2.6 The international economy Flashcards
(99 cards)
1
Q
Globalisation
A
the process of increasing economic integration of the world’s economies
2
Q
Causes of globalisation (6)
A
- containerisation
- change in communication technology
- increasing economies of scale, causing thee MES to rise
- global production standards
- reduction in protectionism
- growth strategies of MNCS
3
Q
Export
A
goods and services produced domestically and sold to residents abroad
4
Q
Import
A
goods and services produced abroad and sold to residents in the domestic country
5
Q
Trade
A
the buying and selling of goods and services
6
Q
Terms of trade
A
the ratio of export prices to import prices
7
Q
Multinational corporation (MNC)
A
a firm which operates in at least two countries
8
Q
Containerisation
A
moving goods through multiple different modes of transport in containers of a standard size. They can be transported efficiently over long distances and are tracked.
9
Q
WTO
A
World Trade Organisation. An international body whose purpose is to promote free trade by persuading countries to abolish import tariffs and other barriers to trade.
10
Q
WTO Most Favoured Nation Principle
A
Most Favoured Nation Principle (MFN) says that any tariff reduction offered to one country must be offered to all (against trade discrimination)
11
Q
Protectionism
A
approaches used by governments to protect domestic producers
12
Q
Capital goods
A
manufactured goods which are used to produce other goods
13
Q
Quality of life
A
the level of wealth, comfort, material goods, and necessities available in a country
14
Q
Economic development
A
the expansion of total economic welfare in a country
15
Q
More developed countries
A
countries with a relatively high degree of economic development, average income per capita, quality of life, and historic level of investment in human capital and infractructute
16
Q
Dependency theory
A
economic events in history have meant that resources flow from a “periphery” of poor and underdeveloped states to a “core” of wealthy states, enriching the later at the expense of the former
17
Q
Describe how changing terms of trade affect development
A
- terms of trade have generally moved in favour of more developed countries and against less developed countries.
- by exporting the same amount of manufactured goods to the developing world, a more developed country can import a greater quantity of raw materials in exchange
- developing countries must export increasingly more in order to import the same quantity of capital goods or energy needed for economic development
- Therefore levels of income and quality of life in more developed countries have improved at the expense of less developed countries.
18
Q
Absolute advantage
A
where a country can produce more of a good than other countries with the same amount of resources
19
Q
Comparative advantage
A
where a country has the least opportunity cost when producing a good
20
Q
Opportunity cost
A
the cost of giving up the next best alternative
21
Q
Double coincidence of wants
A
two people who want to exchange goods of equal value
22
Q
Specialisation
A
a worker only performing one task or a narrow range of tasks. Also different firms, regions, or countries specialising producing one or a narrow range of goods or services.
23
Q
Protectionism
A
the act of guarding a country’s industries from foreign competition
24
Q
Examples of protectionist methods (8)
A
- administrative barriers
- dumping
- embargo
- import quota
- tariffs
- subsidies
- sunset industries
- infant industries
25
Sunset industries
old industries that are going through deindustrialisation and face competition from abroad
26
Subsidies for domestic producers
financial support given to a domestic producer to help compete with overseas firms. They may allow domestic industries to sell products at a lower price than imports
27
Tariffs/custom duties
a tax on imports to make them more expensive
28
Import quota
a physical limit on the quantity of imports into a country
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Embargo
a complete ban on international trade - usually for political reasons
30
Dumping
where an overseas firm sells large quantities of a product below cost in the domestic market
31
Administrative barriers
Rules and regulations (such as trading standards and strict specifications) that make it difficult for importers to penetrate an overseas market
32
Advantages of free trade (5)
- Countries can exploit their comparative advantage, which leads to a higher output using fewer resources and increases world GDP. This improves living standards.
- Free trade increases economic efficiency by establishing a competitive market. This lowers the cost of production and increases output.
- By freely trading goods, there is trade creation because there are fewer barriers. This means there is more consumption and large increases in economic welfare.
- More exports could lead to higher rates of economic growth.
- Specialising means countries can exploit economies of scale, which will lower their average costs.
33
Advantages of protectionism (5)
- protects infant, declining, and strategic industries
- improves the country's balance of payments position
- protects domestic employment
- protects industries from low wage competition and from unfair foreign competition
- avoids potential environmental harm of excessive free trade
34
Disadvantages of protectionism (4)
- higher input costs causing cost push inflation
- reduced choice for consumers
- risk of retaliation
- higher prices
35
Free trade
international trade left to its natural course without tariffs, quotas, or other restrictions
36
Free trade area
member countries abolish tariffs on mutual trade, but each partner determines its own tariffs on trade with non-member countries
37
Customs union
a trading bloc in which member countries enjoy internal free trade in goods and services, with all the member countries protected by a common external tariff barrier
38
Eurozone
the group of EU countries that have replaced their national currencies with the euro
39
Single European Market (SEM)
intended to establish the 'four freedoms' - free movement of goods, services, workers, and capital between EU member states - from 1993 onwards.
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Economic union
a trade block with free mobility of factors of production, harmonised trading standards, and a common currency
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Trade creation
the switch from purchasing products from a high-cost producer to a lower-cost producer
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Trade diversion
the switch from purchasing products from a low-cost producer to a higher-cost producer
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Balance of payments (BOP)
a record of all the currency flows into and out of a country in a particular time period. Consists of three parts: current, capital, and financial accounts
44
Current account of the BOP
measures all the currency flows into and out of a country at a particular time period in payment for exports, imports, primary income flows, and secondary income flows
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Capital account of the BOP
measures capital transfers and the acquisition or disposal of non-produced, non-financial assets such as patents, copyrights, and franchises
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Financial account of the BOP
measures the net change in foreign ownership of domestic financial assets
47
Current account deficit
occurs when currency outflows in the current account exceed currency inflows
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Current account surplus
occurs when currency inflows in the current account exceed currency inflows
49
Balance of trade
the difference between the money value of a country's imports and its exports in goods (called visibles) and services
50
Transfers
payments between countries in forms of foreign aid, grants, private transfers, and gifts. They are payments that are made without anything of economic value being received in return (called secondary income flows)
51
Net flows
the difference between inward and outward flows
52
Foreign Direct Investment (FDI)
money put into capital assets, such as manufacturing and service industry capacity, in a foreign country by a business with headquarters in another country. The firm with their headquarters in another country may establish a subsidiary to manage operations abroad.
53
Subsidiary
a company that is more than 50% owned by or is controlled by another company
54
Portfolio Investment
the purchase of one country's securities by the residents or financial institutes of another country
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Hot money
money which is moved between countries with an aim of making speculative profit either due to changes in exchange rates or interest rates
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Exchange rate
the external price of a currency, usually measured against another currency
57
Impacts of a persistent current account deficit (3)
- causes the exchange rate to fall
- is financed through selling assets and/or taking on debt in the financial/capital account
- indicates that the country is lagging behind in international competitiveness
58
Impacts of a persistent current account surplus (3)
- causes the exchange rate to rise
- means deficits in other countries
- might mean that there is income not being spent on imported goods and services which generate utility
59
Net capital inflow
occurs when currency inflows in the financial account exceed currency outflows (occurs when foreign ownership of domestic financial assets increases more quickly than domestic ownership of foreign financial assets)
60
Net capital outflow
occurs when currency outflows in the financial account exceed currency inflows (occurs when domestic ownership of foreign financial assets increases more quickly than foreign ownership of domestic financial assets)
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Capital flight
when a large number of people in a country move capital and assets from one country to another. If many people feared that the banks of a country were to go bankrupt, they might take their money out of the bank accounts and into other country,
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Expenditure-switching policy
government policy aimed at reducing deficit/increase a surplus on the current account by switching domestic demand away from imports to domestically produced goods
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Expenditure-reducing demand
government policy aimed at reducing deficit/increase a surplus on the current account by reducing demand for imports by reducing the level of AD in the economy
64
Devaluation of a currency
when a government or central bank officially fixes a new lower exchange rate for the currency in a fixed or pegged system of exchange rates
65
Marshall-Lerner condition
a devaluation of a currency will lead to an improvement in the current account if the combined PED for exports and imports in greater than 1
66
J-curve effect
in the short run, a devaluation of a currency is likely to lead to a deterioration in the current account position before it starts to improve
67
Trade weighted exchange rate
a measure of the exchange rate of a country's currency that takes into account the amount of trade between each of the countries involved
68
Foreign exchange markets
global, decentralised markets for the trading of currencies
69
Freely floating exchange rate
the exchange rate is determined by the interaction of supply and demand of the currency
70
Advantages of a floating exchange rate (3)
- Interest rates can be set on the needs of the UK rather than changing them to stabilise the exchange rate.
- Automatic adjustment of the current account balance. A large deficit should see an outflow of pounds leading to a reduction in a pounds value, thus leading a restoration of export competitiveness.
- No need for the government to hold extensive stocks foreign currency to influence the currency's value.
71
Disadvantages of freely floating exchange rates (3)
- Uncertainty for businesses - not knowing the value of the currency makes it harder for businesses to plan ahead.
- Over/under valued currency - the exchange rate may remain high or low due to speculators deciding the either buy or sell the currency. Rather than real economic indicators.
- Could cause cost-push and demand-pull inflation
72
Methods of eliminating a BoP deficit (3)
- contractionary policy to decrease AD
- trade protectionism
- devaluation of currency
73
Methods of eliminating a BoP surplus (3)
- expansionary policy to increase AD
- liberalising trade
- revaluation of currency
74
Rigidly fixed exchange rate
an exchange rate fixed at a certain level by the country's central bank and maintained by the central bank's intervention in forex markets
75
Currency board system
an exchange rate system where a country fixes the value of its currency to another currency
76
Managed exchange rate
exchange rate systems which lie between being freely floating and rigidly fixed
77
Adjustable peg exchange rate
an exchange rate system where currencies are fixed in value in the short term but can be devalued or revalued in the longer term
78
Managed floating exchange rate
an exchange rate system where free markets determine the value of a currency but where central banks intervene from time time to change the value of their currency
79
Advantages of fixed exchange rates (2)
- encourage government responsibility as there is no correction of current account deficits
- stability for firms and households
80
Disadvantages of fixed exchange rates (3)
- lose power over monetary policy
- speculative pressure - Banks have to hold large reserves of currency to intervene in markets in response to fluctuation or attack.
- unstable current account
81
Currency union
an agreement between a group of countries to share a common currency, and usually have a single monetary and foreign exchange policy
82
Impacts of merging currencies (4)
- exchange rate certainty
- each nation loses the ability to use monetary policy to change their economic outlook
- centrally set interest rate may not line up with what is best for individual countries' economies
- political risk from conflicting trade partners
83
Advantages of currency unions (4)
- lower transaction costs
- increased investment in other nations
- encourages fiscal responsibility
- trade stability
84
Disadvantages of currency unions (3)
- lose monetary policy as a tool
- If the countries’ economies are too different, then the appropriate value of their currency may be different from that of the union as a whole.
- high initial costs in joining the union
85
Gross Domestic Product (GDP)
a measure of the output or value added of an economy which does not include output of income from investments abroad or an allowance for the depreciation of the nation's capital stock. It is the standard definition of output used by the UN
86
Economic development
the improvement of total economic welfare and quality of life within a country
87
Indicators of development
these include GDP, information on the distribution of income, mortality rates, and health statistics
88
Human development index (HDI)
an index based on life expectancy, education, and per capita income. A higher HDI indicates a better quality of life
89
Purchasing power parity (PPP)
the exchange rate needed for a quantity of money to buy the same quantity of goods in each country
90
Gross National Income (GNI)
the value of the goods produced by a country over a period of time (GDP) plus net factor income (wages, interest, rent, profit) from abroad
91
Gross National Product (GNP)
the market value of goods produced over a period of time through the factors supplied by citizens on a country both domestically and abroad
92
Barriers to economic growth and development (9)
- poor infrastructure
- corruption in command economies
- inadequate human capital due to poor education
- lack of property rights
- primary product dependency
- volatile earnings from commodities
- undeveloped financial system making it hard to access funds for capital investment
- institutional factors
- conflict shifts LRAS left due to losses to human and physical capital
93
Market based policies to promote economic growth and development (4)
- Trade liberalisation.
- Removal of subsidies.
- Policies to attract inward investment.
- Allowing the price mechanism to work more freely.
94
Interventionist policies to promote economic growth and development (6)
- Infrastructure investment.
- education and training investment.
- investment in tourism and other services.
- overseas aid.
- debt cancellation
- state welfare system.
95
Types of aid (5)
- bilateral aid
- multilateral aid
- tied/conditional aid
- charitable aid
- non-financial aid
96
Why is aid sometimes ineffective? (6)
- Money can get channelled into benefiting a small group of people.
- Conditional aid may largely benefit the developed economy giving the aid if the money has to be spent on their exports.
- Goods and services may not be suitable for the needs of the population.
- Those receiving the money may not have the expertise to spend it wisely, which can lead to expenditure on inappropriate programs.
- Risk of aid dependency
- Market distortions can happen if firms focus their resources on trying to secure aid rather than putting them to their best use
97
free trade pros
more profits pay higher dividends to satisfy shareholders- get rid of any debts
increase ad -increase exports for other countries- increase (x-m) - bc = export revenue- higher income - job creation - reduce poverty- increase living standards
tech diffusion- increase in income from exports- able to buy modern tech- make advancements- lower prices - more choice- competitive advantage
98
free trade cons
Overspecialisation -occurs when a country focuses too heavily on producing one or a narrow range of goods/services for export, relying on trade for everything else.
leads to:
Price volatility
Vulnerability to supply shocks
Limits to employment opportunities
Overdependence on trading partners
unfair trade - dumping good sold abroad to price lower than cost of production - subsidises production-creates excess supply- dumped abroad- negatively impacts foreign industry- illegal
standards- health-
environmental safety- air pollution water pollution resource depletion
current account deficit trade deficit
99
infant industry
A newly established industry that needs protection from international competition in the short term until it becomes established and able to compete.
Governments may use tariffs, subsidies, or quotas to protect these industries so they can:
Grow and achieve economies of scale
Improve productivity and efficiency
Develop a comparative advantage over time
