4.1 - International Economics

Question 1

Define globalisation

Answer 1

Globalisation is the increasing integration of the world’s national economies into an international market

Question 2

Name some factors contributing to globalisation in the past 50 years

Answer 2

1. Trade in goods and services
2. Trade liberalisation
3. Multinational corporations
4. Technology + communication
5. Containerisation

Question 3

What is absolute advantage

Answer 3

When a country produces a good or service at a lover cost and using fever resources than another country

Question 4

What is comparative advantage

Answer 4

When a country can produce a good or service at a lower opportunity cost than another country

Question 5

Advantages of specialisation in an international context

Answer 5

1. Greater world output - economic gains
2. Consumers have more variety
3. Lower average costs due to more competition

Question 6

Disadvantages of specialisation in an international context

Answer 6

1. Countries become over-dependant on importing some goods
2. More structural unemployment as production is moved abroad

Question 7

What a factors influence the patterns of trade

Answer 7

1. Comparative advantage
2. Emerging economies -more participation in trade
3. Growth of trading blocs and trade agreements
4. Changes in relative exchange rates

Question 8

Terms of trade calculation? What does the number mean

Answer 8

Index price of exports over the index price of imports x 100.
Above 100 means improving, below 100 means worsening

Question 9

What factors influence a country’s terms of trade (3)

Answer 9

1. Supply and demand of import and exports
2. Exchange rates
3. Income

Question 10

What is a free trade area

Answer 10

Where countries agree to trade goods with other with members without protectionist barriers

Question 11

What is a customs union

Answer 11

Common trade policy with the rest of the world and free trade between members

Question 12

What is a common market

Answer 12

Same as customs union so the trade between members and common external turns but also allows free movement of capital and labour

Question 13

What are monetary unions

Answer 13

A group of countries that share the same currency and have the same interest rate

Question 14

Role of the WTO?

Answer 14

Promotes world trade through reducing trade barriers and policing existing agreements

Question 15

Name some reasons for restrictions on free trade

Answer 15

1. Correct market failure
2. Reduce trade deficit
3. Protect infant industries
4. Protect domestic jobs

Question 16

What is protectionism?

Answer 16

The act of guarding a countries industries from foreign competition by imposing restrictions on free trade

Question 17

Name some restrictions on free trade

Answer 17

Tariffs, quotas, subsidies to domestic producers, excessive administration (red tape)

Question 18

Disadvantages of protectionism ?

Answer 18

Could distort the market and lead to a loss of allocative efficiency as lower competition means higher prices for consumers and less choice

Question 19

What is the balance of payments

Answer 19

A record of all financial transactions made between consumers, firms and the government of one country to another

Question 20

What does the current account include

Answer 20

Trade in goods and services, income and transfers

Question 21

What causes a deficit on the current account

Answer 21

1. Appreciation of the currency - SPICED
2. Economic growth - more imports
3. Exports less competitive
4. deindustrialisation- less exports

Question 22

Measures to reduce d country’s imbalance on the current account

Answer 22

1. income tax to reduce imports
2. Banks can lower interest rates to cause depreciation in the currency
3. Supply - side policies to increase productivity and export more

Question 23

What is a floating exchange rate? Draw diagram

Answer 23

The value of the exchange rate in a floating system is determined by the forces of supply and demand

Question 24

What is a fixed exchange rate? Diagram?

Answer 24

A fixed exchange rate has a value determined by the government compared to other currencies

Question 25

What is a managed exchange rate

Answer 25

Combine characteristics of fixed and floating exchange rates - not fully floating as the central bank buys and sells currencies to influence their exchange rate

Question 26

Revaluation?

Answer 26

When the currency’s value is adjusted relative to a baseline

Question 27

Appreciation?

Answer 27

Increase in the value of a currency

Question 28

Devaluation

Answer 28

The value of a currency is lowered in a fixed exchange rate system

Question 29

Depreciation?

Answer 29

When the valve of a currency falls relative to another currency

Question 30

What factors influence floating exchange rates

Answer 30

Inflation, speculation, competition, balance of payments

Question 31

How can the government intervene in the current market using interest rates

Answer 31

Increase in interest rates makes it more attractive for investor so increases hot money flows

Question 32

What are foreign currency transactions

Answer 32

When the bank of England buy and sell foreign currency to manipulate the domestic currency