Lesson 2 Flashcards
(24 cards)
What is economic interdependence, and why is it important in trade?
- Economic interdependence refers to the mutual reliance of nations through the exchange of goods, services, labor, and capital.
- It is crucial because it allows countries to specialize in what they produce best, leading to efficiency and economic growth.
- However, it also means that economic disruptions in one country can affect others.
What are some key indicators of trade interdependence between countries?
The key indicators include merchandise trade as a percentage of GDP, exports and imports relative to total output, and foreign direct investment flows.
Nations with high trade-to-GDP ratios, such as Singapore and UAE, are highly interdependent, whereas larger economies like the U.S. and India rely more on domestic production.
Why do small countries tend to have a high trade-to-GDP ratio?
Small economies, like Hong Kong and Singapore, rely heavily on international trade because they lack diverse natural resources and domestic markets. They often serve as re-export hubs, importing goods, adding value, and then exporting them to other countries.
Why do large economies tend to have a lower trade-to-GDP ratio?
Large economies, like the U.S. and India, have vast internal markets and diverse industries. They engage in significant domestic trade between states or provinces, reducing their reliance on international trade. Additionally, they may have trade barriers or geographic distance from key trading partners.
How do geographical factors affect trade between nations?
Proximity lowers transportation costs, making trade more efficient. EU countries trade heavily with each other due to close distances, while Arab countries have lower intra-regional trade due to barriers like political differences and infrastructure limitations.
What major global events have affected international trade in recent years?
Events such as the 2008 Financial Crisis, trade protectionism, exchange rate fluctuations, deep poverty, resource scarcity, and the COVID-19 pandemic have all disrupted trade flows, reduced economic output, and led to shifts in global supply chains.
How did the 2008 Financial Crisis impact global trade?
The crisis began with the collapse of the U.S. housing market, leading to bank failures, credit freezes, and stock market crashes. Since global trade is dependent on financial stability, many countries experienced economic recessions, lower consumer demand, and disruptions in trade financing.
What role does inflation play in global trade and interdependence?
- High inflation reduces purchasing power, increases production costs, and leads to uncertainty in trade agreements.
- Countries with lower inflation tend to attract more trade and investment, while nations with high inflation may experience currency depreciation and trade imbalances.
How can unemployment rates affect a country’s trade relationships?
High unemployment reduces consumer spending, lowering demand for imports. It can also drive trade protectionist policies, where governments impose tariffs or subsidies to protect domestic jobs.
Why are developing countries more vulnerable to global trade disruptions?
Developing nations often depend on commodity exports, making them susceptible to price fluctuations, climate change, and global recessions. Additionally, they have weaker financial systems, making it harder to recover from trade shocks.
What is the Gravity Model of Trade, and what does it predict?
The Gravity Model states that trade between two countries is proportional to their economic size (GDPs) and inversely proportional to the distance between them. In other words, larger economies trade more, and closer countries have stronger trade relationships.
What is the mathematical formula for the Gravity Model of Trade?
T ij= A((Yi x Yj)/ Dij)
- Tij = trade between country i and country j
- Yi, Yj = GDP of both countries
- Dij = distance between them
- A = constant factor
What factors besides distance and GDP influence trade between countries?
- Cultural affinity (shared language, history, or customs)
- Trade agreements (reducing tariffs and formalities)
- Multinational corporations (business operations across borders)
- Government policies (subsidies, sanctions, or restrictions)
How do technological advancements affect trade?
Innovations like container shipping, the internet, and AI reduce transportation and communication costs, making global trade more efficient. However, political instability and trade wars can still disrupt trade flows.
What are the major categories of globally traded goods and services?
- Manufactured goods (cars, electronics, machinery)
- Services (finance, tourism, IT support)
- Commodities (oil, coal, agricultural products)
What is re-exporting, and which countries are known for it?
Re-exporting occurs when a country imports goods, processes or repackages them, and then exports them again. Singapore, UAE, and Hong Kong are major re-export hubs.
Why do countries trade even if they can produce everything themselves?
Trade allows nations to specialize in their most efficient industries, benefiting from comparative advantage, lower costs, and economies of scale.
What is the difference between absolute advantage and comparative advantage?
- Absolute advantage = A country is more efficient than others in producing a good.
- Comparative advantage = A country has a lower opportunity cost of producing a good, making trade beneficial.
What are common trade barriers used by governments?
Tariffs, import quotas, subsidies, and non-tariff barriers like safety regulations or licensing requirements.
What is the role of the World Trade Organization (WTO) in global trade?
The WTO regulates trade rules, resolves disputes, and promotes free trade. It ensures fair competition and prevents excessive tariffs or trade discrimination among member countries.
How do exchange rates influence trade?
- A weaker currency makes exports cheaper and more competitive globally, boosting trade.
- A stronger currency makes imports cheaper but can reduce export demand. Fluctuating exchange rates affect trade balances.
How do multinational corporations (MNCs) impact global trade?
MNCs operate in multiple countries, increasing trade flows, transferring technology, and creating jobs. They influence trade policies and shape global supply chains (e.g., Apple’s production in China).
What is the impact of climate change on global trade?
Climate change affects agriculture, energy production, and supply chains. Rising temperatures and extreme weather events can disrupt trade routes, increase costs, and affect resource availability.
How does global trade benefit consumers?
Trade provides more choices, lower prices, and access to goods not produced locally. It also drives innovation and competition, improving product quality.
