The International Economy Flashcards
(178 cards)
1
Q
What is Globalisation?
A
Globalisation refers to the process of economic integration around the world, affecting the markets for output (goods and services) and inputs (capital and labour flows) and the diffusion of knowledge and information
2
Q
Note:
Globalisation occurs through the channels of trade, capital, and labour flows
A
3
Q
What are the factors contributing towards Globalisation?
A
-Growth of economic co-operation
-Technological factors
-Political and Policy Changes
4
Q
What are the technological factors contributing towards globalisation?
A
-Advances in Transportation Technology
-Advances in Telecommunication Technology
5
Q
How does advancement in transportation technology contribute towards globalisation?
A
advancement of commercial air and maritime travel -> increased efficiency in which goods, raw materials and people can be transported at lower cost -> increasing free flows of goods and services
Reduced transport costs -> increasingly more cost efficient to break up supply chains to locate different parts of their operations in different countries
6
Q
How does advancement in telecommunication technology contribute towards globalisation?
A
Rapid advancement of telecommunication technology -> low cost of information transmission around the world -> expands global demand and supply for goods and services and increases international trade flows
Improvements in information and communication technology -> increased flow of international capital, as financial capital can be transacted across countries with negligible costs and time
7
Q
How does Political and Policy changes contribute to globalisation?
A
As countries the like China, India, and the Eastern European countries have opened up -> world markets and opportunities to export have expanded considerably for advanced economies and developing countries alike
Due to their cheaper production costs -> there has been growing investment flows into developing countries
With the relaxation of migration laws in these countries -> greater flows of people in the global economy
8
Q
Examples of economic cooperation
A
ASEAN, APEC, EU..etc.
9
Q
How does growth of economic co-operation contribute towards globalisation
A
Such economic cooperation has eased trade as well as movements of resources and technology between countries.
This growth in economic cooperation was also aided by WTO (World Trade Organisation), which helps to promote free trade by persuading countries to abolish import tariffs and other barriers to open markets
10
Q
What is International Trade?
A
International Trade refers to the exchange of goods and services across international borders without any restrictions
11
Q
What are the main facets of Globalisation?
A
i) Raw materials and Goods and Services (Free Trade)
ii) Capital Flows; and
iii) Labour flows between countries
12
Q
What does Trade refer to?
A
Trade refers to the exchange of goods and services
13
Q
What are the Demand-side reasons for Free Trade?
A
i) Differences in Tastes & Preferences (pg6)
ii) Stimulates economic growth and development
14
Q
What are the Supply-side reasons for Free Trade?
A
i) Differences in Endowment of Resources
ii) Immobility of Resources
iii) Potential to reap Internal economies of scale (iEOS)
iv) Differences in Technology
15
Q
What is Intra-Industry Trade?
A
It is when countries import and export the same goods
16
Q
Note:
For demand side reasons as to why there is free trade (Differences in tastes and preferences)
A
▪ Even if countries have identical resource endowments and combined those
resources with equal efficiency, they may still engage in trade if their tastes
for goods were different.
- E.g. Suppose Norway and Sweden produce fish and meat in about the
same amounts, but the Swedes prefer meat while the Norwegians prefer
fish. Both countries would benefit if Norway exports meat to, and imports
fish from Sweden.
▪ Differences in preferences also explain why countries seem to export and
import the same goods (Intra-industry Trade). The products may be
differentiated by brand names and other distinguishing features.
- E.g. While Germany and Japan both produce and export cars (e.g. Toyota
in Japan & Volkswagen in Germany), consumers in these countries may
still choose to import cars from other countries due to diverse preferences.
17
Q
How does International Trade stimulate economic growth and development?
A
-International Trade -> creates demand from more countries instead of only domestic market -> larger market size
-Larger market size -> rise in net exports -> increase AD
-This acts as an incentive to invest more in different sectors of the economy, especially the foreign sector. -> increase AD
-Overall increase in AD -> increase in production and employment -> higher level of national income -> achieving actual economic growth
Thus, trade is an engine of growth for many small and open economies
e.g. Singapore, where domestic sources of AD are too low to promote economic growth
18
Q
Note:
(Differences in endowment of resources)
This is the most important reason why countries trade. Students must be very familiar with this point and the related section on Theory of Comparative Advantage.
A
19
Q
How do differences in FOP lead to international specialisation
A
Different countries possess different quantities and qualities of FOP -> results in opportunity cost of production -> different comparative advantage in producing goods and services -> calls for international specialisation -> give rise to differences in the types and price of goods and services produced
20
Q
Note:
Countries generally export products they can produce more cheaply in return for those that are unavailable domestically or are more costly to produce as compared to buying from other countries
A
e.g.
Land-abundant countries, such as Australia and the USA, are able to
produce land-intensive products such as agricultural products, more
cheaply than land-scarce countries, like Hong Kong and Singapore. In the
latter, the use of land for land-intensive products have higher
opportunity cost.
21
Q
What are the three different types of resources available in different countries?
A
a) Natural resources
b) Labour resources
c) Capital Stock
22
Q
Note:
Since international mobility of resources is generally limited, countries could specialise in goods which they produce most efficiently and exchange for goods they do not produce with other countries
A
23
Q
Why would there be immobility of resources?
A
i) Land, natural resources and climatic conditions are not transferable from one country to another
ii) Labour: geographical immobility
iii) Capital: generally mobile within a country, but not feasible between countries due to political instability or government restrictions, and inadequate financial, legal and physical infrastructure
24
Q
Why would there be potential to reap iEOS when international trade occurs?
A
Large market size due to access to external market -> firms able to expand scale of production -> reap large iEOS -> lower average cost
25
Why would there be differences in technology?
This arises because different countries have different intensities of research and
development (R&D) activities and different speeds of adoption of new
technologies. Economies which are able to adopt more advanced technology
can better combine factors of production to produce the good more efficiently
and at a lower opportunity cost than other economies which use relatively old
technology.
26
What is Comparative Advantage?
A country has a comparative advantage over another in the production of a good when it can produce it at a lower opportunity cost than the other countries
27
What assumptions is the Principle of Comparative advantage based on?
i) There are two countries in the world and 2 goods being production and consumption (e.g. car and rice)
ii) Each country initially uses half its resources for the production of each good
iii) Resources are fully employed and perfectly mobile within each country (factor immobility still exists between countries)
iv) Constant opportunity costs of production of the goods
v) No barriers to trade
vi) No transport costs which might outweigh the benefits of trade
28
Note:
The extent of trade and benefits between countries depends on their terms of trade with each other
29
What is Terms of Trade (TOT)?
The Terms of Trade (TOT) is the rate at which exports can be exchanged for imports (rate of exchange of exports for imports)
30
Note:
For both countries to benefit from trade, the TOT must fall between the opportunity cost ratios of the countries for each good
e.g.
Referring to Table 2 (opportunity cost ratios), [pg 10]
▪ Japan would not accept less than 0.5R for 1C exported to Thailand (otherwise
they might as well produce their own within their domestic country).
▪ Similarly, Thailand would not give up more than 2R for 1C imported from Japan.
▪ Hence, for mutually beneficial trade to take place, the TOT must lie between 0.5R
and 2R for each car i.e.
0.5R < 1C < 2R
In other words, for every unit of car, the TOT will lie between 0.5 to 2 units of rice.
31
What are the potential limitations to the benefits of free trade according to the theory of comparative advantage?
a) Increasing opportunity costs
b) Factor immobility within the country
c) Factor mobility between countries
d) Transport costs
e) Trade restrictions
32
Note:
a country's comparative advantage is NOT STATIC and can change over time
For example, in the 1970s, due to its large number of cheaper unskilled workers, Singapore
had CA in cheap electronic products. But overtime, as its workers are more educated
and more highly skilled, Singapore’s CA has evolved to high-end highly capital-intensive technological products.
33
Why would there be increasing opportunity costs when handling free trade?
all resources are not equally suitable and efficient in the production of another good -> increasing opportunity costs
34
Why would there be factor immobility within the country when handling free trade?
This is because factors are not perfectly mobile occupationally and geographically
e.g. neither possible nor easy to transfer resources, e.g. labour, from sheep farming to production of computer chips even if country has comparative advantage in producing computer chips
35
Why would Transport costs affect free trade?
Transport costs may outweigh any comparative advantage.
e.g. If countries transport goods that are bulky/heavy, transportation costs would then be high, adding on to their final price and offsetting any advantage gained through specialisation
36
What is Dynamic Comparative Advantage?
Dynamic Comparative Advantage refers to a country's comparative advantage changing over time due to changes in factor endowments
37
How can a country's comparative advantage improve?
i) Discovery of new source of non-renewable raw materials;
ii) Investment in physical capital, human capital and technology
iii) Government policies to promote targeted inflows of FDIs and foreign labour
38
How would a country lose its comparative advantage?
i) its productivity growth falls behind that of foreign competitors;
ii) Its factor endowment is depleting/depleted
iii) It experiences increasing opportunity cost as it specialises in the production of a good; and/or
iv) Government policies
39
What are the potential benefits of International Trade on the Government?
(Macro and Micro)
Macro-aims:
a) Growth and development of economies
b) Price Stability
c) Faster Rate of Technological Advancement and Diffusion and Potential Economic Growth
Micro-aims:
d) Greater productive efficiency
e) Prevention of Domestic Monopolies
40
How does International Trade achieve Growth and Development of economies to benefit the government?
Free Trade -> provides access to markets around the world for domestic producers -> increase in demand for country's exports -> increase in net exports -> increase in AD -> increase RNY -> increase in actual economic growth
Therefore, the government's macroeconomic aim of positive economic growth can be achieved through free trade
Trade -> full utilisation of underemployed/unemployed resources->
increase in net exports -> increase in AD->
creation of more jobs as more workers are needed to increase production of output to meet increase in AD -> reduces country's unemployment level
The government's aims to achieve low unemployment is therefore achieved
41
How does International Trade achieve Price Stability to benefit the government?
Greater access to global markets -> allow firms to expand scale of production -> reap EOS -> reduce unit COP -> cheaper goods and services -> beneficial for consumers
Through trade -> countries can import resources and raw materials from cheaper sources -> increasing in production at lower cost -> increase country's SRAS -> fall in GPL
This helps the government to achieve its macroeconomic aims of price stability
42
How does International Trade achieve Faster Rate of Technological Advancement and Diffusion and Potential Economic Growth to benefit the government?
In order to maintain market competitiveness with foreign counterparts, firms enhance their products through R&D. -> contributes to rapid economic development
Countries exposed to International Trade can gain access to modern technology -> allow for transmission of ideas, technical expertise and managerial skills which are essential for the country to develop -> lead to higher productivity -> increased productive capacity -> increased LRAS
Hence, NY increases -> leading to economic growth in the long run -> achieving the government's aim of potential economic growth
43
How does International Trade achieve greater productive efficiency
Specialisation and large scale production -> greater productive efficiency -> allow firms to reap iEOS -> reduce average COP -> lower domestic prices
44
How does International Trade prevent domestic monopolies?
The presence of overseas competition
can stop domestic monopolies from exploiting their positions. Without trade, a
domestic monopoly may be able to raise prices and restrict output. However,
trade exposes domestic firms to overseas competition and therefore helps to
keep such monopoly powers in check. It also gives more incentive to the
domestic firms to remain efficient and competitive.
45
What are the potential benefits of International Trade to Producers?
a) Increased profits
b) Increase efficiency and innovation in production due to competition from imports
46
What are the potential benefits of International Trade to Consumers?
a) Higher consumption possibilities
b) Gain in consumer welfare
c) Diversifying the source of products
47
How does International Trade increases firms' profits?
Access to foreign markets -> firms' demand increases as they expand their market size into foreign markets -> firms enjoy additional source of revenue through exports on top of sale of the goods and services within the domestic economy
48
How does Trade enable firms to lower their average COP?
When firms expand scale of production -> reap greater iEOS -> reduce AC of production -> compete better in export market
Through International Trade -> firms have access to cheaper sources of resource from various countries -> able to lower COP
Hence, firms can enjoy higher demand and fall in unit cost at the same time. This results in higher levels of profit, the primary objective of producers
49
How does International Trade increase efficiency and innovation in production due to competition from imports for producers?
-Free trade increases competition for domestic firms
-The entrance of imported goods and services reduces domestic firms' market share in the country -> motivate them to streamline their production towards more efficient production methods. May even embark into new technology and innovations to lower AC to maintain their market share in the economy
50
How would there be a gain in consumer welfare after International Trade?
With trade, consumers can now enjoy lower prices and higher consumer surplus, especially in goods their country have comparative advantage in
51
What happens when countries can import goods and services from different countries and regions?
With trade -> tremendous range and variety of goods and services -> enhance consumer choice
With trade -> countries likely specialise in production of goods and services -> quality of goods/services produced will improve
With trade -> availability of large variety as well as higher qualitied products together with lower prices -> higher consumer surplus -> higher consumer welfare
52
How does international trade mitigate domestic supply disruption?
International trade -> import goods from different parts of the world -> higher amounts of goods available -> fewer disturbances from supply disturbances from domestic country or other country
53
What are the disadvantages of International trade? (Government/Economy)
a) Vulnerability to external shock affecting Economic growth & Price stability
b) Immobility of Resources and Structural Unemployment
c) Environmental Degradation
54
What are the disadvantages of International trade? (Producers)
a) Domestic producers may earn lower profits when faced with greater competition
b) Dumping and Unfair Foreign Competition
55
What are the disadvantages of International trade? (Consumers)
a) Over-dependance on other countries
b) Lower consumer welfare and choice due to dumping
56
What happens when Singapore's exports decline?
Decline in exports -> fall in AD -> (through the multiplier process) decrease in national output -> fall in economic growth
AND rise in demand-deficient unemployment
57
How does External Shock affect price stability?
Fluctuation in global prices of goods -> price of imported goods increase -> imported inflation -> price stability is not attained
58
How does International trade lead to immobility of resources and structural unemployment?
For example:
when developed countries experience a loss in comparative advantage in low value-added manufactured goods to developing economies, workers retrenched from the sunset industries do not possess the relevant skills to be transferred to higher value-added industries. This results in STRUCTURAL UNEMPLOYMENT which needs to be addressed by the government.
59
How does International Trade result in environmental degradation?
Rising exports -> more goods produced -> more power generation for industrial production -> pollution problems
Trade -> encourage firms to move to countries with weak pollution controls and export from there -> further weakens controls and aggravates ENVIRONMENTAL DEGRADATION -> lowering non-material SOL
60
Why would International Trade cause domestic producers to earn lower profits?
allowing of imports to domestic market -> opening up domestic market to foreign competition
While some domestic firms are able to survive the strong competition, other firms that lack the ability to produce at lower costs may not be able to compete in terms of price or quality. This is due to their inability to reap iEOS, or lack of machinery, technological know-how, or access to cheaper resources. -> Hence unable to lower price to compete
Domestic firms may possibly face a lower demand as their market share is reduced -> adversely affect their profits
61
Why would International trade cause dumping and Unfair Foreign Competition?
By practicing dumping, foreign producer seek to drive the domestic firms out of competition and gain monopoly power in the market
Domestic firms operating in smaller scale compared to the multinational companies will not be able to compete at such low prices -> domestic firms may have to shut down -> loss of jobs among domestic workers
62
What is Dumping?
Dumping occurs when foreign producers sell their goods at prices below marginal cost. Such predatory pricing is made possible if the foreign producer use their past profits or obtain government subsidies.
63
How does over-dependence of other countries due to International trade affect consumers?
Due to unforeseen circumstances (e.g COVID) -> import reliant countries may face imported inflation due to shortage resulting in fluctuation of prices -> fall in material SOL
As such, for security reasons, some countries would rather CONTINUE TO PRODUCE SUCH PRODUCTS than to rely totally on imports despite facing a comparative disadvantage in such productions
64
How does dumping lower consumer welfare and choice?
In the short run:
Consumers can enjoy lower prices and higher consumer surplus as a result of foreign firms' dumping practices
In the Long run:
Foreign firms eventually gain large monopoly power due to domestic firms being driven out of the domestic market, resulting in higher prices set by the foreign firms as there are fewer substitutes available
65
Summary of advantages and disadvantages of International Trade on pg 18
66
What are the advantages of International Trade for the Government?
- Higher net export increases AD →
increases actual economic growth.
- Technological diffusion → increase
productive capacity → increase
LRAS → potential economic growth.
- As export sector grows→ demand
for labour increases →
unemployment falls and better
utilisation of resources.
67
What are the advantages of International Trade for Producers?
- Larger market size as some goods
are exported → increases export
revenue.
- Reap IEOS due to large scale
production → lower long run average
costs
- Incentive to be dynamic efficient and
invest in R&D to remain competitive
- Technological diffusion → firms learn
new processes → increases
efficiency→ lowers cost
68
What are the advantages of International Trade for Consumers?
- Trade based on CA →higher
consumption possibility
- More efficient production and IEOS
due to larger scale of production →
may translate to lower prices
- More variety and choice → due to
import and export from different parts
of the world
- Opens domestic market to more
competition→ drives efficiency →
better quality, lower price and higher
consumer surplus.
69
What are the disadvantages of International Trade for Producers?
- Domestic producers may have to
shut down if foreign firm practices
dumping→ may cause
unemployment and wastage of
resources in the country
- Domestic firms cannot compete on
such low price.
70
What are the disadvantages of International Trade for Consumers?
- Over-reliance on imported goods →
imports of essentials may fall during
crisis → material SOL may fall.
- Dumping → may lead to
monopolisation by foreign firms, as
local firms cannot compete at the low
prices→ foreign monopolies exploit
the consumers by charging high
prices.
- Excessive reliance on imports →
faced with imported inflation in the
case of a weak currency.
71
What are the disadvantages of International Trade for the Government?
- Economic instability as economic
growth largely depend on external
factors (like net exports)
- Structural unemployment as country
shifts focus to more export led
economic growth
- Trade encourages firms to set up
factories in developing countries→
pollution levels go up in those
countries→ non-material standard of
living drops.
72
Summary of advantages and disadvantages of International Capital Flows on pg 23
73
What are the advantages of International Capital Flows on the Government?
- Rise in FDI increases overall
investment leading to increase in AD,
thus increases RNY and hence actual
growth
- Better diffusion of technology and
transference of knowledge→ increases
productive capacity → increases LRAS
→ increases national output →
potential economic growth
- Relocation/outsourcing/offshoring by
developed countries → creation of jobs
in developing countries → reduces
unemployment
74
What are the advantages of International Capital Flows on Producers?
- Learn new skills and technology from
the developed counterparts→ lower
average cost of production → higher
profits
- Relocation/outsourcing/offshoring and
access to cheaper resources → lower
lower average cost of production →
higher profits
75
What are the advantages of International Capital Flows on Consumers?
- Better technology → better quality and
cheaper products
- Higher productivity → higher wages →
higher material SOL
76
What are the disadvantages of International Capital Flows on the Government?
- instability of domestic currency
due to the speculation by foreign
investors
- Sectors that receive FDIs grow
faster and more efficient that the
other sectors→ widens income
gap → economic growth is not
inclusive
- Rise in pollution as firms choose
locations where environmental
concerns are limited → economic
growth is not sustainable
- Hollowing out of industries in
countries with higher production
cost → rise in unemployment
77
What are the disadvantages of International Capital Flows on Producers?
Foreign MNCs with large funds
(portfolio investments) in the country
→ stiff competition for domestic
producers.
78
What are the disadvantages of International Capital Flows on Consumers?
Foreign control of the domestic
market → may eventually lead to
higher prices
79
What are the potential benefits of international capital flow to the government?
a) FDI is an engine of growth and creates job opportunities
-Increase both actual and potential economic growth
-Reduce unemployment
80
What are the potential benefits of international capita flow to producers?
a) Higher profits enjoyed by firms
b) Foreign producers stimulates growth of domestic firms
81
What are the potential benefits of international capital flow to consumers?
Increase household income and improves material SOL
82
What are the possible costs of international capital flow to governments?
a) Economic instability caused by hot money due to speculative activities
-Unstable exchange rate
-Negative impact on trade and economic growth
-Imported inflation
b) Widening of income inequality and threatening inclusive economic growth
c) Shifting of highly polluting industries by developed countries
d) Hollowing out of industries and unemployment in countries with higher COP
83
What is Outsourcing?
Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were done by company's own employees
84
What is Offshoring?
Offshoring is the relocation of a business process from one country to another (typically an operational process, such as manufacturing, or supporting processes, such as accounting)
85
What are the possible costs of international capital flow to producers?
Foreign control of domestic industry
86
What are the possible costs of international capital flow to consumers?
Higher price of goods and less choice
87
How does international capital flow result in economic growth and potential economic growth?
-Hot money -> increase in availability of funds for borrowing at lower interest rates -> cheap funds for domestic firms to borrow to increase production as well as increase domestic investment -> increase in I -> increase AD -> increase in RNY through multiplier process -> economic growth is achieved
-Inflow of capital goods and technology as well as transference of knowledge brought into the economy by FDIs -> increase in productivity and productive capacity -> increase LRAS -> further increases national output -> increases potential growth
88
How does international capital flow result in reduced unemployment?
-Increase in real GDP -> firms have to hire more workers -> demand for labour rises -> more workers hired to increase output -> lowers country's demand-deficient unemployment
-When firms from developed countries outsource/offshore part of their production process to developing countries, more jobs are created for the workers in the country
-Entrance of foreign firms -> growth not just in the industry entered, but as well as other related industries such as logistics and construction -> more jobs created -> further reduce country's unemployment rate
89
How does international capital flow result in higher profits for firms?
-Globalisation -> encouraged firms from developed countries to relocate their productions to countries where wage costs are lower -> lower unit labour costs
They will also gain access to cheaper raw materials -> reduce unit COP -> higher profits
-Another gain from FDI is higher revenue by tapping on the potential markets. E.g. many foreign firms undertook direct investments in China to take advantage of the rising income of consumers in the emerging economy
-Industries and sectors with intensive FDI -> have access to more efficient machines -> higher average labour productivity -> lower unit COP -> higher profits
90
How does international capital flow result in foreign producers stimulating growth of domestic firms?
-Domestic producers get to learn from foreign MNCs and gain access to technical expertise and effective business management skills -> greatly help domestic producers to grow -> growth of whole industry
-Competition from foreign firms help to motivate domestic producers to innovate and embark on R&D towards greater efficiency to compete better and maintain market share in the domestic market
-Presence of foreign firms -> relies on domestic producers such as transportation and F&B industry -> domestic producers enjoy larger demand -> higher revenue and profit
91
How does international capital flow result in increased household income and improved material SOL?
Industries and sectors with intensive FDI tend to have higher average labour productivity due to the use of more efficient machines.
Higher productivity -> higher wages for workers -> greater purchasing power for consumers -> material SOL increases
92
How does hot money cause unstable exchange rate?
Short-term capital inflows caused by hot money -> increase in demand for domestic currency -> appreciation of country's currency
Short-term capital outflow caused by hot money -> increase in supply of country's currency -> depreciation of currency
Such rapid changes in country's exchange rate will lower confidence in country's exchange rate
93
How does hot money cause negative impact on trade and economic growth?
Unstable exchange rate caused by volatility in capital flows will have negative impact on business confidence on the country's economy -> fall of net exports due to lowered foreigners' confidence
Fall of business confidence -> foreign investment falls
Fall in net-exports -> fall in AD -> (through multiplier process) -> lower national output -> slow down economic growth and may even lead to recession
*TBC*
94
How does hot money cause imported inflation?
outflow of hot money -> massive capital outflow -> country's currency depreciates significantly -> import prices increase -> prices of imported resources will be more expensive -> country's production costs increase -> cost push inflation
95
How does FDI cause widening of income inequality?
The sector that attracts more FDI are generally modern and more advanced sectors in developing economies -> tend to employ more skilled workers and are willing to pay them higher wages -> FDI tends to widen the inequality/imbalances between the modern and the backward sectors of the economy as well as between skilled and low-skilled workers
Restructuring to higher value added industries as well as relocation and outsourcing/offshoring of lower skilled production process in many developed countries -> increase in demand for skilled workers and fall in demand for lower skilled workers -> wider income disparity between those with relevant skills and the rest who have been displaced, with low or no income in developed countries
96
How does FDI cause shifting of highly polluting industries to developing countries?
Developing countries utilise lax environmental standards to court MNCs, especially with emergence of more low-cost rivals -> developing countries more likely to face environmental degradation compared to developed countries which impose stringent environmental regulations -> fall in non-material SOL for developing countries due to developed countries shifting their polluting industries to developing countries
Environmental pollution is a form of negative externality -> deadweight loss to society and a lack of allocative efficiency (overproduction)
97
How does FDI cause hollowing out of industries and unemployment in countries with higher COP?
US as example:
US Firms move production plants to developing countries due to lower COP -> reduces number of jobs available in US -> unemployment in US
98
What does "Hollowing out" refer to?
"Hollowing out" refers to the deterioration of a country's manufacturing sector when producers move to lower cost countries.
99
Why does Offshoring make it difficult for governments to attain its macroeconomic aims of full employment?
US as example:
US Firms move production plants to developing countries due to lower COP -> reduces number of jobs available in US -> unemployment in US -> macroeconomic aim of full employment not attained
100
How does FDI cause foreign control of domestic industry?
MNCs setting up production plant in developing countries or by raising stake in company through portfolio investment -> local firms faced with greater foreign competition -> smaller less efficient firms are not able to survive competition -> lose market share to foreign firms -> foreign firms eventually gain control of domestic industry
101
How does FDI cause higher prices of goods and less choice for Consumers?
Domination of foreign firms -> decrease level of market competition -> foreign firms able to charge higher prices -> lower consumer surplus and less choices for consumers
102
What is Labour?
The work time and work effort that people devote to producing goods and services is called labour
103
What are the positive impacts of international movement of labour to the Government?
a) Increase in remittance and income level from migrant workers
b) Alleviation of skill shortage can help relax constraint on economic growth
c) Increase in skills and knowledge
d) Diversification of the economy
104
What are the potential benefits of international movement of labour to Consumers?
a) Increase in income and SOL
105
What are the potential benefits of international movement of labour to Producers?
a) Higher profits
106
What are the negative impacts of international movement of labour to the Government?
a) Brain Drain
b) Increase in unemployment in certain sectors in the country
c) Income inequality
d) No incentive to climb up the value chain
107
What are the negative impacts of international movement of labour to Producers?
a) Lower incentive to innovate
108
What are the negative impacts of international movement of labour to Consumers?
a) Loss of income
109
How does international movement of labour result in increase in remittance and income level from migrant workers?
Migrant workers in developing countries receive higher income compared to what they earn in their own countries and remit a large sum of their income back -> improved living standards in their domestic countries
CONSUMPTION rises due to an increase in remittance being sent back by migrant workers, their families in their home country experiences a rise in incomes
INVESTMENT rises because families with small farms and businesses have more funds to invest in farm machinery and other equipment to raise productivity -> increase in LRAS in home country due to increase in I -> increases quality and quantity of resources -> sustained economic growth
110
How does international movement of labour result in alleviation of skill shortage which could help relax constraint on economic growth?
Influx of foreign talent -> enhances quality and quantity of labour and increases productive capacity -> increase in LRAS -> potential economic growth
Highly skilled segments of the population in developing countries may find
opportunities and choose to work in developed countries where there are skill shortages -> increases skilled labour supply of developed countries -> enjoy increase in quality and quantity of labour -> lowered wages and COP due to increase in supply of labour -> increase in SRAS and LRAS -> sustained economic growth in developed countries
Higher skilled workers from developed countries may move to developing countries and take on managerial roles where skills may be lacking in developing countries -> shares expertise knowledge with local counterparts -> contributes positively to economic growth
111
How does international movement of labour result in increase in skills and knowledge?
Such migration of workers will also lead to an increase in skills when they return to their domestic countries and transfer their knowledge -> raise productivity levels in home country -> lower unit COP and increase productive capacity -> actual and potential economic growth
112
How does international movement of labour result in diversification of the economy?
Influx of foreign talent allows emerging economies to develop new niche areas especially in diversifying the economy by allowing the economy to move up the higher value-added manufacturing ladder, or move into the services sector
113
How does international movement of labour result in increase in income and SOL?
Migrant workers employed overseas are attracted by higher pay and better living conditions. With higher income, their material SOL increases
114
How does international movement of labour result in higher profits for producers?
With greater mobility of labour among countries, firms are able to employ migrant workers who tend to command lower wages compared to local workers -> lowers average COP -> higher profits enjoyed by producers
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How does international movement of labour cause Brain Drain?
Outflow of skilled labour from developing countries -> fall in quality and quantity of resources within developing countries -> loss of productive capacity
Loss in talents -> fall in potential growth-> fall in LRAS
This loss of talented skilled labour might impede their ability to progress to higher-value-added production in the future -> may not be able to keep up with the competition in the world
116
How does international movement of labour cause increase in unemployment in certain sectors in the country?
When developed countries set up their companies in developing countries, the top tier management positions may be filled by those from the developed countries -> dominance of foreigners in high skilled jobs even though there may be sufficient supply of local talent in developing countries that could have filled the high skilled jobs -> unemployment of local high skilled workers in developing countries
As developed countries outsource low waged jobs to developing countries -> rise in unemployment of such jobs in their own home country
rise in inflow of labour from developing countries -> depress wage rates especially for some low skilled jobs
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How does international movement of labour result in income inequality?
While outsourcing has created job opportunities in developing countries, these opportunities often benefit only a privileged minority and only exacerbated the existing income inequalities within the country.
118
How does international movement of labour result in no incentive to climb up the value chain?
Firms who make use of cheap migrant labour tend to become less driven and lack incentive to adopt new technology -> no motivation for firms to move up the value chain
119
How does international movement of labour result in lower incentive to innovate for producers?
When domestic firms have cheap migrant workers as an alternative to domestic
workers, producers are less incentivised to improve the method of production or
improve labour productivity through automation.
120
How does international movement of labour result in loss of income for consumers?
Influx of foreign workers -> loss of jobs among domestic workers -> loss of income for those affected -> lowered non-material SOL
121
Summary of advantages and disadvantages of international movement of labour on pg 26
122
What are the three main categories of Globalisation?
-International Trade
-Capital flows
-Labour movements
123
What are the advantages and disadvantages of Globalisation on the economy?
Advantages:
-Increase actual and potential growth
-Lower unemployment
Disadvantages:
-Structural unemployment
-Vulnerable to external factors and global shocks
-Income inequity
-Environmental degradation
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What are the advantages and disadvantages of Globalisation to Producers?
Advantages:
-Access to larger global markets -> larger demand -> larger revenue
-Able to reap large iEOS, access to technology, cheaper resources -> lower production cost
-Access to cheap funds from short-term capital inflows
Disadvantages:
-Lower market share in domestic market
-Strong competition from foreign imports and foreign firms in domestic market
125
What are the advantages and disadvantages of Globalisation to Consumers?
Advantages:
-Lower prices, higher consumer surplus
-Variety
Disadvantages:
-Possibility of higher prices and lower consumer surplus in the long run
126
What are the three main policies to address macroeconomic problems caused by globalisation?
a) Protectionism
b) Regional economic integration and trade agreements
c) Trade and Industrialisation policies
126
What are the key features of Singapore's trade structure?
-High degree of openness to international trade and factor flows
-No significant natural resources
-Rapid growth of intra-industry trade
-High degree of foreign influence
127
What is Protectionism?
Protectionism is defined as the act of imposing economic policies aimed at restricting trade between countries, designed primarily to protect domestic producers and workers from foreign competition
128
Note: While protectionism reduces trade, it does not eliminate it such that it results in an autarky (which means zero trade). Thus, the costs of protectionism should not be the elimination of the
benefits of free trade, but rather a reduction in these benefits.
129
Why should countries adopt Protectionism?
a) To protect infant (sunrise) industries
b) To protect declining (sunset) industries
c) To prevent foreign control of domestic market through dumping
d) To correct BOT deficit temporarily
e) To encourage production of goods of strategic importance
f) Protect against goods that gives rise to negative externalities
130
Why should a country adopt Protectionism to protect infant industries?
An infant industry is one which has potential comparative advantage but is too young to realise this potential in the face of more established foreign competitors
▪ Free trade will expose the domestic infant firms to strong competition from
imported goods. Given the infancy stage of the domestic firms (thus operating
at a smaller scale and higher unit cost), they may not be able to compete with
the foreign firms or products.
▪ These firms in the infant industries need to be protected so that they can reap
the EOS that can help to lower their production cost, in order to grow and
develop the comparative advantage and able to compete on more equal terms.
▪ Protection of infant industries is justifiable if the protection is removed once the industries are established.
131
Why should a country adopt Protectionism to protect declining (sunset) industries?
▪ A country could have lost its comparative advantage in certain industries. This means that there are always some declining industries.
▪ Intense competition from free trade can hasten the decline of such declining
industries and may lead to significant rise in structural unemployment due to
occupational immobility.
▪ Protection would allow the industry to decline gradually and giving time for firms
to restructure their business and move their resources to other industries. It will
also reduce the structural unemployment, allowing the workers time to be
retrained to acquire the skills required in other industries.
132
Why should a country NOT adopt Protectionism to protect infant industries?
▪ A temporary net welfare loss from higher domestic prices is expected from
such restrictions while the industry is still developing. However, this loss may
be permanent if the firms in the protected industry never realised the expected
comparative advantage and thus never become competitive.
▪ It may be difficult to determine which new industries have the potential to
become internationally competitive. If industries with no potential comparative
advantage are protected, it can lead to a misallocation of resources.
▪ Protecting the industry from competition during the growing stage may reduce
the pressure and incentive for it to reduce its average costs, causing the firms
to be complacent and remain inefficient over the long run and become too
dependent on protection.
▪ Once protection is in place, it is politically difficult to remove.
133
Why should a country NOT adopt Protectionism to protect declining industries?
▪ Protection cannot be sustained in such cases as it goes against the principle
of comparative advantage. If the industry has indeed lost its comparative
advantage, then it would only be efficient to transfer resources into other
industries with comparative advantage.
▪ A problem that could arise if such protection is removed would be firms and
employees within the industry will resist the change. Even if the economy does
recover, such protection is not so easily removed once they are in place.
134
Why should a country adopt Protectionism to prevent foreign control of domestic market through dumping?
▪ With free trade, foreign producers might engage in dumping (where prices are
charged below marginal cost of production).
▪ This is possible if they practice predatory pricing (where prices are charged
below average cost of production), or their government is subsidising them.
▪ Dumping allows these foreign producers to further reap economies of scale
and increase their share of the domestic market.
▪ Therefore, this may drive the domestic firms out of the industry resulting in the
foreign company gaining control of the market and subsequently charging
higher prices.
▪ Thus, government impose trade restrictions on imports so that locally produced
goods will be competitive.
▪ Note: According to WTO, dumping through government’s subsidies is illegal.
▪ Example: China being hit by anti-dumping investigations into its steel exports.
135
Why should a country NOT adopt Protectionism to prevent foreign control of domestic market through dumping?
▪ It is difficult to prove that the foreign goods are being subsidised so it will be
difficult to know when to impose trade barriers. The differences in price could
be due to lower production costs (i.e., comparative advantage) rather than
subsidies.
▪ Domestic consumers of the cheap imports will not welcome the tariffs.
▪ Foreign countries may retaliate by imposing restrictions on the home country’s exports. Hence, effort to protect domestic industries may ‘backfire’, leading to hardship for domestic exporting industries.
136
Why should a country adopt Protectionism to correct BOT deficit temporarily?
▪ For countries suffering from an acute balance of trade deficit, unlimited inflow
of imports will worsen their condition.
▪ Trade restrictions may be required to cut down on the import of non-essentials
when a country has a serious trade deficit.
137
Why should a country NOT adopt Protectionism to correct BOT deficit temporarily?
▪ Trading partners may retaliate and impose their own import restrictions thus
causing the initiating country’s exports, output and employment to suffer
subsequently, thus affecting the macro goals and SOL. In a free market and
flexible exchange rate system, a balance of payments deficit should cause the
value of home currency to depreciate. This increases their exports’ price
competitiveness and hence automatically improving their balance of payments.
▪ With trade restrictions, foreigners’ income level will fall because their export
revenue will decrease. Trading partners will use this as reason to retaliate by
imposing trade restrictions on the home country’s exports. This will cause a fall
in the home country’s exports and no improvement to its balance of payments
position.
Note:
▪ The root cause of the trade deficit has to be tackled. If the deficit is due to a
lack of price competitiveness, poor quality or marketing, then imposition of
trade restriction will not be a long-term solution. Instead, supply-side policies
should be adopted to improve the price and quality competitiveness of its exports.
138
Why should a country adopt Protectionism to encourage production of goods of strategic importance?
▪ Where a nation is dependent on foreign sources for goods of strategic
importance, there is a danger of supply being cut off in the event of war.
▪ Even though domestic producers are not as efficient, trade restrictions could
be imposed on the import of these goods to encourage domestic production
and ensure survival of the plant and skilled labour.
139
Why should a country NOT adopt Protectionism to encourage production of goods of strategic importance?
▪ The definition of essential industry may pose a problem. If the term is broadly
defined, many industries may be able to win import protection and the
argument loses its meaning.
140
Why should a country adopt Protectionism to protect against goods that gives rise to negative externalities?
▪ Certain products such as cigarettes, drugs may be considered socially
undesirable and restrictions or prohibitions placed on their importation.
▪ More recently, the EU has introduced policies to restrict import of palm oil from
2021 as it cites the need to stop massive deforestation in Malaysia and
Indonesia to produce palm oil.
141
Why should a country NOT adopt Protectionism to protect against goods that gives rise to negative externalities?
▪ There may be other alternative ways of accomplishing the same objective
which may have a lower economic cost than the costs of import protection. E.g.
Excise duties rather than custom duties.
142
Note:
In summary, protectionism should be used as a short-term measure to
prevent inefficiencies. Once better long-term measures are put in place,
protectionism must be removed.
143
What are the impacts of Protectionism on firms?
[Impact on Firms] Firstly, protection raises the market power of domestic firms
hence resulting in greater allocative inefficiency. Also, being flushed with
monopoly profits, domestic firms tend to end up being productively inefficient as
they have less need to improve operating efficiencies and minimize costs
144
What are the impacts of Protectionism on Consumers and the Government?
[Impact on Consumers and Government] Secondly, when a country engages in
protectionism, it creates a “beggar thy neighbour” effect where exports, output
and income of its trading partners are reduced, which then in turn curbs the
exports, output and employment of the former, subsequently affecting the
country’s macro goals and SOL.
145
What are the different types of Trade Restrictions?
1) Tariffs
2) Quotas
3) Export Subsidies
4) Exchange Control
5) Embargoes
146
What are Tariffs?
A tariff is a tax levied on imports mainly to protect home industries by making imports less competitive than local products
147
How would Tariffs affect imports and economic growth?
Import tariffs -> increase price of imports -> reduce total expenditure on imports (assuming demand for imports is price elastic) -> lower country's imports
Import tariffs -> higher import prices -> domestically produced goods viewed as cheaper now -> causes consumers to switch expenditure from imports to domestic products -> increased consumption of domestic goods -> increased production of domestic output -> increased employment, National Output (or National Income) -> increase economic growth
Graph of Tariffs on pg 33
148
What is Import Substitution Industrialisation (ISI)?
The key idea is to generate economic growth by reducing foreign competition to encourage domestic production
149
How does ISI result in economic growth?
Imports restricted -> domestic industries encouraged to produce previously imported goods -> goods produced domestically are then sold locally -> increased domestic consumption -> rise in AD -> rise in NY -> economic growth
If the domestic industries can produce these goods in sufficient quantities, they may also be considered for exports -> further adding to economic growth of the country
In addition, such a policy can also PROMOTE MORE EMPLOYMENT in the domestic sector by allowing the domestic industries to thrive -> creating higher demand for labour in the absence of foreign competition
150
What are the limitations of Tariffs?
a) Tariffs increased price of imports. Unless it is sufficiently large, it will have little impact in reducing quantity of imports if the demand for imports is price inelastic
b) Domestic consumers have to pay a higher price for imported goods and this could reduce material their SOL. This also means that more inefficient local producers are able to sell their product
c) If tariffs are imposed on imported goods such as steel, then domestic firms using steel in their production will incur a higher COP -> passing on the higher COP to consumers
d) Deadweight loss is created due to the misallocation of resources
e) Retaliation measures may be undertaken by the exporting countries
151
What are Quotas?
A quota takes the form of a physical limitation on the quantity of the commodity which is allowed to enter the country in a given year
-A quota may also be set on the value or volume of imports.
- It is usually enforced by issuing licenses to some group of individuals or firms
152
Note:
Comparison between Tariff and Quota:
Unlike a tariff which curbs imports by raising its price, the quota instead works
by DIRECTLY REDUCING the quantity of imports. Hence, with less imports
available, domestic consumers have to buy more from domestic producers.
Nevertheless, since the import quota reduces the supply of the good in the
domestic market, the price of the good will rise. However, this price rise has
no impact on the quantity imported, which is already fixed by the quota.
153
What are the limitations of Quotas?
-Quotas do not bring in revenue for the Government
-It is usually set on the basis of certain volume which may grow increasingly out of date with times. This might penalise a local firm that wishes to expand its production.
-It might invite retaliation measures by exporting countries
-Quotas may not deal with the underlying cause of the BOT deficit which is uncompetitive exports. They reduce competition for domestic firms and make them less efficient (and more complacent)
-They may also lead to retaliation, with an undesirable decrease in specialisation and world trade
154
What are Export Subsidies?
▪ These are given to domestic producers to help improve their export
competitiveness.
▪ Alternatively, subsidies also allow domestic firms to export their products cheaper
in a process known as dumping (this is a means of increasing exports rather than
reducing imports).
▪ Subsidies can be given in the form of outright cash payments to a domestic
producer after a sale has been completed or they could also be indirect in the form
of tax concessions, loans at below market interest rates or sale of raw materials by
the government to producers at more favourable prices, etc.
Graph of Export subsidies on pg 36
155
What are the limitations of Export Subsidies?
It may lead to a drain in government resources as subsidies involve government expenditure that could have been spent on development projects. Taxpayers eventually pay for the subsidies
156
What are Exchange Controls?
▪ To pay for imports, the importers have to obtain currencies of foreign suppliers.
▪ Importers requiring foreign exchange must apply to the Central Bank which can
hence control the volume of imports by controlling the issue of foreign currency.
▪ By restricting the availability of such foreign currency through some system of
exchange control, the government is able to reduce the purchase of imports.
157
What are the limitations of Exchange Controls?
▪ May cause the development of black market for foreign exchange and encourage
smuggling.
▪ Creates uncertainty among local producers depending on imported raw materials
to produce their product as they are unable to plan ahead.
158
What are Embargoes?
▪ They are total ban on certain imports for different reasons.
▪ They have also been used as diplomatic tools by governments against each
other. For example, The United States has maintained embargoes against
various foreign countries, such as Cuba, Iran, Iraq, Libya, North Korea etc for
security and political reasons.
159
What are the limitations of Embargoes?
May encourage smuggling and development of black markets
160
What are the positive impacts of Protectionism on the Government/Economy?
-Increases Economic growth
-Reduces Cyclical Unemployment
-Improves BOP balance via an improvement in BOT
161
What are the negative impacts of Protectionism on the Government/Economy?
-Cost-push Inflation
-Negative impacts on Economic Growth
162
Note:
When a government adopts protectionist measures on a wide range of imports, it is often taken to address domestic issue such as unemployment, and balance of trade deficit.
163
How does Protectionist Policy alleviate Cyclical Unemployment?
Expenditure switching policies such as import tariffs will divert demand for imports to demand for domestically produced goods. -> increase in production of domestic goods -> increase in the derived demand for labour-> reduce problem of unemployment
164
How does Protectionist Policy improve BOP balance via an improvement in BOT
Reduction in import expenditure can reduce the current account deficit in the BOP
165
How does Protectionist Policy result in economic growth?
- Government protectionist policies essentially make imports relatively more
expensive this reducing the level of competition in the country for the
domestic producers. so that consumers will switch to domestically produced
goods.
- Consumer expenditure on domestic goods will then rise. AD will increase,
thereby increasing Real GDP increase through the multiplier process.
- Hence, by reducing import expenditure and diverting consumption to locally
produced goods, the government is able to restore economic growth.
166
How does Protectionism result in cost-push inflation?
If tariffs are imposed on raw materials and intermediate inputs -> higher COP -> fall in SRAS -> cost-push inflation
167
How does Protectionism result in negative impacts on Economic Growth?
Country imposes trade barriers on imports -> trading partner will experience fall in NY -> reduced purchasing power to buy goods from the country that initiated protectionism
In the long run, protectionism is mutually damaging to all countries involved
Furthermore, it is likely that countries subject to trade restrictions will retaliate. When this occurs, protectionism will be counter-productive. The initial benefit arising from lower import expenditure will be partially offset by the fall in export revenue. The final improvement on net exports may be limited
168
Note:
➔ It should be noted that while the economy may benefit from protectionist measures in the short run, it is not a long term solution as it will creates negative repercussions on the economy. Protectionism is at best a short term solution.
➔ In addition, if the underlying root cause of unemployment and trade deficit is the loss in comparative advantage to other economies, protectionism does not address the root cause. Other policies such as supply side policies should be adopted to develop new areas of comparative advantage.
169
What are the negative impacts of Protectionism to producers?
- Firms in the protected industries stand to gain. This is because imports have
become less competitive due to tariffs and quota. The less efficient firms in the
protected industries will now be able to survive even though they experience
comparative disadvantage in the production of the goods. For example, tariff on imported steel can allow domestic firms producing steel to survive.
- However, firms in other industries can be made worse off. As steel is used as an
input, producers in car manufacturing and construction industries will face a
higher cost of production.
170
What are the negative impacts of Protectionism to consumers?
- Similar to producers, workers in the protected industries stand to gain. This is
because firms in the protected industries will enjoy an increase in output. In order
to produce more goods, firms will hire more workers. Using the same example
that steel industry is protected from imports, the unemployment among steel
workers will reduce. Consequently, the steel workers will not experience a fall in
income due to unemployment. Their material standard of living is preserved.
- However, as explained above that firms will have to face a higher cost of
production, they will pass on the higher cost to consumers in the form of higher
price. By and large, consumers will pay more for the final products. Consumer
welfare is reduced as a result.
171
What is Economic Integration?
Economic Integration refers to the process where neighbouring countries integrate as one economic unit to take advantage of the extended market and bring about better allocation of resources
172
What are Free Trade Areas?
This refers to a trade bloc whose member countries abolish all tariffs and adopt non-tariff barriers among themselves but each can retain whatever restrictions it wants for non-member countries. It is a form of preferential trading arrangement to give special preference or trade concessions to member states
173
Note:
To create a Free Trade Area, countries have to first sign a Free Trade Agreement, which is a legally binding international treaty between two or more trading partners that seek
to promote trade by reducing barriers to trade in goods, services and investments. They may also allow for freer mobility of investments and labour, as well as other forms of social and political agreements.
174
Why would other countries want to sign FTAs with Singapore?
-They expect more trade creation than trade diversion
-It enables the country's exports to bypass trade barriers and gain access to third party markets that also has a FTA with Singapore
-FTAs draw in foreign investments because foreign firms need to set up processing operations here in order to meet the requirements stipulated by the Rules of Origin.
-Singapore could offer to transfer knowledge and technology to the other country
-Extradition treaties and cooperation in security issues
-Political considerations
175
What is the Customs Union?
This refers to a trade bloc where two or more countries agree to free all international trade barriers and to also levy a common set of external trade barriers against non-member countries
176
What is a Common Market?
A Common Market is where member countries operate as a single market.
177
