Global Economics flashcards
(98 cards)
1
Q
What is free trade?
A
Free trade occurs when there are no barriers to trade, meaning that there is no government intervention.
2
Q
What are the benefits of international trade? Name 3 benefits.
A
All possible answers:
- Increased competition for domestic producers.
- More efficient production/ economies of scale.
- Lower prices for consumers.
- Greater choice for consumers.
- Access to larger markets.
- Acquisition of resources.
3
Q
What is absolute advantage?
A
A country has an absolute advantage if they produce more efficiently than the rest of the world.
This means it is able to manufacture goods at a faster rate and a higher quality, for more profit, than other competing economies.
4
Q
What is comparative advantage?
A
The theory of comparative advantage states that two countries will gain from trade if they specialise in the production of the goods that have the lowest opportunity cost.
5
Q
What are 2 factors that impact comparative advantage?
A
Factor endowments: Refer to the natural resources or advantages a country has. For example, Saudi Arabia has higher oil endowments than the United States, and the United States has a higher capital endowments than Saudi Arabia.
Levels of technology: Some countries are able to increase efficiency through improvements in technology (e.g. Japan developing robotic car assembly lines) and some are not.
6
Q
What is the formula for calculating opportunity cost?
A
Opportunity cost of good
A = Production possibility of producing good B/ Production possibility of producing good A
7
Q
Name 2 limitations to the theory of absolute/comparative advantage.
A
Possible answers:
- There are only two countries.
- They only produce two goods.
- Full employment of resources in the best way.
- There is perfect information.
- Technology is constant.
- There are zero costs of transport.
8
Q
What is a tariff?
A
A tariff is a tax applied per unit on imported goods and services into a country.
9
Q
What impacts do tariffs have on consumer surplus?
A
Consumer surplus decreases as a result of the tariff. Prior to the tariff, consumers paid less for the imported goods, enjoying a high consumer surplus because of the lower prices.
10
Q
What happens to (domestic) producer surplus after a tariff?
A
The producer surplus increases as a result of the tariff, as domestic producers receive a higher price for the goods being taxed.
11
Q
When are tariffs most effective?
A
When they’re imposed on elastic goods.
12
Q
What is a quota?
A
A quota is the legal limit on the quantity of a good that can be imported in a given time frame (usually a year).
13
Q
How does a quota impact consumer surplus?
A
Consumer surplus decreases, because consumers have to pay more and consume less of the goods.
14
Q
How does a quota impact producer surplus?
A
Producer surplus increases for domestic producers, as they are able to sell more, receive a higher price, and not face such stiff competition.
15
Q
What is a subsidy?
A
Subsidies are a payment per unit of output given to firms by the government.
16
Q
What forms can subsidies come in?
A
Direct cash grants, where a set amount of money is given to firms by the governments.
Tax breaks, where certain industries are exempted from certain taxes.
17
Q
How does a subsidy impact consumer and producer surplus?
A
Consumer surplus remains neutral, consumers buy the same at the same price.
Producer surplus increases, as domestic firms increase their competitiveness.
Consumer and producer surplus can overlap.
18
Q
What are administrative barriers?
A
Administrative barriers are less intrusive ways to protect domestic markets from goods/services not deemed of adequate quality.
19
Q
What form can administrative barriers come in?
A
They can come in the form of product standards, voluntary export restraints or ‘buy national’ policies.
20
Q
Name 3 arguments for trade protection?
A
Possible answers:
- Protection of infant/sunrise economies.
- National security.
- Health and safety.
- Environmental standards.
- Anti-dumping.
- Unfair competition.
- Balance of payments.
- Source of government revenue.
- Protection of jobs.
21
Q
Name 3 arguments against trade protection.
A
Possible answers:
- Misallocation of resources
- Retaliation
- Increased costs
- Higher prices
- Less choice
- Lack of incentive for domestic firms to become more efficient
- Reduced export competitiveness
22
Q
What are preferential trade agreements?
A
Preferential trade agreements (PTA’s) reduce or remove trade barriers (such as tariffs) for specific goods/services between participating countries.
23
Q
What does it mean for a PTA to be unliaterial/non-reciprocal?
A
This means that the country that provides the PTA is not required to receive the same treatment in return.
24
Q
What are the types of PTA?
A
PTA’s can come in the form of bilateral, multilateral or regional trade agreements.
25
What are bilaterial trade agreements?
Bilateral Trade Agreements (BTAs), are the simplest type of PTA:
In a BTA, two countries agree to engage in ‘freer trade’.
Freer trade means that the countries agree to reduce/remove tariffs for certain products, but not all.
26
Give an example of a BTA
An example of a BTA is the EU-Japan BTA on the most traded goods (machinery/vehicles, chemicals, manufactured goods, etc).
27
What is a multilaterial trade agreement?
When more than two countries engage in a PTA, it is called a multilateral trade agreement (MTA):
28
Give an example of a MTA
An example of an MTA is the USMCA (United States - Mexico - Canada agreement).
29
What are regional trade agreements?
When PTA’s are established between countries that are geographically close to each other, they are called Regional Trade Agreements (RTAs):
30
Give an example of a RTA
The European Union (EU)
31
What are the types of trading blocs?
- Free trade areas.
- Customs unions.
- Common markets.
- Monetary unions.
32
What is a free trade area?
Free trade areas (FTAs) are the most common type of trading bloc.
FTAs are formed by a bloc (group) of countries signing trade agreements to remove all/most barriers to trade with other countries involved in the agreement.
Countries are free to set their own external policy towards non-member countries.
33
What are custom unions?
The only difference between a FTA and custom union is that all the countries in the customs unions set a common external policy towards non-members.
The members of the policy still engage in free trade within themselves.
34
What is a common market?
A common market is a type of trade agreement that not only allows free trade between goods/services, but also between the factors of production.
35
What are the factors of production?
The factors of production are land, labour, entrepreneurial talent and capital.
36
Give an example of a common market and state why that example is correct.
An example of a common market is the EU:
If you have an EU passport, you can work in any EU country.
You also do not need a passport to drive from one EU country to another.
37
What are the components of a monetary union?
Free trade
A common external policy
Free movement of the factors of production
A shared currency
38
Give an example of a monetary union?
The most known monetary union is the Eurozone/European Monetary Union:
The Eurozone is composed of 20/27 EU countries.
39
Name 3 advantages of monetary unions
Posible answers:
Price stability
Reduction of uncertainties
More competitive business environment
Stronger relations between countries
Stronger positions in global trade
40
Name 3 disadvantages of monetary unions
Possible answers:
Political difficulties
Loss of control over monetary policy
Restrictions on the use of fiscal policy
Large change needed to swap currencies
41
What is the WTO?
The World Trade Organisation (WTO) improves and broadens international trade by setting rules/practices to achieve greater balance and transparency.
42
What is an exchange rate?
An exchange rate is the value of a currency expressed in terms of another currency.
43
What market is currency traded in?
Forex market
44
What is a floating exchange rate?
A floating exchange rate is one that is allowed to be set by the price mechanism of the market, not by government interference.
45
What is apreciation and depreciation?
Appreciation is the increase in the value of a currency in terms of another.
Depreciation is the decrease in the value of a currency in terms of another.
46
Name 3 factors that impact the demand/supply for a currency
Possible answers:
- Foreign demand for exports
- Domestic demand for imports
- Inward/outward foreign direct investment
- Inward/outward portfolio investment
- Remittances
- Speculation
- Relative inflation rates
- Relative interest rates
- Relative growth rates
- Central bank intervention
47
How will a depreciation of a currency impact inflation rates?
- Depreciation leads to inflation as the currency's decreased value makes imports more costly, particularly in countries reliant on imported raw materials.
- Currency depreciation raises the price of imports, resulting in cost-push inflation by making foreign goods or services more expensive.
- Depreciation can also enhance demand-pull inflation as consumers shift to domestically produced goods due to the higher cost of imported items, driving up prices if domestic production cannot meet the increased demand.
48
How will an apreciation of a currency impact inflation?
- Appreciation leads to a decrease in inflation as the currency's increased value makes imports cheaper, particularly in countries dependent on imported raw materials, lowering the cost of goods and services and reducing inflationary pressures.
- Currency appreciation can reduce demand-pull inflation by making imports more affordable, which decreases the demand for domestically produced goods and services, thereby easing inflationary pressure.
49
How will a apreciation of a currency impact economic growth?
Currency appreciation can slow economic growth by making exports more expensive and less competitive abroad, reducing foreign demand for domestic goods and services.
49
How will a depreciation of a currency impact economic growth?
Currency depreciation can stimulate economic growth by making exports cheaper and more competitive abroad, increasing foreign demand for domestic goods and services.
50
How will the depreciation of a currency impact unemployment?
Currency depreciation can lead to cheaper exports, potentially increasing demand and decreasing unemployment, as new jobs emerge in export-driven sectors and industries that replace imports, which become costlier.
51
How will the apreciation of a currency impact unemployment?
If a currency appreciates, exports may cost more and demand could drop, potentially raising unemployment in exporting industries, while cheaper imports might boost jobs in industries relying on foreign materials.
52
How will currency depreaction impact living standards in MEDCs?
For most economically developed countries, a depreciation of the currency makes exports more competitive internationally, potentially boosting domestic production and employment in export industries. However, it also makes imports more expensive, which can reduce the purchasing power of consumers and increase the cost of living, especially for imported goods and services.
53
How will currency apreaction impact living standards in MEDCs?
For most economically developed countries, an appreciation would make imports cheaper, meaning that consumers have a wider variety to choose from. However, this can cause firms to shift their production to LEDCs, as they do not have to pay workers so much there.
54
How will currency depreaction impact living standards in LEDCs?
A depreciation in the currency of least economically developed countries can make their exports more attractive on the global market, potentially supporting local industries and employment. However, it also raises the prices of imports, including vital goods such as food, medicine, and technology, which can adversely affect living standards by increasing inflation and making essential products less affordable for the population.
55
How will currency apreaction impact living standards in LEDCs?
For least economically developed countries, an appreciation of the currency can improve purchasing power, making imported goods, technology, and essential commodities more affordable. This can enhance living standards but may also hurt local industries that are not competitive with foreign products, potentially leading to job losses in sectors that cannot compete with cheaper imports. Additionally, LEDCs are usually reliant on tourism, which will fall as a result of appreciation.
56
What are fixed exchange rates?
Fixed exchange rate regimes are when a country's central bank sets and maintains the value of its currency at a specific rate compared to another country.
57
What does the central bank do when they want to weaken the currency?
When a weaker currency is needed, the central bank devalues the currency.
58
What does the central bank do when they want to strengthen the currency?
When a stronger currency is needed, the central bank reevaluates the currency
59
How would the central bank depreciate a currency?
Sell its currency for a foreign currency and keep that foreign currency in reserve.
60
How would the central bank apreciate a currency?
Buy its own currency with foreign reserves.
61
What are managed exchange rates?
A managed exchange rate system is a system between the floating and the fixed exchange rate system.
It allows the exchange rate of a country to fluctuate with the price mechanism of the forex markets, but fluctuations are confined within a set range (upper and lower limits).
62
What is the main goal of a managed exchange rate system?
The main goal of a managed exchange rate system is to avoid significant fluctuations in a short period of time.
63
What is an overvalued currency?
An overvalued currency is one whose value is above the equilibrium point.
64
What is an undervalued currency?
An undervalued currency is one whose value is below the equilibrium point.
65
Why are undervalued currencies seen as an unfair trade practice?
Undervalued currencies would make exports cheaper, which means that the export industries within a nation would have an advantage against foreign competitors.
66
Name 2 advantages of floating exchange rate systems?
Flexibility to policy-makers
No need for large reserves
67
Name 3 disadvantages of floating exchange rate systems
Possible answers:
- Uncertainty for stakeholders
- Negative effects on trade/investment
- Currency speculation
- Potential for financial crises
68
What are the advantages of fixed exchange rate systems?
- Degree of certainty for stakeholders
- Limits on speculation
69
What are the disadvantages of fixed exchange rate systems?
- Need for large reserves
- Limited flexibility for policy-makers
70
What is the balance of payments?
It’s a record of the value of all transactions between the residents of one country and the residents of all other countries in the world over a given period of time.
71
What are the three components of the BoP?
The current account
The capital account
The financial account
72
What are credits/debits in the BoP?
All the payments received into a country from other countries (inflows) are called credits.
All the payments made to other countries from a country (outflows) are called debits.
73
What are the four components of the current account?
The balance of trade in goods
The balance of trade in services
The balance of trade in incomes
The balance of trade in transfers
74
What are the components of the capital account?
The balance of trade of capital transfers
The balance of trade in transcations in-produced, non-financial assests
75
What are examples of "transfers" in the current account?
Transfers refer to financial flows such as remittances, gifts and foreign aid.
76
What are examples of "transcations in-produced, non-financial assests" in the capital account?
Transactions in-produced and non-financial assets are intangible items such as intellectual property, legal agreements (leases) or rights to use something.
77
What are the four components of the financial account?
Balance of trade in FDI
Balance of trade in portfolio investments
Balance of trade in reserve assests
Balance of trade in official borrowing
78
Give an example of "reserve assests" that form part of the financial account
Reserve assets are foreign currency holdings and other assets held by a central bank that are primarily used to manage the exchange rate.
79
Name 3 implications of a persistent current account defecit.
Verbally explain one.
Possible answers:
- Interest rates.
- The foreign ownership of domestic assets.
- National debt.
- National credit ratings.
- Demand management.
- Economic growth.
- Exchange rates.
80
What are the three methods for correcting a persistent current account defecit?
Expenditure-switching policies.
Expenditure-reducing policies.
Supply-side policies.
81
What are expenditure-switiching policies?
Expenditure switching-policies are any trade protectionist measures, including:
Tariffs.
Quotas.
Subsidies.
82
What are the potential drawbacks of expenditure-switching policies?
- Higher domestic prices
- Reduced competition
- Reduced efficiency
- Risk of retaliation
83
What are expenditure-reducing policies?
Expenditure-reducing policies involve trying to slow down domestic spending in the economy.
84
What are the two forms of expenditure-reducing policies?
Give an example of each
- Contradictory monetary policy (e.g. Increased interest rates).
- Contradictory fiscal policy (E.g. Increased taxes).
85
What are the potential drawbacks of expenditure-switching policies?
- The risk of recession
- Currency appreciation
- Short-term solution (does not adress root cause).
86
What are supply-side policies and how do they correct a persisent current account defecit?
Supply-side policies increase the economy's productive capacity, potentially making domestic products more competitive internationally, which can boost exports.
87
What are supply-side policies likely to be in MEDC's?
- Easing business regulations
- Diminishing the influence of trade unions
- Lowering minimum wage
Overall: Lower production costs, increase national output.
88
What are supply-side policies likely to be in LEDC's?
- Simplifying business establishment processes
- Improved acsess to credit
- Ensuring a non-corrupt regulatory framework (creating a trustworthy environment for investment)
89
Name the potential drawback of supply-side policies?
- Increases inequality
90
What is the Marshall-Lerner condition?
The Marshall-Lerner condition (MLC) describes the circumstances under which a depreciation of the domestic currency will lead to an improvement in the current account.
91
What does the MLC state?
It states that a depreciation will only lead to an improvement in the current account if the sum of the elasticities of a country's exports and imports is greater than one.
92
What is the formula for the MLC?
PEDx + PEDm > 1
93
What happens if the MLC > 1
If the MLC > 1, it means that the depreciation of the currency will improve the trade balance.
94
What happens if the MLC < 1
If the MLC < 1, it means that the depreciation of the currency will not improve the trade balance, it will worsen an already-existing deficit.
95
What is the J-curve effect?
The J-curve models the impact that currency depreciation has on a current account.
In the short-term, currency depreciation will worsen the current account deficit.
However, in the long-term, the depreciation will improve the trade balance and lead to a current account surplus.
96
Why will the depreciation of the currency lead to a worsening of the current-account defecit in the short-term?
- The period of time is too brief for customers to adjust their consumption decisions away from imports and to domestically produced goods.
97
What are the implications of a persisent current account surplus?
- Domestic consumption and investment: A current account surplus may decrease domestic consumption and investment due to more capital flowing abroad, reducing funding for domestic projects and spending.
- Pressure on the exchange rate: Upward pressure on the exchange rate from a current account surplus can appreciate the currency, making exports costlier, slowing economic growth, and potentially increasing unemployment.
- Export competitiveness: Increased export prices from currency appreciation due to a current account surplus can reduce export competitiveness, leading to unemployment in export sectors and more competitive imports affecting domestic industries.
