4.2.6 Flashcards
What is globalisation?
Globalisation is the process in which national economies have become increasingly integrated and interdependent.
Causes of globalisation:
-Trade liberalisation - more countries signing up to the WTO - reducing trade barriers
-Larger trading blocs - nations are working together a lot more
-Growth of MNCs
-Technological advancements - e.g. transport, software and communication
-Mobility of labour & capital
What are the benefits of globalisation?
- Lower prices due to increased international competition boosting efficiency and driving down costs.
- Benefits of trade - Greater growth, tax revenue, promoting development
- Greater employment - Firms have access to a lot more potential customers so will employ more to increase output
- Benefits of large EoS
- Free movement of labour & capital - Greater job opportunities for workers and lower costs for firms
- Technological transfers and innovations
What are the costs of globalisation?
- Growing inequality
- Higher structural unemployment if the country struggles to compete
- Environmental costs - lack of sustainability - Economies will prioritise other objectives over the environment, such as growth.
- Trade imbalances - Current account deficits/surpluses - Could lead to protectionist policies and trade wars
- Greater risk of external shocks - As economies become more interdependent, they are at greater risk of shock in other countries.
- Less cultural diversity - MNCs will dominate and remove diversity
What is absolute and comparative advantage?
Absolute advantage occurs when a country can produce a product using fewer factors of production than another nation.
Comparative advantage states that a country should specialise in the goods and services it can produce at the lowest opportunity cost, and then trade with another country.
What are the benefits of free trade?
- Increased efficiency and better allocation of world resources - this is due to countries specialisation in the production of goods and services that they have a comparative advantage in
- Access to goods that wouldn’t be produced domestically
- Lower prices - international competition, greater EoS due to greater production potential of firms, technological transfers allow for more efficient production.
- Greater consumer choice
- Economic growth - gains from exports
- Increased CS and net welfare gain
What are the arguments for protectionism?
- Infant industry arguments - protects new/small firms against the low international prices, allowing them to benefit from EoS in order to compete.
- Protect against ‘dumping’ (sale of a good below the cost of production) - domestic firms will be unable to compete with these ‘dumped’ goods and the low prices
- Protect domestic employment
- Raise govt revenue
- Improve a current account deficit - Protectionism aims to influence demand for domestic goods, reducing imports.
What is a tariff
A tariff is a form of protectionism and is a tax on imports in order to make them less desirable.
The world supply will be horizontal due to the ease at which the rest of the world can supply the individual market. The world S will result in a large excess demand and result in a large amount of imports. The tariff will directly raise the cost of imports, shifting the S curve upwards. This shift results in a higher price, smaller excess demand and reduced imports. By importing less and raising prices, domestic firms are protected. Furthermore, it can be seen that there is a tariff revenue that will be received by the government. However, there will be a net welfare loss (shown in blue) due to the reduction of consumer surplus, with the tariff revenue and increase in producer surplus reducing the welfare loss.
*Link tariff directly to the benefits of protectionism and how it gives those benefits.
What are the disadvantages of a tariff?
- Market distortion - Higher prices - Lower consumer choice - Lower consumer surplus - DWL
- Risk of retaliation - other countries could place
- Could be very regressive - higher prices - if the tariff is placed on a necessity good, it will place a greater burden on the poor.
Tariff eval
- Depends on elasticity of D and S
- Depends on the size of the tariff
- How is the tariff revenue used?
What is an import quota?
An import quota is a physical limit on the amount of imported goods allowed into an economy.
It is assumed that the quota will be set below the current amount of imported goods. This results in there being excess demand for the goods which cannot be resolved by imports. The excess demand will drive up prices and result in an increase in domestic supply. This leads to a DWL and higher prices for consumers.
An import quota will only be used instead of a tariff when the tariff will not reduce imports (inelastic D and S).
*Link import quotas directly to the benefits of protectionism and how it gives those benefits.
What is an export subsidy?
An export subsidy is a subsidy given to domestic producers in order to reduce their costs of production, reduce prices and increase their international competitiveness.
This subsidy results in a right shift of domestic supply, resulting in a greater domestic supply and fewer goods need to be imported. Also, the price will remain unchanged due to firms being able to cover costs with the subsidy. Although, firms will have higher effective prices, due to them charging an effective price equal to Pw+Sub. However, as the new suppliers are likely to be efficient, and are only producing due to the subsidy, there will be a DWL to society.
*Link trade subsidy directly to the benefits of protectionism and how it gives those benefits.
What is international competitiveness?
International competitiveness is the ability of a nation to compete successfully overseas in order to sustain improvements in living standards and output.
There are 3 things to determine if a nation is competing successfully:
1. Price competitiveness
2. Non-price competitiveness
3. Ability to attract factors of production - FDI, labour, entrepreneurs, businesses and capital from abroad
There are 3 measures of competitiveness:
1. Unit Labour Costs (Total Labour Costs/Output)
2. Global Competitiveness Index - Encompases all factors that determine international competitiveness and the figure is made into an index that can be compared. The UK is ranked highly on the GCI meaning that it is very competitive internationally.
3. Terms Of Trade
What are the factors that determine international competitiveness?
- Unit Labour Costs
- Labour Flexibility
- Labour Skills
- Tax Regimes
- Innovation
- Infrastructure
- Regulation
- Economic Stability
What are policies to improve international competitiveness?
Supply side policies will be used in order to improve all 3 things that determine competitiveness. Such policies may include:
-Increased G on infrastructure - such as transport links making it easier to move capital around the country, reducing costs and reducing prices.
-Tax incentives - such as lower corporation tax increasing retained profits of firms, allowing them to invest, become more efficient and reduce prices.
-Deregulation - directly reduces business costs, allowing them to reduce prices.
-Increased G on education - improves skills and qualifications, increasing the productivity of labour.
However, these policies may not work due to:
-High cost - opportunity cost and burden on future generations
-Time lag
-No guarantee of success
-The policies need to be targeted
What is trade creation?
Trade Creation is the movement from a high cost domestic producer to a low cost producer inside the customs union.
It is assumed that there is a tariff between the two nations. After the nation joins the custom union, the tariff will be removed and the two will be able to trade freely. Now the two nations can trade as if there is no tariff in place. This results in an extension in demand and contraction in supply, resulting in a fall in domestic supply and rise in imported goods. Also, consumers benefit from a gain of consumer surplus. However, producers suffer as the producer surplus falls and there is no longer a tariff revenue to the government. Therefore, by the nation with a comparative advantage joining the customs union, there is a net welfare gain in the high cost nation.
Essentially opposite of a tariff
*Link trade creation to the benefits of free trade
