4.1 International Economics Flashcards
What is the definition of globalisation?
The integration of local, regional and national economies into a single international market
What are the four characteristics of globalisation?
- Free trade of goods and services
- Free movement of labour
- Free movement of capital (finance)
- Exchange of technology and intellectual property
What is free trade of goods and services?
- Firms have markets in different places and source their factors of production from other countries.
- Supply chains are globalised.
- Consumers can buy products from a range of other countries.
What is free movement of labour?
Workers are able to seek jobs anywhere they wish, and firms can access labour from any country
What is the danger of free movement of labour?
Firms can relocate in order to exploit low cost labour
What is free movement of capital?
- This is investment across international borders - foreign direct investment
- Capital can be owned by foreign firms, and domestic firms can own capital abroad.
- Profits can be repatriated.
What is the exchange of technology and IP?
Firms can buy and sell technology across borders and firms are able to protect IP abroad
What are the five factors contributing to globalisation?
- Improvements in transport infrastructure (containerisation) and communications technology
- Trade liberalisation (WTO)
- Increasing number of global companies
- End of the cold war - collapse of communism and opening up of China
- Development and deregulation of international financial markets
- Growth in the number and size of trading blocs
What is trade liberalisation?
Widespread removal of protectionist barriers and tariffs.
What is the impact of globalisation on consumers? Three positives + EVAL.
- Increased consumer choice
- BUT goods are now homogenised, e.g hotels or fashion
- Prices are lower due to specialisation and comparative advantage
- BUT average world incomes rising means prices may rise
- Overall income rise, e.g in China
- BUT stagnant incomes below average (e.g in USA) due to structural unemployment
What is the impact of globalisation on workers? Three points + EVAL
-
Structural unemployment due to loss of domestic industry
- Only speeding up rate of change not creating it
- Increased migration and better standards of living
- Migrants take blame for taking jobs or lowering wage rate due to increased competition, or strained education and housing
-
Wages have decreased for low skilled workers in developed nations (compete w/ developing nations
- Low skilled workers in developing nations are doing better
What is the impact of globalisation on firms? Two points + EVAL
- Firms are increasingly dependent on foreign suppliers and markets, easily disrupted supply chains (Covid, Brexit)
- Reduce risks as firms can source products from a wider variety of countries
- Wider supplier network can lower costs of production
- Chains easily disrupted
What is the impact of globalisation on governments? One points + EVAL
Increase in economic growth should result in an increase in profits for firms and incomes for consumers, which should hence increase tax revenues for governements
BUT, transfer pricing may occur - this is where a global company manages its accounting of company transations to show the highest profits in countries where corporation tax is lowest - meaning they are tax avoiding and tax revenues may decrease.
What is the impact of globalisation on countries as a whole? Three point + 2 x EVAL
- Increase in real GDP due to comparative advantage and increased production
- Deglobalisation to protect domestic employment has lead to protectionism that has decreased trade
- Increased inequality in developed economies as labour is transfered away
- Decreased inequality in deveoloping economies benefitting from new jobs
- Harms natural resources and the environment from travel e.g. airplanes
What is absolute advantage?
This is when a country is able to produce (when all resources are devoted) more of one good than another country.
What is comparative advantage?
The ability of one country to produce a good with a lower opportunity cost than another country, meaning it has a relative advantage in producing that good
What are the 5 assumptions underlying the theory of comparative advantage?
- No transport costs
- No trade barriers
- Constant returns to scale - i.e. average cost of production is constant
- Perfect mobility of resources between different uses
- Buyers/consumers have perfect knowledge
Why is comparative advantage a justification for international trade?
- Both countries can specialise into producing the good they have the lower opportunity cost in, and then free trade enables both countries to consume outside of their PPF.
- This is because they are both producing the most they can, and then can trade between each other.
What are 3 limitations of the principle of comparative advantage?
- Transport costs might outweigh the benefits of trade
- Trade barriers may distort the advantage
- Increased production may result in rising average costs caused by diseconomies of scale
What are the overall benefits of international trade and specialisation? [5]
- Increased scope for specialisation and therefore increased global production/consumption and higher living standards
- More growth means more firms can access economies of scale
- Increased competition - encourages the freeing up of resources (creative destruction)
- Sharing of technology and resources for firms
- Lower prices for consumers through imports
What is the overall effect of trade on the global allocation of resources?
A more efficient global allocation of resources.
Give and explain the six costs/risks of international trade.
- Overdependence/overspecialisation, e.g. export-led growth AD
- Structural unemployment - lack of demand for uncompetitive goods/exported labour
- Inequality - trade may only benefit the wealthy/developed countries
- Depletion of natural resources
- Loss of sovereignty e.g. the EU
- Loss of culture by trading goods
Explain the four factors influencing the pattern of trade between countries
- Changes in comparative advantage
- Emerging and developing economies
- The size and number of trading blocs
- Changes in relative exchange rates
What is the terms of trade?
The average price of a country’s exports relative to the average price of its imports
What is the formula for the terms of trade?
index of export prices
__________________________ x 100
index of import prices
What does an ‘improvement’ in the T/T mean and what is it caused by?
The value of the T/T increases, this can be caused by:
- High relative domestic inflation - export prices are rising relative to import prices
- A change in the price of raw materials - depending on whether the country net imports or exports raw materials, a decrease in the price of these would either lower their export prices or import prices
- An appreciation in the exchange rate would increase export prices and decrease import prices
- Removal of protectionist barriers - if tarrifs are loosened, this would decrease import prices
What is a ‘deterioration’ in the T/T and what is it caused by?
The value of the T/T decreases, this can be caused by:
- Low relative domestic inflation - export prices are falling relative to import prices
- A change in the price of raw materials - depending on whether the country net imports or exports raw materials, an increase in the price of these would increase their export prices or import prices
- A depreciation in the exchange rate would decrease export prices and increase import prices
- Imposition of protectionist barriers - if tarrifs are introduced, this would increase import prices
Is a deterioration in the T/T bad for the trade balance?
YES:
If it is caused by a fall in global demand, the value of exports are decreasing and the trade balance is worsening
NO:
If it caused by an improvement in competitiveness and demand for exports is elastic, then the quantity sold increases by more than the price falls so the value of exports is increasing
Is a deterioration in the T/T bad for the domestic economy?
YES:
If it is caused by a fall in global demand, there will be less exports sold and so less employment in the export industry = less growth
NO:
If it is caused by a fall in export prices due to an increase in competitiveness and if demand for exports is elastic, then the value of exports increases and there is MORE demand in export industries = more growth
If it caused by an increase in import prices, then imported goods and costs of production increase (cost-push inflationary pressure) and so producers and consumers switch to domestic goods = more employment and growth
What are the four types of trading blocs?
- Free trade areas - trade barriers removed between certain countries (NAFTA/USMCA)
- Custom unions - no trade barriers between countries, plus a common external tariff on goods imported from outside the bloc (e.g. the EU)
- Common market - a custom union with the added dimension of free movement of labour and capital (e.g. the East African Common Market)
- Monetary unions - custom unions that have adopted a common currency (e.g. the Eurozone)
What is the problem with free trade areas with no common external tarrif?
Trade deflection - the member with the lowest tariff imports the good, and then it is re-exported in the free trade area with no tarrifs
This means that the countries in the FTA with the highest tariff cannot enforce them, unless they impose ‘re-export tariffs’
What is the greatest cost of entering a trading bloc? (diagram)
Trade diversion
- Before entering the trading bloc, country A applies the same tarrif on importing the good from both country B and C
- Country C has cheaper prices, so A imports all the good from there
- Once A enters a block with B, the good is now cheaper from B, meaning the UK imports all the good from there even though they are not the cheapest producer
- This undermines the principle of comparative advantage
What is the greatest benefit of entering a trading bloc?
Trade creation
- Before entering the trading bloc, country A places tarrifs on imports coming from a country within the block
- After entering the bloc, it removes all tarrifs
- This means that there is increased specialisation and trade, at lower prices
Overall, how do trading blocs compare to global trading policies?
They are the second best solution, compared to overall free trade:
- Global free trade > trading blocs > widespread protectionism > autarky
- This is because they distort global trade patterns compared to total free trade, but in the short term they increase trade
- But in the long run, it is more difficult to achieve free trade and there are therefore dynamic benefits that are prevented
This means it depends on the size and depth of integration in the bloc, and how the countries were trading before they joined the bloc
What are the benefits of joining a monetary union? [5]
- It promotes trade and investment
- eliminates echange rate uncertainty as there is no need to convert currency to trade and exporters have a greater degree of knowledge in expected demand
- eliminates transaction costs
- It promotes higher level of inward foreign direct investment
- reward for investment will be in the same currency, so there is greater certainty
- Greater price transparency
- consumers can compare prices more easily reduces information failure and increase competition
What is the benefit of joining a monetary union for countries with weaker/ less well-managed economies?
For countries with weaker economies, a single currency promotes low inflation and enables governments to borrow at lower interest rates. This is because:
- Countries can’t use monetary policy to devalue their debt, so inflation stays low
- There is a lower risk of lending to weaker economies as they can’t devalue their debt, meaning interest rates are lower
- A more credible central bank from a strong monetary union means that inflation is more likely to be met as inflation is a ‘self-fufilling prophecy’
What are the costs of joining a monetary union for all countries? [3]
- It severly limits the range of demand-side stimulus for individual countries
- a single currency means the loss of independent monetary policy, meaning individual nations cannot adjust QE/IR
- the use of a single monetary policy affects all countries differently
- fiscal policy may also be constrained by rules for fiscal discipline (e.g. debt cannot exceeed 60% of GDP in eurozone, defecit cannot exceed 3% of GDP - although not enforced)
- A country cannot devalue their currency in a debt crisis
- The loss of exchange rates as a mechanism for macroeconomic adjustment
- floating exchange rates can help automatically correct a trade defecit
- if a member country has a trade deficit with another member country, it no longer has its own national currency that adjusts
What is the cost of joining a monetary union for countries with stronger economies?
Weaker countries in the monetary union may expect fiscal transfers and support flows from stronger countries, as the weaker economies are constrained in their ability to use other methods to suppoer their economies
e.g. Greece and Germany, when Greece was facing a debt crisis it had to rely on Germany to lend it money to survive
What determines if a monetary union will be successful?
If it is an optimal currency area:
-
Are the economies similar?
- countries with similair economies and industrial structures reduce the likelihood of aysmmetric and aysnchronous shocks
-
Is there an effective system of fiscal transfer?
- there has to be political willingness and union identity for money to be transfered in case of a shock
-
Is there free movement of labour?
- high rates of unemployment in one country can be mitigated by workers moving to elsewhere in the union, reducing need for transfers
What are the functions of the World Trade Organisation (WTO)?
Promoting free trade and competiton:
- forum for negotions
- administering trade agreements
- monitoring national trade policies
- handling/settiling disputes
- promoting economic development and reform
What were two successes of the Uruguay Round of negotiations?
- Established WTO
- Average tariff cut of 38%
Why did the Doha Round fail?
- Developing countries had benefited less in the Uruguay Round, so expected compensation from this one - developed ones expected a clean slate
- Developing countries negotiated as a bloc and argued against intellectual property protection, to the dismay of developed ones
Why might there be a conflict between trading blocs and the WTO?
The WTO is a staunch supporter of free trade, and whilst they would appreciate trade creation, significant trade diversion would not please them.
Why would a country restrict trade? State 4 reasons. [9 total]
- Protect infant/sunset/geriatric industries (e.g. energy)
- Protect employment
- Promote self-sufficiency
- Correct imbalances on current account
- Retaliation to other countries/anti-dumping
- Reduce competition from countries with poor regulatory standards/cheap labour
- Strategy in times of war
- Prevent dumping, illegal under WTO
- To raise tax
What are the four methods of protectionism? Give an example of each.
- Tariffs - Trump v China
- Quotas - Bush and EU textiles
- Subsidies - CAP
- Administrative Barriers - EU/US cattle with growth hormones
What is a tariff? Describe/draw the tariff diagram.
A tax on imports.
How does a tariff work? [3]
- The tariff raises prices above the global one
- This means that more domestic producers are able to compete with foreign ones
- The extension in domestic supply and contraction in domestic demand (caused by the higher price) means imports and quantity consumed decreases.
What is the impact of a tariff on consumers?
Welfare loss.
What is the impact of a tariff on domestic producers?
Welfare gain.
What is a quota? Describe the diagram.
A legal limit on the quantity that can be imported in a given year (either volume or value)
What is a subsidy? (in the context of protectionism).
Describe the diagram
Payments by the government to firms for each unit of output, with the goal of reducing imports or raising exports.
How does the time frame affect the Marshall-Lerner condition? What diagram represents this?
- In the short run, PEDx+m is more likely to be inelastic, as consumers change habits and firms are held up by contracts.
- In the long run, this doesn’t apply, so PEDx+m are elastic, meaning the devaluation improves the current account balance
- This can be shown on a ‘J’ curve, with CA and Time on the axises.
