International Flashcards
(42 cards)
1
Q
Benefits of International trade
A
- Lower Prices for consumers (differneces in quality of labour force, more access to raw materials among other factors may lead to foreign countries being able to produce cheaper goods)
- Greater domestic choice
- Difference in resources
- Economies of scale (bigger market [because of international trade] allows firms ito increase thgeir size which can lead to economies of scale)
- Increased competition
- More efficient allocation of resources
- Sources of foreign exchange. ( wich has the benefit of allowing countries to buy imports and use foriegn exchange reserves to offset a disequilibriumn on the balance of payments)
2
Q
Benefits of Specialisation and Exchange
A
Allows countries to consume combinations of goods and services that lie beyond its own PPC. This is based on the theory of reciprocal absolute advantage.
3
Q
Causes of comaparative advantage
A
Hecksher-Ohlin theory of interantional trade states that a country in which labour is relatively abundant will specialise in producing goods or services whose production is labour intensive. (same applies for countries in which capital is relativley abundant)
More generally, based on their factor endowment.
4
Q
Limitations to theory of comparative advantage
A
- Assumed that consumers have perfect knowledge, which in reality is not the case
- assumed there are no transport costs
- Basic theories/models assume two economies producing two goods
- It is usually assumed that costs do not change and that there are constant returns to scale
- Assumes homogenous products
- assumes free trade
- Assumes factors of production stay in one country when in fact labour and capital are free to move
5
Q
Objectives and functions of WTO
A
(World trade Organisation)
Regulator and of World trading, setting rules of trading and solving disputes between member countries.
All member countries grant most favoured nations status to another member nation which grant trade concessions to one another.
Aims:
-administer trade agreements
-be a forum for trade negotiation
-handle trade disputes between member countries
-monitor national trade policies
-provide technical assistance and training for developing countries
-cooperate with other int organisations.
6
Q
Forms of protectionism
A
- Tariffs
- Quotas
- Embargos
- Others e.g. product standards, red tape
7
Q
Arguments for protectionism
A
- Protecting domestic employment (structural unemployment created in sunset industries is prevented)
- Protecting economies from cost of labour abroad
- Protecting sunrise/infant industries
- Risk of over-specialisation (over dependency on export markets of one or two two products)
- strategic reasons (e.g. during war)
- Prevent dumping by developed countries
- Protect product standards (and so protecting health, safety and environment) (e.g. EU ban of US GH meat)
- Raise government revenue (15% of total revenue for developing countries IMF estimate)
- Correct balance of payment deficit
8
Q
Arguments against protectionism
A
- Misallocation of world’s resources (distortion of comparative advantage).
- Danger of retaliation/trade wars.
- Potential for corruption.
- Increased cots of production because of lack of competition.
- Reduced export competitiveness.
- Because of all reasons above may hinder economic growth.
9
Q
In the case of fixed exchange rates when the value of the currency (or commodity) is fixed to rises, the government maintain their fixed exchange rates by…
A
…. increasing demand for the currency by buying back the excess supply using foreign currency reserves.
10
Q
How does demand for a currency rise in a floating exchange rate system?
A
- if there is an increase in the demand for US goods and Services (inflation lower than foreign countries, increase in foreign income, change in foreign taste)
- US investment prospects improve
- US interest rates increase (making it more attractive to save their)
- Speculation of future rise in currency in question
11
Q
When does supply for a currency rise in a floating exchange rate system?
A
- domestic consumers increase demand for foreign goods increases (because of increase in domestic inflation, increase in domestic income, change of taste for foreign goods)
- Investment prospects abroad improve
- Foreign interest rates increase making it more attractive to sae abroad
- speculation domestically think value of domestic currency will fall
12
Q
High exchange rate advantages
A
- Downwards pressure on inflation
- More imports can be bought
- Forces domestic producers to improve their efficiency to improve their international competitiveness.
13
Q
High exchange rate disadvantages
A
- damage to export industries (possibly leading to unemployment)
- damage to domestic industries (as imports have become relatively less expensive)
14
Q
Advantages of low exchange rates
A
- Increase in employment in export industries
2. Greater employment in domestic industries
15
Q
Disadvantages of low exchange rates
A
Inflation because imports are more expensive.
16
Q
Why government would want to intervene in exchange market?
A
- Lower the exchange rate in order to increase employment
- Raise exchange rate to fight inflation
- Avoid large fluctuation in float in exchange rate and thus improve business confidence
- Improve a current account deficit
17
Q
Advantages of fixed exchange rate
A
- Reduce uncertainty for all economic agents in the country
- Government makes extra effort to ensure low inflation to ensure international competitiveness
- (in theory) Reduce speculation in foreign exchange markets.
18
Q
Disadvantages of fixed exchange rates
A
- Often goal of low unemployment in an economy will be sacrificed as the tools implemented to maintain the fixed rates e.g. increase interest rates may have a deflationary effect on economy. (restriction in freedom for policy makers)
- Government needs to maintain the high level of foreign reserves to make clear ability to defend currency by buying and selling of foreign currencies
- Variables have to be taken into account when setting the exchange rate at the wrong level can lead to a decrease in international competitiveness.
- Undervaluing currency may lead to international disagreement as this will make their products more internationally competitive.
19
Q
Advantage of floating exchange rate
A
- Interest rates are free to be employed as domestic monetary tools
- The exchange rate should adjust itself to fix a current account imbalance
- Not necessary to keep high level of foreign reserves and gold
20
Q
Disadvantage of floating exchange rate
A
- create uncertainty on international markets
- Influenced more by more factors than demand & supply
- Could worsen already high inflation (cost push inflation caused by exchange rate dropping to much to fix inflation)
21
Q
Relationship between three accounts in the balance of payments
A
Current account balance= capital account balance + financial account balance (+net errors and emissions)
22
Q
Implications/consequences of persistent current account deficit
A
- Foreign ownership of domestic assets (threat to economic sovereignty)
- Country may be heavily indebted (short term drain on current account and will increase deficit in long term and the danger that a government lending money could withdraw it at any time) (an inability to pay debts would lead to reduction in credit rating meaning harder to borrow in future)
23
Q
Methods to deal with persistent current account deficit
A
- Expenditure switching policies
- Expenditure reducing policies
- Supply side splices to increase competitiveness of domestic producers
24
Q
Expenditure switching policies to improve current account
A
Switch expenditure away from imports and towards domestically produced products
eg:
-gvt policies to depreciate/devalue currency
(Effectiveness of this depends upon the price elasticity of demand for imports and exports)
-protectionist measures (restrict imports)
WTO prevents many of these techniques and gets rarely want to sacrifice competition for this
25
Expenditure reducing policies
Reduce AD in an attempt to reduce expenditure on imports.
eg
-Deflationary fiscal policies (increase indirect tax/reduce gvt expenditure)
-deflationary monetary policies (increasing interest/ restricting money supply)
But, conflict of internal and external interests in economy.
26
If there is a surplus in the three accounts the exchange rate......
...... appreciates
27
If there is a deficit across the three account the exchange rate will...
depreciate
28
Current account deficit deficit/ Capital account surplus indicates:
That the total spending by domestic households, government and firms is greater than the gross national disposable income
Or that the level of investment in a country exceeds the level of gross national saving.
29
Significance of current account imbalance
the significance of an imbalance depends not upon the magnitude of the imbalance but instead upon its size RELATIVE TO GDP.
(because current account deficit indicates spending beyond current income meaning sone spending is funded by previously saved income or out of future income and so the smaller the deficit as a share of GDP the smaller the burden)
30
Explain the process shown in a J-curve
Lower exchange rates from point they were previously at, but because communication is not perfect = will take time for other countries to realise prices in this country have fallen.
In addition, they may be tied into contracts which cannot be broken in the short term meaning they cannot change suppliers immediately.
This means PEDexports will be inelastic and export revenue will fall as a consequence of the reduced prices (which fell more quickly than demand will rise).
The same applies for imports.
Overall, this will worsen the deficit (point Y on diagram).
By the time a current account deficit reaches point Y he PEDimports and PED exports has risen to the point where there sum is greater than 1.
This means the Marshall-Lerner condition is satisfied and the current account balance will improve (point Z).
31
Advantages of economic and monetary union
- Elimination of exchange rate fluctuation leading to less uncertainty about export/import/asset prices and hence greater cross border investment and trade.
- Elimination of transaction costs (from exchange rates)
- A currency used in a large area has more credibility and therefore should be more stable
- Improvement in business confidence in member countries as there is less perceived risk involved in trading among the member countries.
- Makes price differences between countries more obvious leading to fewer opportunities for price discrimination between countries by price-making MNCs (therefore over time prices should equalise)
32
Disadvantages of Economic and monetary union
- Loss of monetary policy sovereignty (single interest rate set for all member countries which may help some countries but hinder others made worse if no economic convergence exists)
- Can't rely on evaluation/depreciation in currency to increase international competitiveness meaning more reliance on Internal devolution, wage restraint and productivity improvement to maintain competitiveness.
- No central fiscal authority meaning without fiscal co-ordination the currency will be unstable/ weak
- menu costs when currency changed.
33
Equation for terms of trade
= (weighted index of average export PRICES) ÷ (weighted index of average import PRICES)
multiplied by 100.
34
An improvement in the TOT
is when there is an increase in export prices and a decrease or no change in import prices.
It is measured by an increase int he TOT value
35
Changes in the TOT in short-run may be result of:
1. changes in conditions of demand and supply for exports and imports
2. changes in relative inflation rates
3. changes in exchange rates
36
Changes in the TOT in long-run may be result of:
1. Changes in income over time
2. Improvements in productivity
3. Technological developments
37
Relationship between the TOT and the current account balance
An improvement in the TOT can lead to an improvement or deterioration in the current account balance. The effect that it has on the current account balance depends on the reason for the TOT improvement.
38
An increase in demand for a country's exports will.....
| TOT and current account balance
cause an increase in the average export price and thus an improvement in the TOT. It walls causes an increase in export revenue meaning an improvement in the current account balance
39
An improvement in the productivity or technology of a country will.....
(TOT and current account balance)
Reduce the cost of production leading to an increase in AS leading to a fall in the domestic price level and therefore a deterioration in the TOT. A country's products will be more internationally price competitive leading to higher export revenue and an improvement in the current account balance.
40
An increase in inflation in a country will.....
| TOT and current account balance
Depend upon whether PED for exports is elastic or inelastic.
If PED is inelastic then as the price of exports rises demand falls less than proportionally, export revenue rises and the current account position improves.
If PED is elastic then as the price of exports rises demand falls more than proportionally export revenue falls and the current account balance deteriorates.
41
Factors leading to decline in commodity prices that took place up to 2001
- Improvement in technology lead to a decrease in the cost of supply (increase in crop yield and thus an increase in the supply of commodities
- Discoveries of new synthetic replacements for natural commodities
- Dumping from developed countries.
- Miniaturisation of goods which has lead to less packaging and therefore decrease in demand for goods previously used to manufacture packages.
42
Harmful effects of decrease in TOT for developing countries
- in order to maintain consumption of imported goods, developing countries have to export an increasing amount of exported goods, driving down the price of these goods meaning more exported goods need to be produced
- high levels of debt and falling export prices leads to a further increase in an economy's debt creating a viscous circle
- over use of resources to increase export revenue has lead to the creation of negative externalities of production in some developing countries (e.g. heavy use of agrochemical on cotton in Benin).
