4.1 interntional economics

Question 1

What is globalisation

Answer 1

Globalisation refers to the growing interdependence of countries and the rapid rate of change it brings about

Question 2

Another definition for globalisation

Answer 2

The increasing integration of the world’s local, regional and national economies amino a single international market.

Question 3

What are there movements towards with globalisation

Answer 3

Free trade of goods and services, free movement of labour and capital and free interchange of technology and intellectual capital

Question 4

Factors contributing to globalisation

Answer 4

• improvements in transport infrastructure and operations
• improvements in IT and communication
• trade liberalisation and reduced protectionism
• international finance markets allows movement of money around the world
• TNC’s

Question 5

Impact of globalisation on consumers

Answer 5

• Have more choice since wider range of goods available
• can lead to lower prices as firms can take advantage of comparative advantage
• leading to a rise in prices
• many worry about the loss of culture

Question 6

Impact of globalisation on workers

Answer 6

• some have gained employment whilst others have lost it
• increased migration may affect workers by lowering wages
• international competition has led to a fall in wages
• increasing inequality

Question 7

Impact of globalisation of producers

Answer 7

• firms are able to source products from more countries and sell them in more
• can exploit comparative advantage
• able to employ low skilled workers much cheaper in developed countries
• firms who are unable to compete internationally will lose out

Question 8

Impact of globalisation on the government

Answer 8

• May be able to receive higher taxes since TNC’s pay taxes
• TNC’s have the power to bride and lobby governments

Question 9

Impact of globalisation on the environment

Answer 9

• increase in world production has led to an increased demand for raw materials
• increased trade has led to more emissions
• means world can work together and tackle climate change

Question 10

Impact of globalisation on economic growth

Answer 10

• Increased investment within countries
• TNC’s may bring world class management techniques and technology
• Trade will increase output since it allows exploitation of comparative advantage
• power of TNC’s can cause political instability

Question 11

What is the theory of comparative advantage

Answer 11

The theory of comparative advantage states that countries find specialisation mutually advantageous if the opportunity cost of productions are different.

It is when a country is able to produce a good more cheaply relative to other goods produced

Question 12

What is absolute advantage

Answer 12

Exists when a country can produce a good more cheaply in absolute terms than another country

Question 13

Assumptions that are also limitations of the theory of comparative advantage

Answer 13

• assumes no transport costs
• also assumes costs are constants and that there are no economies of scale.
• goods are assumed to be homogenous, which is unlikely in real life.
• also assumes the FOP are perfectly mobile, there are no tariffs etc…
• whether trade takes place will depend on the terms of trade between the countries

Question 14

Advantages of specialisation and trade

Answer 14

• comparative advantage shows how the world output can be increased
• trading and specialising allows countries to benefit from economies of scale.
• different countries have different FOP’s and so allows countries to make use of different ones
• enables greater customer choice
• greater competition

Question 15

Disadvantages of specialisation and trade

Answer 15

• can lead to over dependence where some countries become dependent on particular exports
• can cause structural unemployment as jobs are lost to foreign firms
• Environment will suffer due to problems of transport and increased demand for resources
• Countries may suffer loss of sovereignty, EU example
• may see a loss of culture as trade brings foreign ideas

Question 16

Factors influencing the pattern of trade

Answer 16

• Comparative advantage - countries will produce products in which they have a comparative advantage

• emerging economies - countries grow at different rates when they grow, they are likely to need to import more goods and services than before to pay for this. Emerging economies shift they trade pattern by taking up a larger proportion of a countries imports and exports than they had before

• trading blocs - increase the level of trade between countries and so influence the pattern of trade because trade increases between these countries and decreases between others

• relative exchange rates - the exchange rate affects the relative prices of goods between countries. Prices are an important factor in determining whether consumers buy goods and so change in price will affect the pattern of trade

Question 17

What is the terms of trade

Answer 17

The terms of trade measure the rate of exchange of one product for another when two countries trade. It tells us the quantity of exports that need to be sold in order to purchase a given level of imports.

Question 18

What is an improvement in the terms of trade

Answer 18

Terms of trade are favourable when the terms of trade increase as the country can buy more imports with the same level of output.

Question 19

What is a deterioration of the terms of trade

Answer 19

Terms of trade are unfavourable if they decrease, when export prices fall or import prices rise.

Question 20

Equation for terms of trade

Answer 20

Average export price
—————————— X 100
Average import prices

Question 21

Factors influencing a country’s terms of trade

Answer 21

An improvement will be caused by a rise in export prices or a fall in import prices

A deterioration will be caused by a fall in export prices or a rise in import prices

In the short run, exchange rates, inflation and changes in demand/supply of imports or exports affect the terms of trade since these affect the relative prices of X and M

In the long run, an improvement in productivity compared to a country’s main trading partners will decrease the terms of trade since export prices will fall relative to import prices

Another long run factor is changing incomes as it effects the demand for goods and services

In general, anything that affects the price of a country’s imports or exports will affect its terms of trade

Question 22

Impacts of changes of terms of trade

Answer 22

If PED of exports and imports is inelastkx, a favourable movement in terms of trade would improve the current account, vice verda with elastic

An improvement in the terms of trade is likely to lead to a fall of GDP and a rise in unemployment since if it is caused by a rise in the price of export, exports will fall and if it is caused by import prices, imports will rise.

Question 23

What is a regional trading bloc

Answer 23

regional trading bloc is a group of countries within a geographical location that protect themselves fr imports from non-members. They sign an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers.

Question 24

What’s a preferential trading area

Answer 24

These are where tarifff and other trade barriers are reduced in some but not all goods between member countries

Question 25

Free trade area

Answer 25

Occur when two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members of the

Question 26

Customs union

Answer 26

Involves the removal of tariffs between members and the acceptance of a common external tariff

Question 27

Common markets

Answer 27

First step towards full economic integration and occurs when members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed Common external tariff Must be a significant level of harmonisation of micro-economic policies, common rules regarding monopoly power and anti-competitive practices.

Question 28

Monetary unions

Answer 28

Two or more countries with a single currency, with an exchange rate that is monitored and controlled by one central bank or several central banks with closely coordinated monetary policy. EU example

Question 29

Advantages of trading blocs

Answer 29

Free trade encourages specialisation, and this increases output, according to comparative advantage. Also helps to benefit from economies of scale. Firms may be able to grow much larger by creating a larger customer market, but this may be difficult given different customer markets in different countries Firms in the bloc are protected from cheaper imports outside. Those in EU protected from Chinese imports. More competition due to removal of trade barriers May create more jobs Increased choice for consumers.

Question 30

Disadvantages of trading blocs

Answer 30

Countries are no longer able to benefit from trade with countries in other blocs and the blocs are likely to distort world trade, reducing benefits of specialisation. May be a reduction in competition as inefficient firms are driven out of the market as it becomes oligopolistic. May be loss of resources, as the most successful countries will attract capital and labour and so this heightens regional inequalities. Could also be retaliation as the creation of one bloc will lead to the creation of others. Weaken sovereignty.

Question 31

What is trade creation

Answer 31

Is when trade is created by the joining of a trade union. Diagram is opposite of a tariff diagram, since it removes the tariffs and leads to welfare gains and higher consumer surplus.

Question 32

What is trade diversion Example

Answer 32

Occurs when consumption shifts from a lower cost producer outside the trading bloc to a higher cost producer within it. For example, the UK switching from buying New Zealand butter, which is the cheapest, to European butter when they joined the EU.

Question 33

What is the role of the WTO

Answer 33

Set up 1995, replacing GATT, which was set up to reduce protectionism. Two main aims to bring about trade liberalisation and to ensure countries act according to the trade agreements they have signed. They hold series of talks called rounds, most recent is Doha round in 2001 which aims to cut protectionism on agricultural goods.

Question 34

Problem of the WTO

Answer 34

All countries must agree to it and so any country is able to veto.

Question 35

Possible conflicts with the WTO

Answer 35

• regional trade agreements contradict the WTO’s principles as common external tariffs introduced protectionism They can complement the trading system and the WTO strives to ensure non-members can trade freely and easily with members of a trade bloc Some might argue the WTO is too powerful or that it ignores the developing countries Protectionist approach of USA and China provides a threat to the WTO

Question 36

What is the infant industry argument (reasons for restrictions for free trade)

Answer 36

An infant industry is one that is just being established within a country. They need to be able to build up a reputation and customer base and will have go cover a lot of sunk costs, meaning their AC will be higher Therefore, the industry will not be able to compete in the international market and so the government protect them until they are able to compete on an equal level

Question 37

Job protection (reasons for restrictions for free trade)

Answer 37

Governments may be concerned that allowing imports will mean domestic producers will lose out to international firms, and so there will be job losses within the country. Would be politically unpopular

Question 38

Protection from potential dumping (reasons for restrictions for free trade)

Answer 38

Dumping is when a company or country with surplus goods sells these goods off to other areas of the world at very low prices, harming domestic producers in those countries. The government may need to intervene to protect domestic producers who are unable to compete with firms that are willing to make a losss

Question 39

What’s a tariff

Answer 39

Taxes placed on imports

Question 40

What is a Quotas

Answer 40

A quote is a Limit placed on the level of imports allowed into a country, meaning people are forced to buy domestic goods if they want that food and the quota is already used up.

Question 41

What are subsidies to domestic products

Answer 41

These are payments to domestic producers which lower their costs and help them to be more competitive by enabling cheaper prices. Sometimes purely given to goods that are exported whilst other times they are given to firms that have a large proportion of their sales as exports

Question 42

What are non tariff barriers

Answer 42

Countries can introduce an embargo, which is a total ban on imported goods They can introduce import licensing when countries need a lisence to be able to import. The use of legal and technical standards means that some products cannot be sold in the country, for example specific specification can be imposed for goods or intellectual property laws over patents and copyrights can be introduced.

Question 43

Impact of protectionist policies on consumers pi

Answer 43

There are higher prices for consumed as they are unable to buy imports at the cheaper price. It tends to rise price of domestic producers since goods and services are needed for the production of these goods and import controls may effect the raw material prices Less choice

Question 44

Impact of protectionist policies on producers

Answer 44

Domestic producers tend to benefit from import controls since they have less competition so can sell more goods at a higher price than otherwise and they will benefit from measures to increased exports However, they may suffer from higher costs if there are controls on the imports they need for production Foreign producers will lose out as they are limited in where they can sell their goods

Question 45

Impact of protectionist policies on workers

Answer 45

Little difference to employment figures Can be argued that allowing inefficient firms to close would be better for workers in the long run.

Question 46

Impact of protectionist policies on governments

Answer 46

In short run, governments benefit from protectionist policies as they gain tax revenues and they are politically popular However, can lead to inefficient economy.

Question 47

Impact of protectionist policies on living standards

Answer 47

As the tariff diagram shows, the imposition of import controls results in deadweight welfare loss It also causes trade wars since the introduction of restrictions often leads to retaliation by other countries.

Question 48

Impact of protectionist policies on equality

Answer 48

It has a regressive effect on the distribution of income as the rise in prices affects the poorer members of society far more than the well off as it is they are no longer able to afford the products.

Question 49

What is the balance of payments

Answer 49

A record of all the economic transactions that take place between a country and the rest of the world over a specific period

Question 50

What is the current account

Answer 50

The current account itself is split into different parts: trade in goods, trade in services, income, transfers

Question 51

What is the capital and financial account

Answer 51

Relatively unimportant as it mainly records transfers of immigrants and emigrants taking money abroad or bribing to the uk

Question 52

What is FDI Example

Answer 52

The flow of money to purchase part of a foreign firm. BT buying a 15% share in a telecoms company in Brazil

Question 53

What are portfolio investments.

Answer 53

The same thing as FDI but less than 10% of the company.

Question 54

Short terms causes of deficits and surpluses current count

Answer 54

High levels of consumer demand. If household spending grows more quickly than the supply side of the economy can deliver, the only way of meeting demand is by importing goods and services. Can be caused by a strong exchange rate which reduced the UK price of immports and leads to expenditure switching effect away from domestically produced output A high level of relative inflation will decrease exports since it will increase their price compared to goods produced by other countries

Question 55

Medium causes of a deficit or surplus on the current account

Answer 55

As a country loses its comparative advantage, people will transfer their purchases to other countries and the UK will need to switch to resources to production of other things.

Question 56

Long term causes of deficits and surpluses in the current account

Answer 56

Lack of capital investment means firms use more older and out of date tech DeIndustrialisation Countries with large amount of natural resources tend to export more and if they have a small population, they tend to have a surplus

Question 57

Demand side policies to reduce deficit Plus eval/however

Answer 57

Monetary or fiscal policy can be used to reduce AD. This reduces income so reduces demand for imports. However, they are only short term and limit output of the economy, causing a reduction in living standards and growth.

Question 58

Supply side policies to reduce imbalance on current account

Answer 58

Could use measures to improve productivity and efficiency or improve quality. Can seek and encourage industries to exploit opportunities in the export market overseas and focus where UK has a comparative advantage.

Question 59

Types of expenditure switching policies

Answer 59

Tariffs or quotas will reduce the attractiveness of the import. However likely to cause trade wars Could attempt to control inflation. Problem is that it will lead to a fall in demand for domestic goods and so therefore could cause unemployment and a fall in growth. Can depreciate the pound to make exports cheaper and imports more expensive. However not always works due to Marshall Lerner / J curve.

Question 60

Significance of global trade imbalances.

Answer 60

Argued that a CA imbalance is not much of a problem as long as the capital and financial account is in surplus. Problems arise if foreign investors refuse to lend to a country - but it is an individual or institution which takes the loan and not the country. Deficits not a concern for countries. Not a problem when governments cannot repay their foreign debt

Question 61

What is an exchange rate

Answer 61

The purchasing power of a currency in terms of what it can buy of other currencies.

Question 62

What’s a free floating exchange rate

Answer 62

Where the value of the currency is determined purely by market demand and supply of the currency, with no target set by the government and no official intervention in the currency markets.

Question 63

Arguments for a floating exchange rate

Answer 63

Central bank does not need to try to maintain a particular exchange rate and therefore will not need to use reserves to buy pounds in the market to keep it at the target.

Question 64

What is managed floating Examples.

Answer 64

Where the value of the currency is determined by demand and supply but the central bank will try to prevent large changes in the exchange rate on a day to day basis Brazil, Switzerland, Japan

Question 65

What’s a fixed exchange rate

Answer 65

When a government sets their currency against another and that exchange rate doesn’t change. The country can decide to devalue its currency overnight to improve international competitiveness of its industry.

Question 66

Arguments for a fixed exchange rate

Answer 66

Good because it avoids currency fluctuations, which encourages trade and investment as firms know the true costs of the deal. Reduces the cost associated with trade, as firms have less to spend on currency A stable exchange rate may reduce inflation as there is not a sudden reduction in the value of the currency leading to a rise in imports and then inflation.

Question 67

What’s an appreciation of an exchange rate

Answer 67

An increase in the value of the currency using floating exchange tates

Question 68

What’s a depreciation of exacted rate

Answer 68

An decrease in the value of the currency using floating exchange rates

Question 69

What’s a revaluation of currency

Answer 69

When the currency is increased against the value of another under a fixed shstem

Question 70

What’s a devaluation of currency

Answer 70

When the currency is decreased against the value of another under a fixed system

Question 71

Factors effecting floating exchange rates

Answer 71

Determined by interaction of demand and supply The demand for pounds is determined by the amount of British goods that foreigners want to buy; the number of foreigners wanting to invest in the UK, visit the UK or place their money in British banks; and the amount of speculation on the pound. The supply of pounds is determined by: the amount of foreign goods people in the UK want to buy; the number of British firms that want to invest abroad, the amount of British people wanting to go on holiday abroad or place their money in foreign banks; and the amount of speculation on the pound. Therefore, in general, the currency is affected by the level of exports and imports , the level of investment, those going on holiday and speculation.

Question 72

the two main methods governments can use to influence the value of the currency.

Answer 72

If they want to increase or decrease demand for their currency, a government can use interest rates. An increase in interest rates will strengthen the pound as people will convert their money to pounds to put them in English banks, so demand for pounds will rise. Falls in interest rates will decrease demand for the pound so weaken the currency. Also, governments can use gold and foreign currency reserves to manipulate the value of their currency. If the value of the pound is too high and they want to weaken it, they can increase supply by buying foreign currency or gold with pounds. To strengthen the pound, they can increase demand by selling their foreign currency or gold in exchange for pounds.

Question 73

what is competitive devaluation / depreciation problems / eval

Answer 73

This is where a country deliberately intervenes in foreign exchange markets to drive down the value of their currency to provide a competitive boost to their exporting industries. A weaker currency will encourage exports and discourage imports and therefore the balance of payments should improve assuming the Marshall-Lerner condition. One problem is that other countries may follow and reduce their currency as well. This is unlikely if there is a current account deficit but if the country who devalues has a surplus, other countries are likely to retaliate.

Question 74

impacts of changes in exchange rates (Not SPICED AND WIDEC)

Answer 74

The Marshall-Lerner condition states that the sum of the price elasticities of imports and exports must be more than one (i.e. elastic) if a currency devaluation is to have a positive impact on the trade balance. The J-curve (shown in the diagram) shows how the current account will worsen before it improves. People will not immediately recognise that British exports are cheaper and it will take a while to find a source for them, whilst UK consumers will not see that imports are more expensive and may be unable to switch straight away Economic growth and unemployment: A weaker exchange rate is likely to increase exports, since they become cheaper, and decrease imports so lead to an increase in AD. This will increase employment and economic growth. Rate of inflation: Falls in the exchange rate will increase inflation as imports become more expensive, causing a rise in prices and a fall in SRAS. Also, the net exports section of AD will increase and so inflation will rise further. FDI: A fall in the currency may increase FDI because it becomes cheaper to invest. However, if the currency is continuing to fall then this is an indication that an economy has serious economic difficulties which will discourage investment.

Question 75

measures of international competitiveness.

Answer 75

Relative unit labour costs: Unit labour costs are total wages divided by real output: the cost of employing workers for each unit of good. These are measured in an index number with one year chosen as a base year. Relative export prices: This is the price of UK exports compared to the exports of the UK’s main trading partners. A rise in relative export prices means UK export prices have risen more than other countries’ export prices and so the UK has become less competitive.

Question 76

factors influencing international competitiveness

Answer 76

Exchange rates: 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 firms Productivity: A rise in productivity will cause a rise in the UK’s competitiveness because costs are lower and so prices will fall. Labour productivity is important. Regulation: High levels of regulation slow down business decisions, making them less adaptable to changes in the global market. It also increases their cost of production. Therefore, regulation reduces competitiveness because of higher costs and slow decision making. Investment: Investment in infrastructure improves productivity and ensures firms can deliver and produce their product reliably, cheaply and efficiently. Investment in research and development allows firms to develop new products, which increases competitiveness as other countries won’t have these products, and new technology, which reduces costs and increases efficiency. taxation inflation economic stability flexibility competition and demand at home factors of production openness to trade

Question 77

benefits of being internationally competitive

Answer 77

By being competitive, a country will experience current account surpluses A competitive economy is likely to attract inflows of foreign investment, whether this be by establishing new companies (creating jobs) or buying domestic firms. This will lead to a transfer of knowledge, skills and technology to firms. Employment is likely to increase because more goods are being produced, since more goods are exported and less are imported, so more are sold internationally and domestically. A rise in demand for labour will lead to a rise in wages. There will be economic growth, both by supply side improvements due to efficiency and investment and by demand side improvements relating to X-M.

Question 78

drawbacks of international competitiveness

Answer 78

However, the problem with being internationally competitive is that this 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. Countries who are competitive may become more dependent on overseas countries and so this may mean they suffer from larger issues if there is a global recession.