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Economics Theme 4 > 4.1 International Economicss > Flashcards

4.1 International Economicss Flashcards

1
Q

What is globalisation?

A

Globalisation is the interdependence and integration of countries and the rapid change it brings about.

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2
Q

Factors contributing to globalisation

A
  • Improvements in infrastructure e.g trade links
  • Improvement in communication and technology
  • Trade liberalisation and reduced protectionism
  • TNCs based in multiple countries
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3
Q

4 characteristics that show globalisation

A
  • Increasing foreign ownership of companies
  • Increasing movement of labour & technology
  • Free trade
  • Easy flows of capital across borders
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4
Q

Impact of globalisation on consumers

A
  • Consumer choice increases as products across the world are available
  • Lower prices for products produced with comparative advantage and produce in countries with lower costs.
  • Reduction in absolute poverty
  • Better forms of technologies
  • Concern of local cultures being overshadowed
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5
Q

Impact of globalisation on workers

A
  • Decrease in poverty
  • Increased migration , increase in employment and skills in other countries & increase AD
  • TNCs provide employment for developing countries
  • Can create unemployment in developed countries, labour moved to cheaper countries to lower production cost
  • Exploitation of workers in countries with less labour regulations.
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6
Q

Impact of globalisation on firms.

A

Lower prices
- due to increased supply chain and decrease in cost of production
Reach more consumers
- in many other countries
Improved technology
- to enhance efficiency, reduce costs

Over-reliance make firms vulnerable to distruptions e.g natural disaster, COVID
- Increased competition makes it hard for smaller firms to compete
- Firms that can’t keep up with tech advancements fall behind
- Costs cut at expense of fair labour practices

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7
Q

Impact of globalisation on government

A
  • Governments where TNCs are based receive more tax
  • Interconnection of tech increases chances of cyber threats
  • Address issues of outsourcing jobs, and production
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8
Q

Impact of globalisation on environment

A
  • Interconnection means world can work together against climate change and share ideas and technology.
  • Increase in emissions as globalisation causes increased production and consumption; more extraction and energy required
  • Over-exploitation of Natural Resources
  • Transportation of products may contribute to emissions.
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9
Q

Impact of globalisation on economic growth

A

Investment of TNCs acts as injection
- AD/EG increase
Access to larger market
- reduce costs & increase efficiency
Specialised countries
- comparative advantage decreases price and increases efficiency
New capital transfer
- Tech, knowledge, skills transfer from TNCs
Attraction of FDI
Increased competition
- for firms, infant industries unable to compete

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10
Q

What is comparative advantage?

A

Comparative advantage is when countries specialise in products that it can produce at lowest opportunity cost.

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11
Q

What are the assumptions of comparative advantage?

A
  • Transport costs are zero
  • Perfect knowledge; all countries know what they have comparative advantage in
  • Factor substitution is easy; economies quickly adjust from labour to capital, vice-versa
  • Constant costs of production
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12
Q

Advantages of comparative advantage

A
  • World output increases as specialisation increases.
  • Employment in countries with comparative advantage
  • Traders have greater choice
  • Greater competition, incentive to innovate new ways of productions
  • Different FoPs from different countries utilised amongst the world.
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13
Q

Disadvantages of comparative advantage

A

Over-dependence
- generates vulnerability, supply chain affect
Structural unemployment
- jobs lost to countries more efficient and competitive.
Environment suffers
- increase in demand for transport and resources, leads to emission and deforestation

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14
Q

What is absolute advantage?

A

Absolute advantage is when a country can produce a product using fewer factors of production.

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15
Q

What is a terms of trade?

A

Terms of trade refers to ratio of a country’s average price of exports to average price of imports.

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16
Q

When is the terms of trade said to be favourable and infavourable?

A

Favourable when price of exports improved
Deteriorated when price of exports can buy less imports

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17
Q

What factors affect terms of trade in SR?

A
  • **Demand/supply for X/M **
  • Inflation rates - Inflation increases price of products; prices more expensive to rest of world
  • Exchange rates; SPICED
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18
Q

What factors affect terms of trade in LR?

A
  • Improvement in productivity/technology reduces costs and price; decreases terms of trades as exports get cheaper
  • Anything that affects price of import/export will affect terms of trade
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19
Q

Impacts of Terms of trade changes

A
  • Favourable movement cause
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20
Q

What is a trading bloc?

A

Trading bloc is a group of countries that come together to reduce/eliminate trade barriers between them

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21
Q

What are the 4 types of trading blocs?

A
  • Free trade areas
  • Customs unions
  • Common market
  • Monetary unions
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22
Q

What is free trade areas?

A

Free trade areas is a bloc where 2 or more countries abolish trade restrictions but operate their own barriers against non-members

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23
Q

What is customs union?

A

Customs union is when members abolish trade barriers between themselves and have uniform barriers against non-members

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24
Q

What is a common market?

A

Common market is a customs union but also have free movement of FoPs across national borders

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25
Q

What is a monetary union?

A

Monetary union is a common market of 2 or more countries with an exchange rate monitored and controlled by one central bank/ several central banks with similar monetary policies.

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26
Q

What is an economic union?

A

An economic union is the final step of economic integration where a common market with the same social, fiscal and monetary policies.

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27
Q

Advantages of trading blocs

A

Free trade encourages specialisation
- increasing output due to comparative advantage; firms benefit from EofS; causing lower prices/costs.
Larger customer market
- more countries to sell products to; output increases
Greater competition for domestic firms
- provides incentive for innovation and lower price/ increase quality/quantity of good; productive efficiency increases; output increases.
Increased choice for customers

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28
Q

Disadvantages for trading bloc

A

Trade diversion
countries switch to trading within their bloc instead of seeking most efficient/cost effective trading partners; reduces effect of specialisation; decreases EofS
Retaliation
- creation of one bloc may cause creation of others; trade disputes.
Complex rules
- may cost businesses more in administrative costs to comply with rules.
Loss of sovereignty
- countries surrender some control in terms of policies and regulations.
- Increased competition for infant industries
- Limited access for non-members; limits international trading

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29
Q

What is trade creation?

A

The formation of a free trade area or a customs union leads to an increase in trade between member countries

30
Q

What is trade diversion?

A

Trade diversion is when a country moves from buying goods from a lower cost country to a higher cost.

31
Q

What causes trade creation?

A

Trade is created by joining a trade union; removes tariffs and leads to higher welfare gain and higher consumer surplus. Consumption shifts from a high cost domestic producer to a low cost partner producer.

32
Q

What causes trade diversion?

A

Trade shifts from more efficient exporter to less efficient one
Due to formation of a free trade agreement or customs union.

33
Q

What is the WTO aim?

A

The world trade organisation was set up in 1995 and the aim was to reduce protectionism; to bring trade liberalisation and ensure countries act according to the trade agreements. They believe free trade is the best way to increase living standards, create jobs and improves lives.

34
Q

What are the 2 roles of the WTO?

A
  • Brings countries together at conferences & encourages to reduce trade barriers. E.g Doha round
  • Acts as adjudicating body; member countries can file complaints if they believe another has violated trade agreements.
35
Q

Why may restrictions on free trade benefit an infant industry and economy?

A

Restrictions decrease international competition for new firms; able to build up reputation/customer base; establish themselves in economy

36
Q

Why may restrictions on free trade help job protection?

A

Decreases international competitiveness; Government worried that allowing imports will mean domestic producers lose out to international firms; leading to job losses; les employment.

37
Q

How can restriction on free trade help potential dumping?

A

Dumping occurs when foreign firms sell products at unfairly low prices; lower than cost of production; domestic firms can’t compete; harms domestic industries

38
Q

How can restriction on free trade prevent danger of over-specialisation?

A

Protectionism increases price of imports; decreases imports; decreases complete reliance on other countries for specialised products.

39
Q

How does restrictions on free trade prevent unfair competition?

A

Foreign countries may have different rules; foreign firms can produce at lower prices; their products priced lower than domestic products;

40
Q

How does restrictions on free trade prevent over specialisation?

A

Prevents over reliance on other countries; prevents economic disaster

41
Q

What are the 4 types of restrictions on free trade?

A

Tariffs
- Taxes placed on imported goods; increases price for imported goods; decreases demand
Quotas
- Limits level of imports allowed into a country
Embargo
- Total ban on certain products
Subsidies to domestic firms
- Decrease cost of production; decrease price to consumers; encourages switching

42
Q

Impact of protectionism on consumers

A

Higher prices
- unable to import cheaper products
Less choice

43
Q

Impact of protectionism on domestic firms

A

Higher profits
- Less competition, more demand
Inefficiency
- Without international comp, firms may get complacent and have less incentive to be efficient
Increased CoP
- Imported raw materials expensive, increase price
Higher prices
- Lower comp means firms can push up price

44
Q

Impact of protectionism on international firms

A

Smaller size of market
- Demand in country decreases, missing out opportunity in international markets

45
Q

Impact of protectionism on workers

A

Job creation
- Domestic demand increase; increased firm output, more employment to meet increased demand
Higher wages
- Increased domestic demand; increased profits; increased wages

46
Q

Impact of protectionism on governments

A

Tariff gains
- Extra revenue
Retaliation
- Causes strained relations between countries

47
Q

Impact of protectionism on living standards

A

Trade wars
- Introduction of restrictions may cause retaliation from affected countries; causes reduction in trade and growth
Higher prices
- Domestic and international good prices increase; less purchasing power; lower living standards

48
Q

What is balance of payments?

A

Balance of payments shows all flows into and out of country

49
Q

What is the balance of payments components?

A

Current account
- Trade in goods/services
- Income/current transfers
Financial accounts
- FDI, portfolio investments
Capital accounts

50
Q

What is deindustrialisation?

A

Deindustrialisation is process of decline in industrial activity in an economy.

51
Q

How does deindustrialisation cause balance of payment deficit?

A

Reduction in manufactured goods
- Industries shrink; production of manufactured goods decrease
- Manufactured goods usually big portion of exports; so decline in exports
- BoP deficit

Increased imports
- Fall in domestic industrial production; consumers turn to imported goods to meet demand

52
Q

Causes of balance of payments deficit?

A

High levels of consumer demand
- If spending grows quicker than what supply side can deliver, meeting this demand requires imports; imports increase; more money leaving economy.
Strong exchange rate
- SPICED; valuable currency, domestic consumers can buy imported goods at cheaper price, imports increase
Inflation
- foreign goods and services may become cheaper in comparison
Loss of comparative advantage
- People transfer their purchases to other countries for cheaper prices
Lack of capital investment
- Out of date tech, lower productivity, less quality products, less exports
Deindustrialisation
- In 1980s, UK deindustrialised; caused lower exports; higher exports

53
Q

Causes of balance of payments surplus?

A

Natural resources
- Increased exports; potential current account surplus
More competitive
- High labour productivity/ high quality; more people importing their goods; exports increase
High Interest rates
- More foreign investment into savings; more money inflow
Weak currency
- SPICED/WPIDEC; exports cheaper, demand increase

54
Q

Demand side policy to reduce balance of payments imbalance

A

Reduction in income
- Less demand for imports
Increase in interest rates
- MPC decreases, less consumption, less import demand
Tariffs
- Increased price for imports, less imports; expenditure switching to domestic goods.

55
Q

Supply side policy to reduce balance of payments imbalance

A

Subsidies to domestic firms
- Reduces CoP, more competitive, increased international competitiveness
Improvements to productivity/efficiency
- More international competitive, more demand
Investment in education/training
- Skilled workforce, increased productivity, Q of goods, Increased international comp, increased exports
Investment in infrasturucture
- Efficient transport networks decreases logistic costs, improve ease of exporting

56
Q

Long-term solutions to balance of payments imbalance?

A

Quotas/tariffs
Devalue currency
- Exports cheaper, imports dearer

57
Q

What is an exchange rate?

A

Purchasing power / price of one currency in the form of another.

58
Q

What are the 3 diff exchange rate systems?

A

Free floating system
- Value determined by market supply and demand of currency
Managed floating
- Currency determined by demand and supply but CB will prevent large changes in rate; by buying/selling currency or changing interest rates
Fixed system
- Government sets their currency against another and rate does not change

59
Q

Factors affecting floating exchange rates (demand)

A

Level of exports
- More exports, more demand for currency, higher value
Foreigners willing to invest in currency
- Speculation; if currency speculates increase, demand increase, value increase
Tourism
- Foreigners exchange currencies to domestic currency; increase value
Inflation
- Higher demstic price; switch to imports, increased supply of currency’ depreciation

60
Q

Factors affecting floating exchange rates (supply)

A

Level of imports
- More imports; more supply of currency, decrease value
Domestic firms willing to invest abroad
- Exchange money into other currency; supply increase, value decrease
Tourism in international countries
- Exchange domestic currency; supply increase; value decreases
Speculation

61
Q

What are the general factors of value of a currency?

A

Level of exports/imports
Level of investment
Consumers on holiday
Speculation

62
Q

How can a government use interest rates to increase/decrease demand for their currnecy?

A

Government increase interest rates
Saving more attractive
Foreign investors convert money to pounds to put into their banks
Demand increases
Value of currency increases

MPC decreases, less people import

63
Q

How can a government use gold and foreign currency reserves to change value of currency?

A

Government buys gold/foreign currencies
Supply of currency increases.

64
Q

What is competitive devaluation

A

Economy intervenes in FX market to drive down value of currency
- Weaker currency encourages exports and discourages imports
- Ineffective if other countries follow

65
Q

What is the marshall learner condition?

A

Sum of elasticity of import/export > 1
for devaluation to have positive impact on trade balance

66
Q

What is the J-curve?

A

Trade balance worsens before improving.

Consumers immediately aren’t aware of cheaper exports
Will take time to find a source of the exporters

Consumers aren’t immediately aware of more expensive imports

67
Q

Why is international competitiveness important for countries?

A

Lower levels may mean country faces current account deficit

68
Q

Factors influencing international competitiveness

A

Exchange rates
- SPICED
Productivity
- Costs lower; prices lower; more competitive
Regulation
-
Investment
- Education/training/infrasturcture make it easier to produce and lower costs; more competitive
Taxation
- High taxation can be passed onto consumer price; less competitive
Domestic demand
- High Dd means firms alr producing in large numbers; EoS, low AC curve, low price, increased comp

69
Q

Benefits of being internationally competitive

A

Current account surplus
Foreign investment
- Establishing new companies; transfer of knowledge ,skills and tech
Increased Employment
- More products sold; more labour needed, better wages too
Economic growth
- AD increase due to increased exports

70
Q

Negatives of being internationally competitive

A

Dependency on exports for growth

Economics Theme 4 (6 decks)

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