6 International Economic Issues

Question 1

Absolute advantage

Answer 1

Ability ot produce more of a product than another country, with the same amount of resources

Question 2

Comparative advantage

Answer 2

Ability to produce a product at a lower opportunity cost than another country

Question 3

Trade

Answer 3

Exchange of goods & services between countries

Question 4

Benefits of trade

Answer 4

1. Access to larger markets
2. More choices for consumers
3. Lower prices through competition
4. Economic growth
5. Comparative advantage & efficiency

Question 5

Globalisation

Answer 5

Increasing interconnectedness & interdependence of countries through trade investment, technology and cultural exchange

Question 6

Key features of globalisations

Answer 6

1. FDI
2. MNC
3. Increased trade
4. Growth in exports & imports

Question 7

Cause of globalisation

Answer 7

1. Reduction of tariffs & trade barriers
2. Improved transport
   
   • Cheapter & faster shipping
3. Technology advancements
   
   • Internet & communication

Question 8

Positive impacts of globalisation

Answer 8

1. Increased economic growth
2. Access to larger markers
3. Lower prices for consumers

Question 9

Negative effects of globalisation

Answer 9

1. Exploitation of labour in developing countries
2. Environmental degradation
3. Loss of domestic industries

Question 10

Terms of trade

Answer 10

Ratio of export prices to import prices

Index of export prices / Index of import prices x 100

Question 11

Improvements in ToT

Answer 11

• Export prices rise relative to import prices
• More imports can be bought with the same amount of exports

Question 12

Deterioration of ToT

Answer 12

Import prices rise relative to export prices
Country must export more to afford the same amount of imports

Question 13

Facotrs affecting ToT

Answer 13

• Increased export prices
• Decreased import prices
• High productivity
• Change in exchange rates
• Inflation

Question 14

Tariffs + -

Answer 14

Taxes on imports, raising price
+ Helps domestic firms compete, increaes govt revenue
- because imports are more expensive, consumers switch to domestic alternatives. reduces trade deficit, improves current account
- Higher prices for consumers, retaliation (trade wars)

Question 15

Quotas + -

Answer 15

Limits the quantity of imports allowed in a country
- restricts imports, fewer goods flow into the country
- reduces money flowing out for imports
+ Protects jobs, ensures domestic market control
- Reduced choice, higher prices, risk of illegal smuggling

Question 16

Subsidies + -

Answer 16

Financial aid provided by the government to lower production cost
- makes domestic products cheaper, replace imports
- lower prices makes domestic goods more attractive for exports
+ Protects jobs, helps new industries grow
- Expensive, distorts competitionm may cause overproduction

Question 17

Non-tariff barriers + -

Answer 17

Rules/ standards that restrict imports (e.g strict safety, quality laws
+ Can protect consumers, enforce ethical/ environmental standards
- May be used unfairly, trigger trade disputes

Question 18

Exchange rate

Answer 18

Determines how much one currency is needed to purchase a unit of another currency

Question 19

Fixed exchange rate

Answer 19

A system where a country’s currency value is set at a specific rate against another currency

Question 20

Floating exchange rate

Answer 20

Market forces (supply & demand) determines the value of currency

Question 21

Managed exchange rate

Answer 21

Combination of fixed & floating, central bank intervenes to prevent extreme fluctuations

Question 22

Factors that affect exchange rate

Answer 22

• Supply and demand currency
• Interest rates
• Inflation rates
• Purchasing power remains stable
• Speculation

Question 23

Currency depreciation

Answer 23

• A decrease in a country’s value relative to others
• Exports become cheaper
• Imports become more expensive

Question 24

Currency appreciation

Answer 24

• An increase in a currency’s value
• Imports become cheaper
• Exports become expensive

Question 25

Current account

Answer 25

Record of transactions in terms of trade in goods, services and primary & secondary income

Question 26

Components of current account

Answer 26

- Trade in goods - Trade in services - Primary income - Secondary income

Question 27

Current account balance

Answer 27

(Export of goods - export of service) + (Import of goods - import of services)

Question 28

When does surplus occur in current account

Answer 28

Surplus occurs when exports > imports - More money in than out

Question 29

When does deficit occur in current account

Answer 29

Deficit occurs when imports > exports

Question 31

Financial account

Answer 31

- Record of the movement of money in the form of investments by residents of a country & inward flow of investment - FDI - Portfolio investment (e.g stocks, bond)

Question 32

Capital account

Answer 32

- Capital transfers, including trasfer of ownership of fixed assets/ non-financial assets - Capital transfers

Question 33

Persistent deficit

Answer 33

Imports > exports - Leads to severe economic problem - Exchange rate depreciates - Domestic currency loses value abroad - Inability to pay international debts - Risk of extreme bankruptcy

Question 34

Persistent surplus

Answer 34

Exports > Imports - Creates difficulties for trade partners

Question 35

Benefits of contractionary fiscal policy on reducing current account deficit

Answer 35

(Reducing government spending / Increasing taxes) - Reduces disposable income → less consumer spending → lower demand for imports - Lower demand reduces inflation → domestic goods become more price-competitive - Export demand may rise → improves current account balance

Question 36

Negatives of contractionary fiscal policy on reducing current account deficit

Answer 36

- Can increase unemployment & reduce economic growth - May reduce firms’ output → hurts export production capacity - Consumer & business confidence may fall → discourages investment - Living standards may fall due to reduced public services or higher taxes

Question 37

Benefits of monetary policy on reducing current account deficit

Answer 37

(Raising interest rates to reduce spending and demand for imports) - Higher interest rates → reduce borrowing & increase saving → lower spending on imports - May strengthen the currency → makes imports cheaper (not always good for reducing deficit, though)

Question 37

Evaluation of contractionary fiscal policy on reducing current account deficit

Answer 37

Good short-term fix to reduce demand for imports - But damaging if used alone; combine with other policies - Better for high-inflation economies than for stagnant ones

Question 38

Negatives of monetary policy on reducing current account deficit

Answer 38

- Stronger currency = exports more expensive → could worsen deficit - Slows down overall economic growth and investment - May hit sectors like housing or consumption-sensitive industries hard

Question 39

Evaluation of monetary policy on reducing current account deficit

Answer 39

- Not always reliable — effects on trade can be indirect - Risk of currency appreciation counteracting benefits - Best used alongside fiscal and supply-side policies

Question 40

Benefits of supply-side policy on reducing current account deficit

Answer 40

(Improve productivity and competitiveness) Examples: Invest in education, training, R&D, infrastructure * Improves efficiency → lowers production costs * Makes domestic firms more competitive globally → increases exports * Encourages innovation, higher-quality products → long-term export growth * Can attract FDI

Question 41

Negatives of supply-side policy on reducing current account deficit

Answer 41

Time lag — takes years for results to show * Expensive — infrastructure and education reforms require large investment * No guarantee it will shift trade balance unless demand for exports exists