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Economics > 4.2.6 The International Economy (excl. 4.2.6.1 Globalisation, end of 4.2.6.2/4.2.6.3/4.2.6.4) > Flashcards

4.2.6 The International Economy (excl. 4.2.6.1 Globalisation, end of 4.2.6.2/4.2.6.3/4.2.6.4) Flashcards

1
Q

What is comparative advantage?

A

The ability of a country to produce at a lower opportunity cost than another country
They have to give up producing less of another good than another country, using the same resources

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2
Q

What is absolute advantage?

A

The ability of a country to produce at a lower unit cost than another country

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3
Q

What can countries do where they have comparative advantage?

A

Specialise, increasing economic welfare

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4
Q

What are the benefits of specialisation?

A

Exploitation of economies of scale, lowering costs of production
Increasing total output as all countries specialise in what they are efficient at producing

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5
Q

What are the benefits of international trade?

A
  • Increase in total world output, leading to higher economic growth and living standards
  • Access to resources/ finished goods that the country can’t produce
  • More choice - meeting demand closely (solving economic problem)
  • Increase in economic efficiency by establishing a competitive market, lowering costs of production and increasing output
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6
Q

What are the costs of international trade?

A
  • Job losses, as countries with lower labour costs have entered the market
  • Environmental damage due to increase in manufacturing
  • Dependency on other countries for necessities
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7
Q

What are the reasons for changes in the pattern of trade between the UK and the rest of the world?

A
  • Changing comparative advantages, as developing countries gain advantage in production of manufactured goods due to their lower labour costs, shifting production abroad and away from developed countries
  • Impact of emerging economies - more countries participating in world trade since collapse of communism
  • Exchange rate changes - e.g. China keeping their currency’s value low to make exports relatively cheap (export-led growth)
  • Protectionism/ Free Trade areas - policies of developed countries have limited the ability of developing countries to export primary commodities
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8
Q

What are examples of protectionist policies?

A

Tariffs, quotas and export subsidies to encourage production and lower costs

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9
Q

What 3 accounts make up the balance of payments?

A

The current account, the capital account and the financial account

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10
Q

What does the current account consist of?

A

The balance of trade in goods, the balance of trade in services, primary income flows and secondary income flows

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11
Q

Is the current account in surplus or deficit in the UK?

A

Deficit in the UK

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12
Q

What components of the current account are in deficit in the UK?

A

The balance of trade in goods and secondary income flows

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13
Q

What components of the current account are in surplus in the UK?

A

The balance of trade in services and primary income flows

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14
Q

What components of the current account represent the trade balance?

A

The balance of trade in goods and the balance of trade in services

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15
Q

What are examples of primary income flows?

A

Net income flows from UK overseas assets, e.g. dividends, interest and profits

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16
Q

What are examples of secondary income flows?

A

Net current transfers, e.g. aid, EU grants, remittances, gifts

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17
Q

What does the financial account consist of?

A

Other capital flows (‘hot money’), net portfolio investment, net direct investment (FDI), drawing on reserves, and financial derivatives + employee stock options

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18
Q

What does the current account measure?

A

All currency flows into and out of a country to pay for trade, together with primary and secondary income flows

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19
Q

What does the financial account record?

A

Flows of capital into and out of the economy

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20
Q

What does a deficit in the financial account mean?

A

The country acquires capital assets located in other countries that are greater in value than the country’s own assets bought by overseas companies

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21
Q

What does a surplus in the financial account mean?

A

Money flowing into the country

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22
Q

What is long term capital?

A

Investing in FDI e.g. factories/offices

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23
Q

What are portfolio capital flows?

A

Purchase of bonds/shares etc. rather than physical/productive assets like FDI

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24
Q

What causes short term speculative flows (‘hot money’)?

A

Expected exchange rate or interest rate changes

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25
Q

Where does investment go in the balance of payments?

A

The financial account

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26
Q

Where does income from investment go in the balance of payments?

A

The current account

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27
Q

What is the effect of a balanced current account on the AD curve?

A

AD is stable/unchanged

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28
Q

What is the effect of a deficit on the current account on the AD curve?

A

AD shifts left

29
Q

What is the effect of a surplus on the current account on the AD curve?

A

AD shifts right

30
Q

What does a current account deficit imply for the financial account?

A

There is a financial account deficit

31
Q

How does a current account deficit affect the exchange rate?

A

It puts pressure on the exchange rate to fall

32
Q

What are the benefits of the exchange rate falling as a result of a current account deficit?

A

It could solve the current account deficit
It makes foreign investment into the UK attractive, which could lead to a surplus on the financial account

33
Q

What does a current account deficit being seen as a weakness depend on?

A

The size or percentage of the GDP
How the deficit is financed

34
Q

What are the benefits of a current account deficit?

A
  • More imports means consuming outside the PPF, increasing living standards
  • Could be deflationary
  • Could be from importing capital goods, boosting LRAS
35
Q

What are the long run issues with a current account deficit?

A
  • If imports are persistently greater than exports, AD decreases, resulting in lower growth and increased unemployment
  • It puts pressure on the currency to depreciate, resulting in import inflation
  • If it is being financed by ‘hot money’ then it could result in ‘disaster’, or foreign currency reserves, which could run out
36
Q

What different ways can a current account deficit be financed, and how will they perform in the long run?

A
  • FDI - stable in long run
  • ‘Hot money’ - ‘disaster’
  • Foreign currency reserves - fine but could run out
  • Selling bonds/shares to foreign investors - depends on how long country can keep borrowing
37
Q

What are the demand-side determinants of the current account?

A
  • The economic cycle of the UK and foreign countries
  • The value of the currency
  • Protectionism
38
Q

What are the supply-side determinants of the current account?

A
  • Training
  • Changes in productivity
  • Innovation
  • Current account changes
39
Q

What is the exchange rate of a currency?

A

The weight/price of one currency relative to another

40
Q

What determines the value of the exchange rate in freely floating systems?

A

Supply and demand

41
Q

What is the demand for a currency equal to?

A

Exports + capital inflows

42
Q

What is the supply for a currency equal to?

A

Imports + capital outflows

43
Q

How are interest rates linked to exchange rates?

A

If the interest rate falls, there will be less demand for the currency, but more supply due to ‘hot money’ outflow and imports increasing due to increased consumption
This decreases the exchange rate, but the quantity remains the same

44
Q

What factors impact exchange rates?

A
  • Interest rates within country (positive correlation)
  • Interest rates abroad (negative correlation)
  • Political/economic stability/instability (e.g. Brexit), speculation
  • Government intervention
  • (Inflation)
45
Q

What are the benefits of a weaker, depreciating pound?

A
  • Increase in exports as they become more price competitive - foreign consumers will be able to buy more pounds with their currency, and there should be growth in export industries in UK
  • Improvement on trade deficit - UK firms competing with foreign firms will benefit as consumers buy domestic goods over importing (imports more expensive)
  • More FDI coming into UK
  • More AD, more growth, increased employment
46
Q

What are the negatives of a weaker, depreciating pound?

A
  • Cost-push inflation from importing raw materials e.g. oil, increasing costs of production
  • Potential demand-pull inflation due to increase in AD - particularly if there is not much spare capacity
47
Q

What does the impact of a change in the value of a currency depend on?

A

The size of the change and the currency it is moving against

48
Q

What is economic growth?

A

The changes in physical quantity of goods and services that are produced/ a country has the potential to produce

49
Q

What is economic development?

A

The changes in the physical quantity and quality of goods and services that are produced/ a country has the potential to produce

50
Q

What is the difference between economic growth and economic development?

A

Economic growth refers to the quantity of goods and services that are produced/ a country has the potential to produce, whereas economic development refers to the quantity and quality of goods and services

51
Q

What are the aims of economic development?

A
  • To raise living standards
  • To increase sustainability
  • To expand political and social choices
  • To improve equality/ distribution of income, so that absolute/relative poverty is decreased
52
Q

What does total economic welfare come from?

A
  • Purchasing goods and services
  • State provision (healthcare, education)
  • Quality of life factors
53
Q

What are the 2 methods of measuring development?

A

1) GDP per capita (at PPP)
2) HDI - Human Development Index

54
Q

How is GDP per capita a method of measuring economic development?

A

A higher GDP per capita shows an increase in NI, showing an increase in average income, meaning there is more spending on goods and services, leading to higher living standards. The higher average income also shows a decrease in poverty.

55
Q

What are the issues with measuring economic development using the GDP per capita?

A
  • It doesn’t prove quality of life
  • More growth does not necessarily equal more development
  • It doesn’t account for inequality (e.g. Qatar has high GDP/capita but also high poverty)
  • It doesn’t take into account the cost of living (unless using PPP) (e.g. Norway)
  • It doesn’t consider the quality of goods and services provided
  • It doesn’t consider what the GDP is being spent on (inefficient spending) (e.g. military over health)
  • It doesn’t consider externalities (e.g. environment)
56
Q

How is the HDI as method of measuring economic development?

A
  • Measures life expectancy at birth
  • Measures mean/expected years of schooling (for over 25s)
  • Measures GNI per capita (PPP $)
57
Q

What are the issues of measuring economic development with the HDI?

A
  • Quality of education/life in general not accounted for
  • Skewed answers
  • Income inequality (and other GNI issues)
  • Misses key quality of life factors
58
Q

What are the barriers to growth and development?

A
  • Lack of physical capital investment
  • Corruption
  • Institutional factors (laws, constitutions, financial system, property rights)
  • Lack of infrastructure
  • Poor human capital
    Others:
  • Primary product dependency
  • Rapid population growth
  • External debt
  • Disease
59
Q

How is a lack of physical capital investment a barrier to growth and development?

A
  • Harod-Domar model (circle of: increased investment -> higher capital stock -> higher economic growth -> increased savings)
  • ‘Capital flight’ = money going overseas
  • Developing countries tend to have poorer banking infrastructure: not many banks, lack of finance, very high interest rates - lower savings in banks - less money for investment - lack of capital investment
60
Q

What is corruption?

A

Dishonest/fraudulent conduct by those in power

61
Q

How is corruption a barrier to growth and development?

A
  • Political corruption - money being spent on unnecessary goods and services (personal gain) rather than health/education
  • Business impact - face higher costs - ‘red tape’ (paying to get through)
  • Less FDI
62
Q

How are institutional factors a barrier to growth and development?

A
  • Laws e.g. well policed contract law is critical for businesses and consumers to do business with each other
  • Constitutions
  • Financial system e.g. poorer banking infrastructure -> lower savings in banks -> less money for investment
  • Property rights - tradeable property rights are critical for economic development
63
Q

How is a lack of infrastructure a barrier to growth and development?

A

Examples: transport (roads/rail/ports), hospitals/schools (buildings), water network/ gas/electricity, communication - broadband
- Can restrict trade - very costly, difficult to get raw materials, very difficult to export - decreased exports - lower AD
- Lack of FDI

64
Q

How is poor human capital (collective knowledge/skills/experience from education) a barrier to growth and development?

A
  • Developing countries tend to have a low stock of human capital
  • Even if you spend on education, educated people move country to be paid more (‘brain drain’)
  • People in developing countries pressured to go to work much earlier in life
  • Lower human capital - less skilled population - little increase in productive capacity over time, higher costs (so higher prices), lower productivity - less innovation
65
Q

How is primary product dependency a barrier to growth and development?

A
  • GDP reliant and lack of diversity of products
  • Low value added
  • Natural disaster -> less product (e.g. tea leaves)
66
Q

How is rapid population growth a barrier to growth and development?

A
  • Leads to resource depletion and unemployment
  • Pressure on healthcare/education -> more inequality
  • e.g. Niger
67
Q

How is external debt a barrier to growth and development?

A

Paying high interest loans - less government expenditure on education/healthcare

68
Q

How is disease a barrier to growth and development?

A
  • Wipes out FoP - decreased productivity
  • Higher percent of government income spent on healthcare rather than education
  • e.g. Uganda - Ebola

Economics (10 decks)

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