The International Economy Flashcards
(55 cards)
Globalisation
The process of increasing economic integration of the worlds economies, making countries increasingly dependent upon each other
Main characteristics of globalisation
Growth of international trade and trade liberalisation- encouraged by World Trade Organisation (WTO). Greater international mobility of both capital and labour. Increase in power of multinational corporations. Decrease in government power to influence decisions made by multinational companies (or transnational)
Consequences of globalisation for less developed countries
Globalisation has destroyed local and national products which have been overwritten by identities and cultures by US world brands such as McDonalds or Coca-cola. There has also been controversy concerning the treatment of local labour by MNCs.
Key factors driving globalisation
Cost of transport, technological advances, trade barriers, differences in tax systems
Economic benefits of globalisation
Encourages both producers and consumers to reap benefits from division of labour and economies of scale. More competitive markets reduces monopolies and cause businesses to seek cost-reducing strategies. Trade can drive faster economic growth.
Economic costs of globalisation
Rising inequality as the gains are usually unequal. Threats to global environments usually from the overuse of resources which can cause deforestations for example. Macroeconomic fragilities as external shocks can spread to others with more interdependency. Workers may suffer structural unemployment from out-sourcing of manufacturing to lower-cost countries
Less developed and more developed countries
Less developed- low national income per head, high population growth, low human capital, high unemployment, poor infrastructure, over dependence on exports of a few primary goods
More developed- high degree of economic development, high income, standard of living, human capital, infrastructure
Absolute and Comparative Advantage
Absolute- can produce more of a good than other countries from the same amount of resources.
Comparative- the country with the least opportunity cost when producing a good possesses a comparative advantage
Assumptions of comparative advantage
No externalities in production and consumption. High mobility of labour and capital. Low transport costs. Constant returns to scale. No trade barriers
Factors affecting comparative advantage
Natural resources available. Unit wage costs. Infrastructure. Non-price factors (competitiveness). Import controls. Exchange rates. Investments.
Efficiency gains from trade
Allocative: competition from lower cost import sources drives market prices down which reduces monopoly profits and increases real incomes.
Productive: specialising and selling in larger markets encourages increasing returns to scale causing lower long run average costs of production.
Dynamic: may see growing numbers of innovative businesses who invest more in R&D and human capital.
X-inefficiency: intense competition provides discipline for firms to keep costs under control to reduce waste
Import controls and protectionist policies
Tariffs- taxes imposed on imports from other countries entering a country
Quotas- physical limits on the quantities of imported goods allowed into a country.
Export subsidies- money given to domestic firms by gov to encourage the sale of products abroad
Reasons for protectionist policies (import controls)
Developing countries use protectionism to protect infant industries from established rivals in advanced economies, needed until they develop and achieve full economies of scale, also helps reduce international dependency which reduces vulnerability to external shocks spreading damage. Similarity it can be used to protect older industries from new ones. Helps prevent exploitation by a foreign based monopoly. Over-specialisation can cause a country to become vulnerable to sudden changes in demand or costs and availability of production, can cause of lack of diversity in an economy so import control can allow them to diversify their economy. Politically it is necessary for military and strategic reasons to ensure a country is self-sufficient in resources at a time of war. Can help prevent MNCs shifting capital to low wage countries and exporting output to the original country which would have caused structural unemployment, protects employment.
Arguments against protectionist policies
Resource misallocation- loss of allocative and productive efficiency
Potential for corruption with tariff revenues misappropriated
Higher prices for consumers, regressive for poorer people
Barriers to entry increases monopoly power of domestic firms
Customs union and free trade areas
Free trade area is where member countries abolish tariffs on mutual trade but each member determines its own tariffs on trade with non-member countries, whereas for customs unions they each share a common external tariff barrier for non-members
Balance of payments
A record of all the currency flows into and out of a country in a particular time period. This it involves the current account, the capital account and the financial account
Current account
Measures the flow of money in and out of a country through exports and imports of goods and services together with primary and secondary income flows. Reflects an economy’s international competitiveness
Primary and secondary income
Primary- inward income flowing into the economy in the current year generated by UK-owned capital assets located overseas and outward of overseas assets located in UK.
Secondary- current transfers such as gifts of money or international aid and transfers flowing into or out of the economy
The financial account
Includes transactions that result in a change of ownership of financial assets and liabilities between a country’s residents and non-residents such as net balance of FDI or changes to a country’s reserves
The capital account
Includes the transfer of assets without any exchange of economic value, such as debt forgiveness, gifts. Also involved non-produced and non-financial assets such as the transfer of land ownership between countries
Consequences of a current account deficit
Short run deficits or surpluses do not pose a problem, a persistent long run imbalance indicates disequilibrium. The larger the deficit the greater the problem. In short run a deficit allows a country’s residents to enjoy boosted living standards by imports but in long run the decline of the country’s industries from international competitiveness lowers living standards. Short run generates more output for economy but long run can shut domestic business down
Consequences of a current account surplus
Small surpluses may be unproblematic but a large surplus has it faults, the balance of payments must balance for the world as a whole so if one country has a large surplus that means another has a large deficit and they will be unable to reduced the deficits unless countries take action to reduce their surplus, deficit countries can then be forced to impose import controls which would hurt trade and cut world economic growth and to an extreme a world recession. A surplus can also be an important cause of domestic inflation as it is an injection of AD into the circular flow of income which raises price levels and if an economy is close to full capacity there is higher inflationary pressures
Factors influencing current account balance
Productivity- improving labour productivity and output can help success of supply side policies to improve both price competitiveness and quality of competitiveness of a country’s exports internationally.
Inflation- the rate of inflation relative to trading competitors. If it’s higher, the country’s exports will lose their price competitiveness which can deteriorate the current account balance.
Exchange rate- rising exchange rate increases the foreign currency prices of the country’s exports and reduces their competitiveness, meanwhile import demand rises due to cheaper prices of foreign goods therefore the current account balance falls, opposite for a fall in exchange rates
Policies to correct a deficit
Contractionary monetary or fiscal policy to reduced aggregate demand, which reduces household income and spending on imports.
Direct controls such as import controls, tariffs and quotas to reduce imports.
Devaluation of exchange rate, making imports more expensive and reducing demand for them, while exports become cheaper. Marshal Lerner condition must be met. All short term.
Supply side long run: Subsidise firms to improve innovation and quality of product for international competitiveness to improve exports and domestic demand which may reduce imports to create export led growth
