Chapter 14

Question 1

Define the term globalisation

Answer 1

Increasing economic integration across international borders

Question 2

Define free trade

Answer 2

When two or more countries trade without barriers

Question 3

What are the 7 causes of globalisation?

Answer 3

Improvements in communication
Improvements in transport (in terms of speed and cost reduction)
Containerisation (which has generated massive increases in efficiency for firms transporting goods globally + growth of air freight)
Increased free trade
Closer political ties between countries, especially since the end of communism in many countries
Abolition of capital controls
Coca-colonisation (destruction of local cultural identities)

Question 4

What are the main characteristics of globalisation?

Answer 4

The growth of international trade and the reduction of trade barriers - trade liberalisation
Greater international mobility of both capital and labour
A sig increase in the power of international capitalism and MNCs or transnational companies
The deindustrialisation of older industrial regions and countries, and the movement of manufacturing industries to newly industrialising countries (NICs)
More recently, the movement of internationally mobile service industries, i.e. call centres etc, to NICs
A decrease in gov power to influence decisions made by MNCs to shift economic activity between countries

Question 5

What are the 5 more features of globalisation?

Answer 5

Greater foreign trade
Higher levels of overseas migration
Increasing capital flows between countries through FDI and portfolio investment
Increased regional specialisation - i.e. greater division of labour
Emergence of global brands
Greater use of outsourcing/ offshoring

Question 6

What are the 5 consequences of globalisation for more developed economies?

Answer 6

Increasing ability to outsource production to low-cost countries
Potential for higher sales by targeting products at fast-growing, less-developed countries
Exploitation of economies of scale by producing on a global scale
Increased competition for firms in developed economies from low-cost producers
Need to diversify away from manufacturing as less-developed economies utilise their absolute and comparative advantage in manufacturing
Ability of firms to recruit globally - though this may push down wages in the local economy
Possible ‘brain drain’ as skilled workers seek opportunities overseas

Question 7

Define the term containerisation

Answer 7

The use of uniform-sized containers for transportation of goods, which significantly reduces the cost of transportation through increased efficiency

Question 8

Define the term outsourcing

Answer 8

Part of a firm’s production is performed by another firm (or, in the case of offshoring, the work is done by a firm in another country)

Question 9

What is the WTO and what does it encourage?

Answer 9

World Trade Organisation encourages the growth of international trade and the reduction of trade barriers = trade liberalisation

Question 10

Define the WTO

Answer 10

An international body whose purpose is to promote free trade by persuading countries to abolish import tariffs and other barriers to trade. As such, it has become closely associated with globalisation.

Question 11

Define the term multinational corporations (MNCs)

Answer 11

Enterprises operating in several countries but with their headquarters in one country.

Question 12

Define the term less developed countries

Answer 12

Countries considered behind in terms of their economy, human capital, infrastructure and industrial base

Question 13

Name 3 nations who are less developed economies

Answer 13

Asia, Africa, Latin America

Question 14

What are the 6 characteristics of less developed countries

Answer 14

Low GDP per capita
Fast population growth
Primary product dependence
Poorly developed infrastructure and financial markets
Large informal economy
Large rural population/agricultural output

Question 15

What do the critics of globalisation say?

Answer 15

Globalisation has led to a ‘McDonaldisation’ or ‘Coca-colonisation’ of sig part of the world economy.
On one hand - companies i.e. Nike are accused of exploiting their workers with low wages, but multinationals argue that low wages they are paid far exceed the wages paid by indigenous firms - they believe this encourages local wages to rise.
MNCs also claim to improve labour productivity, health and safety and other labour market conditions in the poor countries in which they operate.

Question 16

What are the consequences for less developed countries with globalisation?

Answer 16

Increasing dominance by global brands from developed countries - Coca-colonisation etc (although many global brands succeed by adapting their products to local tastes = GLOCALISATION)
Issues of treatment of local workforces
Having to adopt free market macroeconomic policies in order to attract FDI
Having to open up markets to foreign competition, placing local businesses at risk of failure

Question 17

Define the term more developed countries

Answer 17

Countries with a high degree of economic development, high average income per head, high standards of living, usually service industries dominating manufacturing, and investment having taken place over many years in human capital and infrastructure.

Question 18

What does FDI stand for?

Answer 18

Foreign direct investment

Question 19

Argument for globalisation

Answer 19

Free market economists generally support globalisation and regard it’s growth as inevitable. They argue that the benefits of further global economic integration, which include the extension of political freedom and democracy as well as the economic benefits of more production and higher living standards, sig exceed the disadvantages, i.e. destruction of local cultures. However, opponents argue that globalisation is a respectable name for the growing exploitation of the poor, mostly in developing countries, by international capitalism and US economic and cultural imperialism.

Question 20

What are the 5 benefits of MNCs to less developed economies?

Answer 20

Employment boost
Multiplier effects of FDI
Wages may rise to attract local labour
Tax rev boosted
Hard currency may be earned

Question 21

What are the 6 drawbacks of MNCs to less developed economies?

Answer 21

Wages offered by MNCs are often v low
MNCs may bring in their own workers
Tax avoidance by MNCs
Poor working conditions
Environmental damage
Increased competition for local businesses

Question 22

What are the 3 reasons for foreign trade?

Answer 22

Access to cheaper products
Greater variety of products
Lower production cost through specialisation and outsourcing

Question 23

Define absolute advantage

Answer 23

One country being able to produce a product at a lower cost than in another country

Question 24

Define comparative advantage

Answer 24

One country being able to produce a product at a lower opportunity cost than another country

Question 25

How is comparative advantage measured by?

Answer 25

The opportunity cost of producing a product, in terms of what could have been produced instead in the same country.

Question 26

For absolute advantage, what does specialisation do?

Answer 26

Increases world output. It allows the countries in question to trade, making each country better off than before

Question 27

For comparative advantage, what does specialisation do?

Answer 27

World output is higher than before specialisation. Trade is mutually beneficial (at an appropriate exchange rate) - each country can consumer more despite one country being less efficient at producing both products.

Question 28

What are the assumptions of the model of comparative advantage, which make it thus hard to implement in the real world?

Answer 28

Factor immobility between countries Perfect factor mobility within each country (i.e. workers can make either product) No economies or diseconomies of scale - costs remain the same. This doesn't occur in the real world Transport costs are small enough not to matter No artificial trade barriers - there are tariffs, quotas and transport costs in the real world. Perfect info - doesn't exist in reality

Question 29

Describe the changing pattern of UK trade

Answer 29

The UK is an open economy - foreign trade accounts for around 30% of UK GDP Trade with EU has grown over the last 50 years (though may decline due to leaving EU) There has been a gradual decline in trade with former Commonwealth countries There has been a gradual decline in manufacturing exports The UK has a high level of financial services exports Areas of success for export include air tech, cars and military tech.

Question 30

Define trade protection

Answer 30

Using artificial barriers known as protectionist policies to restrict the flow of imports into a country

Question 31

What are the 4 protectionist policies?

Answer 31

Tariffs - taxes on imports. Increases import prices, encouraging switch to domestic alternatives Quotas - limits on the quantity of imports Export subsidies - when govs subsidise export-producing industries Red tape/artificial barriers - length administrative procedures or complex legal standards for imports

Question 32

What are the arguments for protectionist policies?

Answer 32

Protection of jobs Infant industry - protecting small domestic industries from larger, more efficient competition Anti-dumping - stops large overseas businesses selling output below cost to drive domestic businesses out Sunset industries - protecting industries in long-term decline Strategic reasons - protecting strategically important industries (i.e. agriculture)

Question 33

What are the arguments against protectionist policies?

Answer 33

Based on comparative advantage, free trade maximises global output Protecting infant/sunset industries encourages inefficiency Higher prices (and possible job losses elsewhere due to reduced spending power) Protectionist policies usually encourage retaliatory measures

Question 34

What are the features of the single European market?

Answer 34

Customs union Freedom of movement of EU population Free movement of capital between members Common product standards and regulations Some fiscal coordination Some countries share monetary policy via Euro currency

Question 35

Define the term customs union

Answer 35

Free trade areas with a common external tariff on imports from outside

Question 36

Define the term balance of payments

Answer 36

Record of financial transactions between the UK and rest of the world

Question 37

Explain the arguments in favour of leaving the EU

Answer 37

Less competition from low-cost producers within the EU Trade diversion - avoiding common external tariff on non-EU imports No further financial contribution to EU (almost $10 billion per year) Less downward-pressure on wages from EU migrants willing to work for low wages No need to comply with EU rules and regs UK unaffected by new laws made by European Parliament

Question 38

Explain the arguments against leaving the EU

Answer 38

Larger market for UK businesses Wider choice of products due to free trade access to single European market Larger supply of skilled workers for UK business - often at lower wages Economies of scale Trade creation - access to tariff-free goods and services

Question 39

Explain the role of the WTO (World Heath Organisation)

Answer 39

More than 100 countries are WTO members WTO promotes trade liberalisation across membership Trade negations are conducted in 'rounds' WTO has been successful in reducing trade barriers (but progress v. slow) Recent trend has been growth of regional trade blocks i.e. EU, NAFTA and ASEAN

Question 40

Explain the balance of payments and what 3 parts makes it up

Answer 40

Capital account Financial account Current account The balance of the total of the 3 sections affects the foreign currency holdings of the UK gov. A balance of payments deficit means foreign currency reserves fall, and vice versa. A gov can alternatively cover a balance of payments deficit by borrowing. If foreign reserves are insufficiently high to finance a current account deficit, then surplus must be generated on either the financial or capital account.

Question 41

Explain the capital account

Answer 41

Contains some transfers and purchases/sales of non-financial assets

Question 42

Explain the financial account

Answer 42

3 components: - FDI = Foreign direct investment = opening up/buying existing businesses located outside country of ownership - Portfolio investment = trade in financial assets (i.e. shares) outside country of ownership - Short-term movements of capital = into and out of a country, often moved for speculative motives and known as 'hot money'

Question 43

What are the 4 parts of the current account?

Answer 43

Trade in goods = exports of goods - imports of goods Trade in services = exports of services - imports of services Primary income balance = net investment income flows from interest, dividends and profits earned on overseas investments (less outflows from foreign-owned assets based in UK) Secondary income balance = Net transfers of money include: private transfers between countries (i.e. overseas workers sending wages back to home country), foreign aid, grants and gifts

Question 44

Explain the balance on current account

Answer 44

Current account balance is measured by difference between inflows and outflows of money into/out of country due to: - exports and imports - investment income from factors of production located outside their country of ownership - transfers of money between countries Current account deficit: outflows > inflows Current account surplus: outflows < inflows UK current account is normally in deficit (surplus on services < deficit on goods)

Question 45

What are the 5 factors determining exports?

Answer 45

Foreign GDP = increases mean more demand for UK exports Relative inflation Relative productivity Exchange rates - a higher exchange rate means exports appear more expensive overseas (and vice versa)

Question 46

What are the 5 factors determining imports?

Answer 46

UK GDP - increases mean more spending by UK consumers and more imports Relative inflation Relative productivity Exchange rates Both imports and exports are also affected by the level of trade barriers that exists

Question 47

What are the policies to correct a deficit on the current account?

Answer 47

Expenditure reducing policy 1 - deflation Expenditure switching policy 1 - devaluation Expenditure switching policy 2 - protectionist policies Expenditure switching policy 3 - supply side

Question 48

Why are policies to correct a deficit on the current account important?

Answer 48

Achieving a balance on current account is an economic objective. Deficits on current account can be corrected (eliminated or reduced) by: - expenditure-reducing policies = policies to reduce overall expenditure - expenditure-switching policies = policies to encourage a switch away from imports to exports

Question 49

Explain expenditure-reducing policy 1: deflation

Answer 49

Reducing UK consumption leads to less imports. Reductions in UK consumption are achieved by: - Higher interest taxes - Higher taxes - Lower gov spending

Question 50

What are the issues with expenditure-reducing policy 1 - deflation?

Answer 50

Unpopular with population Conflicts with objectives for growth and unemployment Higher interest rates may cause rise in exchange rate, which reduces exports

Question 51

Define the term expenditure-reducing policy

Answer 51

Reducing current account deficits through reductions in AD

Question 52

Define the term expenditure-switching policy

Answer 52

Reducing current account deficits through encouraging switch away from imports to domestic output

Question 53

Explain expenditure-switching policy 1: devaluation

Answer 53

If currency falls (either by devaluation or depreciation) = export prices appear cheaper overseas = exports should rise If currency falls then import prices rise = imports should fall

Question 54

What are the issues with expenditure-switching policy 1: devaluation?

Answer 54

1. Marshall-Lerner condition = devaluation ONLY improves current account balance if Marshall-Lerner condition is satisfied. If not, then the devaluation will not improve current account balance at all. 2. The J curve

Question 55

What is the Marshall-Lerner condition?

Answer 55

Price elasticity of demand of exports + price elasticity of demand of imports > 1

Question 56

What is the J curve?

Answer 56

Observation that the current account balance will worsen before it improves following devaluation

Question 57

Explain the J curve

Answer 57

- Devaluation will not immediately improve current account balance - In the short run, demand for exports and imports is more price inelastic and demand for both doesn't change much. - However, imports now cost more, so value of imports rises - worsening current account balance - In the medium term, demand for exports and imports becomes more price elastic - demand for exports rises and demand for imports falls. - Current account balance eventually improves = J curve.

Question 58

Explain the expenditure-switching policy 2: protectionist policies

Answer 58

Creates trade barriers that prevent free trade Leads to lower levels of imports to improve the current account balance

Question 59

Explain the issues with expenditure-switching policy 2: protectionist policies

Answer 59

Protection usually leads to other countries retaliating, reducing UK exports Trade barriers are not allowed in some customs unions (i.e. EU)

Question 60

Explain the expenditure-switching policy 3: supply-side policies

Answer 60

Reforms an economy which then leads to improvements in exports Improvements to productivity, infrastructure and education should boost exports' competitiveness

Question 61

Explain the problems with expenditure-switching policy 3: supply-side policies

Answer 61

Takes many years to have a full effect Difficult to measure

Question 62

What are the 5 reasons for wanting to avoid current account deficits?

Answer 62

1. A large current account deficit can indicate weaknesses in the export sector 2. Interest rates may need to be higher to generate a surplus on the other parts of the balance of payments 3. Persistent deficits may lead to diminished foreign currency reserves (unless surplus exists on financial or capital accounts) 4. If the gov has insufficient foreign currency reserves, then it may need to borrow money or deflate the economy i.e. reduce AD 5. Deficits often lead to falling currency values, which can boost cost-push inflation

Question 63

What are the 4 reasons that current account deficits may not matter?

Answer 63

1. Current account deficits may be due to high economic growth, which is more desirable 2. A surplus on the financial account (i.e. from FDI) may 'cover' the current account deficit 3. Deficits that are large when measured in £s may be small when measured as a % of GDP 4. This objective is usually seen as lower priority than achieving growth, employment and low inflation

Question 64

What are the 2 implications of current account imbalances?

Answer 64

If govs attempts to eliminate a current account deficit, it will have knock-on effects across the world. 1. A fall in spending on imports means a fall in exports from another country 2. Protectionist policies adopted by large economies can sig affect the growth rate in smaller economies if they sell fewer exports to the larger economy

Question 65

When the currency is floating, what happens?

Answer 65

Its price is determined by demand and supply

Question 66

Define exchange rates

Answer 66

Price of one currency in terms of another currency

Question 67

Define floating exchange rate

Answer 67

Where currency can find its own free market level

Question 68

Explain exchange rate systems

Answer 68

Increases in the exchange rate (called strengthening an appreciation or a revaluation) = a currency buys more of another currency Decreases in currency = weakening, a depreciation or a devaluation Exchange rate systems can either be floating or fixed

Question 69

Explain floating exchange rate systems

Answer 69

The exchange rate of floating currencies is determined by the supply/demand of the currency. A rise in demand for a currency leads to rising exchange rate (and vice versa). A rise in supply of a currency leads to falling exchange rate (and vice versa)

Question 70

What is the pound like?

Answer 70

(AKA the sterling) is freely floating since 1992.

Question 71

What are the 5 factors affecting a freely floating currency?

Answer 71

Interest rates Foreign trade Relative inflation FDI Speculation/expectations

Question 72

Explain interest rates as a factor of a freely floating currency

Answer 72

Higher (relative) interest rates affect hot money flows. Increases in interest rates lead to higher demand for a currency because of increases in hot money Higher demand for the currency leads to an exchange rate increase

Question 73

Explain foreign trade as a factor of a freely floating currency

Answer 73

Increased exports increase demand for the currency and subsequently the exchange rate. Increased imports increase supply of a currency, leading to a fall in the exchange rate

Question 74

Explain relative inflation as a factor of a freely floating currency

Answer 74

If inflation is (relatively) higher then there will be a switch to relatively cheaper imports and a fall in exports Higher (relative) inflation will lead to a fall in the exchange rate

Question 75

Explain FDI as a factor of a freely floating currency

Answer 75

Higher FDI increases demand for the currency Higher FDI leads to a rise in the exchange rate

Question 76

Explain speculation/expectations as a factor of a freely floating currency

Answer 76

Exchange rates also change if there are expectations of a change in the determinants of a currency's value Speculators will buy a currency if they expect it to rise in the future (or sell if they think it will fall in the future)

Question 77

What are the advantages of floating exchange rates?

Answer 77

1. Monetary sovereignty - ability to set interest rates for needs of domestic economy 2. No need to hold foreign reserves for currency stabilisation 3. Automatic adjustment to current account via exchange rate movements

Question 78

What are the disadvantages of floating exchange rates?

Answer 78

1. Business uncertainty over future value of currency 2. Currency may remain over/under valued

Question 79

Explain the fixed exchange rate systems

Answer 79

Gov can fix the exchange rate by: - open market operations - monetary policy = interest rate changes - capital controls = restrictions on trade in currency

Question 80

Define the term fixed exchange rate

Answer 80

Where the gov attempts to stabilise the value of its currency

Question 81

What are the 3 advantages of the fixed exchange rates?

Answer 81

1. Easier for businesses to plan 2. No imported inflation 3. Monetary discipline = no politically motivated interest rate reductions

Question 82

What are the 3 disadvantages of the fixed exchange rates?

Answer 82

1. Loss of monetary sovereignty - stuck with inappropriate interest rate 2. Lack of adjustment available to restore price competitiveness of exports 3. Need to hold foreign currency reserves for foreign exchange market intervention

Question 83

What are the arguments in favour of currency unions?

Answer 83

1. Greater business certainty - encouraging intra-currency area trade 2. No conversion costs when exchanging currencies 3. Greater price transparency for consumers

Question 84

What are the arguments against currency unions?

Answer 84

1. Monetary policy set for whole currency area rather than for needs of individual economies 2. Businesses may not be able to compete with low-cost producers (and no exchange rate adjustment to help) 3. Fiscal policy needs to be used more actively 4. Countries may have to 'bail out' other members of currency zone

Question 85

Explain the 4 features of economic growth and development

Answer 85

1. Economic growth is measured by changes in national income 2. Development is multidimensional 3. Both are connected as growth feeds into development 4. Growth alone will not lead to development

Question 86

What are the 5 indicators of development?

Answer 86

HDI Human Poverty index Gender-related development index (GDI) Gender empowerment measure (GEM) Social indicators

Question 87

What is the HDI made up of?

Answer 87

HDI is used by the UN and is a composite index, based on combined values for: Real GDP per capita (PPP) Health - based on life expectancy Education - mean and expected years of schooling

Question 88

What are the 2 factors affecting growth and development?

Answer 88

Long run growth comes from increases in LRAS or outward shifts in PPC Development needs growth and improvements in: - investment in infrastructure i.e. transport links, public services - education and training i.e. boosting literacy rates and productivity of the workforce

Question 89

What are the 8 barriers to economic growth and development?

Answer 89

Corruption Institutional factors Poor infrastructure Inadequate human capital Lack of property rights Lack of stable gov Undeveloped financial system preventing businesses accessing funds Volatile earnings from exports (due to unstable commodity prices on which economy is over-reliant)

Question 90

What are the market-based strategies to promote economic growth and development? (free market)

Answer 90

Trade liberalisation Removal of subsidies Policies to attract inward investment Allowing markets to work freely

Question 91

What are the interventionist strategies to promote economic growth and development?

Answer 91

Investment in infrastructure Investment in education and training Overseas aid Debt cancellation Welfare systems

Question 92

What is the role of trade in promoting growth and development?

Answer 92

Free trade helps development Free trade allows countries to benefit from their comparative advantage

Question 93

What is the role of aid in promoting growth and development?

Answer 93

Money, in the form of: - soft loans = loans with conditions - unconditional transfers - goods/services

Question 94

What are the 5 limitations of aid?

Answer 94

1. Corruption may mean money only benefits small groups 2. Conditional aid may only benefit those granting the soft loans 3. Systems for using aid may not be in place (i.e. how it's shared out) 4. Goods and services may be unsuitable 5. Money may be spent unwisely, even if motives are genuine