Pack 7: International economies pt1

Question 1

What is globalisation?

Answer 1

The increasing internationalisation of trade and ever-increasing integration of the world’s local, regional and national economies into a single interdependent global market.

Question 2

What are the characteristics of globalisation?

Answer 2

~Increased International trade and interdependence
~Increased FDI and movement of capital

Question 3

What is a transnational company?

Answer 3

Commercial enterprise that operates substantial facilities or does business in more than one country.

Question 4

What factors contribute to globalisation?

Answer 4

~Transport improvements
~Communication improvements
~Lowering of trade barriers
~Growth of trading blocs
~Capital mobility + opening up of markets
~Economic development + rising real incomes
~Increased importance of Transnational companies

Question 5

Benefits of globalisation for individual countries?

Answer 5

~Up output, growth and employment
~Down absolute poverty
~Lower inflation rates

Question 6

Costs of globalisation for individual countries?

Answer 6

~Increased inequality
~Job/industry losses
~Greater risk

Question 7

Benefits of globalisation to governments?

Answer 7

~Up economic prosperity + political benefits
~Improved budget balance

Question 8

Costs of globalisation for governments?

Answer 8

~Tax avoidance
~Potential political costs

Question 9

Benefits of globalisation to workers?

Answer 9

~Employment by global companies
~Up wages + living standards

Question 10

Costs of globalisation for workers?

Answer 10

~potential job losses
~Downward pressure on wages

Question 11

Benefits of globalisation to producers?

Answer 11

~Larger market
~Lower production costs
~Tax avoidance + transfer pricing

Question 12

Costs of globalisation for producers?

Answer 12

~Up risk and interdependence
~Diseconomies of scale
~Greater competition
~Anti-globalisation backlash

Question 13

Benefits of globalisation for consumers?

Answer 13

~Increased choice
~Lower prices

Question 14

Costs of globalisation for consumers?

Answer 14

~Issue of homogenisation
~Higher prices by global companies

Question 15

Benefits of globalisation to the environment?

Answer 15

~Development of renewable energy

Question 16

Costs of globalisation to the environment?

Answer 16

~Transportation of goods
~Increased good/service production
~Strain on environment + scarce resources

Question 17

How is transfer pricing regulated?

Answer 17

Arm’s length principle - Price agreed in a transaction between two related parties must be the same price that is agreed between two unrelated parties.

Question 18

What are the limits of this regulation of transfer pricing?

Answer 18

~Room for interpretation
~No control of other forms of tax avoidance

Question 19

Limits to controlling global companies?

Answer 19

~Issues for developing countries
~Balance between attracting and controlling companies
~Global nature of companies

Question 20

What is specialisation?

Answer 20

System of organisation where economic units, such as firms or nations are not self-sufficient but concentrate on producing certain goods and services in which they have an advantage, trading the surplus with others.

Question 21

What is international trade?

Answer 21

Exchange of goods and services across international borders

Question 22

What are the assumptions of the international trade model?

Answer 22

~Only two countries
~No transport costs
~No economies of scale
~Homogeneous goods
~Factors of production + perfectly mobile
~Perfect knowledge
~No tariffs and quotas

Question 23

What is an absolute advantage?

Answer 23

Ability of a country to produce greater quantity of a good/service with the same quantity of inputs, per unit time

Question 24

What is a comparative advantage?

Answer 24

Economy’s ability to produce a particular good/service at a lower opportunity cost than trading partners

Question 25

Limitations of comparative advantage?

Answer 25

~High transport costs + external costs ignored ~Labour immobility + unemployment ~Diseconomies of scale

Question 26

Advantages of specialisation and trade?

Answer 26

~Comparative advantage ~Export-led growth + improvement to trade balance ~Larger market ~Competition +Efficiency ~Lower inflation

Question 27

Disadvantages of specialisation and trade?

Answer 27

~Higher risk ~Vulnerable to external shocks ~Job losses + foreign competition ~Environmental damage ~ Higher inequality within + between countries

Question 28

What is the Pattern of Trade?

Answer 28

What goods and services a country trades, with whom, and in what direction

Question 29

What factors influence the Pattern of Trade?

Answer 29

~Comparative advantage ~Impact of emerging economies ~Up trading blocs + bilateral trade deals ~Changes in relative exchange rates

Question 30

What are the Terms of Trade?

Answer 30

The ratio of export prices to import prices

Question 31

What improves the terms of trade?

Answer 31

When the value increases such as when export prices rise relative to import prices.

Question 32

What factors influence the Terms of Trade?

Answer 32

short-term: ~Exchange rate ~Inflation ~demand for exports/imports long-term: ~Productivity changes ~Income changes

Question 33

What is the impact of changes in the Terms of Trade?

Answer 33

~Living standards ~Competitiveness + balance of payments ~Growth + employment

Question 34

What is free trade?

Answer 34

International trade conducted without the existence of barriers to trade, e.g. tariffs and quotas

Question 35

What is protectionism?

Answer 35

Use of economic policies to regulate trade between countries, mainly to reduce imports.

Question 36

Reasons for trade restriction?

Answer 36

~Infant industry argument ~job protectionism ~Protect against dumping ~Correct balance of payments problem ~Cheap labour ~Strategic/self-sufficiency reasons ~Limits over-specialisation ~Retaliation

Question 37

What are tariffs (customs/import duty)?

Answer 37

Tax on imported goods which has the effect of raising domestic import price and thus reducing demand

Question 38

What are the effects of tariffs?

Answer 38

~Domestic supply up ~Domestic price up ~Domestic demand down ~Imports + import revenue down ~Government gain tariff revenue

Question 39

What are quotas?

Answer 39

Physical limit on quantity of imports into country

Question 40

Effects of quotas?

Answer 40

Same as tariffs but no revenue for the government and risks of shortages

Question 41

What are subsidies on domestic producers?

Answer 41

Grant given by government, to firms, within country in order to reduce production costs, increase supply and improve international competitiveness. Up exports, down imports

Question 42

What are Non-Tariff Barriers?

Answer 42

Protectionist measures other than through imposition of tax and tariffs, e.g. voluntary export restraints + technical regulations

Question 43

Costs of protectionism to consumers?

Answer 43

~Restricted choice ~Up prices, lower CS ~Less competition

Question 44

Impact of protectionism on producers?

Answer 44

benefits: ~Higher output, sales and profit Costs: ~Higher costs of production

Question 45

Costs of protectionism to governments?

Answer 45

~Direct costs ~Inefficiency + economic damage

Question 46

Benefits of protectionist policies to governments?

Answer 46

~Up tax revenue ~Jobs/industries protected

Question 47

Effects of protectionist policies on living standards?

Answer 47

Benefits: ~Industries, employment + output protected Costs: ~Distortion of comparative advantage

Question 48

Effects of protectionist polices on equality?

Answer 48

Benefits: ~Jobs for low-income workers protected Costs: ~Long-term growth constraint

Question 49

What is a trading bloc?

Answer 49

Group of countries that have signed an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers between themselves

Question 50

What is a regional trade agreement?

Answer 50

An agreement between at least two countries to reduce or eliminate tariffs, quotas and other protectionist barriers between themselves

Question 51

What is a bilateral trade agreement?

Answer 51

An agreement between two countries or trading blocs to reduce or eliminate tariffs, quotas and other protectionist barriers between themselves

Question 52

What is a free trade area?

Answer 52

Group of countries between which there is free trade in goods and services but allows members to set their own tariff levels against other non-members

Question 53

What is a customs union?

Answer 53

Group of countries between which there is free trade of goods and services, and which imposes a common external tariff on non-members

Question 54

What is a common market?

Answer 54

Group of countries between which there is free trade in products and factors of production, imposes common external tariff on non-members

Question 55

What are some advantages of regional trade agreements?

Answer 55

~Free trade + comparative advantage ~Trade creation ~Benefits to macro objectives (GDP, living standards, job creation, inflation) ~Dynamic benefits - +economies of scale +Greater competition +Better governance

Question 56

What are the disadvantages of regional trade agreements?

Answer 56

~Protectionism impacts on non-trading bloc members ~Trade diversion ~Distraction of governments from global trade agreements ~Retaliation ~Loss of national sovereignty ~Dynamic costs ~Differing impacts on members within the bloc

Question 57

What is a monetary union?

Answer 57

Group of countries which share a common currency such as the Euro

Question 58

What requirements must a country hit to be able to join the Euro?

Answer 58

~Stable prices ~Stable exchange rate ~Sound government finances ~Interest rate convergence

Question 59

What conditions are required for the success of a monetary union?

Answer 59

~Free movement of labour ~Capital mobility, associated with wage and price flexibility ~Automatic fiscal transfers ~Countries sharing same trade cycle

Question 60

What are the benefits of monetary unions?

Answer 60

~Increased trade ~Boost to economic growth + jobs (specialisation - comparative advantage) ~Increased comp. and efficiency (price transparency) ~Lower inflation ~Increased FDI + Balance of payments ~Benefits for smaller economies - financial support + better macro management

Question 61

What are the disadvantages of monetary unions?

Answer 61

~One size fits all monetary policy ~Inability to devalue your currency ~Potentially slower growth + jobs ~Problems of supporting struggling economies ~Fiscal policy problems

Question 62

What is the World Trade Organisation (WTO)?

Answer 62

International body founded 1995 to promote international trade + provide trading rules in order to settle trading disputes

Question 63

What is the role of the WTO?

Answer 63

~Promoting trade liberalisation ~Setting trade rules and settling disputes: +Most-favoured nation (MFN) - treating other people equally +National treatment - treating foreigners and locals equally