4.1 - International economics Content Flashcards

Question

# 4.1 - International economics Disadvantages of globalisation for high income countries

Answer 1

* **Job Displacement**: Operations moving to low-wage countries or rising competition may leave workers unemployed. * **Income Inequality**: Globalisation increases wage gaps between high-skilled and low-skilled workers; the top 1% has seen income share rise by over 3% since the 1980s (IMF). * **Environmental Degradation**: Long-distance transportation and resource exploitation drive carbon emissions and pollution.

Answer 2

1. **Economic Dependence**: One disadvantage of globalization is that developing nations can become overly dependent on the export of a few key commodities or industries, leaving them vulnerable to fluctuations in global demand and prices. 1. **Exploitation of Labour**: As multinational corporations seek to lower costs, they may outsource production to countries with lower labour standards, wages, and working conditions. 1. **Environmental Degradation**: As companies seek out the cheapest sources of raw materials and production, they may exploit natural resources and pollute local environments. This threatens the sustainable growth of many poorer countries

Answer 3

1. **Increased access to foreign markets**: Globalization has allowed the UK to expand its markets beyond its national borders. For instance, the value of UK exports increased from £196 billion in 2000 to £613 billion in 2019. 1. **Attraction of foreign investment**: FDI in the UK increased from £62 billion in 2000 to £1,033 billion in 2019, reflecting the country's ability to attract and benefit from international investment. This has an impact on AS and long run aggregate supply. 1. **Improved productivity and innovation**: A Study by the National Bureau of Economic Research found that exposure to international competition has driven innovation in UK firms, leading to increased factor productivity and competitiveness.

Answer 4

1. **Increased foreign investment**: An increase in foreign investment in developing countries, providing a source of capital, technology, and expertise. FDI inflows to Sub-Saharan Africa increased from $10 bn in 2000 to $46 bn in 2020. 1. **Expanded access to global markets**: According to the World Bank, the value of exports of goods and services from Sub-Saharan Africa increased from $79 billion in 2000 to $338 billion in 2019, reflecting the growth in global trade. 1. **Increased access to technology and knowledge**: Access to new technologies and knowledge from around the world can drive economic growth and development. Cell phone penetration in Sub-Saharan Africa increased from 3% in 2000 to 44% in 2020, reflecting the growth in technology adoption in the region.

Answer 5

When one country can produce a good / service at a lower OC cost than another country.

Answer 6

When an economy can produce a greater total of goods for the same quantity of inputs.

Answer 7

Two parties benefit from trade if they specialize in goods they produce at a lower opportunity cost, even if one has an absolute advantage in all areas. This specialization maximizes efficiency and mutual gains.

Answer 8

When two countries specialize in goods they produce more efficiently than the other (absolute advantage) and trade, both benefit from specialization and increased productivity.

Answer 9

* **Assumptions**: Relies on unrealistic conditions like free trade and perfect mobility. * **Inequality**: Trade imbalances may favor one country disproportionately. * **Specialization Risks**: Over-specialization can make economies vulnerable to demand or supply disruptions. * **Environmental Impact**: Global trade can increase carbon emissions and harm sustainability. * **Labor Disruption**: Industry shifts may cause social and economic challenges in local labor markets.

Answer 10

As long as a country has a comparative advantage in some resource (as long as it faces a lower opportunity cost than another country for that resource), then it can benefit from trade.

Answer 11

* **Efficiency and Productivity**: Countries focus on producing goods/services they’re most efficient at, boosting productivity and GDP growth. * **Consumer Benefits**: Wider variety of goods/services at lower prices due to global competition, raising living standards. * **Resource Allocation**: Resources shift to industries with comparative advantage, minimizing waste (e.g., land, labor, capital). * **Economies of Scale**: Specialisation enables mass production, lowering average costs (e.g., China’s manufacturing dominance). * **Theory of Comparative Advantage**: Specialising in goods with lowest opportunity cost (OC) increases global output (e.g., mutual gains from trade). * **International Cooperation**: Trade interdependence reduces conflict risks, fostering diplomacy and global partnerships.

Answer 12

* **Over-Dependence on Exports (Dutch Disease)**: Over-reliance on a single export (e.g., Nigeria’s oil) crowds out other sectors, causing collapse if prices fall or demand shrinks. * **Vulnerability to Import Disruptions**: Critical goods (e.g., energy, semiconductors) reliant on imports risk shortages during geopolitical crises (e.g., Europe’s 2022 gas crisis). * **Job Displacement**: Structural unemployment in uncompetitive industries (e.g., U.S. “Rust Belt” manufacturing jobs lost to globalisation). * **Income Inequality**: Concentrated gains in export sectors (e.g., tech/finance) widen wealth gaps, leaving non-tradable sectors (e.g., retail) behind. * **Geopolitical Risks (Interdependence)**: Trade wars/conflicts (e.g., U.S.-China tariffs) or sanctions can disrupt supply chains, harming over-specialised economies.

Answer 13

Italy lost comparative advantage for manufacturing, forced to move from a secondary to a tertiary economy.

Answer 14

Efficient use of resources for comparative advantage. Export-led growth. e.g. Singapore and South Korea.

Answer 15

Even though USA has an absolute adv. in both machines + food, OC of the two countries are different. Theory of comparative adv. states countries should specialise where they have the lowest OC. USA - machines, G. - food.

Answer 16

Because they may still be able to produce a good at a lower relative opportunity cost. This means that both countries can focus on what they have a lower opportunity cost in and increase total output.

Answer 17

* **LEDCs may have a comparative advantage in primary products** - Therefore should continue to develop in areas which they are strongest - Argument given by the Bad Samaritans * **Some rich countries have been able to use primary products to develop** - Saudi Arabia and oil. - Primary product revenue should be used to reinvest into manufacturing. * **Forward markets can be used to fix prices in advanced to reduce volatility and risk.** * Not all primary products have a low YED - Diamonds in Botswana. * **Primary products rose steeply in price between 2000-2008 while prices for manufactured goods was falling. They also rose post-pandemic.**

Answer 18

* Ignores transport costs - Might eliminate comparative cost advantage. * Ignores economies of scale. * Assumes there are only two economies producing two goods. * Assumes that traded goods are homogenous. * Assumes perfect factor mobility. * Assumes no trade barriers * Assumes perfect information

Answer 19

* Transport costs are not considered * Strategic industries - risky to be reliant on another country * Not just 2 countries in the world producing goods * Infant industries might be damaged

Answer 20

* **Trading Blocs** - within blocs members have reduced trade barriers so more trade between them * **Exchange rate** - changes in exchange rate mean changes in competitiveness of exports and amount of imports, SPICED/WIDEC * **Emerging economies** - they are major exporters of manufactured goods and services, altering global trade dynamics * **Comparative advantage** - countries exports g/s that they have comparative advantage in and import those they have a disadvantage in. This drives international trade patterns (TEEC) Also * Tarrif and non tarrif barriers, FDI, changes in competitiveness and inflation rates.

Answer 21

When the patterns of trade are changed, due to blocs. (Reduced benefits from specialisation).

Answer 22

* UK has increasingly had a comparative advantage in services rather than good. -> Usually financial services. * Foreign trade has increased as a proportion of GDP. Exports are now around 30% of national income. * The UK does earn money from North Sea Oil. * EU has become main trading partner since joining the EEC

Answer 23

The rate of exchange of one product for another when two countries trade.

Answer 24

The quantity of exports that need to be sold to buy a given quantity of imports.

Answer 25

## Footnote (Remember X over M)

Answer 26

Increasing, increased injections into economy.

Answer 27

Use equation ToT = avg.Xprices/ avg.M prices. If X prices ↑, ToT ↑. If M prices ↓, ToT ↑.

Answer 28

SR - anything that affects price LR - anything that affects productivity

Answer 29

In the LR, the price of primary products declines compared to manufactured products. (Terms of trade for primary products tends to fall in the LR).

Answer 30

Profit margins for chocolate are better than cocoa.

Answer 31

Primary product dependency.

Answer 32

When rapid development of one sector of the economy precipitates a decline in other (non-resources) sectors. (Other industries don't take off, Rostow's model doesn't occur).

Answer 33

* A change in exchange rate. spiced/widec * Inflation * A change in demand for imports and exports * Changing incomes affect pattens of demand. * Changes in productivity * Incomes * PRIMARY PRODUCT DEPEDENCY * Protectionism - tarrifs increase prices so terms of trade worsen

Answer 34

Falling import prices Rising export prices

Answer 35

Inflation - would increase export prices. Lower production costs abroad - would decrease import prices An appreciation in the exchange rate

Answer 36

Higher productivity A weaker exchange rate

Answer 37

1. Would lead to a reduction in import expenditure 1. A rise in export revenue 1. Increase in net trade and an improvement in the balance of payments.

Answer 38

* If imports are price inelastic - consumers are not responsive to the fall in price so spend less on imports * And exports are price inelastic - other countries continue to buy exports despite the increase in price.

Answer 39

* If demand for imports imports are elastic * And demand for exports are price elastic

Answer 40

1. Increase in import expenditure 1. Decrease in export revenue 1. Bad for current account balance

Answer 41

1. Fall in import spending 1. Increased export revenue 1. There is an improvement on the current account and balance of payments

Answer 42

* Likely will be bad for the current account - commidities are very price inelastic. * This would mean as prices fall, export revenues will also fall * This means a deterioration in trade balances and cut in aggregate demand. * **Evaluation**- Commodities are very volatile. Likely future increase. Longrun/short run. * Or, depends on what is happening with imports.

Answer 43

* For every import, a country has to export more * A decline in terms of trade reduces the ability to import goods. * Less purchasing power means worse standards of living * Can make it harder to pay foreign debt.

Answer 44

1. Might make exports more competitive - better for balance of payments. 1. The impact of a decline in the terms of trade will depend on the elasticity of demand. If demand is elastic, the lower price of exports will cause a bigger % increase in demand. 1. Some LDC’s have seen an improvement in terms of trade because of rising price of commodities and food post-2008. It is not always LDCs who see a decline in the terms of trade. 1. It is important to distinguish between a short-term decline in terms of trade and a long-term decline. A long-term decline is more serious for reflecting a fall in living standards.

Answer 45

A group of countries with trade agreements.

Answer 46

Regional Trading Bloc. Free Trade Area Preferential Trade Area Customs union. Common / single markets. Monetary unions. Economic union.

Answer 47

A group of countries in a geographical region that protect themselves from imports from non-members. (Also reduction / elimination of internal tariffs).

Answer 48

Trans-Pacific Partnership (TPP)

Answer 49

* **Trade creation** - Makes it easier for countries to trade within the bloc and specialise - Exploit comparative advantage. Economies of scale from new markets. Greater competition * **More FDI** - MNCs can invest in the free trade area as they can avoid tariffs and other trade restrictions.

Answer 50

* **Trade diversion** - Trade is diverted away from former partners - when the UK joined the EU it began trading less with the commonwealth. might lead to overall fall in economic output. * **Country might be better off outside** - they can sign lots of bi-lateral agreements * **Might make developing countries worse off** - Do not have enough economies of scale so their infant industries die off. * **Less efficient use of world resources** - Trading blocs distort comparative advantage because they entain the use of trade restrctions - Might be more effective to persue global free trade in the WTO. * Increased negative externalities of production, resource depletion & environmental damage

Answer 51

Reduced tariff barriers on all goods coming from other members. (Members allowed to impose restrictions on those outside the FTA)

Answer 52

Reduced barriers on some goods (Used to protect domestic industries)

Answer 53

The removal of tariff barriers between members and acceptance of common external tariff against non-members. May also have preferential import tariffs rates that apply to trade agreements with the customs union has entered into with other countries or groupings of countries

Answer 54

No barriers to trade between members - freedom of asset / factor mobility. Common external tariffs on imported goods from outside.

Answer 55

Harmonisation of macroeconomic policies e.g. common rules regarding monopoly powers, anti-competitive practices and the removal of custom posts. (Best example is the EU).

Answer 56

1. **No customs posts between countries** - Just as goods and people are free to travel between Manchester and London, they should be as free to travel between London and Milan 2. **Identical product standards** - The existence of individual national safety standards on cars, for instance, is a barrier to trade just as it would be if cars sold in London had to meet different safety regulations as cars in Bristol 3. **Harmonisation of taxes**- If the tax on the same car is £2000 more in the UK than in France, then UK residents will buy their cars in France and drive them over -> distorting pattern of trade 4. **A common currency** - Having to buy foreign currency is a barrier to trade, hence there should be a common currency as there is in the UK

Answer 57

* **Tariff-Free Access to Nearly 500 Million Consumers**: Membership provides duty-free access to a vast market, enabling firms to leverage economies of scale, reduce per-unit costs, and ultimately boost profits. * **Easier Access to Foreign Direct Investment (FDI)**: Being part of the single market enhances economic credibility, attracting foreign investors who bring capital, technology, and expertise—fueling long-term growth and productivity. * **Enhanced Competition Leading to Macroeconomic Efficiency**: In the EU single market, intensified competition at the macro level forces industries to innovate and improve efficiency broadly. As individual firms adapt, these cumulative improvements drive aggregate productivity growth and economic stability across the region.

Answer 58

1. **Immigration Control**: Free movement rules → governments can’t limit EU migrants, risking public service strain/wage undercutting (e.g., UK pre-Brexit). 2. **Subsidy Inequity**: Wealthier states (e.g., Germany) net contributors; poorer regions (e.g., Eastern Europe) gain more → taxpayer resentment. 3. **Job Losses**: Efficient EU firms outcompete domestic industries → closures/unemployment (e.g., Italian steel vs. Germany). 4. **Capital Inequality**: Financial integration → wealth concentrates in hubs (e.g., Frankfurt) → widens wealth gaps (asset owners vs. workers).

Answer 59

Countries with a single currency and exchange rates monitored by a central bank.

Answer 60

EU - Eurozone (Results in loss of monetary policy for members)

Answer 61

1. **Savings on Transaction Costs**: Eliminates currency conversion, reducing costs across borders. 1. **Greater Certainty for Firms**: Minimizes currency fluctuations, allowing for more stable business planning. 1. **Increased Economies of Scale**: Opens larger markets, enabling firms to expand and lower per-unit costs. 1. **Currency Risk Reduction**: Uses a stable currency to lower exposure to exchange rate volatility and enhance borrowing conditions. 1. **Enhanced Competition & Price Transparency**: Provides consistent pricing that boosts market competition and benefits consumers

Answer 62

* **Loss of control over monetary policy** - countries can't use monetary policy in order to adopt to local problems. One sized fits all. * **Loss of exchange rate flexibility** * **Reduced control over fiscal policy** - 3 % limit on budget deficit and 60% limit on national debt or face a fine * **Transition costs** - Adjustment costs when switching currencies * **Makes countries excessively interdependent** - Contagion.

Answer 63

* **Similar trade cycles** - So that interest rates synergise. E.g. interest rate rises to curb inflation in a booming Germany will not help Spain if it is in recession. * **Mobility of factors of production** - Reduces the impact of shocks, as worker can migrate to other countries. * **Mobility of finance** - There should be complete mobility of finance with prices & wages free to adjust based on market conditions. * **Automatic fiscal transfers** - Some form of automatic fiscal transfer is needed for countries that are doing badly. E.g. Greece and Portugal. This will reduce the need of excahnge rate adjustment, which might have been the prior policy response. * **Similar economic situation** – so interest rate changes have similar effects across the union

Answer 64

To help members use trade to raise living standards and create jobs.

Answer 65

Tries to negotiate trade agreements and resolve trade problems. (By reducing protectionism + ↑ integration).

Answer 66

* Allows rich countries to exploit developing countries, paying low wages and making them work in conditions that would be completely unacceptable in the developed world - Glencore in Zambia, DRC * Is causing environmental disaster as rich countries plunder the poor countries * Destroys native cultures and replaces it with an American way of life. * Forces poor countries to lower their barriers to trade whilst rich countries keep theirs * Gives ownership of the rules of the world trading system to a few rich countries and their multinational companies

Answer 67

* If the WTO cannot produce multilateral agreements between all member countries then countries will resort to signing ever more regional trade agreements (RTAs) * RTAs do not produce anywhere near the economic gains that could be achieved by a world trade agreement * Still arguably better than nothing so long as trade creation > trade diversion

Answer 68

* **Conductor** – Creates trade rules, organizes global talks (e.g., Doha Round), and pushes nations to dismantle barriers (tariffs, quotas) for freer trade * **Tribunal role** – Members first negotiate bilaterally; unresolved issues escalate to WTO hearings and rulings on trade agreement violations. * **Monitor roles** – The WTO 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, to help them engage in trade with other WTO members.

Answer 69

Taxes placed on imports.

Answer 70

X and Y represent net welfare loss. Yellow box represents govt. rev.

Answer 71

Welfare loss is greater with quotas, as there is no tax revenue generated by the government

Answer 72

Qs of domestic producers increases from Q1 to Q4. Qs of world producers decreases from Q2 to Q3.

Answer 73

Increases prices, due to reduced world supply. Reduces quality of life for consumers. However, govt. revenue from tax may improve quality of life in LR (hypothecated). Other eval: Infant industry argument: domestic producers increase producer surplus + increased market share increased job protection in domestic economy.

Answer 74

Triangles X and Y = net welfare loss. (Net welfare loss as areas of X and Y larger than revenue). Reduction in CS larger than increase in PS.

Answer 75

Potential distortion of comparative adv. - as this theory assumes no tariffs. Tariff alters the cost advantage that countries may have built up through specialisation. Retalitation: Countries hit by tariffs often impose counter-tariffs on the aggressor’s exports, sparking a trade war. This harms industries/consumers in both nations (e.g., higher prices, lost jobs) and reduces global trade efficiency.

Answer 76

When importing country represents a very small proportion of the total demand for the good. ∴ Any protectionist diagram can be evaluated by elasticity of world supply i.e the optimal tariff argument.

Answer 77

A country with a large proportion of global trade experiences a smaller price increase when tariffs are imposed. Reducing the MSC all while govt. benefits from tax rev.

Answer 78

The country with a large proportion of global demand reduces global price (as they import less). The usual price increase of a tariff is offset by this fall in global prices.

Answer 79

* **Minimal Domestic Price Increase**: Because the country’s large share of global demand gives it market power, its tariff drives down the world price. This reduction partially offsets the tariff’s direct effect, keeping the domestic price only slightly higher than it would otherwise be. * **Tariff Revenue Transfer**: The tariff revenue collected by the government effectively captures the value that foreign producers had earned before the global price drop. This transfer of surplus from foreign suppliers to the domestic government enhances national welfare

Answer 80

Horizontal, perfectly elastic.

Answer 81

Optimal tariff theory: Tariff can actually increase a countries welfare, if the area of tax revenue is larger than the loss in consumer surplus. (Condition is country must represent large proportion of global demand).

Answer 82

Size of tariff x no. of imports.

Answer 83

Retaliation. (Countries will retaliate with tariffs that cause domestic country to overcome their portion of DWL).

Answer 84

An additional tariff, above normal import tariffs.

Answer 85

A 'tit for tat' trade war.

Answer 86

However, there is net welfare loss overall, represented by blue boxes.

Answer 87

* **Infant industries** - To protect new firms that would be unlikely to succeed at start-up due to the level of global competition. Once established support is removed * **Sunset industries** - At the end of the life cycle, these firms are on their way out & the government chooses to support them to help limit the economic damage that would occur if they closed abruptly * **Strategic industries** - Industries such as energy, defense & agriculture are essential to self-sufficiency & security. Being reliant on other countries for these creates vulnerabilities for a nation * **Dumping** - Dumping is anti-competitive & can harm a country's industries. Excess output is sold in another country below costs (illegal) or below normal prices in the home market * **Employment** - helps fix structural unemployment and offshoring * **Current Account deficit** - When imports > exports the amount of money leaving the country to support foreign firms is greater than that entering to support domestic firms. Protectionism aims to correct this imbalance * **Raise tax revenues to lower budget deficit** - Important for countries that are developing as they have a limited domestic tax base

Answer 88

Outward shift in domestic supply to Q3. Higher prices due to relative shortage.

Answer 89

They create a relative shortage, total output falls:

Answer 90

* **Increased market share**: Reduced foreign competition boosts sales/profits (e.g., local steel firms). * **Job protection**: Short-term employment gains in protected industries. * **Dependency risk**: Over-reliance on government support, reducing efficiency (e.g., "infant industry" may not mature). * **Cost-push inflation**: Higher input prices if protected raw materials (e.g., tariffs on steel raise costs for car manufacturers). * **Retaliation risks**: Exporters may lose foreign markets if trade partners impose barriers.

Answer 91

* **Higher prices**: Tariffs/quotas raise import prices, leading to cost-push inflation (e.g., imported electronics become more expensive). * **Reduced choice**: Restricted imports limit product variety (e.g., fewer foreign car models). * **Lower quality**: Domestic producers face less competition, reducing innovation incentives. * **Regressive effect**: Low-income households spend a higher % of income on protected goods (e.g., food tariffs). * **Consumer surplus loss**: Deadweight loss from higher prices and reduced consumption.

Answer 92

* **Tariff revenue:** Income from import taxes (e.g., £X billion from steel tariffs). * **Trade war risks**: Retaliation from other countries (e.g., China imposing counter-tariffs). * **Political costs**: Short-term popularity with domestic industries vs. long-term consumer backlash. * **Administrative costs**: Enforcement of quotas/subsidies (e.g., monitoring compliance). * **WTO disputes**: Potential legal challenges for violating free-trade agreements.

Answer 93

* **Higher wages in protected industries**: Domestic firms may increase employees’ wages (e.g., steelworkers), temporarily raising living standards for those workers. * **Higher prices → Reduced real incomes**: Short-term decline in purchasing power (e.g., food tariffs), lowering living standards for most households. * **Long-term stagnation**: Inefficient industries are kept in business → slower productivity/wage growth → weaker future living standards. * **Unstable employment**: Jobs saved in protected sectors (e.g., agriculture) vs. losses in export industries (e.g., manufacturing) → net uncertainty for households. * **Inequality worsens**: Low-income households spend more on tariff-hit essentials (e.g., clothing), disproportionately reducing their living standards. * **Lower-quality goods**: Restricted imports limit access to superior foreign products (e.g., medicines, technology), harming health/wellbeing.

Answer 94

* **Perceived fairness**: Workers in declining industries (e.g., steel) may gain jobs, reducing feelings of unfair competition. * **Domestic inequality**: * **Regressive**: Tariffs on essentials (e.g., food) hurt low-income households most. * **Wage/regional disparities**: Benefits concentrated in protected sectors/regions. * **Global inequality**: Limits export opportunities for developing nations, worsening income gaps. * **Evaluation**: Short-term fairness vs. long-term inefficiency and broader inequality.

Answer 95

* **Absolute quota** – A simple physical limit either a volume or a value * **Tariff rate quota** – These allow a certain number of imports to gain a discount on the usual tariff rate * **Voluntary export restraints (VER)** – This is when a government limits the amount of exports from one country to another for a particular type of good.

Answer 96

* **Welfare Loss**: Quotas reduce it more (no govt revenue vs. tariffs’ tax income). * **Import Control**: Quotas fix quantity; tariffs’ impact depends on demand elasticity. * **Enforcement**: Quotas harder (tracking imports vs. taxing them). * **Fairness/Corruption**: Quotas risk unfair allocation, lobbying, and political bias.

Answer 97

Payments to domestic producers which lower their costs.

Answer 98

* Decreases costs of production * Increases output * Increases international competitiveness * Higher revenues will lift profits and possible lead to higher share price. More output could lead to economies of scale Evaluation: Risk of dependency, removes the incentive to be more competitive by innovation, increasing efficiency and productivity

Answer 99

The subsidy may not be large enough to change the world price. So won't affect them But could lower the overall price Eval Facing higher taxes if the subsidy is expensive

Answer 100

Can be an effective non-tariff barrier to reduce the volume of imports by encouraging domestic production Eval: Doesn't generate tax revenue. More spending can increase budget deficit. Opportunity cost

Answer 101

* Risk of Retaliation and a possible trade war * Market Distortions * Higher prices for consumers * Regressive effect on income inequality * Incentives to by-pass controls in shadow markets * Higher costs for exporters

Answer 102

* Increases their output * Raises the selling price * Increases their revenue

Answer 103

* Decreases their output * Compared to a tariff, those firms who manage to export in the quota receive a higher price for their sales

Answer 104

Results in higher prices & less choice

Answer 105

* They do not receive any tariff revenue (as there is no tariff) * They may receive higher tax revenue at the end of the financial year when domestic firms pay their corporation tax. * More employment so more taxes that way and also achieve some objective of low unemployment

Answer 106

Reduces for consumers as higher prices erode the purchasing power of their income

Answer 107

Improves for domestic firms but worsens for foreign firms

Answer 108

Makes it harder for them to compete with domestic firms

Answer 109

Improves for consumers as they benefit from lower prices - their income goes further

Answer 110

Domestic firms can compete more equally

Answer 111

* Limits foreign competition * Protects levels of outputs * May increase selling price & revenue

Answer 112

* Acts as a disincentive to sell into foreign markets * Costs of meeting the non-tariff barriers may significantly reduce profit margins

Answer 113

May reduce choice/variety in a market

Answer 114

* They may lose some credibility with the WTO * Enforcing the non-tariff barriers may be difficult or expensive

Answer 115

* Less choice & higher prices erode standards of living * Product labelling information may improve decision making & quality of life

Answer 116

May help improve equality e.g. environmental standards help create equal production inputs which results in equality in the costs of production

Answer 117

The sum total of a country’s income and expenditure on foreign trade together with all its international capital movements It’s split into two sections….. Current account Capital & financial account Always = 0

Answer 118

* (Balance of) trade in goods * (Balance of) trade in services * (Net) income flows from abroad * (Net international) transfer payments.

Answer 119

How much is spent on imports vs the total value of exports

Answer 120

X = Positive M = Negative

Answer 121

1. Current account 1. Financial account 1. Capital account 1. Balancing items

Answer 122

Ensures BoP is always 0. S for currency = D for currency. (E.g. CA deficit can be compensated for by FA surplus).

Answer 123

Rate of consumer spending on imports AKA Marginal propensity to import. (↑M ↓BoP). International competitiveness. Structure of the economy. (De-industrialisation can harm export sector; e.g. Italy). Exchange rate. (Can influence export value).

Answer 124

* **Relatively low productivity** * **Relatively high value of a countrys currency** * **Relatively high rate of inflation** * **Rapid economic growth resulting in increased imports** * **Non-price factors such as poor quality and design** * Poor Price * Recession * Volatile global prices * Government policy

Answer 125

1. Low productivity raises costs 1. Exporting firms with low productivity may find themselves at a price and cost disadvantage in overseas markets which will decrease competitiveness and the level of exports 1. With higher domestic prices, consumers may also buy abroad thus increasing the imports 1. Falling exports and rising imports creates a deficit

Answer 126

1. Currency appreciation makes a country's exports more expensive relative to other nations 1. Foreign buyers look for substitute products which are priced lower 1. Exports fall and the balance on the current account worsens 1. Similarly, currency appreciation makes imports cheaper 1. Domestic consumers may switch demand to foreign goods and as imports rise, the balance on the current account worsens

Answer 127

1. A relatively high rate of inflation makes a country's exports more expensive than other nations 1. Foreign buyers look for substitute products which are priced lower 1. Exports fall and the balance on the current account worsens 1. Similarly, high inflation may mean that goods/services are cheaper in other countries 1. Domestic consumers may switch demand to foreign goods and as imports rise, the balance on the current account worsens

Answer 128

1. Rapid economic growth raises household income 1. Households respond by purchasing goods/services with a high-income elasticity of demand (income elastic) 1. Many of these goods are imported and as imports rise, the balance on the current account worsens

Answer 129

1. When a country develops a reputation for poor quality and design, its exports fall as foreign buyers look for better substitutes elsewhere 1. Domestic buyers who are able to shop abroad also choose to buy better quality products elsewhere and the level of imports rise 1. A fall in exports and a rise in imports worsens the balance on the current account

Answer 130

* Signals a long term loss of competitiveness * May mean higher unemployement * Withdrawl from circular flow, drag on aggregate demand * May create imported inflation * Leads to a falling exchange rate - higher import costs. * Fall in GDP * Withdrawl from circular flow

Answer 131

* Depends on the size of the deficit and how long it persists * Might be cyclical * Depends on what the imports are - capital goods and investment will improve future growth prospects. * Depends on if the exchange rate is fixed or floating, In a floating system, the balance of payments deficit should be self correcting * Might be financed by a surplus on the financial account

Answer 132

* Competitive economy - High productivity, investment, training, quality * Low inflation * Low exchange rate * Vast natural resource - Kuwait, UAE * Trade cycle * Government policies - competitive supply side policies * Surplus of savings over investment

Answer 133

* **Retaliation** - Countries with large deficits might retaliate by putting up barriers to trade to reduce imports - American withdrawl from NAFTA * Resources are focused on producing to meet export demand rather than export demand, so lower consumer living standards * **Rise in the exchange rate** - makes exports more uncompetitive in the long run. * **Inflation** - high demand for exports could create inflation.

Answer 134

* **Do nothing** and leave it to market foces in Forex market to self-correct deficit * **Use expenditure switching policies** - change relative prices of exports and imports * **Use expenditure reducing policies** - lower real incomes and AD - cutting demand for improts but causes unemployment * **Use supply-side policies**

Answer 135

* This is because it has to pay for everything it consumes and funds in some way - to fund a current account deficit, a country must be selling assets to foreign investors. * It is debatable whether this is sutainable in the long run since, if people invest in a country, at some point they will require a return on their investment, and this will cause a deficit on the financial account

Answer 136

1. **Depreciation of the exchange rate** - Reduces relative price of exportds & make imports more expensiive - BUT risk of cost push inflation - which erodes competitive boost + fall in incomes 2. **Import tariffs** - Increases the price of imports & makes domestic output more price competitive - BUT risk of retaliation from other countries if import tariffs are used as BoP policy 3. **Low rate of inlfation (perhaps deflation)** - Keeps general price level under control and makes exports more competitive - BUT risks from deflation as a way of achieviing intenal develuation - including lower investment

Answer 137

1. **Increase in income taxes** - Reduces real disposable incomes causing falling demand for imports - BUT cut in living standards and risk of damage to work incentives in labour markets 2. **Cuts in real levels of government spending** - Lower aggreagate demand, firms may look to export their spare capacity - BUT damage to short term economic growth, risks that austerity hits investment

Answer 138

Means finaince from abroad (in form of loans or foreign direct investment) is required in order to fund continued imports * This may mean that a country is gradually selling its assets * Owing money to a foreign entity creates vulnerabilites * 2008 GFC - Greece owend creditors significant sums and was required to pay these back making numerous problems their economy. Creditors insisting on being paid back quickly * Run up large external debts and then relying on foreign capital * May switch towards protectionist policies * Can lead to fall in relative living standards if economoc growth slows down

Answer 139

Focus of allocation of resources is on meeting foreign demand as opposed to meeting domestic demand * This can limit availabilty of goods/services in the local economy which can possibly decrease the standard of living for some households * It can also create instabiloty in the forex maket if there is a floating exchange rate * Saving more than they spedn * May adopt a policy of delibrately under-valuing the currency * May be under-consuming (affecting living conditions)

Answer 140

major issue with trade imbalances is that it strengthens those who want to move away from free trade. Large trade imbalances leading to rise of de-globalisation – creating trade tensions --> tariff and non-tariff barriers

Answer 141

A net improvement in trade will only occur if (PED X + PED M) is more than 1. (Good evaluation to the J-Curve).

Answer 142

Short term negative effect (of devaluation as demand inelastic). Long term positive effect (of devaluation as demand becomes more price elastic). REGARDING THE CURRENT ACCOUNT.

Answer 143

* In the short-term, a fall in the price of exports will only cause a smaller percentage rise in quantity demanded. * A rise in the price imports will cause a smaller percentage fall in demand for imports. Therefore, the value of imports actually rises (we spend more on imports) * Therefore, if demand is inelastic, following a depreciation, we actually get a worsening of the current account account

Answer 144

In the long-term, demand for exports and imports will tend to become more price elastic. (more sensitive to price) * Therefore, a fall in the price of exports will cause a bigger percentage rise in quantity demand. (And therefore we get a bigger rise in the value of exports) When demand is elastic, the value of exports rises – and we get an improvement in the current account position. * Also, if demand for imports is price elastic, then there will be a bigger percentage fall in demand for imports. In this case, the total spending on imports starts to fall.

Answer 145

* In the short-term, firms and consumers may have contracts to keep buying the good. * It takes time to find alternatives. * The higher price of imports will be an incentive for domestic firms to increase production, but this takes time * Elasticity and time

Answer 146

* The current account will depend on consumer spending and the rate of economic growth. * It also depends on consumer spending in foreign countries (hence demand for exports) * It depends on Inflation (e.g. depreciation can cause imported inflation which reduces the competitiveness of exports) * Firms may engage in insurance policies to hedge against exchange rate movements.

Answer 147

1. Depreciation due to current account deficit 2. WIDEC 3. Imports should ↓, Exports should ↑ 4. So C.A deficit should imprive 5. BUTTT 6. Elastics of D+S, contracts have been signed so 7. Short term, imports might not reduce, exports might not imprive 8. So CA deficit gets worse before it gets better

Answer 148

This is a weighted index of sterling's value against a basket of currencies where the weights are based on the importance/share of trade between the UK and each country

Answer 149

* External value is set by market forces * No intervention by central bank * No target for the exchange rate

Answer 150

* **Trade/current account balances** – strong trade and CA surplus see currencies appreciate as money flows into circular flow by exports and inflows of investment * **Foreign direct investment** – more FDI means increase in currency demand and so rising exchange rate * **Portfolio investment** – strong inflows of investment into equities and bonds from overseas sees currency appreciation * **Interest rate differentials** – hot money

Answer 151

1. Rise in policy interest rates by central bank 2. Currency more attractive for investors 3. Attracts inflows of short term hot money 4. Causes outwarad shift in currency demand 5. Currency appreaciates in value in floating system

Answer 152

1. Recession in a trading partner 2. Causes a fall in export sales 3. Worsening of trade balance 4. Inward shift of currency demand 5. Currency will depreacite

Answer 153

Decrease in investment from overseas will mean a decrease in demand for pounds and a depreciation of currency

Answer 154

Combination of fixed & floating mechanism. Central bank determines prefered currency value and thn lets the currency flucturate within a certain range of the preferred value. If it goes outisde the range then the cenral bank will intervene

Answer 155

* **Chanes in monetary policy interest rates** * Changes in interst rates - lower interst will depreciate the exchange rate * Causes movments of "hot money" in and out of country * **Quantitative easing** * Increas liquiduty in banking system, causes an outflow of money leading to depreaciation of ER * **Direct buying/selling in the currency market (intervention)** * **Taxation of overseas currency deposits and capital controls** * Taxation of foreign deposits in banks cuts profts from hot money inflows * Gov could introdeuce control of the free flow of capital in and out of a country

Answer 156

1. In a managed floating currrency system, one way that a central bank can influecne the external value is by changing interest rates 2. For example, if they want to achieve a depreciation, they might opt to lower their main monetary policy interest rate 3. A fall in interest rates reduces the returns on overseas money held in a country's banking system. The real reutnr may become negative 4. As a result, lower interest rates might cause an outflow of short-term "hot money" from commercial banks to other countries 5. This will cause an outward shift of the supply curve for the currency as investors look for currencies with higher expected returns 6. In this way, assuming other central banks have kept their rates constant, a fall in interest rates might lead to a depreciation

Answer 157

When a country deliberatelt intervenes to drive down the value of the currency to provide a competitive lift to aggregate demand, output and jobs in their export industries. Countries with persitent trade deficits and rising unemployments this could be an attractive option

Answer 158

* Can be seen as a form of trade protection so inveites retaliatory action * Goes against princples of trade based on comparitive advantage * Cutting the exchange rate makes it harder for other countries to export, negativelt affecting their growth rate which in turn can damage the volume of trade that takes place between nations

Answer 159

The central bank negotiates with the IMF to fix (peg) their currency to another one Could be party so - 1 Brunei dollar = 1 Singapore dollar Often not party so - 7.75 Hong kong dollars = 1 US$

Answer 160

* A revaluation occurs if the Central Bank decides to change the peg and increase the strength of its currency * A devaluation occurs if the Central Bank decides to change the peg and decrease the strength of its currency

Answer 161

1. A depreciation is a fall in the external value of a currency inside a floating exchange rate system 2. Consider for example a deprecation of the UK £ agaisnt the Euro. The £ might fall from Euro 1.50 to Euro 1.20, a drop of 20% 3. As a result exporters can reduce the foreign price of goods and services sold overseas 4. This makes UK exports relatively cheaper in overseas markets. Relative export prices fall leading to improved competitveness 5. In addition, the UK price of imported products will increase £1 buys fewer euros. For example, imported cars will be more expensive 6. A rise in import prices will make domestic producers in the UK appear relatively more competitive purely in cost and price terms

Answer 162

Depreciation Impact: Cheaper exports, pricier imports. But effect depends on Marshall-Lerner Condition: * If export/import demand elastic (PED + XED >1), current account improves. * If inelastic (PED + XED <1), current account worsens. Time Lag (J-Curve Effect): Short-term CA deficit → long-term improvement (e.g., UK firms take months to renegotiate contracts post-£ fall). Example: A UK car maker cuts export prices after £ depreciation. U.S. buyers switch slowly due to existing supplier loyalty. Evaluation: CA response hinges on demand elasticity and adjustment speed (e.g., Germany’s inelastic exports limit J-Curve pain

Answer 163

* Net exports are a component of aggregate demand (AD) * A depreciation that results in an increase in net exports will lead to economic growth

Answer 164

* Cost push inflation is likely to occur as the price of imported raw materials increases with currency depreciation * Net exports are a component of aggregate demand (AD) * A depreciation that results in an increase in net exports will lead to an increase in aggregate demand * This may lead to an increase in demand pull inflation * Could be a stimulus to GDP growth * An appreciation of the currency will have the opposite effect

Answer 165

* If depreciation leads to an increase in exports, unemployment is likely to fall as more workers are required to produce the additional products demanded * An appreciation of the currency will have the opposite effect so decrease in exports, unemployment rises as less is produced

Answer 166

* The impact of a depreciation on living standards can be muted * As imports are more expensive, households face higher prices & less choice, which detracts from living standards * Rising exports can decrease unemployment & increase wages/income which means an improved standard of living for some households * The impact of an appreciation on living standards will be the opposite

Answer 167

* Depreciation of a currency makes it cheaper for foreign firms to invest in the country and can increase the FDI * The money they have available to invest is worth more when the currency has depreciated * An appreciation has the opposite effect

Answer 168

* When consumers from your country want to buy products form another, they will first have to sell your country's currency in exchange for the other country's currency before they can buy the product * This means dmenad for the other country increases, and that the supply of your currency increases

Answer 169

* FDI refers to international firms investing abroad, usually into factories to decrease costs of production * Inward FDI means a firm invests into your economy (money goes in). More demadn for domestic currency * Outward FDI means a domestic firm invests in another ecnomy (money goes out). More supply of domestic currency

Answer 170

* Some people/firms/governments may purchase financial investments from abroad. This includes stocks, options and bonds * Inward investment means someone from abroad wants to purchase investments in your country (money goes in). More demand for domestic currency * Outward investment means someone from your country wants to purchase investments abroad (money goes out). More supply of domestic currency

Answer 171

* Remittances refers to money sent from people working abroad sending their money back to their home country * More demand for the home currency, while more supply of the original currency

Answer 172

* Speculation here refers the purchasing of a currency in hope that its value will increase * More demand for investment currency, while more supply of the original currency

Answer 173

* High inflation rates will make the country's exports less competitve, which will reduce exports, which in turn reduces the demand for the country's currency * Additionally, if inflation is hurting a currency, investors may sell this currency in exchange for a more stable one * More demand for stable currency, while more supply of the inflationary currency

Answer 174

* High economic growth -> inflation -> central banks increases interest rates -> investors see high returns on bank depoists -> more money is put into local banks * High economic growth -> more confidence in the economy -> more investment from other countrys * More demand for high growth economy's currency, while more supply of the original currency. Here, we assume the economic growth would increase the inflation rate A counter point * High economic growth -> more net imports from other countries as demand outweights supply * More demand for other foreign currencies, while more supply of the high growth economy's currency

Answer 175

1. Time lags 2. Size of change 3. Is change permanent 4. Coefficients of PED for exports and imports (marshall-lerner condition) 5. Size of any second round multiperler and accelerator effects 6. The type of economy (differnet for developing and develped countries) 7. Degree of openness of the economy to international trade (measured by value of trade as a % of GDP)

Answer 176

* Reduces the need for a central bank to hold large amounts of currency reserves * Freedom to set monetary policy interest rates to meet domestic objectives * May help to prevent imported inflation * Insulation for an economy aftern an external shock especially for export-dependent countries * Partial automatic correction for a current account/trade deficit * Less risk of a currency becoming significantly over/undervalued

Answer 177

* No guarantee that floating exchange rate will be stable * Volatility in a floating currency might be detrimental to attracting inward investment * A lower (more competitive) exchange rate does not necessarily correct a persistent current account deficit - consider the J curve theory and the importance of non-price competitiveness

Answer 178

* Certainty of currency value gives confidence of inward investment from overseas businesses * reduced need to engage in and costs of "currency hedging" for businesses such as airlines * Currency stability helps to control inflation - i.e. it is a discipline on businesses to keep labour costs low * A stable currency can lead to lower borrowing costs (i.e lower yields on government bonds) * Imposes responsibility on government macro poliices e.g. to keep inflation under control * Less speculation in the curency market if the fixed exchange rate is regarded by traders as credible

Answer 179

* Reduced freedom to use interest rates for other macro objectives such as stimulating GDP growth * Many developing countries do not have sufficiently large foreign currency reserves to be able to maintain a fixed exchange rate over some time * Difficult for countries to use a competitive devaluation of their fixed exchange rate - creates political tensions and possible retaliation * Devaluation of a fixed exchange rate can lead to a surge in cost-push inflation - this is damaging to competitiveness and has regressive impacts on poor families

Answer 180

* Fixed rates may be optimal for developing countries wanting to control inflation * Export-dependent economies may favour a managed floating rate e.g. to offset fluctuating world prices * Not every country has the scale of foreign currency reserves needed to influence the price of a currency * The choice of currency regime is hugely important for developing and emerging countries. Some have opted to join a monetary union e.g. the 19 members of the Euro Zone

Answer 181

* The competitiveness of a country's exports abroad and its ability to compete with imports at home * Depends on price and non price factors such as quality, reliability and brand name

Answer 182

* Product quality * Innovation * Reliability * Performance * Marketing * Brand loyalty * After sale services * Branding

Answer 183

1. Environmental taxes - costs for carbon emissions 2. Employment protection laws and health & safety regulations 3. Statuatory requirements - pensions 4. Employment taxes - employers national insurance - increased in 2024 autumn budget

Answer 184

The main measures are * Relative unit labour costs * Relative export prices * Quality ## Footnote Others * Productivity * Unit costs * Levels of investment * R&D expenditure * Training and education

Answer 185

Total labour costs/ouput Determined by 1. Average wages/salaries 2. Labour productivity

Answer 186

* A country's exchange rate appreciates * Wages costs rises relatively faster than other nations * Labour productivity growth is relatively slower

Answer 187

* Monetary policy interventions aimed at a currency depreciation e.g. a managed floating exchange rate * Wage controls e.g. wage/pay freezes for people working in the public (state) sector * Supply-side measures designed to raise labor productivity/efficiency across many industries

Answer 188

The price of the UK's exports compared to the exports of the UK's main trading partners. (High relative export prices is bad for competitiveness).

Answer 189

* An appreciation of the currency - export price rise in overseas markets * A period of high relative inflation * Export businesses experience higher costs e.g. higher minimum wages - prices rise to protect profits so inflation * When exports are hit by import tariffs

Answer 190

* FoP. * Exchange rates. * Economic stability. * Domestic demand. * Domestic competition. * Openness to trade. * Productivity. * Regulation. * Inflation / Investment. * Finance (access to). * Taxation.

Answer 191

* Competitive exchange rate – maybe moving to a managed floating currency * Competitive tax environment – attract inward investment and encourage new business to set up * Investment in human capital – improves quality of the workforce – more funding for higher education * Increase r&d – drive faster pace of innovation – r&d tax credits * Stronger market competition to raise factor productivity and lower relative export prices * Stable macroeconomic environment – low inflation and steady economic growth --> business confidence and investment * Investment in critical infrastructure – better road, air and rail links, improved darts, faster broadband

Answer 192

* Subsides – lower cost of research e.g. pharmaceuticals * Tax incentives – can encourage different aspects * Lower employment taxes – stimulate skilled migration from overseas * Lower capital gains taxes – encourage small businesses to set up * Special economic zones – attract research-intensive businesses

Answer 193

Micro Foundations: Driven by businesses in competitive markets (innovation, skilled/adaptive workforce). Key Drivers: * Globally scaled, tech-leading firms. * Start-up culture + financial systems enabling R&D. Avoid Unsustainable Tactics: * Currency devaluation/low wages fail long-term (vs. high-wage leaders like Germany). * Focus on talent retention + investment > "race to the bottom" in wages/tax. Evaluation: Competitiveness hinges on innovation + human capital, not cost-cutting.

Answer 194

**A strategy to boost price competitiveness by reducing wage costs and raising productivity without currency devaluation. Achieved via fiscal austerity (tax hikes, spending cuts) and/or higher real interest rates, causing deflationary pressure**. Common in fixed-exchange-rate countries (e.g., Ecuador, Eurozone members like Greece) and **requires years of low relative inflation/deflation**. Examples: Latvia, Greece, Ecuador post-financial crises.

Answer 195

A deliberate reduction in a country's currency value (under a fixed/semi-fixed exchange rate) to boost export competitiveness and raise import costs. Goals include shrinking trade deficits and lowering the real value of sovereign debt. Faster than internal devaluation. Examples: Egypt (16% devaluation in 2016) and Ghana (17% in 2019).

Answer 196

1. Severe loss of output and rising unemployment 2. Fall in nominal wages reduces living standards 3. Risks from sustained price deflation 4. Real value of debt increases 5. Danger of a country suffering a permant loss of output (known as "hystersis")

Answer 197

1. Increase in cost-push inflation from higher import prices 2. Reduces real income because of a rise in inflation 3. No guarantee that the trade deficit will improve (refer to the J-curve concept) 4. Foreign creditors will demand higher interest rates on new issues of government and corporate debt 5. Currency uncertainty makes country less attractive to inward FDI

Answer 198

* Improved living standards e.g. measured by real GNI per capita (PPP) * Stronger trade performance from an increase in export sales * Virtuous circle of economic growth * Employment creation * Higher government tax revenues as incomes and profits increase

Answer 199

* Trade surpluses might invite a **protectionist response** * Possible risks of **demand-pull inflation** * Competitiveness might be achieved at the expense of **growing inequality of income and wealth** * Higher productivity might be achived at expense of a **worsening work-life balance** and increased incidence of mental health problems * Increased competitiveness might cause a country's **exchange rate to appreciate**

4.1 - International economics Content Flashcards

(227 cards)