4.1 International Economics

Question 1

terms of trade

Answer 1

amount of imported g/s an economy can purchase per unit of exported g/s
e.g. increased x price, improvement in TOT, country can buy more M at any level of X, increased living standards

Question 2

factors affecting tot

Answer 2

SR:
changes in exchange rate (SPICED/WPIDEC)
relative inflation rate to trading partners
changes in demand for X/M

LR:
changes in productivity
changes in incomes

Question 3

tot link with current account BOP

Answer 3

both deteriorations and improvements in TOT can lead to inc SOL if X rev rises/M rev falls

e.g.
X price rise (imp TOT): if elastic, det in current account. if inelastic, imp in current account
M price rise (det TOT): if elastic, imp in current account. if inelastic, det in current account

Question 4

financial account

Answer 4

transactions that result in change of ownership of financial assets between uk residents and non-residents

FDI
portfolio investment flows
banking flows
changes to value of reserves of gold and foreign currency

Question 5

capital account

Answer 5

sale or transfer of patents, copyrights contracts
debt forgiveness (forgiven debt = negative)
capital transfers of ownership of fixed assets

Question 6

comparative advantage

Answer 6

relative advantage that one country or producer has over another

assumes perfect knowledge
no transport costs
no economies of scale
inflation rates ignored
no import controls
non-price comp ignored
r and d investment ignored
exchange rate movement ignored

Question 7

wto

Answer 7

aims for trade to be
non-discriminatory
free from barriers
predictable
promoting fair competiion

sets and enforces rules on world trade
resolves trade disputes
provides forum for negotiating trade liberalisation
increases transparency

Question 8

free trade area

Answer 8

A free trade area (FTA) is where there are no import tariffs or quotas on products from one country entering another.

Question 9

customs union

Answer 9

FTA + common external tariff

Question 10

common market

Answer 10

CU + free movement of G/S, capital and labour

Question 11

monetary union

Answer 11

CM + single currency and same economic policies

fiscal transfers between each other & provide financial support during difficult economic times

Question 12

role of wto

Answer 12

Tribunal role:
This role involves settling disputes between members

Monitor role:
reviews the trade policies of its members to make sure that WTO rules are being applied fairly and consistently

Training role:
The WTO provides training to government officials in (mostly) developing countries

“regional integration should complement the multilateral trading system and not threaten it”

Question 13

competitiveness

Answer 13

sustained ability of a country’s businesses to sell goods and services profitably at competitive prices in overseas markets

measured by relative labour costs per unit and relative export prices

Question 14

internal devaluation

Answer 14

country seeks to improve price competitiveness through lowering wage costs and increasing productivity and not reducing the external value of their exchange rate

Question 15

external devaluation

Answer 15

country operating with a fixed or semi-fixed exchange rate system decides to deliberately lower the external value of their currency

Question 16

reasons for protectionism

Answer 16

infant industry
sunset industry
diversify economy
raise tax revenues
improve trade balance
prevent import dumping