The International Economy

Question 1

how does international trade benefit consumers ?

Answer 1

decreases prices
&
increases the variety of goods/services

Question 2

what does it mean if a country has absolute advantage in production of a good/service ?

Answer 2

it can produce it using fewer resources at a lower cost than another country.

Question 3

what is comparative advantage ?

Answer 3

when a country can produce a good/service using fewer resources at a lower opportunity cost than another country.

i.e. they have to give up less of another good than another country, using the same resources.

allows a country to specialise in production of that good/service.

Question 4

what is free-trade ?

Answer 4

the act of trading between nations without protectionist barriers, such as tariffs, quotas or regulations.

Question 5

what are the benefits of Free trade ?

Answer 5

+ countries exploit their comparative advantage, which leads to higher output using fewer and increases the worlds GDP, improving living standards.

+ free trade increases economic efficiency by establishing a competitive market, lowering costs of production and increases output.

+ greater consumption due to less trade barriers, leading to large increases in economic welfare.

Question 6

what are the drawbacks of free trade ?

Answer 6

• free trade may lead to loss of jobs for some, since countries with lower labour costs have entered the market creating structural unemployment in the economy.
• environmental damage, from increased manufacturing in particular.

Question 7

what are some reasons in the changes in the pattern of trade in the UK and the rest of the world ?

Answer 7

. comparative advantage
(recent growth in the exports of manufactured goods from developing countries, due to these developing countries gaining a comparative advantage in the production of manufactured goods)

. emerging economies

. growth of trading blocks
(created trade elsewhere, where manufacturing costs of producing is cheaper)

. changes in relative exchanges rates

Question 8

what is protectionism ?

Answer 8

the act of guarding a country’s industries from a foreign competition.

Question 9

how does a tariff impact a country ?

Answer 9

price of foreign goods and imports increases.

therefore, quantity demanded of domestic goods increases, whilst quantity demanded for imports decreases.

Question 10

what is quota ?

Answer 10

limits the quantity of a foreign produced good that is sold on the domestic market.

sets a physical limit on a specific good imported in a set amount of time.

leads to a rise in the price of that good for domestic customers, reducing consumer surplus.

Question 11

what are export subsidies ?

Answer 11

a form of government intervention to encourage goods to be exported rather than sold on a domestic market.

(could be through direct payments, tax relief, or provide cheap and easy access to credit)

Question 12

what are embargoes ?

Answer 12

the complete ban on trade with a particular country.

(usually politically motivated)

Question 13

what is excessive administrative burdens (red tape) ?

Answer 13

excessive attempts to increase the cost of trading, and discourage imports.

Question 14

what if the effect of “red tape” on developing countries ?

Answer 14

makes it difficult or these developing countries to access the market.

Question 15

what are the main forms of protectionism ?

Answer 15

. tariff
. quota
. embargoes
. export subsidies
. “red tape”

Question 16

what are the causes and consequences (adv & dadv) of countries adopting protectionist policies ?

Answer 16

+ reduced trade deficit

+ support and develop domestic industry, to a point where the country can return to free trade

+ correct market failure (demerit goods, and protect society from them

+ protect domestic jobs

• could distort market and lead to allocative inefficiency, loss in consumer welfare

. imposes extra cost on exporters, which could lower output and damage the economy

. could mostly damage those on low and fixed incomes due to the regressive nature of tariffs

. some countries may become hostile

. government failure

Question 17

what is a customs union ?

Answer 17

occurs when a group of countries agree to have free trade amongst themselves and agree on a common external tariff to countries outside the zone.

(e.g. EU)

Question 18

what are some other features of Customs unions other than agreeing on a tariff ?

Answer 18

. safety measure for imported goods (such as food)

. common customs rules and procedures

Question 19

what are the main characteristics of the Single European Market (SEM) ?

Answer 19

• Free movement of goods, services, capital and labour between nations.
• Administrative provisions, laws and regulators are approximated between member nations. This could mean some laws are better suited to some countries, and not so much for others.
• Competition policy is common across the whole of the EU.
• There are common external tariffs.

Question 20

what are the consequences for the UL of its membership in the European union (EU) ?

Answer 20

. trade creation and diversion
(With more trading blocs, trade has been created between members, but diverted from
elsewhere.)

. reduced transactional costs
(cheaper and easier to trade between members of union)

. economies of scale

. enhanced competition
(firms may become more efficient)

. migration

Question 21

what is the role of the World Trade Organisation (WTO) ?

Answer 21

promotes world trade through reducing trade barriers and policing existing
agreements.

Every member of the WTO must follow the rules. Those who break the rules face trade sanctions. In addition to trade in goods, the

WTO covers the trade in services and intellectual property rights.

Question 22

what are the common conflicts between regional trade agreements and the WTO ?

Answer 22

. trading blocks might distort world trade or adversely affect those who do not belong to them

. conflicts between blocs could lead to an increase in protectionism

Question 23

what is the Balance Of Payments ?

Answer 23

a record of all the financial transactions made between consumers, firms, and the government from one country with other countries

states how much is spent on imports, and the value of imports.

Question 24

what is the Balance Of Payments made up of ?

Answer 24

Current account

Capital account

Financial account

Question 25

what is the current account ?

Answer 25

includes all the economic transactions made between countries. the main transactions are: . trade in goods/services . income . current transfers

Question 26

what is the capital account ?

Answer 26

involves transfers of the ownership of assets.

Question 27

what is financial account ?

Answer 27

involves investment (FDI, direct investment, portfolio investment)

Question 28

what does a current account surplus mean ?

Answer 28

there is a net inflow of money into the circular flow of income. (the UK has a surplus with services but a deficit with goods)

Question 29

what does a current account deficit mean ?

Answer 29

the UK spends more on imports from foreign countries, than they earn from exports to foreign countries.

Question 30

what are the causes of a Balance Of Payments disequilibrium ?

Answer 30

DEFICIT - appreciation of the currency (SPICED) - economic growth (incomes increase, more imports) - deindustralisation (declining industries means more goods are imported) SURPLUS - becoming a more internationally competitive country (exports increase, due to lower inflation) - attractiveness to foreign investors (low interest rates, increased investment, greater exports)

Question 31

if there is a current account surplus, what will be the state of the financial and capital account ?

Answer 31

capital and financial account deficit.

Question 32

what are the consequences of investment flows between countries ?

Answer 32

FDI can create employment, encourage innovation, and promote long term sustainable growth.

Question 33

how can Fiscal Policy be used to correct a Balance Of Payments Deficit ?

Answer 33

> increase indirect tax and income tax: + (reduce disposable income and spending on imports) - (retaliation from trading partners if taxes imposed on trading partners > governments could reduce spending to reduce AD: + (less spending on imports) - (governments may have imperfect information, leading to market failure). vice-versa for suplus

Question 34

how can Monetary Policy be used to correct a Balance Of Payments Deficit ?

Answer 34

reducing the supply of money increase interest rates

Question 35

how can Supply-side Policies be used to correct a Balance Of Payments Deficit ?

Answer 35

. increased spending on education and training, greater productivity, country becomes more internationally competitive, exports increase. (- time lag) . deregulation and privitisation to make the economy more competitive, lower AC, reduced prices, increased exports . subsidies . improving infrastructure to make the economy more attractive to investors

Question 36

what is the significance of surplus and deficit for an economy ?

Answer 36

. if imported goods are expensive, there could be cost-push inflation in the domestic economy . could indicate an imbalance in the economy . An imbalance suggests that the UK is reliant on the performance of other countries. If export markets, such as the EU, become weak, UK economic performance will be affected. This was seen during the 2008 financial crisis. . It could become difficult to finance the deficit in the long run. In the US, the current account deficit is financed by Chinese investors buying US securities at low interest rates. If they lose confidence in the US economy, they would stop buying US debt. The interest rates would then have to be increased to encourage investors to buy the debt. This would be damaging to US consumers who have a lot of debt, since repayments would increase, and they would have less disposable income as a result.

Question 37

what is the exchange rate of a currency ?

Answer 37

weight of one currency relative to another.

Question 38

what determines exchange rates ?

Answer 38

the demand for that countries currency.

Question 39

what is a fixed exchange rate ?

Answer 39

where the value of a country's exchange rate is determined by the government compared to other currencies. can be manipulated by the central bank, where they buy or sell the currency to change the price to where they want.

Question 40

what is a managed exchange rate ?

Answer 40

combines characteristics of fixed and floating exchange rate systems.

Question 41

what is a floating exchange rate ?

Answer 41

where the value of the exchange rate is determined by the forces of supply and demand. The currency fluctuates, but it doesn’t float on a fully free market. This is when the exchange rate floats on the market, but the central bank of the country buys and sells currencies to try and influence their exchange rate.

Question 42

how can exchange rates be influenced by the government other than buying the currency (floating exchange rate system) ?

Answer 42

changing interest rates (higher interest rates, makes economy more attractive for investors, leading to investment and an appreciation in exchange rate) quantitative easing (reduce value of the currency) foreign currency transactions (buying and selling foreign currency to manipulate the domestic currency. China kept large reserves of the US Dollar by purchasing government bonds, in order to undervalue the Yuan.)

Question 43

what are the ADV and DADV of fixed exchange rates ?

Answer 43

A: allows for firms to plan investment, because they know that they will not be affected by harsh fluctuations in the exchange rate. D: the government and the central bank do not necessarily know better than the market where the currency should be.

Question 44

what are the ADV and DADV of floating exchange rates ?

Answer 44

ADV: It gives the monetary policy more freedom to focus on other macroeconomic objectives. DADV: the fluctuations in exchange rate can be unpredictable making planning for investment difficult.

Question 45

what is a currency union (Eurozone, Euro) ?

Answer 45

Members of a monetary union share the same currency. This is more economically integrated than a customs union and free trade area. The Eurozone is an example of this. A common central monetary policy is established when a monetary union is formed. The single European currency, the Euro, was implemented in 1999 to form the Eurozone. Monetary unions use the same interest rate. The Euro, for example, floats against the US Dollar and the Pound Sterling.

Question 46

what are the advantages for a country joining a currency union (Eurozone) ?

Answer 46

+ The participating countries have more currency stability, and the currency is less prone to speculative shocks. This gives future markets more certainty, so there is more investment and growth potential. + There are fewer admin fees and less red tape when travelling abroad or exchanging money.

Question 47

what are the disadvantages of joining a currency union ?

Answer 47

+ Labour mobility is limited across Europe due to language barriers. + Moreover, the differences in economic performance between member countries means a common monetary policy might not be effective. + The exchange rate is not flexible to meet each country’s need, such as if they need a boost in exports.

Question 48

What is Economic Growth ?

Answer 48

Is an increase in the country’s real national output. This is caused by an increase in the country’s quality or quantity of factors of production, which causes an outward shift in the PPF.

Question 49

What is Economic Development ?

Answer 49

Refers to living standards, freedom and life expectancy. Covers a more moral side to economic growth rather than normative. Economic development is also concerned with how sustainable the economy is and whether the future generations needs and wants can be met.

Question 50

What are the characteristics of LEDC’s ?

Answer 50

- low life expectancy - high mortality rates - high dependency ratio - Low GDP - fastest population growth - low levels of education - poor standard of living - poor nutrition, lack of access to clean, safe drinking water and a lack of sanitation

Question 51

What are the 3 indicators of economic development ?

Answer 51

HDI (education, life expectancy, standard of living) GNI PPP

Question 52

What are the advantages of using HDI to compare levels of development between countries over time ?

Answer 52

+ It allows for comparisons between countries to be made + it provides a much broader comparison between countries to be made

Question 53

What are the disadvantages of using HDI to compare levels of development between countries over time ?

Answer 53

- HDI does not consider how politically free people are - does not take the environment into account - does not consider the distribution of income into account

Question 54

What is Human Poverty Index (HPI) ?

Answer 54

Indicator of economic development. Human poverty index measures life expectancy, education, and the ability of citizens to meet basic needs.

Question 55

What is Gender related index (GRI) ?

Answer 55

Indicator of economic development. Measures the relative inequality between men and women. It combines HDI with the comparison of gender.

Question 56

What are the factors that affect economic growth and development ?

Answer 56

. Free Trade (The act of trading between nations without barriers) . Promotion of FDI (FDI is the flow of capital from one country to another, in order to gain a benefit from a higher interest rate) . Removing government subsidies (could lead to market failure as I distort price signals.) . Floating exchange rate systems

Question 57

What are the interventionist strategies to influence economic growth and development ?

Answer 57

. Development of Human Capital (Spending on education and training to improve productivity) . Protectionism (Protects domestic industries) . Managed exchange rate system (Floats on the market, but the central banks can influence the exchange rate through buying and selling currency reserves) . Infrastructure Development

Question 58

What is Debt Relief ?

Answer 58

Partial or total forgiveness of debt. In developing countries, debt is deemed to be a significant cause of poverty.

Question 59

What are the barriers to Economic Growth and Development ?

Answer 59

. Primary Product dependency (Commodity prices are highly volatile, making it hard to plan for the future, fall in price leads to a fall in exports incomes) . Savings Gap (In poorer countries, people have to focus on their immediate needs (food, water, shelter), which they only have enough for, which means there is insufficient savings, leading to inefficient capital accumulation. This impedes capital investment) . Foreign currency gap . Capital flight . Debt . Infrastructure

Question 60

What is the foreign currency gap ?

Answer 60

When a country is not attracting sufficient capital flows to make up for a deficit in the capital account.

Question 61

What is capital flight ?

Answer 61

When capital and money leaves the economy through investment in foreign economies.