Chapter 6 - International trade and globalisation Flashcards

Question

What is over reliance on MNCs for jobs as a disadvantages of multinational corporations?

Answer 1

Over reliance on MNCs for jobs: many developing nations have over reliance on MNCs to provide jobs for their citizens. If the MNC leaves it can create significant unemployment.

Answer 2

Diseconomies of scale: the challenges of operating a business over different time zones and cultures can create significant diseconomies of scale.

Answer 3

Exchange rate fluctuations: unexpected exchange rate fluctuations can have severe impacts on the costs and profits of MNCs.

Answer 4

Negative externalities: MNCs are associated with many negative externalities of production in developing countries.

Answer 5

International trade refers to the exchange of goods and services between countries. This is done through imports and exports. International trade is ‘free’ when there is no government intervention (quotas, taxes etc.) to reduce or limit trade.

Answer 6

Greater choice, lower prices, international cooperation, flow of new ideas, access to resources, increased efficiency, economic growth and economic development.

Answer 7

Greater choice: with access to a wider variety of goods and services the standard of living improves.

Answer 8

International cooperation: required for trade helps countries to build better relationships which leads to lowers levels of hostilities.

Answer 9

Lower prices: with international competition prices fall giving households the ability to buy more.

Answer 10

Flow of new ideas: innovative ideas and technology can be shared between countries.

Answer 11

Access to resources: output can increase, and costs of production can fall with increased access to raw materials.

Answer 12

Increased efficiency: international competition allows the most efficient firms to emerge, and this improved the use of global resources.

Answer 13

Economic growth: exports are a key component of the gross domestic product of many countries and an increase in exports can lead to economic growth.

Answer 14

Economic development: increased output leads to lower levels of unemployment which leads to higher incomes and a higher standard of living.

Answer 15

Tariffs, quotas, subsidies to domestic producers, embargoes and administrative barriers

Answer 16

Tariffs are taxes on imported goods and services. With the price of imports higher, domestic firms find it easier to compete and increase their market share as consumers switch from buying imports to buying domestically produced goods and services. Less efficient domestic firms are now producing at the expense of more efficient international firms.

Answer 17

Quotas are the physical limits on imports. This limit is usually set below the free market level of imports. As cheaper imports are limited, a quota raises the market price and may create shortages. Some domestic firms benefit as they are able to supply more due to lower levels of imports which will increase the level of employment for domestic firms.

Answer 18

Subsidies to domestic producers can lower the cost of production of domestic firms, increase output and lower prices. With lower prices, their goods and services are more competitive internationally and their level of exports increases which may result in increased domestic employment.

Answer 19

Embargoes are a complete ban on trade with a certain country usually as the result of a politic fall out.

Answer 20

Administrative barriers such as health and safety regulations, product specifications, environmental regulations and product labelling.

Answer 21

A foreign exchange rate is the price of one currency in terms of another. The central bank of a country controls the exchange rate system that is used in determining the value of a nation’s currency.

Answer 22

Appreciation is an increase in the external value of one currency in relation to another. It occurs when the value of a currency rises making its exports relatively more expensive and its imports less expensive.

Answer 23

Depreciation is a decrease in the external value of one currency in relation to another. It occurs when the value of a currency falls making its exports relatively more attractive and imports less attractive.

Answer 24

The two main exchange rate systems are a floating exchange rate and a fixed exchange rate.

Answer 25

A floating exchange rate is determined by the market forces of supply and demand which one currency exchanges for another. If there is excess demand for the currency, then prices rise, and the currency appreciates. If there is excess supply for the currency, then prices fall, and the currency depreciates.

Answer 26

A fixed exchange rate is a system in which the country’s central bank intervenes in the currency market to fix the exchange rate in relation to another currency. When the want their currency to appreciate, they buy it on markets using their foreign reserves and therefore increasing its demand. When they want their currency to depreciate, they sell it on markets and therefore increase its supply.

Answer 27

A revaluation occurs if the central bank decides to change the fixed exchange rate and increases the strength of its currency.

Answer 28

A devaluation occurs if the central bank decides to change the fixed exchange rate and decreases the strength of its currency.

Answer 29

Natural fluctuations in the exchange rate based on supply and demand help to maintain stable current account balances. If a currency appreciates, the country’s exports fall, and imports rise. If a currency depreciates, the country’s exports rise, and imports fall. Currency appreciation may allow costs of imported raw materials to decrease which may help lower prices in the economy. Lower exchange rates or a depreciating currency may help to increase economic growth as export sales increase.

Answer 30

Fluctuations in the exchange rate can create uncertainty for firms, leading to a reducing in investment. Currency depreciation may cause costs of imported raw materials to increase resulting in cost push inflation. Higher exchange rates or an appreciating currency may reduce and slow down economic growth as export sales decrease.

Answer 31

Government does not need to monitor and maintain a fixed exchange rate. Even with an increasing demand for a country’s exports, the price of its exports will remain fixed as the currency will not appreciate with more demand. This can boost export sales over time. Firms that are foreign or domestic benefit as they can agree prices with a high level of certainty as the exchange rate will not fluctuate.

Answer 32

In order to maintain the fixed exchange rate, the central bank has to regularly intervene in the currency market by buying or selling its own currency. This can be an expensive policy to maintain. Changing the interest rate can also influence the exchange rate. Changing the interest rate to maintain a fixed exchange rate can have negative consequences on consumption, investment, lending, saving and borrowing.

Answer 33

Relative interest rates, net investment, the current account, changes in demand, speculation, quantitative easing and MNCs.

Answer 34

Relative interest rates: influence the flow of money between one country to another in order to earn short term profits on interest rate differences. If New Zealand increases its interest rate, then demand for NZD$ by foreign investors increases and the NZD$ appreciates. The New Zealand decreases its interest rate, then the supply of NZD$ increases as investors sell their NZD$ in favour of other countries and the NZD$ depreciates. As inflation in New Zealand rises relative to other countries, its exports become more expensive so there is less demand for New Zealand’s products by foreigners which means there is less demand for NZD$ and so the NZD$ depreciates.

Answer 35

Net investment: foreign direct investment into New Zealand creates a demand for the NZD$ which leads to the NZD$ appreciating. Foreign direct investment by New Zealand firms abroad creates a supply of NZD$ which leads to the NZD$ depreciating.

Answer 36

The current account: New Zealand exports have to be paid for in NZD$. New Zealand imports have to be paid for in local currencies, which requires NZD$ to be supplied in the foreign exchange market. Due to this, increasing net exports will result in an appreciation of NZD$ and falling net exports will result in a depreciation of NZD$.

Answer 37

Changes in demand: as global demand for quinoa increased as it became fashionable, Bolivia’s esports for quinoa increased dramatically which upward pressure on their currency. Foreigners demanded the Bolivian dollar in order to pay for the quinoa. This would cause the Bolivian dollar to appreciate.

Answer 38

Speculation: the vast majority of currency trades are speculative. Speculation occurs when traders buy a currency in the expectation that it will be worth more in the short to medium term, at which point they will sell it to earn a profit.

Answer 39

Quantitative easing: is a process whereby the central bank buys back the New Zealand government securities or gilts from the open market. It involves increasing the money supply and much of the new supply is used to buy back gilts. Many of these gilts are owned by foreigners who then exchange the NZD$ received for their own currency, The increase in the supply of the NZD$ depreciates the NZD$.

Answer 40

MNCs: an increase in the number of MNCs globally will result in more money flows between countries, each of which influences the exchange rate.

Answer 41

The current account, economic growth, inflation, unemployment, living standards and foreign direct investment.

Answer 42

The current account: the depreciation of the NZD$ causes exports to be cheaper for foreigners to buy and imports to New Zealand are more expensive. The extent to which a currency depreciation improves the current account balance depends on the price elasticity of demand for exports and imports. This follows the revenue rule which states that in order to increase revenue, firms should lower prices for products that are price elastic in demand. If the price elasticity of demand for New Zealand’s exports is elastic, then a depreciation of the currency will result in a larger than proportional increase in demand for New Zealand exports, which rapidly improve any current account deficit.

Answer 43

Economic growth: net exports are a component of aggregate demand. A depreciation that results in an increase in net exports will lead to economic growth.

Answer 44

Inflation: cost push inflation can be caused by a depreciating currency as the price of imported raw materials increases with a weaker currency. Net exports are a component of aggregate demand. A depreciation that results in an increase in net exports will lead to an increase in total demand. This may lead to an increase in demand pull inflation. An appreciation of the currency will have the opposite effect.

Answer 45

Unemployment: if depreciation leads to an increase in exports, unemployment is likely to fall as more workers are required to produce the additional products demanded. An appreciation of the currency will have the opposite effect.

Answer 46

Living standards: the impact of a depreciation on living standards can be muted. As imports are more expensive, households face higher prices and less choice, which detracts from living standards. Rising exports can decrease unemployment and increase income which means as improved standard of living for some households. The impact of an appreciation on living standards will be the opposite of.

Answer 47

Foreign direct investment (FDI): depreciation of a currency makes it cheaper for foreign firms to invest in the country which can increase investment and real GDP. An appreciation has the opposite effect.

Answer 48

The balance of payments for a country is a record of all the financial transactions that occur between it and the rest of the world.

Answer 49

The current account which is all transactions related to goods and services along with payments related to the transfer of income. The current account records the net income that an economy gains from international transactions.

Answer 50

Money flowing into the country is recorded in the relevant account as credit (+) and money flowing out as debit (-).

Answer 51

A current account surplus occurs when the credits are higher than the debits. The value of exports is greater than the value of imports.

Answer 52

A current account deficit occurs when the credits are less that the debits. The value of imports is greater than the value of exports.

Answer 53

Goods can also be referred to as visible exports or imports.

Answer 54

Services can also be referred to as invisible exports or imports.

Answer 55

Net income consist of income transfers by citizens and corporations.

Answer 56

Net primary income is calculated by income credits – income debits.

Answer 57

Current transfers are typically payments at government level between countries.

Answer 58

Net secondary income is calculated by transfer credits – transfer debits.

Answer 59

The current account balance = net trade in goods + net trade in services + net primary income + net secondary income.

Answer 60

Relatively high productivity decreases costs and exporting firms with high productivity may find themselves at a price and cost advantage in overseas markets which will increase competitiveness and the level of exports. Relatively low value of the country’s currency as currency depreciation makes a country’s exports less expensive in relative to other nations, foreign buyers increase their purchases and the level of exports rises, currency depreciation makes imports more expensive and domestic consumers may switch demand to locally produced products and the level of import falls. Relatively low rate of inflation makes a country’s exports less expensive that other nations and foreign buyers will increase their purchases and the level of exports rise, improving the balance on the current account.

Answer 61

Increasing employment because with increasing demand for locally produced goods and services, more works will be required and unemployment will fall. Economic growth as exports are a key component of the real GDP of many counties and a rise in exports may significantly increase the level of economic growth. Higher standards of living as a rise in economic growth usually leads to a rise in wages which leads to an increase in the standards of living. Demand pull inflation as economic growth caused by a rise in exports will lead to demand pull inflation. Appreciating exchange rate as rising exports will appreciate the exchange rate which leads to imports now being cheaper which causes the demand for imports to rise.

Answer 62

Relatively low productivity raises costs and exporting firms with low productivity may find themselves at a price and cost disadvantage in overseas markets which will decrease competitiveness and the level of exports. Relatively high value of the country’s currency as currency appreciation makes a country’s exports more expensive relative to other nations and makes imports cheaper, foreign buyers look for substitute products which are priced lower, exports fall and the balance on the current account worsens, and domestic consumers may switch demand to foreign goods as the imports rise and the balance on the current account worsens. Relatively high rate of inflation makes a country’s exports more expensive than other nations; foreign buyers look for substitute products which are priced lower, exports fall and the balance on the current account worsens, also high inflation may mean that goods and services are cheaper in other countries and domestic consumers may switch demand to foreign goods and as imports rise, the balance on the current account worsens. Rapid economic growth resulting in increase imports as rapid economic growth raises household income, households therefore respond by purchasing goods or services from abroad and the balance on the current account worsens. Non-price factors such as poor quality and design causes a countries exports to fall as foreign buyers look for better substitutes elsewhere and domestic buyers who are able to shop abroad also choose to buy better quality products elsewhere and the level of imports rise.

Answer 63

Increasing unemployment because falling demand for locally produced goods and services, fewer workers will be required, and unemployment will rise. Slow down in economic growth or a recession because exports are a key component of the real GDP of many countries and a fall in exports may significantly reduce the level of economic growth. Lower standards of living as a fall in economic growth usually leads to a reduction in wages which leads to a decrease in the standards of living. Increased levels of borrowing if the deficit is caused by continually increasing levels of exports, then it is likely that these imports are being paid for through higher levels of borrowing. Depreciating exchange rate as while this may ultimately help to increase exports again, it makes the cost of imported goods and raw materials more expensive and may cause cost push inflation.

Answer 64

Doing nothing, expenditure switching policies, expenditure reducing policies and supply side policies

Answer 65

Doing nothing and leaving it to market forces in the foreign exchange market to self-correct the deficit.

Answer 66

Expenditure switching policies which include protectionist policies which raise the price of imports, so consumers switch to buying domestic goods or currency devaluation which makes the price of imports more expensive and so consumers switch to buying domestic products.

Answer 67

Expenditure reducing policies which include raising taxes which cause consumers to have lower disposable income and so they spend less on imports and raising interest rates which reduces the level of borrowing resulting in a fall in the level of imports.

Answer 68

Supply side policies which include investment into education which raises productivity making exports cheaper and more attractive and investment into infrastructure which lowers costs for firms making exports cheaper and more attractive.

Answer 69

Floating exchange rates act as a self-correcting mechanism. Over time a higher level of imports will end up depreciating the currency, causing imports to decrease as they are more expensive and exports to increase as they are cheaper. This improves the deficit.

Answer 70

There may be other external factors that prevent the currency from depreciating. It may take a long time for self-correction to happen, and many domestic industries may go out of business in the interim. The longer it takes to self-correct, the more firms will delay investment in the economy.

Answer 71

This is often successful in changing the buying habits of consumers, switching consumption on imports to consumption on domestically produced goods and services. This helps improve a deficit.

Answer 72

Any protectionist policy often leads to retaliation by trading partners. This may consist of reverse tariffs or quotas which will decrease the level of exports. This may offset any improvement to the deficit caused by the policy.

Answer 73

Contractionary fiscal policy invariably reduces discretionary income, which leads to a fall in the demand for imported goods and improves a deficit.

Answer 74

Contractionary fiscal policy also dampens domestic demand which can cause output to fall. When output falls, GDP growth slows, and unemployment may increase.

Answer 75

Improves the quality of products and lowers the costs of production. Both of these factors help the level of exports to increase, thus reducing the deficit.

Answer 76

These policies tend to be long term policies so the benefits may not be seen for some time. They usually involve government spending in the form of subsidies, and this always carries an opportunity cost.

Chapter 6 - International trade and globalisation Flashcards

(100 cards)