Edexcel A Economics - Theme 4 Flashcards
What is globalisation?
The ever increasing integration of the world’s local, regional and
national economies into a single, international market.
What are the characteristics of globalisation?
Free trade of goods are services
Free movement of capital and labour
Free interchange of technology and intellectual capital.
Increased FDI
Global branding and increased inter dependency..
What factors have continue to globalisation?
Trade in goods
Trade in services
Trade liberalisation
Multinational Corporation (MNCs)
International financial flows
Communications and IT
Containerisation
How has the trade in goods contributed to globalisation?
Developing countries have capital and knowledge to manufacture goods.
MNCs take advantage of cheaper labour abroad.
How has the trade in services contributed to globalisation?
Trade in tourism, call centres and software production had increased from developing countries to developed countries.
How has the trade liberalisation contributed to globalisation?
Growing strength and influence of WTO advocates free trade which has reduced trade barriers.
How has MNCs contributed to globalisation?
MNCs are organisations which own or control the production of goods and
services in multiple countries.
Marketing has become global and by growing this take advantage of economies of scale.
Spread of technological knowledge and EoS has led to lower costs of production.
How has international financial flows contributed to globalisation?
The flow of capital and FDI across international borders has increased.
There has been more
investment in factories abroad.
How has communications and IT contributed to globalisation?
The spread of IT has resulted in it becoming easier and cheaper to
communicate, which has led to the world being more interconnected.
Better transport links and easier transfer of information.
How has containersation contributed to globalisation?
Cheaper to ship goods across the world.
Prices fall, more competitive markets.
Helps meet world demand.. Economies of scale and less labour needed.
However, mainly MNCs which exploit this and can lead to structural unemployment.
What is the impact of globalisation on individual countries?
Trade imbalances.
Inequalities in consumers and countries access to health, education and markets.
Income and wealth inequalities.
Weakened culture due to global brands. However, helped spread culture and helped improve quality of life.
What is the impact of globalisation on governments?
Lose sovereignty due to increase in international treaties.
What is the impact of globalisation on producers and consumers?
Consumers and producers can earn the benefits of specialisation and economies of
scale as firms become larger.
Firms operate in a more competitive environment.
Producers lower average costs by switching to cheaper labour.
Increase world GDP, increases living standards and help lift people out of poverty.
Rise in average consumer incomes.
Some consumers gain more from globalisation than others. Globally, there are fewer people in extreme poverty, but this has not been the case in Sub-Saharan Africa.
Consumers could take advantage of a wider range of goods and services because of the increased availability of goods and services.
What is the impact of globalisation on workers?
Workers can take advantage of job opportunities across the globe.
Structural unemployment.
Production shifts labour to other countries.
Countries would have had the change from
agriculture to manufacturing to services anyway, and globalisation simply sped it up.
When production shifts to lower labour cost countries, the creation of jobs could be
seen as either beneficial or harmful.
On one hand, MNCs could be exploiting their
labour and providing poor working conditions in. On the other hand, working in a sweatshop might provide a higher, more stable income
than any alternatives
What is the impact of globalisation on the envirnment?
Increased consumer living standards might lead to
more pollution through increased production and increased car use.
Consumers might show more concern towards the environment as their average incomes
increase.
What is comparative advantage?
Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country.
This means they have to give up producing less of another good than another country, using the same resources.
What is absolute advantage?
A country has absolute advantage in the production of a good or service if it can produce it
using fewer resources and at a lower cost than another country.
What are the assumptions and limitations of comparative advantage?
Assumes a perfectly competitive market.
Does not consider exchange rates.
Countries can develop an advantage in production.
Comparative advantage is a model that only uses 2 countries.
What are the advantages of specialisation and trade in an
international context?
Greater world output, so there is a gain in economic welfare.
There could potentially be higher quality, since production focuses on what people and businesses are best at.
A greater variety of goods and services
Lower average costs, more competitive.
There is an increased supply of goods to choose from.
There is an outward shift in the PPF curve.
More opportunities for economies of scale
What are the disadvantages of specialisation and trade in an
international context?
Less developed countries might use up their non-renewable resources too
quickly, so they might run out.
Countries could become over-dependent on the export of one commodity,
There could be more structural unemployment, since production moves
abroad.
Some countries might become stuck in the production of one good or service, so they cannot develop further.
What are the factors affecting patterns of trade?
Comparative advantage
Impact of emerging economies
Growth of trading blocks
Changes in relative exchange rates.
What is terms of trade?
The terms of trade measures the volume of imports an economy can receive per unit of exports.
How is terms of trade calculated?
(Index of export prices / index of import prices) x 100
What factors affect a countries terms of trade?
Globalisation price of invisibles (services) is less impacted than
visibles (manufactured goods).
Price elasticity of demand. The more inelastic the demand for
exports than imports, the better the terms of trade, as the country can charge higher prices for exports.
Only imports manufactured goods and only exports primary goods, the terms of trade will be worse.
An appreciation in exchange rate lead to improvement in the terms of trade, as it increases price of exports and a decrease in the price of imports.
Protectionist measure, the terms of trade will improve because imports are restricted.
What is the Prebisch-Singr hypothesis?
There will be a long run decline in the terms of trade for countries that depend on natural resource exports.
Exports (natural resources, primary commodities) are income inelastic.
Developing countries demand relatively elastic goods, manufactured goods.
What are the impacts in a countries terms of trade?
Improving ToT: Economy can import more goods per unit of export. Reduced cost-push inflation Improve standards of living However worsens balance of payments.
Worsening ToT:
For every import, the country has to export more.
Technology more expensive, lower productivity.
Lead to falling living standards.
Harder to pay debt
What is a free trade area and given an example?
This is where countries agree to trade goods with other members without
protectionist barriers.
Examples:
- NAFTA (North American Free Trade Agreement)
- EFTA (European Free Trade Association)
What is a customs union and given an example?
Countries in a customs union have established a common trade policy with the rest of the world.
Examples: EU
What is a common market and given an example?
This establishes free trade in goods and services, a common external tariff and
allows free movement of capital and labour across borders.
Example: EU
What is a monetary union and given an example?
Members of a monetary union share the same currency. This is more economically integrated than a customs union and free trade area.
Example: Eurozone
What are the requirements to join the Euro?
budget deficits cannot exceed 3% of GDP
Gross National Debt has to be below 6% of GDP
Inflation has to be below 1.5% of the three lowest inflation countries
The average government bond yield has to be below 2% of the yield of the
countries with the lowest interest rates.
What are the costs and benefits of regional trade agreements? (Trade creation and trade diversion)
Countries might stop important from a cheaper producer and start trading with a country inside the trading bloc. Protectionist measures are often placed on countries outside the trading bloc
What are the costs and benefits of regional trade agreements? (Reduced transaction costs)
Since there are no barriers to trade or no border controls, it is cheaper and simpler to trade.
What are the costs and benefits of regional trade agreements? (Economies of scale)
Firms can take advantage of a larger potential market in which to trade.
What are the costs and benefits of regional trade agreements? (enhanced competition)
Firms operate in a more competitive market, become more efficient and there is a better allocation of resources.
LR: dynamic efficient
What are the costs and benefits of regional trade agreements? (migration)
By being a member of a Customs Union, the supply of labour is increased, which could help fill labour shortages.
However, this might mean some countries lose their best workers.
What is the role of the WTO?
The WTO promotes world trade by reducing trade barriers and policing existing
agreements.
It settles trade disputes.
Those who break the rules face trade sanctions.
In addition to trade in goods, the WTO covers the trade in services and
intellectual property rights.
What are the possible conflicts between regional trade agreements and the WTO?
Trading blocs might distort world trade.
There could be an inefficient allocation of resources.
Conflicts between blocs could lead to a rise in protectionism.
The WTO is too powerful, or that it ignores the problems of developing countries.
Setting up a customs union or a free trade area could be seen to violate the WTO’s principle
of having all trading partners treated equally
What are the reasons for restricting free trade?
Reduce trade deficit.
Protection of infant industries.
Correct market failure.
Protect domestic jobs.
Retaliation against trade barriers imposed by other countries.
What is a protectionist measure?
Protectionism is the act of guarding a country’s industries from foreign competition, by imposing restrictions on free trade.
What is a tariff and how does it work?
Tariffs are taxes on imports to a country.
Leads to retaliation, exports may decrease.
Quantity demanded of domestic goods increases.
Higher prices for consumers.
What is a quota and how does it work?
A quota limits the quantity of a foreign produced good that is sold on the domestic market.
Leads to a rise in the price of the good for domestic consumers, so they become worse off.
What are subsidies to domestic producers and how does it work?
This makes domestic goods relatively cheap compared to imports.
It encourages domestic
production to increase and the average price falls.
However, it depends how the subsidy is spent.
What are subsidies to domestic producers and how does it work?
This makes domestic goods relatively cheap compared to imports.
It encourages domestic
production to increase and the average price falls.
However, it depends how the subsidy is spent.
What are examples of non-tariff barriers?
Voluntary export restraints
Embargoes
Excessive administrative burdens
What are voluntary export restraints and how does it work?
Voluntary export restraints (VERs)
When two countries make an agreement to limit the volume of exports to one
another over a period of time.
What are voluntary export restraints and how does it work?
Voluntary export restraints (VERs)
When two countries make an agreement to limit the volume of exports to one
another over a period of time.
What are embargoes and how do they work?
This is the complete ban on trade with a particular country.
It is usually politically motivated.
What are excessive administrative burdens and how do they work?
Excessive administration increases the cost of trading, and hence discourages imports.
Harmful for developing countries which are unable to access these markets.
What is the impact of protectionist policies on consumers, producers,
governments, living standards and equality?
Protectionism could distort the market and lead to loss of allocative efficiency.
Consumers face higher prices and less variety.
Imposes an extra cost on exporters, which could lower output and damage the economy.
Tariffs are regressive and are most damaging to those on low and fixed incomes.
Retaliation
What is an export?
Exports are goods and services sold to foreign countries, and are positive in the balance of payments.
This is because they are an inflow of money.
What is an import?
Imports are goods and services bought from foreign countries, and they are negative on the balance of payments.
They are an outflow of money.
What is the balance of payments?
The balance of payments is a record of all financial transactions made between
consumers, firms and the government from one country with other countries.
What is the current account?
This includes all economic transactions between countries.
Imports
Exports
Income
Transfer payments
What are the capital and financial account?
Capital transfers involve transfers of the ownership of fixed assets.
The financial
account involves investment.
What are the causes of deficits and surpluses on the current account?
Appreciation of the currency
Economic growth
More competitive.
Industrialisation
Membrane of trade union (fees)
What are the measures to reduce the imbalance on the current account?
Increased income tax. Decrease imports, however will impact domestic growth.
Gov reduced spending, reducing AD leading to less imports.
Fiscal policy in SR but not in LR.
Taxes imposed on trading partners, made lead to retaliation.
Green taxes, less competitive.
Bank may lower interest rates to cause depreciation. However, it is hard to control the supply of money in reality.
Supply-side policies could help increase productivity. Increase FDI.
Provide subsidies to some industries
What is an exchange rate?
The weight of one currency relative to another.
What is a floating exchange rate and draw a graph to represent this
The value of the exchange rate in a floating system is determined by the forces of supply and demand.
