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Moi cards > Possible macroeconomic theme 4 > Flashcards

Possible macroeconomic theme 4 Flashcards

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1
Q

Absolute advantage

A

A country has an absolute advantage in the production of a good when it can produce more of that good than another country

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2
Q

Comparative advantage

A

A country has a comparative advantage in the production of a good when it can produce that good at a lower opportunity cost than another country

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3
Q

Specialisation

A

When specialisation in something helps boost output

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4
Q

The theory of comparative advantage

A

If countries specialise in the production of the goods in which they have a comparative advantage, global output will increase

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5
Q

Assumptions of the theory of comparative advantage

A

The first assumption of the theory of comparative advantage is that the average cost of production stays constant
No trade barriers
No transport costs

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6
Q

Limitations of the theory of comparative advantage

A

Increased specialisation might result in rising average costs caused by diseconomies of scale.
Trade barriers might distort comparative advantage.
Real life transport costs might distort comparative advantage.

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7
Q

Advantages specialisation & trade

A

Leads to an increase in global output and living standards
May create economies of scale
Can lead to lower prices and more choice for consumers

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8
Q

Disadvantages specialisation & trade

A

Benefits are based on unrealistic assumptions
May lead to over dependence on imports and exports
Can cause demotivation which will decrease productivity and increase prices

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9
Q

Globalisation

A

Increased integration of different economies around the world

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10
Q

Increased international movement of labour

A

An increase in globalisation means more people moving around the world for labour

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11
Q

Increased international movement of financial capital

A

An increase in globalisation means more FDI around the world

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12
Q

Increased specialisation

A

An increase in globalisation means an increase in specialisation

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13
Q

Increased international trade

A

An increase in globalisation means an increase in international trade, with 80% being done with TNC’s

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14
Q

Transnational corporation

A

A TNC is a company which operates in 2 or more countries

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15
Q

Increase trade-to-GDP ratios

A
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16
Q

Improvements in transport

A

Improvements in transport has led to an increase in the international movement of labour

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17
Q

Improvements in IT

A

Improvements in IT, like the internet, has led to an increase in the international movement of financial capital

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18
Q

Containerisation

A

Containerisation, the use of shipping containers, has improved efficiency and reduced costs, increasing international trade

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19
Q

Trade liberalisation

A

The reduction and removal of trade barriers

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20
Q

Impacts of globalisation

A

Individual countries
Governments
Producers
Consumers
Workers
The environment

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21
Q

Impacts on Individual countries

A

One benefit of globalisation is an increase in living standards as a result of increased specialisation, which has increased global output and world real GDP
One disadvantage of globalisation is an increase in overdependence as a result of specialisation

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22
Q

Impact on governments

A

One benefit of globalisation is an increase in tax for governments
One disadvantage of globalisation is a big increase in transfer pricing

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23
Q

Impact on producers

A

One advantage of globalisation is a reduction in costs through relocation.
One disadvantage of globalisation is that Transnational corporation (TNCs) create high barriers to market entry

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24
Q

Transfer pricing

A

A method of pricing goods and services transferred within TNCs in order to reduce the amount of corporation tax paid

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25
Impact on consumers
One advantage of globalisation is wider choice and lower prices for consumers. One disadvantage of globalisation is that being driven to consume more can reduce consumer happiness
26
Impact on workers
One advantage of globalisation is more international jobs for workers One disadvantage of globalisation is an increase in structural unemployment
27
Impact on the environment
One advantage of globalisation is an increase in global cooperation to fight climate change One disadvantage of globalisation is an increase in global warming
28
Terms of trade
Relationship between the price of exports and the price of imports
29
Terms of trade formula
Terms of trade = (Index of export prices / Index of import prices) x 100
30
Improvements and deteriorations of the terms of trade
When the terms of trade increase we say that they have improved When the terms of trade decrease we say that they have deteriorated.
31
Factors of terms of trade
Raw material prices Tariffs Exchange rates Inflation rates
32
Changes in raw material prices
An increase in raw material prices will deteriorate the terms of trade for countries who import raw materials and improve the terms of trade for countries who export raw materials
33
Changes in tariffs
A removal of tariffs will lead to a/an improvement in the terms of trade An increase in tariffs will lead to a/an deterioration in the terms of trade
34
Changes in exchange rates
A depreciation of a country’s exchange rate will increase the price of imports and decrease the price of exports causing the terms of trade to decrease An appreciation of a country’s exchange rate will increase the price of exports and decrease the price of imports causing the terms of trade to improve
35
Inflation rates (Terms of trade)
If a country’s inflation rate is higher than that of its trading partners, its index of export prices will be rising more than its index of import prices. Therefore its terms of trade will improve If a country’s inflation rate is higher than that of its trading partners, its index of import prices will be rising more than its index of export prices. Therefore its terms of trade will deteriorate
36
Living standards (Terms of trade)
An improvement in the terms of trade will lead to an increase in the standard of living A deterioration in the terms of trade will lead to a decrease in the standard of living
37
Competitiveness (Terms of trade)
If terms of trade improve, then a decrease in competitiveness, less exports so decrease in employment and real GDP and an increase in the current account deficit If terms of trade deteriorate, then a increase in competitiveness, more exports so increase in employment and real GDP and an decrease in the current account deficit If the relative price has decreased (they are now relatively cheaper), then the exports are more competitive - competitiveness has increased If the relative price of exports has increased (they are now relatively more expensive), then the exports are less competitive - competitiveness has decreased
38
Types of restrictions on free trade
Tariffs Quotas Subsidies Non-Tariff barriers
39
Tariffs
A tariff is a taxpaid on imports. It creates a barrier to trade
40
World supply curve
Its just a perfectly elastic curve (straight line) The world supply + tariff line is just above it
41
Quotas
A quota is a strict limit on the quantity of imports. They do not raise tax revenue for the government
42
Subsidy
A subsidy is when the government gives a grant to producers in order to increase supply Subsidies to domestic producers are grants given to reduce the costs of production and increase the quantity supplied. This makes domestic goods more competitive and should reduce the demand for imports
43
Non tariff barriers
Restrict free trade by setting rules and regulations for imports to follow. They include regulations regarding health and safety, environmental regulations and correct labelling of products to show a best before date
44
Reasons to restrict free trade - Trade barriers/Protectionist policies
Preventing dumping Protecting domestic employment Protecting infant industries Health and safety
45
Preventing dumping
It is predatory pricing on a international level A trade barrier can be used to prevent dumping. For example, a tariff will increase the price of imported goods so that foreign firms won’t be able to undercut domestic firms by charging a lower price
46
Protecting domestic employment
Trade barriers can be used to protect domestic jobs. A restriction on imports (quotas) will increase demand for domestic goods. This will increase the derived demand for labour and increase employment
47
Protecting infant industries
Infant industries do not benefit from economies of scale. This means that their cost of production is often higher than other countries. This means that they can’t compete with large industries from other countries. Subsidies to domestic producers can help reduce the price of their goods
48
Health and safety
Trade barriers can be used to reduce imports of goods which do not meet health and safety regulations
49
Trading Blocs
A trading bloc occurs when countries join together and agree to remove trade barriers such as tariffs, quotas, subsidies to domestic producers and non-tariff barriers
50
Types of trading bloc
Free Trade Areas Customs Unions Common Markets Monetary Unions.
51
Free trade areas
In a free trade area, trade barriers are removed between member countries. However, member countries can set their own trade barriers on non-member countries
52
Custom unions
In a customs union, all trade barriers are removed between member countries. Also, all member countries must have a common external tariffs on imports from non-member countries - The European Union
53
Common markets
In a common market, all trade barriers are removed between member countries. Also, all member countries must have a common external tariffs on imports from non-member countries. Also, there is free movement of the factors of production
54
Monetary unions
In a monetary union, all trade barriers are removed between member countries. Also, all member countries must have a common external tariff on imports from non-member countries. Also, there is a common currency - The Eurozone
55
The European Union
The European Union is a customs union with 27 member countries. They have removed trade barriers between each other and share a common external tariff with non-EU countries
56
Trade creation
The removal of trade barriers mean the tariff will decrease the price leading to a contraction in domestic supply and an extension in domestic demand as shown below. This will increase the quantity of imports, known as trade creation
57
Trade diversion
Trade diversion happens when trade is diverted from low cost producers outside a trading bloc to high cost producers inside a trading bloc
58
The World Trade Organisation (WTO)
Organising rounds of talks Settling trade disputes
59
Organising rounds of talks
The first function of the World Trade Organisation is to organise rounds of talks between members in which trade deals are negotiated. For example, at the Ministerial Conference in 2013, all members agreed to the Bali package
60
Settling trade disputes
The second function of the World Trade Organisation is to settle trade disputes which occur when one member thinks another member is breaking the rules of a trade agreement. Since 1995, over 350 rulings have been issued on disputes
61
Patterns of trade
Comparative advantage Emerging economies Trading blocs Exchange rates
62
Balance of Payments
A record of payments between one country and the rest of the world
63
Hot Money Flows
Money that investors move internationally between banks to maximise the interest they receive
64
Expenditure Reducing Policies
Policies which aim to reduce expenditure on all goods in order to reduce import expenditure and improve the current account.
65
Expenditure Switching Policies
Policies which aim to switch expenditure from imported goods to domestic goods. They include trade barriers and low interest rates.
66
J-Curve
Following a depreciation of the exchange rate, the J-curve effect shows a worsening of the Current Account in the short run and then an improvement in the long run
67
Marshall-Lerner Condition
Following a depreciation of the exchange rate, the Current Account will only improve if the sum of the elasticity of demand for exports and the elasticity of demand for imports is greater than one (i.e.) PEDx + PEDm > 1).
68
Competitive Depreciation
When a country depreciates their own currency to keep their exports cheap and competitive
69
Currency War
A currency war is when countries depreciate their exchange rates to make their exports more competitive than other countries
70
Revaluation
When a country raises their fixed exchange rate
71
Devaluation
When a country lowers their fixed exchange rate
72
Fixed Exchange Rates
The government, or central bank, fix the value of one currency to the value of another
73
Managed Exchange Rates
The government, or central bank, will only intervene to keep their exchange rate within a certain range
74
Floating Exchange Rates
The government or central bank does not intervene at all. The exchange rate is simply determined by market forces.
75
Role of Financial Markets
To facilitate saving, to facilitate lending, to facilitate exchange, to provide a market for equities and to provide forward markets.
76
Equity
When firms sell a percentage of their company to investors in the form of shares. The investors can then receive a percentage of the profits.
77

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