging markets) can destroy local cultures
16
Q
What 6 variables can we use to measure globalisation?
A
- FDI flow as a % of GDP 2. (X-M) as a % of GDP 3. Migration flows 4. Tourism as a % of GDP 5. Foreign aid as a % of GDP 6. Remittances as a % of GDP.
17
Q
How do low levels of protectionism influence globalisation?
A
Makes globalisation happen quicker.
18
Q
What are 7 causes of globalisation?
A
CWTSDGG
- Containerisation
- WTO membership
- Technology
- Sovereign Wealth Funds
- Deregulation
- Growth of emerging economies
- Growth of free trade blocks
19
Q
How does containerisation contribute to globalisation?
A
- Firms can benefit from volume economies of scale accomplished by the use of shipping containers
- This encourages trade by making it more price competitive
20
Q
Why is technology considered a significant cause of globalisation?
A
- By far the most significant cause
- Internet has removed physical barriers to trade (SEARCH COSTS)
- Travel and transportation cheaper
21
Q
What is the history of the WTO?
A
- GATT founded 1948 2. Uruguay Round in 1995, WTO formed 3. Began with 23 members and now has 163 members.
22
Q
Which major member was admitted to the WTO?
A
China in 2001.
23
Q
What is the MFN principle?
A
Most Favoured Nation principle. In order to join the WTO, members must treat other members as well as their most favoured nation
24
Q
What is IP?
A
Internet protocols - example of standardisation and globalisation
(also intellectual property, which is also important for development and growth)
25
How do sovereign wealth funds aid globalisation?
1. Countries have budgetary surpluses (e.g. Norway from oil revenue)
2. To generate government revenue without taxes, which is a dream scenario, you buy assets in other countries. E.g. Qatar owns Canary Wharf
3. This means your GNI>GDP in the future, and you have a useful source of government revenue independent of taxes
26
What are free trade blocs?
A group of countries with no internal trade barriers.
27
What is a Customs Union?
A group of countries with no internal trade barriers but a common external tariff (CET).
28
What does BRICS stand for?
Brasil, Russia, India, China, South Africa. Coined by Goldman Sachs - 5 strong emerging economies of export led growth. Their exports have increased globalisation
29
How does deregulation of financial markets aid globalisation?
Example: Big Bang 1987 allows huge flows of hot money and FDI.
30
Why do goods face higher tariffs with the EU post-Brexit?
We are outside the customs union and face the common external tariff (CET).
31
What characterizes an LEDC?
Less economically developed country
Characterised by lower levels of economic and other types of development
32
What are 6 characteristics of LEDCs?
1. Low GNI per capita (BELOW $1046 in World Bank definition)
2. High rate of population growth
3. Lower GDP due to low VALUE ADDED e.g. high proportion of primary industry, dependent on exports for AD
4. High unemployment
5. Low levels of human capital
6. Poor infrastructure (LRAS constrained)
33
What are 4 benefits of globalisation for LEDCs?
1. FDI flows increase 2. Export markets grow 3. Access to finance 4. Technology transfers.
34
How do increasing FDI flows benefit LEDCs in globalisation?
1. AD is increased by FDI. A multiplier is usually incurred. THIS IS GOOD BECAUSE LARGE NEGATIVE OUTPUT GAPS EXIST IN DEVELOPING COUNTRIES
2. LRAS is shifted outwards by MNC activity, particularly FDI flows
35
What is an example of FDI?
In 2017, China became the biggest FDI investor in Africa through its Belt and Road Initiative.
36
What is a downside of FDI?
Could be used to expropriate another country's wealth e.g. China built that infrastructure to access inland cobalt mines, which actually helps Chinese domestic cobalt demand
37
How does globalisation help LEDCs boost AD through export-led growth?
Open up new markets to LEDCs, who experience a positive multiplier from the injection from exports
38
Harrod-Domar model? Relevance to our course?
A precursor to exogenous growth theory, indicating that a lack of finance is a key source of differential development.
39
How has the Harrod-Domar model's concern about finance been resolved?
Through deregulation of international financial markets eg 1987 Big Bang
40
Concurrent example to financial deregulation which shows the globalisation of finance and its effect on development?
Microfinance has grown in recent years, with an annual growth rate of 10.5%.
41
How do technology transfers from globalisation help LEDCs? More general point?
1. They can import high-tech goods for instance medical drugs far more cheaply than they can be domestically produced
Economies of scale, particularly technical ones, can be externalised by the LEDC, and they can take the benefits
42
What does a lack of finance cause?
A lack of investment.
43
Is buying out foreign firms an example of FDI?
Yes.
44
What is technology transfer?
LEDCs buying technology from other countries which they cannot afford to produce domestically.
45
What are 4 negative effects of globalisation on LEDCs?
1. Environment and externalities 2. Poor conditions for workers 3. Brain drain 4. Dumping.
46
Why are externalities worsened by globalisation in LEDCs?
Weaker government regulation.
47
What asymmetric effect does globalisation have on the labour market of LEDCs and eval?
1. Makes conditions worse for most workers who find themselves in increasingly poor working conditions
2. May cause a brain drain
Many jobs are actually higher paid in the imported MNC lines of work
48
What is dumping?
When developed firms sell products at below cost onto LEDC markets.
49
What is an example of dumping?
Coca-cola sold so many bottles into the infant State of Israel that the IDF had to fit bottle openers to their rifles to stop soldiers damaging their rifles by opening them on the gunsight
50
What evidence is there that dumping is significant?
Over half of all anti-dumping cases brought to the WTO are by LEDCs against more developed countries.
51
Why is judging sweatshops to be bad a normative judgement?
Against our frame of reference; for many countries, the alternative is equally poor agricultural labour.
52
Whether an MNC is good or bad for workers in an LEDC depends on?
The opportunity cost to the worker, i.e., where else the worker could be working.
53
What are 2 reasons MNCs like globalisation, besides finding more profits?
1. Lower costs from less regulation 2. Achieve economies of scale.
54
What are 4 impacts of MNCs on LEDCs?
1. Changing employment patterns 2. Increased spread of technology 3. Achieve economies of scale 4. Risk of externalities.
55
How can the transfer of skills and technology to LEDCs from globalisation be illustrated?
By a PPF shifting outwards or LRAS shifting right.
56
Is research a fixed cost?
Yes.
57
Besides poor conditions in globalised industry, what else do people criticize globalisation for?
1. IMF power - e.g. forced privatisations to qualify for IMF - quasi-imperialism
2. Removal of local cultures and brands (MCDONALDISATION)
58
What is a caveat to the idea that international economies of scale can be achieved by lowering wage costs?
Nike continues to charge high prices in developed countries.
59
What are 3 benefits of globalisation for more developed countries (MDCs)?
1. Better supply of labour 2. Increased competition and choice 3. Export-led growth.
60
How does a better supply of labour benefit MEDCs from globalisation?
1. MEDCs often benefit from LEDC brain drains
2. Free flows of labour mean that labour shortages can meet demand
61
How does globalisation lead to increased competition and choice for MEDCs?
1. A greater degree of price competition from other countries
2. Deregulation may lead to contestability gains
62
How does export-led growth represent a benefit to MEDCs from globalisation?
Many find new markets into which to sell their exports.
63
How can globalisation affect wage inflation in MEDCs?
Reduce it by giving a ready supply of labour.
64
What is contagion?
Economic problems spreading between countries.
65
What are 3 negatives of globalisation for MEDCs?
1. Structural or regional unemployment 2. Exchange rate volatility 3. Vulnerability to shocks.
66
How has globalisation made MEDCs more vulnerable to shocks?
Interdependence with other countries means contagion is a real risk.
67
How can globalisation make MEDCs more vulnerable to exchange rate volatility?
1. Volatile HOT MONEY flows are a feature of money market globalisation
2. MNCs find it hard to plan when exchange rate volatility is high
68
What is an example of exchange rate volatility from globalisation?
In 2011, the Swiss Franc devalued 30% against the Euro in one day.
69
What is an example of how globalisation can create regionally concentrated unemployment in MEDCs?
The Rust Belt in the USA.
70
Who is responsible for structural unemployment due to globalisation?
MNCs.
71
Why can globalisation worsen inequality in MEDCs?
Often outsourced industries are replaced with high skilled service sector work, but also low skilled gig economy work, which depresses wages
72
What has driven globalisation?
Increased trade.
73
What is an example of contagion?
Greece sovereign debt crisis in 2008, negative ripple effects across the EU
74
The supporters of globalisation argue it benefits all countries because trade is a more allocatively efficient outcome. Which theory of trade rejects this hypothesis?
Dependency theory of trade and development.
75
What is key for development questions?
Remember to use diagrams!
Perhaps there is a negative production externality created by MNC investment
You could show growth on a PPF or an LRAS curve
76
What is Dependency theory of trade and development?
1. The idea that trade does not benefit all and does not necessarily create an efficient outcome
2. Developing economies possess little capital because the system of world trade has been organised to the advantage of MNCs.
3. The terms of trade - export prices:import prices - favour industrialised countries and not primary producers
4. This is because these goods are higher value added
5. So developed economies can import a higher volume of raw materials and primary goods in exchange
6. This is exacerbated by the fact that the globalisation of financial markets means interest payments and MNC transfers to HQ leave the developing country.
77
What evidence supports the dependency theory of trade and development?
In most years, flows of income to MNCs and dividend payments from the Global South to the Global North exceed aid payments going the other way
78
Which industries globalised first?
Primary industries and manufacturing.
Evidence emerging that service industries are globalising
79
How have service industries globalised?
1. Previously UK firms performed "back-office" work, such as call centre work, in low wage parts of the UK
2. With "THE DEATH OF DISTANCE" they have been globalised, often to the Indian subcontinent and former Soviet bloc Eastern Europe
3. This has been aided by the fact that English is widely spoken in these places, the wages are lower and that flexible hours are more readily available e.g. night work
80
Why has back-office service-sector globalisation gone into reverse?
Some have been sent back to the UK due to the perceived cultural disconnect when using foreign call centre staff.
81
What other process has a lot of back office work undergone?
Outsourcing.
82
Why is most globalisation about the movement of capital? Eval?
Much more restriction on migration
Although many developed countries such as the US are basically dependent on low-waged illegal immigrants for their labour force
83
Where has globalisation's effect on the labour market been most felt?
At the top end of the labour market.
84
How has globalisation affected sovereignty?
Weakened it, particularly for LEDCs:
1. Reduced protectionism
2. Dependence on MNCs for investment
85
When has most MNC growth occurred?
Since the 1970s.
86
What are 4 ways in which MNC growth has driven globalisation?
1. Economic integration and increased trade
2. Investment and technology transfers
3. Changing employment patterns and global capitalism
4. The global marketplace and international brands
87
How have MNCs increased economic integration and trade?
1. Capitalised on the "global division of labour" e.g. Apple iPhones designed in California and assembled by Foxconn in China
2. Integrating supply-chains across borders has forced globalisation
3. The second point and the first means that trade WITHIN THE PRODUCTION PROCESS has increased
88
When has most MNC growth been?
Since the 1970s
89
4 ways in which MNC growth has driven globalisation
1. Economic integration and increased trade
2. Investment and technology transfers
3. Changing employment patterns and global capitalism
4. The global marketplace and international brands
90
How have MNCs increased economic integration and trade?
1. Capitalised on the 'global division of labour' e.g. Apple iPhones designed in California and assembled by Foxconn in China
2. Integrating supply-chains across borders has forced globalisation
3. Trade within the production process has increased
91
How has investment and technology transfers created international tensions?
China and US - some feel that property rights are being violated and that China is competing with US using "stolen" intellectual property, undermining the viability of technology transfers to a LEDC
92
What are forced technology transfers?
The theft of intellectual property by a country of another country's technology e.g. China's theft of US intellectual property as a cause of the 2018 trade war.
93
Why do MNCs seek cheaper costs?
They are rational profit-maximisers seeking lower costs in foreign markets.
94
What is the primary driver behind neoliberalism in the UK to an extent?
The pressure from MNCs and the threat of absquatulation.
95
What does free trade allow countries to do?
Specialise in the production of goods and services for which they are most efficient.
96
Fundamentally, comparative advantage is linked to the concept of...
Opportunity cost
If one country has a lower opportunity cost of producing something than another country, then it has a comparative advantage in the production of that product.
## Footnote
If one country has a lower opportunity cost of producing something than another country, then it has a comparative advantage in the production of that product.
97
What is NAFTA?
A defunct free trade area of US, Canada and Mexico.
98
Example of unintended consequences of NAFTA?
Under NAFTA rules, 62.5% of a vehicle had to be made in the USA, Canada or Mexico for it to qualify for tariff protection. Resultantly, auto firms built in Mexico, making their products more price competitive.
99
What was Trump's approach to NAFTA?
1. Trump prefers bilateral negotiation
2. He asked for a renegotiation such that 85% of cars had to be built in North America, of which 50% was the USA
3. He demanded a $16 minimum wage in Mexican factories
4. Trump renegotiated NAFTA with the USMCA in 2020 as a result.
100
What is the evaluation of the USMCA?
US-Mexico-Canada Agreement
1. More regulations to enhance market failure protections and enhance worker's rights
2. BUT ALSO makes a competitive industry less price competitive
3. Clearly favours US and Canada at the expense of Mexico
101
Who theorised the decline of globalisation and what did they say?
Robert J. Samuelson - "what has happened to globalisation?"
Global trade declining and in some places falling.
## Footnote
Global trade declining and in some places falling.
102
Example of deglobalisation?
1. $100 million recent Apple investment to onshore Mac production
2. Trump protectionism.
103
Why might China be driving deglobalisation?
The cost benefits of China have eroded, with rising wage costs increasingly outweighed by higher US productivity.
104
In a world without trade, what are 2 features of countries?
1. Low PPFs due to a limited resource base
2. High average costs leading to economies of scale not being achieved.
105
What is a key advantage for firms from trade in general terms?
Allows them to achieve international economies of scale.
106
Why is trade good in general terms and what two concepts does this lead to?
1. Countries can specialise in producing only what they are good at
2. Countries can import at lower costs goods made in other economies more specialised in their production at lower average costs
COMPARATIVE AND ABSOLUTE ADVANTAGE
107
What is absolute advantage?
A country has an absolute advantage if it can produce more of a good than other countries from the same amount of resources.
108
What are 2 ways to conceptualise absolute advantage?
1. It can produce the same amount of a good or service with fewer resources
2. It can produce more of a good or service provided a given set of resources than other countries.
109
Explain absolute advantage.
1. When a country is able to produce a good more cheaply than another country (i.e. because it has lower costs of production for that good) then it is said to have absolute advantage in that good.
2. The theory of absolute advantage stipulates that countries will produce the maximum amount of the good or service they have an absolute advantage in given their resources.
3. Because real world output is higher, provided trade, allocative efficiency and welfare ought to rise.
110
What is production without specialisation?
The initial state before countries pursue their absolute advantage.
111
What are 2 key preconditions of absolute advantage?
1. The transport and administration costs of international trade must be less than the benefits to output from specialisation.
2. There must be a double coincidence of wants for trade to lead to welfare gains, since the goods must be demanded in the other country.
112
Who developed absolute advantage?
David Ricardo, 1817 On The Principles of Political Economy and Taxation.
113
What is comparative advantage?
A country with the least opportunity cost when producing a good possesses a comparative advantage in that good.
114
Explain comparative advantage.
Comparative advantage occurs when a country can produce a good or service with a smaller opportunity cost in terms of other goods and services than another country. When countries specialise in line with comparative advantage, world output is maximised, since productive efficiency is achieved as all costs, including the implicit cost of opportunity cost, are minimised. Providing externalities and other market failures are insignificant, this should increase global economic welfare.
115
When presented with a table and asked to calculate comparative advantage, you must calculate...
Opportunity cost, by figuring out what one of the first good is worth in terms of the second good (MAKE A RATIO!).
116
There are two countries, country A and country B. Both countries produce good X and Y at first, but country A has a comparative advantage in the production of good X, and country B has a comparative advantage in the production of good Y, so both countries specialise. In country A, the opportunity cost of producing 1 of good X is 10 of good Y. In country B, the opportunity cost of producing 1 of good X is 15 of good Y. What is the advantageous trade price? Where will it fall?
Between 11 and 14
Somewhere in this range which reflects the bargaining power of each country
## Footnote
Somewhere in this range which reflects the bargaining power of each country.
117
For 2 countries producing 2 goods, the first country has an absolute advantage in both goods. By inspection, which goods have comparative advantage for the first country?
The good where the absolute advantage is the highest.
118
Countries can specialise either in line with comparative or absolute advantage. Which form of specialisation increases world output and hence economic welfare the most?
Specialising in line with COMPARATIVE - productive efficiency achieved since costs INCLUDING IMPLICIT COSTS i.e. OPPORTUNITY COSTS are minimised
119
For 2 countries producing 2 goods, if the first country has an absolute advantage in both goods, the weaker country has a comparative advantage in the good where...
Its absolute disadvantage is lowest.
120
For both nations to benefit from trade, then the terms of trade...
Must lie between the two country's opportunity cost ratios.
121
What are terms of trade?
The rate at which two products are exchanged for each other. DO NOT CONFUSE WITH BALANCE OF TRADE.
122
True or false: when one country has an absolute advantage in both goods, complete specialisation in line with comparative advantage leads to a net output gain.
True?
123
What do students often get wrong about comparative advantage, trade and welfare?
Assuming that because net output does not rise that a gain in welfare from trade does not occur.
124
How can partial specialisation lead to an output gain, even if not a total welfare gain?
The country with absolute advantage in both goods can split resources to 'top up' world production.
125
How can we evaluate comparative and absolute advantage and why is this significant?
The 3 assumptions of comparative and absolute advantage rarely hold in the real world
Brings into doubt the arguments for free trade generally and against protectionism particularly
## Footnote
Brings into doubt the arguments for free trade generally and against protectionism particularly.
126
What are the 3 assumptions underlying the principle of comparative advantage?
1. Each country has factors of production which are domestically mobile but internationally immobile.
2. There are constant returns to scale so that opportunity costs remain constant.
3. Demand and cost conditions are stable.
127
Give an example of a disadvantage of exploiting comparative advantage
Monoculture farming
1. At first, increasing returns to scale increase the comparative advantage the monoculture country has
2. Eventually, however, diminishing returns to scale set in, with soil erosion a possibility
Draining of the Aral Sea during the USSR
## Footnote
1. At first, increasing returns to scale increase the comparative advantage the monoculture country has.
2. Eventually, however, diminishing returns to scale set in, with soil erosion a possibility.
128
What is a key argument that demand and cost conditions are not relatively stable concerning international trade?
1. Over-specialisation leaves countries strategically exposed.
2. Economic shocks can destabilise the whole economy and not just the market, since the two are interchangeable.
129
Comparative advantage must not be confused with...
Competitive advantage, when a firm or country produces goods which are either non-price or price competitive (higher quality or cheaper).
130
What is a key thing with advantages, both comparative and absolute?
It is assumed that factors of production i.e. CELL are equal in quantity and quality between either country.
131
How can we illustrate comparative advantage?
PPF.
132
What are 3 problems of international trade?
1. The cost of trade must be less than comparative advantage gains for trade to be worthwhile.
2. There are the wider risks of globalisation e.g. regionally concentrated structural unemployment.
3. Negative externalities in production from trade.
133
It is taken as a condition of free trade that the costs associated with free trade (e.g. transport costs) must be less than the benefits from international trade. Using this fact, explain why international trade did not become a major proportion of the world economy as fast as Ricardo would have liked.
It wasn't until the innovation of volume economies in international shipping that the costs of international trade significantly fell.
134
What is free trade?
Free movement of goods and services cross-border between countries with no attempt from government to interfere.
135
What are 4 benefits of international trade?
1. Greater allocative efficiency
2. Greater productive efficiency because costs are driven down by specialisation
3. Greater degrees of competition and consumer sovereignty/surplus
4. Reduce domestic cost-push inflationary pressures (THOUGH EVAL THIS - EXCHANGE RATE CRISIS)
136
Example of how free trade increases choice?
Increased consumption of tropical fruit.
137
Which term refers to a country which produces a good using fewer resources compared to another country?
Absolute advantage.
138
What are import controls?
Government imposed limits on the volume of imports.
139
What are the 2 types of import controls?
1. Quotas (essentially regulation to set a maximum limit on imports)
2. Tariffs, import duties and export subsidies - price manipulation.
140
What is a tariff?
A tax on imports.
141
What is a basic evaluation of protectionism?
1. Free traders - by preventing countries from pursuing their comparative advantage, protectionism prevents welfare gains and efficiency gains from specialisation.
2. Protectionists - the 3 assumptions of free trade are false.
142
What is the tempting thing to avoid in questions regarding protectionism's merits?
Do a "shopping list" approach, evaluating each policy in turn
Better to evaluate merits and counters of the whole thing
143
What are 8 arguments for protectionism?
1. Infant industries
2. Sunset industries
3. Strategic trade theory
4. Agricultural efficiency
5. Changes in demand or cost conditions
6. Anti-dumping
7. Self-sufficiency
8. Employment.
144
What is the infant industries argument?
1. Increasing returns to scale will happen
2. But until these set in, the country should employ protectionism such as tariffs or import quotas to prevent price competition which could kill the industry
Often used by developing countries. Convincing, but society bear the higher costs as a net welfare loss (since consumer surplus goes into costs and not producer surplus and welfare)
145
What is the sunset industries argument?
1. Infant industries in the developing world are rapidly catching up with the developed world
2. With this in mind, deindustrialisation is likely to occur as the industry of the developing world becomes price competitive with the developed world
3. Import control, TARGETED TO PROTECT SUNSET INDUSTRIES, can allow an orderly transition away from sunset industries in the labour market, dodging the worst effects of deindustrialisation
Only to be used in the SHORT RUN to counteract for FACTOR IMMOBILITY, particularly of LABOUR. Must be accompanied with SUPPLY-SIDE POLICIES to ensure that the NEXT GENERATION OF LABOUR is not also dependent on the sunset industry
146
What is the strategic trade theory argument?
1. Comparative and competitive advantage are not natural
2. Competitive advantage is often nurtured by countries e.g. China and exclusive subsidies for Chinese firms
3. The industries must develop competitive advantage to serve as comparative advantage, and doing so requires them to be safeguarded from international trade
4. Failure to do so may lead to exploitation of our sunset and other industries by a foreign-subsidised monopoly
Lots of evidence for this theory - compelling. But WTO forbids this
147
How can agricultural efficiency strengthen the case for protectionism?
Total specialisation, in line with Ricardo's comparative advantage, leads to decreasing returns to scale and resource exhaustion. Protectionism by a refusal to fully specialise is the best way to counteract this
148
Why is the need for diversification an argument for protectionism?
Over-specialisation can lead to strategic shortfalls - E.G. 2025 BRITISH STEEL BAIL OUT
149
What is the cost of British steel renationalisation?
94 million.
150
What is the anti-dumping argument?
1. When a country produces too much of a good, they often sell at below cost in overseas markets to weaken their competitors
2. Import controls can return price to cost, with the excess being taken as government revenue
Article 6 of GATT, and subsequently the WTO, allows this behaviour
Dumping happens for several reasons:
1. Predatory dumping
2. Sporadic dumping (eliminating excess inventory at a loss)
3. Gain market share in a foreign oligopoly market
151
What is the self-sufficiency argument?
1. Autarky and the appeal of self-sufficiency
2. Particularly necessary for pariah states
PPF would be very limited
152
What is the second-best theory?
EXAMPLE OF:
Free-trade theory is unattainable. Therefore, a country can settle for the second best, which is employment, protected by tariffs, as the OPPORTUNITY COST OF THIS is the unemployment of free trade
153
What is the employment argument?
1. Without import controls, firms will move overseas
2. The opportunity cost of free trade is this deindustrialisation
3. This is worse for communities and suchlike
4. The government should employ protectionism
Appeal both on left and right
154
Where is the employment argument most heard at the moment?
2025 - Trump tariffs - to return auto manufacturing to the Rust Belt.
155
Who theorised strategic trade theory?
Paul Krugman, for which he won the 2008 Nobel Prize in Economics.
156
What is Krugman's argument?
1. Rich countries condemnation of infant industry protectionism by the developing world was rank hypocrisy
2. The free trade model of David Ricardo et al had never truly been shaken until the Strategic Trade Theory - which focusses on the following points:
3. CONSTANT RETURNS and PERFECT COMPETITION were essential models of free trade
4. The presence of INCREASING RETURNS IN REAL LIFE incentivised government subsidy and support
5. So comparative advantage is not NATURAL but rather MANUFACTURED
6. These markets have NATURAL BARRIERS TO ENTRY AND COMPETITIVE ADVANTAGE
7. The free marketeers are wrong. Some kind of ADVANCED SYSTEM OF GOVERNMENT INTERVENTION is required
157
What is the opportunity cost of free trade?
Deindustrialisation
## Footnote
This is worse for communities and suchlike.
158
What should the government employ according to the text?
Protectionism
159
Where is the employment argument most heard currently?
2025 - Trump tariffs - to return auto manufacturing to the Rust Belt
160
Who theorised strategic trade theory?
Paul Krugman, for which he won the 2008 Nobel Prize in Economics
161
What is Krugman's argument regarding infant industry protectionism?
Rich countries' condemnation of infant industry protectionism by the developing world was rank hypocrisy.
162
What did Strategic Trade Theory focus on?
1. Constant returns and perfect competition were essential models of free trade.
2. The presence of increasing returns in real life incentivised government subsidy and support.
3. Comparative advantage is therefore not natural but rather manufactured.
4. So natural barriers to entry and competitive advantage > comparative advantage
163
Who has traditionally benefited from free trade according to Krugman's Strategic Trade Theory?
Developed world
Those natural economies of scale favour the established economies of the Global North and West
## Footnote
Those natural economies of scale favour the established economies of the Global North and West.
164
In a closed economy, how is domestic demand met?
Domestic production only.
165
What happens to domestic supply following free trade?
Contracts.
166
Who would pressure a government to introduce a tariff or import duty?
Domestic firms.
167
What is the diagram for tariffs or import duties?
The same.
168
What could the government welfare part of the tariff diagram be used for?
To boost spending on welfare programs etc. - not necessarily a bad thing.
169
What was the original Global North-South trade pattern?
19th-20th century - global North has a comparative and competitive advantage in industrialised goods, and global South in primary industries. Hence the global North should import raw materials from the global South and export manufactured goods to the South
170
What are three ways the Global North-Global South trade pattern has changed?
1. Increased trade between North countries e.g. top trading partners for UK are US, Germany and Netherlands
2. BRICs are increasingly exporting developed goods and services rather than primary goods to the global North
3. Deindustrialisation means that other countries are now manufacturing
171
What evidence shows EU trade is significant for the UK?
50.4% of imports and 48.4% of exports in 2020, even after Brexit.
172
What was the trade deficit with the EU in 2020?
49.4 billion deficit with the EU but a 53.7 billion surplus with non-EU countries.
173
What does the decline in trade with the EU reflect?
1. 58% of imports in 2002, now just 50.4% (2020)
2. 55% of exports in 2002, now 48.4% (2020)
Changing trade patterns
174
What does the UK's trade deficit with the EU show?
Global North still responsible for some high value added manufacturing - that's why our deficit is so high.
175
What was the UK-US trade relationship in 2020?
## Footnote
!!
In 2020, we exported around 125bn to the US, but only imported around 75bn, WE HAVE A DECENT TRADE SURPLUS WITH THE US. Hence why our tariffs, as of April 1st 2025, were only 10%
US FIGURES ARE DIFFERENT AND SUGGEST WE HAVE A DEFICIT. KEY KEY KEY KEY KEY KEY KEY KEY KEY KEY EVALUATION OF TRADE DEFICITS! Because they include stuff like crown dependencies etc.
176
What are the three main types of UK exports in 2018?
1. Machinery and transport equipment - 113bn.
2. Chemicals - 54bn.
3. Miscellaneous manufactured - 41bn.
177
What are the three main types of UK imports in 2018?
1. Machinery and transport equipment - 155bn.
2. Miscellaneous manufactured - 72bn.
3. Chemicals - 55bn.
178
How is the trade deficit in a particular good/service market calculated?
Subtracting the value of the export value from the import value or vice versa
VALUE NOT VOLUME
179
What are the six levels of economic integration?
1. Preference areas.
2. Free trade areas.
3. Customs unions.
4. Common markets.
5. Economic unions.
6. Political unions.
180
What are preference areas?
1. Weakest form of economic integration
2. Multilateral agreement to levy reduced or preferential tariffs on certain trade
3. Example would be the EU's Association Agreement with developing economies
181
What are the characteristics of free trade areas?
1. Member countries have no tariffs
2. Each country determines its own external tariffs with non-member states
Risk of infiltration - if a country within the union sets a higher tariff with a particular country outside the area than another country in the area, the country which is outside the union may try to import into the latter area country and then have that country export its products into the original area country through the free trade area
182
How does a customs union supersede the problems of the free trade area?
1. Member countries have no tariffs
2. Each country determines its own external tariffs with non-member states
Risk of infiltration - if a country within the union sets a higher tariff with a particular country outside the area than another country in the area, the country which is outside the union may try to import into the latter area country and then have that country export its products into the original area country through the free trade area
183
What are common markets?
Customs unions with additional provisions to encourage trade and integration through the free movement (MOBILITY) of factors of production and the harmonisation of trading standards and practices
184
What are economic unions?
Further integration through economic, legal and social policies. May also be supplemented by monetary union e.g. the Eurozone in 1999
185
What is a political union?
The final form of economic integration, with centralised control
1. USA - federal structure
2. UK - devolved structure
3. EU - sovereign states and an umbrella government
186
What is a CET?
Common External Tariff - a tariff applied to imports from non-member countries in a customs union.
187
What is a free trade area?
A group of countries where internal tariffs and import duties are removed, but each country sets its own tariffs with non-member states.
188
What is a customs union?
Trading blocs in which member countries enjoy internal free trade, but also have a CET to prevent arbitrage.
189
What is a common economic policy?
The policies set by customs unions which members must follow.
190
What are examples of common EU policies?
1. Common Agricultural Policy (CAP) - protects European farmers, since 1962.
2. Common Fisheries Policy - prevent tragedy of the commons
3. Stability and Growth Pact
191
What is the Stability and Growth Pact?
The EU never coordinated fiscal policy, leading to doubts about Eurozone inflation, since a single country could bring down the Euro (cough cough Greece)
So in the 1990s the Stability and Growth Pact was created. Still isn't binding though
192
What is evidence that the ECB is exerting more central control?
As a condition of bailout for Greece, it set strict austerity measures in place.
193
What is the context of the WTO?
Many economist in the 1930s and 1940s saw protectionism as part of the economic downward spiral of the depression - by reducing export demand in all countries due to retaliation, protectionism had worsened the Depression, and helped the rise of fascism
194
What are three facts about the WTO?
1. Founded as GATT (which still exists, though displaced by WTO) after WW2 in 1948
2. Quinquennial "rounds", e.g. Doha Round or Kennedy Round in the mid-60s
3. The failure of rounds in Cancun and Doha for developed areas such as the EU to drop its CAP against developing countries food exports led many to redouble their accusation of the colonial nature of globalisation
195
Where has the WTO been successful?
Reducing import controls on manufactured goods
Much less on agricultural front
196
What else do customs unions tend to have besides a CET?
Quality regulations.
EU bans chlorinated chicken
197
What is the European Single Market?
Common Market (one above a customs union).
198
What are three features of the European Single Market?
1. Common Policies.
2. Countries must not subsidise or favour producers without approval from the European Commission.
3. Four freedoms (movement).
199
What are some Brexit arguments?
1. EU laws.
2. Free movement of people in the Single Market - but UK opted out of Schengen
200
Who threatens the WTO?
USA.
201
What are the effects of a tariff?
1. Increase price of imports
2. Reduce competitiveness of imports
3. Increase substitution to domestic firms
4. Recover balance of payments
5. But reduce consumer surplus and encourage productive inefficiency
202
What is an import quota?
1. Volume limit on imports
2. DO NOT RAISE GOVERNMENT REVENUE (sad face)
3. Will probably increase the price faced by domestic consumers (PERFECTLY INELASTIC SUPPLY)
203
What are some non-tariff barriers?
1. Import bans (black markets)
2. Rules of origin (hard to enforce, most useful in customs union)
3. Exchange rate manipulation - hard to prove
4. Subsidies
204
Why do customs unions seek to limit subsidies?
To reduce protectionism
EU has the EU State Aid rules
205
How can we use protectionism to correct market failures?
If other countries have laxer environmental regulations, we incentivise MNCs to offshore there. We don't want to do that
206
What is an anti-dumping law?
A form of protectionism which can stop imports being sold below cost into a market, which is bad for domestic producers
207
What is the strongest argument for protectionism from the perspective of a LEDC?
Need the revenue from tariffs - no equivalent tax base.
208
How can protectionism drive economic growth?
Redirect spending towards domestic supply, increasing AD and growth.
209
What key assumption do we make when we say that protectionism will boost employment?
No retaliation
Not likely - many countries retaliated to Trump tariffs 2025
210
What are five arguments against protectionism?
1. Encourage x-inefficiency and dependence by domestic firms on protectionism
2. Risk of retaliation, which would offset all the benefits
3. Inflation - because protected industry may have higher prices and because imports are expensive
4. Reduced consumer choice
5. Cost-push inflation if firms import raw materials
211
How can protectionism encourage x-inefficiency?
Domestic industries become reliant on protectionism to stay competitive
60% of EU budget spent on CAP
212
How can retaliation affect AD negatively?
Our export demand falls.
213
How do anti-dumping laws work?
Imposing a tariff such that the price reflects the cost of production.
214
What is an example of how protectionism can reduce choice and increase prices?
US textile industry uses protectionism - less choice and more price in US
215
What is the balance of payments?
A record of all transactions that a country does with the rest of the world.
216
What are the three components of the balance of payments?
1. Current Account.
2. Capital Account.
3. Financial Account.
217
What things are recorded in the capital account?
1. Sale of intangible assets such as patents and copyrights
2. Transfers of ownerships of fixed assets
218
What things are recorded in the financial account?
1. Net foreign ownership of domestic assets.
2. Hot money flows.
219
What is recorded in the net primary income balance of the current account?
Net factor income from abroad:
1. Remittances
2. Profits
3. Interest on dividends
220
What is recorded in the net secondary income balance of the current account?
Net unilateral transfers such as foreign aid.
221
What must the balance of payments do?
Add up to 0.
222
What is a balancing item?
The thing we add to the balance of payments to make it equal 0.
223
What things are recorded in the current account?
1. Balance of trade in services.
2. Unilateral transfers.
3. Merchandise trade balance.
4. Income receipts and payments.
224
What is the merchandise trade balance?
Balance of trade on the current account in goods.
225
What is an example of something that could influence balances of trade in services?
UK financial services firms selling financial services to a Saudi firm.
226
What is an example of a unilateral transfer on the secondary income statement?
Aid to a sub-Saharan African country.
227
What are the three components of the current account?
1. BALANCE OF TRADE
2. NET PRIMARY INCOME (NET FACTOR INCOME FROM ABROAD)
3. NET SECONDARY INCOME (NET UNILATERAL TRANSFERS)
228
What is an example of something that would count as a credit on the UK's merchandise trade balance?
Selling Aston Martins overseas.
229
What are income receipts and payments?
Mostly money received from foreign investments, e.g. from factors owned by UK residents which are overseas
230
If someone owned a unit of American capital, and they made a return, what part of the balance of payments would this be recorded in?
Current account -> Net primary income -> income receipts and payments.
231
What are the four categories of money flows on the UK BOP?
1. Services trade balance.
2. Merchandise trade balance.
3. Unilateral transfers.
4. Income receipts and payments.
232
What is a unilateral transfer?
Money sent abroad by households or governments where no good or service is received in exchange.
233
What is the services trade balance?
(X-M) in services.
234
Which part of the BOP is made up of the net foreign ownership of domestic assets?
Financial account.
235
What is the condition of the current account in most developed countries?
In large deficit.
236
What was the UK Current Account Deficit in Q4 2024?
-21 million.
237
What are five causes of a current account deficit?
1. Low productivity - final price of goods are likely to be higher
2. Inflation being higher domestically than abroad
3. Strong exchange rateAC
4. Non-price factors (bad reputation/quality of UK goods)
5. Supply-side constraints/comparative disadvantage
238
What are three reasons a current account deficit might not be a concern?
1. If it is a primary income flow due to repatriation of returns for previous FDI, this implies our LRAS has shifted right and the FDI was a success
2. If a deficit is being used to purchase current goods then short-term standard of living is higher
3. If we are importing lots of capital goods, and hence the BOP worsens, then this may be good in the long run
239
What are two reasons a current account deficit might be a concern?
1. High proportion of GDP and rising.
2. Exchange rate crisis.
240
If we have a current account deficit, how do we need to finance it?
With a financial account surplus.
UK does this
241
Why can a financial account surplus be a tough requirement for many countries?
We need to have assets the rest of the world wants, and they need to be stable and secure
242
How can the exchange rate correct the balance of payments issue?
1. If we have a substantial deficit, the exchange rate will devaluate to match this
2. But this can cause imports to rise in price, leading to imported cost-push inflation
3. Also doesn't work if one is part of a currency union
243
If the current account deficit is due to the purchase of capital goods, why is it okay in the long run?
It may end up correcting itself as supply-side improvements yield output which can be exported.
244
What does a current account deficit cause the exchange rate to do?
Depreciate.
245
How can we sustain a current account surplus or deficit?
Have a financial account surplus or deficit of equal and opposite magnitude.
246
How could the US Government balance a current account deficit?
Could run a capital account deficit by selling government debt to foreign investors
247
What happens if the current account deficit is due to the purchase of capital goods?
It may end up correcting itself as the supply-side improvement yields output which can be exported.
248
How could the US Government balance a current account deficit?
Could run a capital account deficit e.g. by selling government debt to foreign investors.
249
How can a current account surplus be linked to economic growth?
1. A current account surplus implies that a country is exporting lots of goods or services.
2. If this surplus fuels AD, then GDP may be rising.
250
What is the link between current account and employment?
1. In some economies, a current account surplus implies high employment since domestic production is high.
2. In others, a current account deficit doesn't necessarily mean high unemployment - it could simply mean more are employed in service sector work or higher paid work.
251
How could a current account deficit affect inflation?
1. A large deficit could cause the exchange rate to depreciate, causing a cost-push pressure for domestic firms.
2. However, if factors are cheaper overseas, and are imported, then this may still serve to reduce inflationary pressure.
252
What are the 3 types of policy to correct a current account deficit?
1. Expenditure-switching.
2. Expenditure-reduction.
3. Supply-side.
253
What is expenditure switching policy?
A policy aimed to influence the relative prices of exports and imports and hence cause consumers to SUBSTITUTE IMPORTS FOR EXPORTS.
254
What are some expenditure switching policies to have in mind?
1. Tariffs.
2. Exchange rate manipulation.
255
What are supply-side policies essentially a form of?
Long-run expenditure switching policy.
256
How are supply-side policies the superior solution to current account deficits?
Also boost our export sales, hence are a net injection into the circular flow.
257
What are expenditure reducing policies?
Policies which aim to reduce AD and limit spending on imports this way.
258
Where are expenditure reducing policies most effective?
In countries with high MPM, like developed countries.
259
What are some expenditure-reducing policies to know?
1. Contractionary monetary policy.
2. Contractionary fiscal policy.
260
When are expenditure-reducing policies better than expenditure-switching?
When the economy is overheating.
261
What is the primary way we can balance a current account deficit?
Have a financial account surplus from FDI.
262
What are the benefits of FDI?
1. Shift LRAS right.
2. Create employment.
3. Create competition for domestic monopolies.
4. Contribute to AD (as I) and hence multiplier.
263
What are the problems of FDI?
1. High-value added activities such as R&D remain in the home country.
2. RACE TO THE BOTTOM e.g. countries compete for FDI so must reduce tax/regulations etc.
3. Externalities?
4. Long-term profit repatriation.
264
What effect does FDI have on PPF?
Shift it right!
265
What is economic integration?
The process by which countries coordinate to reduce trade barriers and perhaps to harmonise fiscal and monetary policy.
266
What is a trading bloc?
A group of countries who join and agree to promote trade between one another.
267
What is a bilateral/multilateral trade agreement?
Agreement to reduce protectionism between 2 or more countries.
268
How is a FTA more deep than the PTA?
All goods and services enjoy free trade between the countries, not just for some goods.
269
What is the best example of the FTA?
NAFTA (subsequently replaced).
270
Is a CET always there for a customs union?
No, it can be a common external barrier.
271
What is a single market?
Another name for common market
1. MAIN FEATURE IS COMPLETE FREE MOVEMENT
2. Common regulation
272
Who is Bela Balassa?
Hungarian economist who came up with the 6 levels of economic integration.
273
What are the features of the EU?
1. CUSTOMS UNION - internal free trade and an external barrier in the form of the CET.
2. Common policies including in agriculture (dominant) and also fishing.
3. 4 freedoms - free movement within the single market.
4. Co-ordination of economic policy - ECB rules.
274
What are the features of CAP?
1. Price floors.
2. Tariffs.
3. Led to oversupply and intervention buying.
275
What is an example of how the EU has harmonised economic policy?
Since 1990s - the ETS.
276
What are 4 benefits of EU membership?
1. Free trade benefits - jobs, higher GDP and growth.
2. Huge market - 500,000,000 customers.
3. Factor mobility helps growth.
4. Attracts foreign investment.
277
Why does being in the EU help FDI?
Firms wanting access to EU markets come to an EU member state.
278
What are 4 negatives of EU membership?
1. Forced to follow EU laws and regulation e.g. chlorinated chicken.
2. Opportunity cost of funding for EU in budget.
3. Trade could accrue from FTAs - because we have a strong trade link with the UK.
4. Immigration strain on government.
279
What is an example that shows that the argument that we could leave the EU and get an FTA is weak?
Chequers - rejected by Michel Barnier.
280
What is trade creation?
The extra units produced when we transfer from a high cost domestic producer to a low cost producer inside the customs union.
281
What is an example of how comparative advantage and welfare gains must be balanced with the need to preserve strategic domestic industries?
2025 Labour Government performs an emergency nationalisation on Scunthorpe steelworks to prevent it from shutting down, which would've made UK the only G7 country without domestic steel production capabilities.
282
When commenting on trade creation from joining a customs union with a diagram, what should you remember to comment?
1. This creation in supply for the exporting country will be mirrored in other CU member states, so this is good news.
2. With effective SS policy, the country who has lost out from the imports can reallocate factors to an area it has a comparative advantage and in doing so increase world efficiency. And the end of trade barriers from a customs union joiner means that this is easier for these countries.
283
What diagram should be drawn for trade creation?
Opposite of a tariff diagram.
284
What is a key benefit and negative of a country joining a customs union?
1. Benefit - TRADE CREATION.
2. Negative - TRADE DIVERSION.
285
What is trade diversion?
When the entry of a country into a customs union causes trade to be diverted from a low-cost producer outside the customs union to a low-cost producer within the customs union because the tariff offsets the comparative and price competitive advantage of the more efficient external country.
286
How to illustrate trade diversion?
3 line tariff diagram but with the supply of the customs union country in between the best country and the best country + tariff.
287
What happens to domestic supply and demand when trade diversion occurs?
ILLUSTRATED ON DIAGRAM
CONTRACTION IN DEMAND, EXTENSION IN DOMESTIC SUPPLY
## Footnote
CONTRACTION IN DEMAND, EXTENSION IN DOMESTIC SUPPLY.
288
What is an example of a bilateral trade agreement/PTA?
6th May 2025 - post-EU UK-India deal finalised - will add 4.8bn/annum by 2040.
289
What is the efficiency loss under the supply curve in the tariff diagram?
Either a loss in world efficiency or a loss in domestic efficiency.
290
Balance of payments
The record of all currency flows into or out of a country in a particular time period
291
3 accounts on the BOP
1. Current account
2. Capital account
3. Financial account
292
Evidence UK does better on BOP for services than goods?
2020 - 133bn surplus in services, 128bn deficit in goods on CURRENT ACCOUNT
293
4 components of the current account
1. Balance of trade in goods
2. Balance of trade in services
3. Primary income flows (net income flows)
4. Secondary income flows (net current transfers)
294
Evidence capital account is small?
2020 - only 2.6bn
295
Net errors and omissions is equal to
The financial account balance minus the current and capital account balances
296
THE BALANCE OF PAYMENTS ON THE CURRENT ACCOUNT FUNDAMENTALLY...
MEASURES THE FLOW OF EXPENDITURE ON GOODS AND SERVICES. SHOWS THE DIFFERENCES IN THE MONEY VALUE OF EXPORTS AND IMPORTS
297
Most important part of BOP? And why?
Current account
1. Reflects international competitiveness
2. Largest component
298
Primary income section of the current account of the BOP
Earnings from investment and employment.
1. Earnings from investments abroad including dividends and interests, minus payments to foreign investors
2. Net wages paid to residents working overseas and from foreign workers in the UK
299
Secondary income of the current account
ONE WAY TRANSFERS, no goods or services exchanged
1. Net transfers for remittances, foreign aid and gifts
300
How could the secondary income component of the current account be used as a measure of development?
Likely to be positive in developing countries who receive remittances and also aid payments. Likely to be negative in developed countries who have many migrant workers and who provide aid
301
What happened to reform the capital account?
Capital flows (money and asset movement across national boundaries) were moved out of the capital account and re-categorised under the heading of the financial account. The capital account now only consists of various legacy payments. It is usually insignificant
302
Capital account of the balance of payments
1. Capital transfers - where assets change hands without a corresponding exchange
2. Sale and transfer of intangible assets such as emissions permits
Usually very insignificant because of financial account
303
Financial account
Transactions involving assets and liabilities
1. FDI
2. Portfolio investment
3. Central Banks buying reserve assets
4. Other investments
304
What is the importance of the financial account?
Often used as a way of financing a current account deficit
305
How could a country finance a current account deficit using the rest of its BOP and example?
Bring in money in the capital or financial account. This is what BoE did by raising interest rates during ERM crisis.
306
How could a rise in foreign-owned assets affect the UK BOP? Eval?
Worsen the primary income statement. It has
307
Why has the balance of secondary income perhaps improved in recent years?
Used to be where money sent to the EU would go
308
Debit item
Something in the balance of payments where more currency leaves the country than enters
309
Facts about UK current account deficit?
1. 2016 was 5.3%, largest in the G7.
2. 2.9% in 2024 - down
3. Mark Carney said we were dependent on the "kindness of strangers" because we are reliant on investment flows for BOP equilibrium
310
UK has a ___ deficit but a ___ surplus on the current account
Balance of trade in goods
Balance of trade in services
311
Main cause of UK worsening current account deficit and eval?
Primary income deficit growing. Previously we had a substantial surplus - INCREASED FOREIGN OWNERSHIP OF UK ASSETS DUE TO GLOBALISATION
312
When did the balance of trade, in overall goods and services, BRIEFLY move into surplus and eval?
COVID-19 - a slight uptick in balance of trade in goods, perhaps due to vaccines but more likely due to decline in global trade. Unlikely to persist
313
What is the long-term risk of the current account deficit and how?
Not a short-term but a long-term risk. If investors lose confidence in financial assets sold by the UK, we will be unable to finance our trade deficit. Living standards may fall dramatically.
314
Sudden stop
The feared sudden drying up of capital and financial account inflows which allows the UK to sustain its current account deficit. Could, in the long-run if investor confidence falls, mean we cannot finance our deficit
315
Balance of visible trade
Same as the balance of trade in goods
316
If we disaggregate the balance of trade in goods, what is interesting?
In 2020, we had a 2bn surplus in oil. We had a huge deficit of 94bn in manufactured goods. Total deficit was 128.7bn in balance of trade in goods
317
How can we see insights about our economic state from the BOP?
1980s we went into current account deficit in manufactured goods. Reflects deindustrialisation
318
When we disaggregate the balance of trade in services, what do we learn?
Financial services hard carry, with a 45.8bn surplus in financial services in 2020 of an overall 133bn surplus
319
Why has the balance of trade in services worsened in recent years, despite remaining in surplus?
Back-office activities, including call centres, have been outsourced to countries with cheap labour costs e.g. India. We are hence IMPORTING services again.
320
How has a dependence on financial services made the UK an unbalanced economy?
Made huge losses after 2008 that had to be covered by government spending etc. Also, tax rates limited by need to keep capital in the UK
321
When MNCs invest in foreign countries, how is this transmitted through the BOP?
Leaves the country through the financial account but then returns through the primary income of the current account
322
What is the main cause of a worsening primary income position?
Largely how productive past capital investment has turned out to be. Net primary incomes flows were -32billion in 2020, worse from -19billion in 2019, suggesting that UK citizens owned less productive assets overseas than foreigners owned in the UK
323
Where is return on portfolio investment from assets owned overseas or by foreigners in the UK documented in the balance of payments?
Primary income of the CA
324
How can a financial account deficit lead to a current account surplus?
If financial account spending goes on FDI, then that generates a return which re-enters the country through the primary income statement on the current account
325
When did the net investment flow of the primary income statement on the current account go negative?
2012
326
Why did the UK initially do much FDI, and what can we learn from this?
After 1979 - much investment on the capital (latterly the financial) account, came back in through the primary income statement. But now we are a net debtor nation
Deregulation of capital flows can help generate FDI
327
3 main types of flow on the financial account
1. Long-term direct capital flows
2. Portfolio capital flows
3. Short-term speculative "hot money" flows
328
Capital flows on the financial account
Usually overseas investment to buy real productive assets. Often associated with FDI
329
Generally FDI as a long-term capital flow on the financial account is towards countries with...
Competitive or comparative advantage in production of something, so our investment returns are more handsome
330
Portfolio capital flows
The part of the financial account dedicated to the purchase of overseas financial assets
331
Eval on portfolio capital flows
Created by increases in globalisation of financial markets and deregulation of exchange controls in 1979. But in 2007, toxic assets and asymmetric information led to systemic risk to BOPs worldwide from this.
332
3 reasons for hot money flows
1. Interest rate differential
2. FOREX market speculation
3. Political instability
333
Why is speculation problematic, both as a component of the BOP and on the FOREX markets?
IMPERFECT COMPETITION because the buyers and sellers are market movers. So the expected change in XR occurs, so it is very popular
334
2 examples, other than ERM, of hot money being a problem?
1. Depreciation of pound from 2:1 to 1.3:1 after 2008
2. Since COVID and Ukraine, $ forced up because global reserve currency
335
How can we illustrate the current account's effects on AD/AS? Key eval?
Net (X-M) is the main part of the current account and can cause the AD to shift right if net exports increase. NOTICE HOWEVER that in many countries an increase in export demand is due to improving supply-side conditions, so this may be instead the result of successful LRAS policies, meaning AD shifts to FOLLOW a shift in LRAS
336
Example of how countries often have AD growths due to the current account after LRAS improvements?
Export-led growth in Japan, China, Germany etc.
337
Is the current account deficit fundamentally a problem?
No
338
Key evaluative comment when discussing the pros and cons of a current account deficit?
Whether a current account deficit is significant or not depends on whether they indicate a fundamental disequilibrium. For example, a persistent current account deficit is often taken as evidence that domestic industries are uncompetitive and unproductive. This might mean that in the long run, unemployment may rise or living standards may worsen
339
For whom is a current account deficit least consequential and why?
LEDCs. Often use them to import higher specification capital goods, which in the long run boosts export output and allows the country to rectify it's current account deficit. A short-run/long-run trade-off
340
2 main reasons why a current account SURPLUS may also be bad?
1. Implies that other countries are in deficit. Countries overwhelmed by other countries surpluses tend to impose protectionist measures. These can be evaluated in their own light. The US is a particularly salient example.
2. Extensive AD boosting can be inflationary if the economy is near full employment
341
How can we ensure the balance of payments remains in equilibrium?
1. Other parts must be in surplus if the current account is in deficit
2. Currency depreciation
342
3 FACTORS WHICH INFLUENCE OUR CURRENT ACCOUNT BALANCE
1. Productivity - improving our productivity is crucial to our export's price and export competitiveness
2. Inflation
3. Exchange rate
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Two ways we can improve export competitiveness and eval?
1. Quality competitiveness
2. Price competitiveness
UK appears to have performed the latter. But makes PED for UK exports more inelastic, which can have negative consequences if export demand becomes inflationary, because a currency appreciation might not fix it
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2 key comments on inflation as a determinant of the current account balance?
1. RELATIVE inflation
2. Depends on price elasticity of exports and imports (Marshall-Lerner condition and J-curve)
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3 main types of policy which can be used to reduce a current account deficit?
1. Expenditure-reducing policy
2. Expenditure-switching policy
3. Supply-side policies
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What key, key, key point must be made before any essay evaluating policies which could be taken to reduce our current account deficit?
Implies the exchange rate is over-valued, since the exchange rate should fix.
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The 3 Ds
Deflation, direct controls (protectionism) and devaluation
Methods to reduce a current account deficit. Only deflation is expenditure-reducing, the rest are expenditure-switching
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When a government pursues an reflationary policy to address the current account, this is most likely to correct...
A CURRENT ACCOUNT SURPLUS since consumers have demand for imports due to high MPI. Ceteris paribus, notably if export demand remains consistent, will therefore rebalance the current account
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Expenditure-switching policy
Policy which aims to reduce a current account deficit by switching domestic demand away from imports towards domestically produced goods, and vice versa
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The UK has a current account deficit of 4 billion. The MPI is known to be 0.4. You, as the chancellor, have been authorised to perform a tax increase to reduce demand for imports and return the current account to equilibrium. Presuming ceteris paribus and that there is no negative multiplier, how large should your withdrawal from the circular flow be?
10billion
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Explain how deflationary (expenditure reduction) policies can reduce the current account deficit.
1. Reduce rate of domestic price inflation relative to other countries, including export competitiveness (usually quite a small effect)
2. Reduce consumer demand for imported goods which, ceteris paribus, balances the current account
352
Eval on deflationary policies to reduce the current account deficit
1. Obvious policy conflicts. But can be useful in the event of a POG
2. Firms which export may suffer from a local recession and may raise prices on exports to survive, offsetting the effect
3. Quality, and not price, can affect import demand. We must make our exports quality as well as price competitive
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Direct controls as an expenditure-switching policies. Eval?
1. The use of tariffs, quotas or even embargoes (bans)
2. Very likely to attract retaliation, offsetting the effect and resulting just in cost-push inflation
3. WTO rules - UK unlikely to be able to pursue
4. But have been normalised today
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Why do we assume depreciation to be the best solution to a current account deficit?
Protectionism should be off the cards, and is likely to attract retaliation
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Marshall-Lerner condition
The extent to which a devaluation of a currency leads to an improvement in the current account depends on the PED for imports and exports. If inelastic, and the two summed come to less than one, then the devaluation/depreciation is liable to be ineffective, since domestic consumers simply bear the higher price and foreign consumers do not react to a fall in the real price of UK exports by buying them
356
Why might the Marshall-Lerner condition be particularly bad for an uncompetitive country, reducing the imperative to devalue the currency?
1. Their weak export quality competitiveness eclipses the increased price competitiveness of a devaluation
2. Their consumers are aware of this, and will demand imports come what may
357
Best approach to reducing a current account deficit?
BOTH MARSHALL-LERNER AND SPARE CAPACITY IN DOMESTIC FIRMS MUST BE SATISFIED. So deflation can be used to generate spare domestic capacity. Then devaluation can be used to make firms price competitive. Then they can respond to an increase in export demand WITH this spare capacity. And if we are uncompetitive, then we should use supply-side policy too
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3 necessary conditions for a devaluation to reduce the current account deficit
1. Marshall Lerner condition
2. Spare capacity with domestic firms (CREATED BY DEFLATIONARY POLICY?)
3. QUALITY competitiveness to satisfy ML condition
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If the ML condition is not satisfied, a currency depreciation perversely...
WORSENS the current account
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Explanation of the J-curve effect?
Elasticities are more inelastic in the short-run than the long-run, because consumers are tied into existent contracts, it takes time for changes in relative prices to set in etc.
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2 reasons for the J-curve effect?
1. Firms are price inelastic in supply in the short-run. They need time to need time to increase supply in the long-run for the new export demand, particularly if they are already tied into contracts with domestic consumers.
2. Consumers are price inelastic in the short-run. They may not notice a devaluation's effect in terms of a real terms rise in import prices for a long time, or may be hesitant to substitute for domestically produced goods due to imperfect information about their quality and hence their substitutability.
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3 reasons the Black Wednesday devaluation of 1992 was very successful in terms of rectifying the current account deficit?
1. Inflationary expectations were low due to the recessions, so inflation psychology did not worsen any inflation that may have resulted from increase import costs
2. The UK being in recession previously had created spare capacity which encouraged expenditure-switching when the pound was devalued.
3. The UK's tight monetary policy allowed inflation to be kept under control, even as import prices rose
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Evidence that, besides a problem with the ML condition or being in the short-run (J-curve), a devaluation of the currency might not necessarily eliminate the current account deficit?
2008 - GBP lost 25% against major trading partners. But by 2010, the CA deficit was bigger than in 2007. The low AD in our export markets was the reason why.
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The 3Ds and expenditure-switching/expenditure-reduction policies should be evaluated by reference to the fact that...
They work in the SHORT-RUN but supply-side improvements are preferable in the LONG-RUN
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What two things do supply-side policies do to the balance of payments and why is this good?
1. Increase price competitiveness, encouraging expenditure-switching on the CA
2. Increase QUALITY COMPETITIVENESS e.g. through R&D - expenditure-switching/expenditure-reduction cannot do this
366
SHORT-TERM ECONOMIC GROWTH
AD increases (generally increasing)
367
2 problems with consumption-led growth?
1. Likely to worsen the current account of the balance of payments due to high MPI
2. Can create speculative bubbles and the economic cycle
368
Why is export-led growth seen as preferable to consumption-led growth and eval?
Risk of speculative bubbles with consumption-led growth, particularly if fuelled by high levels of pernicious consumer debt
We have not consistently achieved export-led growth
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The 3 Rs
Reflation, Removing import controls, revaluation - methods to counter a current account surplus
370
Example of how negative output gaps and current account balances are linked?
Japan - large surplus
371
Reverse J-curve
Same axes - but curve upside down
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What is the main evaluation point in an essay about whether the current account deficit matters?
In the short run, it doesn't, because imports boost living standards. In the long run, it does, because it implies a fundamental lack of competitiveness in the UK economy, which will worsen future living standards
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2 problems of a surplus on the current account?
1. Risk to demand-pull inflation if we are near full employment
2. The global CA must sum to zero, so unless we want import controls and all their problems, we must accept some compromise
374
How has the UK's current account deficit been financed? How could we evaluate this?
Increasing inflows on the capital account from increasing FDI
In the long run, these create even greater outflows as profits are repatriated and money leaves via the primary income balance. Investment by foreign firms may decrease if they doubt the ability of the UK to finance growing overseas debts
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What has been the main cause of the UK's worsening current account deficit?
Increased outflows on the primary income balance on the current account, NOT the worsening trade positionW
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When did the primary income balance first go negative in the UK?
2012
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Why did the primary income balance on the current account go negative in 2012 according to Parliamentary briefings?
1. Value of UK foreign investments fell, partly due to weak performance in the Eurozone
2. The total stock of FDI owned by UK residents decreased
3. Those investing in the UK, particularly those drawn by the UK's relative macroeconomic stability and low capital controls, have shifted their portfolios towards riskier but more profitable assets
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Why does the US have a large current account deficit and fact?
US has the largest current account deficit in the world, mainly for low-cost imports of primary goods and services which are then assembled, with high value added, by American producers. For instance, take the import of raw materials for use in iPhones as an eaxmple
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What is the effect of an expenditure-reducing policy in a country with a very large current account deficit on the rest of the world? Example?
Can cause deficient AD from declining export demand in other parts of the world. The US is an example - when the US went into recession in 2008, there were severe issues for many countries who had previously used the US as a safe export market
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Why does Trump call China a currency manipulator?
2015 - two consecutive days of renminbi devaluation, (yuan as sterling is to the pound), and in 2019 doing the same
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Why might countries have limited success when devaluating their exchange rate to achieve export competitiveness?
Other countries might retaliate - for instance, the RMB is unofficially pegged below the dollar, so a US depreciation would probably see a depreciation of the renminbi
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Why is the US dollar overinflated? Also, why is the US able to sustain such a large current account deficit?
Huge capital inflows into the US
For instance, Chinese investors hold over $1 trillion in US Treasury bonds
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4 conditions for evaluating the effectiveness of a devaluation?
1. How big is our share of the global economy?
2. Retaliation
3. PED(x) and PED(m)
4. What is the effect on hot money flows
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WHAT EFFECT DOES A FALL IN THE EXCHANGE RATE HAVE ON HOT MONEY FLOWS? Why?
Causes them to leave the currency.
1. Reduced returns in the denominated currency
2. Further expectations of a capital loss if the XR falls further.
385
Are protectionist measures expenditure-reduction or expenditure-switching?
Expenditure-switching
386
Why might devaluation and deflation be used in concert when correcting a CA deficit?
Create spare capacity into which an increase in export demand can find supply
387
Explain how a persistent current account deficit could lead to a currency crisis
1. Financial account surplus to sustain current account surplus
2. Investors lose confidence in this domestically denominated debt because the currency is already being sold to finance the current account deficit, and foreign interest payments only make this worse
3. CAPITAL FLIGHT occurs as domestic consumers repatriate their savings out of the country as the exchange rate falls
4. The exchange rate PLUMMETS, leading to inflation
