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Flashcards in Chapter 2 - The Global Economy Deck (4):

Global Pattern of Wealth

- GDP: Market value of total output of goods/services produced within a nation
o Indicates country’s purchasing power but doesn’t reflect living standards
o Need to calculate PPP – purchasing power in respective market
o GDP only measures formal, official recorded activities – ignores shadow economy
- Economic growth: Annual percentage change in a nation’s GDP
- OECD predicts world economy will grow at 3% over next 50 years


Pattern of international trade

- Trade has been growing at 7.3% over past 30 years
- Contributors to growth Reduction in barriers, reduction in transport and communication costs, establishment of global supply chains
- Mercantilism theory – countries should maximize their exports and try to limit imports to stimulate economy and increase number of jobs – generating a trade surplus.


Intervening trade

- To protect domestic industries from foreign competitors – especially industries in their infancy
- To protect domestic jobs
- Protect against over dependence on a narrow base of products – countries should specialise in goods they have a comparative advantage over.


Impact of exchange rates

- Countries with trade surpluses and those that attract inflows of capital will see demand for their currency rise – appreciation of value of currency
- To achieve stability – countries can adopt fixed exchange rate policy
- For businesses producing overseas – a rise in ER could reduce value of foreign sales/assets when converting into domestic currency