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economics > 4.1 International Economics > Flashcards

4.1 International Economics Flashcards

1
Q

What is globalisation?

A
  • refers to the growing interdependence between countries and the integration of different national economies with the world economy -> eventually becoming one global market
  • essentially, countries specialise in specific goods and then trade with other countries
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2
Q

What is the impact of globalisation on governments?

A
  • larger multinational companies operating in those countries would have to pay more in the form of corporate tax, which will contribute to tax revenue made by the government - this will mean a better govt. budget
  • however, larger companies are more likely to participate in tax avoidance because they have to pay so much in taxes
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3
Q

What is the impact of globalisation on producers?

A
  • Firms can source resources from more countries, that are probably cheaper, and then sell them in more countries -> this reduces risks since the collapse of the market in one company will have a smaller impact
  • however, there will be increased competition in any one market - which is one negative of free trade
  • they can also employ low skilled workers much cheaper in developing countries and exploit a comparative advantage and have larger markets - both of which can increase profits
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4
Q

What is the impact of globalisation on consumers?

A
  • Leads to a wider range of products being sold so consumers have more choice
  • Lower prices available for consumer because the companies are more competitive and want to achieve the cheapest prices
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5
Q

What is the impact of globalisation on environment?

A
  • The increase in world production has led to an increase in demand for raw materials - which harms the environment
  • However, globalisation means the world can work together to tackle climate change by sharing ideas and technology
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6
Q

What is the impact of globalisation on workers?

A
  • there will be more available job opportunities available to the population because there are more companies operating in the countries
  • Increased migration may also help by lowering wages and migrants can also provide important skills and increase AD which increases the number of jobs
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7
Q

What is the impact of globalisation on overall economic growth?

A
  • Globalisation increases investment within countries; the investment of TNCs (Transnational Corporation) represents an injection into the economy and cause a multiplier
  • TNCs bring world class tech which can have knock on benefits to all industries as these techniques will become available to them too
  • however, the power of TNCs can cause political instability as they may choose to support regimes which are unpopular and undemocratic but that benefit them
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8
Q

What is an absolute advantage?

A
  • occurs when a country can produce a good or service using fewer factors of production than another nation
  • may also refer to the ability of a party to produce a greater quantity of a good than a competitor with the same resources
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9
Q

What is a comparative advantage?

A
  • when a country has the lowest opportunity cost of producing a good - this is ideally the good that the country should produce in
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10
Q

What are terms of trade?

A
  • the rate of exchange of one product for another when two countries trade
  • also tells us the quantity of exports that need to be sold in order to purchase a given level of imports
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11
Q

When is movement in the terms of trade said to be favourable? And when is it considered unfavourable?

A
  • said to be favourable if the terms of trade increase as the country can buy more - also known as an improvement in the terms of trade
  • deemed to be unfavourable if they decrease, when export prices fall or import prices rise - called a deterioration
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12
Q

What is the equation for terms of trade?

A

Index of export prices / index of import prices x 100

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13
Q

What is a change in the terms of trade?

A
  • A rise in exports relative to import prices = a favourable movement
  • A fall in exports relative to import prices = unfavourable movements
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14
Q

How can a change in price level/inflation rate cause a change to the terms of trade?

A
  • a rise in a country’s relative inflation rate would also make its export prices higher and import prices lower - which would benefit the country
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15
Q

What is a pattern of trade?

A
  • the composition of a country’s imports and exports, and the volume of its trade with the rest of the world and how that is likely to change over time
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16
Q

What is devaluation?

A
  • a deliberate attempt to deterioration of its terms of trade
  • this is because it is a deliberate attempt to reduce export prices and raise import prices in order to make the country’s products more internationally competitive
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17
Q

How do changes in demand and supply of imports or exports?

A
  • demand is dependent on productivity and income of the buyer
  • an increase in the demand for exports would increase their prices - depending on excess demand - and so cause a favourable movement in the terms of trade
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18
Q

How can a change in terms of trade impact balance of payments?

A

The effect on the BoP would depend on the PED of exports and imports
- a favourable movement would improve the current account on the balance of payments
- but if it elastic, a favourable movement, would worsen the BoP

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19
Q

How can a change in the terms of trade affect economic growth and employment?

A
  • improvement in the TOT: likely to lead to a fall in GDP and a rise in unemployment - since, if caused by a rise in export prices, exports will fall and imports will rise
  • leads to a reduction in production within the country and so a fall in jobs and output
  • eventually, long term decline in the TOT suggests a long term decline in living standards as less imports can be bought
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20
Q

What are the factors affecting the pattern of trade?

A
  • comparing advantage
  • emerging economies
  • relative exchange rates
  • trade blocs
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21
Q

How does a comparative advantage influence a pattern of trade?

A
  • countries trade where there is a comparative advantage to trading so a change in this will influence the pattern
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22
Q

How do emerging economies influence the pattern of trade?

A
  • growing countries are likely to need to import more goods and export more goods to pay for this
  • emerging economies shift the trade pattern by taking up a larger proportion of a country’s imports and exports than they had previously
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23
Q

How do relative exchange rates influence the pattern of trade?

A
  • the exchange rate affects the relative prices of goods between countries
  • this then influences the level of exports and imports of a country
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24
Q

How do trading blocs influence the pattern of trade?

A
  • these increase the level of trade between certain countries and so influence the pattern of trade because trade increases between these countries and decreases between others
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25
Q

What are the different levels of trading blocs?

A

Preferential trading areas -> free trade areas ->customs union -> single market/common market -> monetary union -> economic union -> political union

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26
Q

What are preferential trading areas? + example?

A
  • the loosest form of economic integration: where tariffs and other trade barriers are reduced on some, but not all goods traded between member countries
  • provide lower barriers on trade among participating nations than in trade with non-members -> lower tariffs on imports of each other
  • commonwealth preference system (1932) - established among 48 commonwealth countries of the empire
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27
Q

What are free trade areas?

A
  • when two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members of the
  • although, each member can impose its own tariffs and quotas on goods it imports from outside the trading bloc
  • ASEAN FTA, NA AFTA
28
Q

What is a customs union?

A
  • the removal of all tariff barriers between members and the acceptance of a common external tariff against non-members -> this allows them to negotiate as a single bloc with third parties such as other countries
  • example: customs union between EU and turkey 1996
29
Q

What is a common market?

A
  • when all members trade freely in all economic resources so trade in GOODS, SERVICES, LABOUR and CAPITAL are removed
  • they impose a common external tariff on imported goods from outside the markets
  • example: EU, easy African community
30
Q

What is an economic union?

A
  • More intense integration -> an agreement between two or more countries to remove barriers to trade, allow free flow of labour, capital and coordinate economic policies
  • Members agree to harmonise their tax, monetary and fiscal policies and to create a common currency
  • Trade policies are set through common external tariffs on non-members
  • example: EU, West African Economic Community
31
Q

What is a political union?

A
  • an agreement between two or more countries to coordinate their economic, monetary and political systems
  • required to accept a common stance on such policies against non-members
  • Example: each US state has its own government that sets policies and laws but they also grant control to the foreign govt over foreign, welfare, monetary policy
32
Q

Why are there restriction on free trade?

A
  • to protect infant industries -> to protect jobs
  • To prevent dumping
  • To prevent unfair competition
  • To prevent a country becoming reliant on imports from other trading partners
33
Q

What is an infant industry and why must they be protected?

A
  • An industry that is just being established within a country. They need to be stable to build up a rep and customer base to cover their sunken costs -> AC is higher; they need to achieve EOS to be cost effective
  • When govt intervenes to protect them, they can often become too reliant or inefficient
34
Q

How can trade restrictions protect jobs?

A
  • governments mat be concerned that allowing imports leads to domestic producers losing out to international firms = job losses in the country
  • Leads to negative consequences but also the incumbent government being unpopular
35
Q

What is dumping and how does the government prevent this?

A
  • when a country or company with surplus goods sells them off to other country at very low prices - harming domestic producers in those countries
  • Using trade restrictions, the govt intervenes to protect domestic producers who are unable to compete with firms that are willing and able to make a loss
36
Q

Why may domestic producers face unfair competition?

A
  • they may be unable to compete with a firm that has very low labour costs or very low health and safety costs due to regulation or with a firm that is heavily subsidised by the government
37
Q

Why do countries employ protectionism?

A
  • to prevent firms and consumers becoming reliant on imports so that no country becomes totally reliant on another
38
Q

What are some methods of trade restrictions?

A
  • quotas
  • Subsidies
  • Non-tariff barriers: embargoes, legal and technical standards
  • Tariffs
39
Q

What are quotas?

A
  • limits places on the level of imports allowed into a country
  • This then means people are forced to buy domestic goods if they want that good but the quota is already used up
40
Q

How are subsidies used as trade restrictions?

A
  • Payments are made to domestic producers which lower their costs and help them to be more price competitive by enabling cheap prices
  • Can also be given to domestic firms that compete with imports - usually in the form of tax breaks or cheap lo
41
Q

What is an embargo?

A
  • a total ban on imported goods
  • Instead of this, they can introduce an import license when countries/firms need to be able to imports; also reducing the number of licenses they give out
42
Q

What are tariffs?

A
  • taxes places on imported goods which make them more expensive for the consumer to buy, making them more likely to buy domestic goods
43
Q

What is the exchange rate?

A
  • the purchasing power of a currency in terms of what it can buy of other currencies
44
Q

What are the two different types of exchange rates?

A
  • fixed exchange rate system
  • Flexible/floating system
45
Q

What is the fixed exchange rate system?

A
  • when a government sets their currency against another, and that exchange rate does not normally change
  • The country can then decide to devalue its currency overnight to improve international competitiveness of its industry
  • E.g the gold standard where each major gold trading nation made its currency convertible into gold at a fixed rate
46
Q

What is a free/floating system?

A
  • where the value of the currency is determined purely by interaction of market demand and supply of the currency and thus are affected by changes in S&D, with no targets set in the market and no official intervention
  • Both trade and capital flows affect the exchange rate
  • UK and most systems are floating
47
Q

How is the value of a currency maintained by the government?

A
  • The value is FIXED and maintained
  • This is done by either buying or selling the currency
  • if there is a downward pressure (falling value): then they buy the currrency because…
  • If there is an upward pressure (rising value): they sell
48
Q

What creates demand for domestic currency?

A
  • exports
  • Foreign investment in a country’s shares or FDI (e.g buying land)
  • To open an account in a country’s bank (when ROI is higher in home country)
49
Q

What creates supply for domestic currency?

A
  • imports
  • A lack of foreign investment??
50
Q

What is the depreciation of a domestic currency?

A
  • a decrease in the value of domestic currency in TERMS OF foreign currency by market demand and supply in a floating system
  • Takes place due to demand and supply of forex
51
Q

What is the devaluation of a domestic currency?

A
  • the fall in the value of the domestic currency by the govt in a fixed system
  • Takes place when govt orders to correct the BOP
52
Q

What is the appreciation of domestic currency?

A
  • increase in the value of a currency in terms of foreign currency by market demand and supply in a floating system
  • Takes place due to demand and supply of forex
53
Q

What is revaluation of domestic currency?

A
  • rise in the value of domestic currency by the govt in a fixed system
  • Takes place when govt orders to correct the BOP
54
Q

What is the Marshall-Lerner condition?

A
  • PED of exports + PED of imports = must be greater than 1
  • depreciation will only lead to an improvement of the current account when the Marshall-Lerner condition is met
  • If met, appreciation of the currency will cause the current account to worsen
  • WHEN NOT MET, it is opposite
55
Q

What is the J-curve effect when the currency depreciates?

A
  • In some cases, depreciation in the exchange rate will actually worsen the current account initially before it starts to improve it
  • This is because, in the short term, demand for imports and exports may be relatively inelastic. It takes time to recognise that prices have changed and then to search for substitutes
  • In the long term, demand becomes more elastic and current account position may move from deficit into surplus
56
Q

What are the other factors that can influence the effect of a fall in the exchange rate on the current account position?

A
  • exports may be cheaper but the impact of the Q sold may be limited by a low elasticity of supply
  • Trade restrictions imposed by foreign governments
  • Declines in the relative quality of the products made by the country’s firms
57
Q

What is the J-curve effect when the currency appreciates

A
  • value of goods is initially higher
  • So revenue from exports is higher due to inelastic demand
  • But over time, substitutes would be found and adjusted to = making the demand more elastic so the current account position begins to decline
58
Q

What is the common factor of costs for all industries in a country?

A
  • the labour cost is the only one that affects every industry regardless of any other factor
59
Q

What determines international competitiveness?

A
  • price -> avg cost per unit production -> dependent on energy and labour costs
  • Quality -> the supernormal profits available to reinvest in the business to gain capital etc. to improve the quality of products
60
Q

What are the factors that can affect international competitiveness?

A
  • price -> avg cost per unit production -> dependent on energy and labour costs
  • Quality -> the supernormal profits available to reinvest in the business to gain capital etc. to improve the quality of products
61
Q

How does exchange rate affect international competitiveness?

A
  • a rise in the pound will cause exports to become more expensive, and thus make UK goods less competitive as their price changes
  • However, this depends on the elasticity, the good and the reaction of the firm
62
Q

How does productivity affect international competitiveness?

A
  • Rise in labour productivity will cause a ruse in the UK’s competitiveness because costs are lower and so prices will fall
63
Q

How do regulations affect international competitiveness?

A
  • high levels of regulation slow down business decisions, making them less adaptable to changes in the global market
  • Also increases the cost of production
  • Therefore, regulation reduces competitiveness because of higher costs and slow decision-making
64
Q

How does investment affect international competitiveness?

A
  • investment in infrastructure improves productivity and ensures firms can deliver and produce reliably, cheaply and efficiently
  • Investment in research and development allows forms to develop new products, reducing costs and increasing efficiency
  • High levels of corporate taxation reduces investment and so cause a reduction in IC in the long term -> also reduces to take risk, and therefore reduce innovation
65
Q

How does domestic demand affect international competitiveness?

A
  • decent level of domestic demand will mean that firms in the country will already be producing at a large scale so they will be able to exploit EOS and have low AC curves to reduce prices and become more price competitive in the international market
  • High levels of competition have the same effect because firms will have to have good quality or cheap products to survive
66
Q

What are the benefits of being competitive?

A
  • A country will experience current account surpluses allowing them themselves the opportunity to invest overseas and build up a surplus of assets overseas, on which interest, profit and dividends can be earned
  • Competitive economy attracts inflows of FDIs, whether by establishing new companies or buying domestic firms -> leads to a transfer of knowledge, skills and technology to firms
  • Economic growth, both by supply side improvements due to efficiency and investment and by demand side improvements relating to net exports
  • Employment is likely to go up because more goods are being produced, since more goods ate exported and less are imported (more sold internationally) -> a rise in the demand for labour will lead to a rise in wages
67
Q

What are the limitations of being competitive?

A
  • competitiveness can be easily lost -> developing countries who have benefits due to lower costs of labour and costs of materials etc. Could see this eroded when they experience export led growth due to their competitiveness
  • a current account surplus may lead to a rise in the exchange rate, reducing their competitiveness
  • less competitive countries may implement trade barriers to protect themselves
  • countries who are competitive may become more dependent on overseas countries so may suffer more if there is a global recession

economics (21 decks)

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