Theme 4: International Economics Flashcards
(157 cards)
1
Q
What is 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.
2
Q
What is 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.
3
Q
What is 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.
4
Q
What are the 3 assumptions of the Theory of Comparative Advantage?
A
1) Average cost of production is constant
2) No trade barriers
3) No Transport Costs
5
Q
What is the limitation to average cost of production is constant in the theory of comparative advantage?
A
That increased specialization might result in rising average costs caused by diseconomies of scale
6
Q
What is the limitation to no transport costs in the theory of comparative advantage?
A
That transport costs might distort comparative advantage
7
Q
What is the limitation to no trade barriers in the theory of comparative advantage?
A
That trade barriers might distort comparative advantage
8
Q
What are the 3 advantages of specialization and trade?
A
1) Leads to an increase in global output and living standards
2) May create economies of scale
3) Can lead to lower prices and more choice for consumers
9
Q
What are the 3 disavantages of specialization and trade?
A
1) Benefits are based on unrealistic assumptions
2) May lead to over dependence on imports and exports
3) Can cause demotivation which will decrease productivity and increase prices.
10
Q
What are the 5 characteristics of globalisation?
A
1) increased international movement of labour
2) increased international movement of financial capital
3) increased specialisation
4) increased international trade
5) increased trade-to-GDP ratios
11
Q
What is Globalisation?
A
Increased integration of different economies around the world.
12
Q
What does FDI stand for?
A
Foreign Direct Investment
13
Q
What is Foreign Direct Investment?
A
An investment made by a firm in one country into a firm in another country, to gain control over the foreign firm.
14
Q
What does TNC stand for?
A
Transnational Corporation
15
Q
What is Transnational Corporation?
A
A company that operates in two or more countries.
16
Q
What are the 4 causes of globalization?
A
- Improvements in transport
- Improvements in IT
- Containerisation
- Trade Liberalisation
17
Q
What is containerisation?
A
An efficient and relatively low cost system of transport that uses a common size of steel container to transport goods.
18
Q
What is trade liberalisation?
A
The reduction and removal of trade barriers.
19
Q
What is a tariff?
A
A tax on imported goods
20
Q
What are the 6 areas that are impacted by globalisation?
A
1) individual countries
2) governments
3) producers
4) consumers
5) workers
6) the environment
21
Q
Give 1 positive and 1 negative impact on individual countries through globalisation
A
Globalisation has led to an increase in living standards but also an increase in overdependence.
22
Q
Give 1 positive and 1 negative impact on governments through globalisation
A
Globalisation has led to an increase in tax revenue but also an increase in transfer pricing.
23
Q
Give 1 positive and 1 negative impact on producers through globalisation
A
Globalisation has reduced costs through relocation but it has also increased barriers to entry.
24
Q
What is transfer pricing?
A
A method of pricing goods and services transferred within TNCs in order to reduce the amount of corporation tax paid.
25
Give 1 positive and 1 negative impact on consumers through globalisation
Globalisation has led to an increase consumer choice and lower prices but it has arguably reduced happiness.
26
Give 1 positive and 1 negative impact on workers through globalisation
Globalisation has led to an increase in international job opportunities but increased structural unemployment.
27
Give 1 positive and 1 negative impact on the environment through globalisation
Globalisation has increased international cooperation to fight climate change but it has increased global warming.
28
What is Terms of trade?
The relationship between the price of exports and the price of imports
29
What is terms of trade formula?
The terms of trade formula equals the index of export prices divided by the index of import prices, multiplied by 100.
30
What does it mean when there is an improvement in TOT?
An improvement in the terms of trade means that there has either been an increase in the index of export prices or a decrease in the index of import prices.
31
What does it mean when there is a deterioration in TOT?
A deterioration in the terms of trade means that there has either been a decrease in the index of export prices or an increase in the index of import prices.
32
What are the 4 factors that influence a country's TOT?
1) Raw material prices
2) Tariffs
3) Exchange rates
4) Inflation rates
33
What is the impact of Raw material prices on TOT?
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. (Vice Versa)
34
What is the impact of Tariffs on TOT?
An increase in tariffs will deteriorate the terms of trade and a decrease in tariffs will improve the terms of trade.
35
What is the impact of Inflation rates on TOT?
A low inflation rate relative to trading partners will deteriorate the terms of trade and a high inflation rate relative to trading partners will improve the terms of trade.
36
What is the impact of Exchange Rates on TOT?
An exchange rate depreciation will deteriorate the terms of trade and an appreciation will improve the terms of trade.
37
What are the 2 areas that can impact a country's TOT?
1) Living Standards
2) Competitiveness
38
What is the impact of TOT on living standards?
An improvement in the terms of trade will increase living standards and a deterioration in the terms of trade will decrease living standards.
39
What is the impact of TOT on Competitiveness?
An improvement in the terms of trade will decrease competitiveness and a deterioration in the terms of trade will increase competitiveness.
40
What is a trade barrier?
A trade barrier is a restriction placed by the government on the imports of a foreign good. One example of this is a tariff which is a tax paid on imports.
41
What are the 4 types of restrictions on free trade?
1) tariffs
2) quotas
3) subsidies for domestic producers
4) non-tariff barriers
42
what are tariffs also known as?
sometimes known as import or custom duties.
43
Draw a tariff graph
A = producer surplus
B & D = societal welfare loss
C = tax revenue
44
What is a quota?
A strict limit on the quantity of imports
45
how does a subsidy to domestic producers restrict free trade?
Grants given to domestic producers by the government in order to encourage supply and reduce price. This will decrease demand for imports.
46
what are the 2 disadvantages of using quotas?
1) it generates no tax revenue
2) can create severe shortages
47
What is a non-tariff barrier?
Restrict free trade by setting rules and regulations for imports to follow.
48
Give 3 examples of non-tariff barriers
- Health and safety regulations
- environmental regulations
- labelling.
49
What are the 4 reasons to restrict free trade?
1) preventing dumping
2) protecting domestic employment
3) protecting infant industries
4) health and safety
50
What is dumping?
Where foreign firms aggressively cut their prices, below average variable costs, to force out domestic producers from a market.
51
What are infant industry?
New industries which do not benefit from economies of scale and can’t compete with larger industries from other countries.
52
What are the 4 types of trading blocs?
1) free trade areas
2) customs unions
3) common markets
4) monetary unions
53
What are trading blocs?
when countries join together and all agree to remove trade barriers between each other.
54
What are free trade areas?
An area where trade barriers are removed between member countries.
55
What is a common external tariff?
Where members of a trading bloc must all have the same tariffs on external non-member countries.
56
What is a customs union?
Where trade barriers are removed between member countries and there is a common external tariff placed on countries outside the trading bloc.
57
What is a common market?
Where trade barriers are removed between member countries and there is a common external tariff placed on countries outside the trading bloc and factors of production can move freely between countries.
58
What is a monetary union?
Where trade barriers are removed between member countries and there is a common external tariff placed on countries outside the trading bloc and countries share a common currency.
59
Can you give an example of a custom 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.
60
Can you give an example of a common market?
The European Single Market is a common market, which means that factors of production, like labour, can move freely between the 31 countries.
61
Can you give an example of a monetary union?
The Eurozone is a monetary union meaning that all 20 of its members have adopted a common currency - the Euro.
62
What are the 2 effects of trading blocs on trade?
1) trade creation
2) trade diversion
63
How does trade creation affect trading blocs of trade?
When the removal of tariffs means that the quantity of imports increases and trade is created.
64
How does trade diversion affect trading blocs of trade?
When the creation of a trading bloc means that trade is diverted from low cost producers outside the bloc to high cost producers inside the bloc.
65
What is the world trade organisation?
An organisation of 164 countries that regulates world trade.
66
What are the 2 functions of the world trade organisation?
1) to organize rounds of talks to negotiate trade deals
2) to settle trade disputes
67
Can you give an example of how the world trade organisation settles rounds of talks to negotiate trade deals?
For example, at the Ministerial Conference in 2013, all members agreed to the Bali package which is estimated to boost world trade by about $1 trillion!
68
Can you give an example of how the world trade organisation settles trade disputes?
Since 1995, over 350 rulings have been issued on disputes
69
What are the 4 factors that influence the patterns of trade?
1) Comparative advantage
2) Emerging economies
3) Trading blocs
4) Exchange rates
70
How does comparative advantage impact the pattern of trade?
If a country has a comparative advantage in a good, they will export more of it.
71
How do emerging economies impact the pattern of trade?
There has been an increase in exports and imports from the emerging economies; Brazil, Russia, India, China and South Africa.
72
How do trading blocs impact the pattern of trade?
Trading blocs can lead to trade creation and trade diversion.
73
How do exchange rates impact the pattern of trade?
An exchange rate appreciation will lead to an increase in imports and a decrease in exports.
74
What is the balance of payments?
A record of payments between one country and the rest of the world.
75
What are the 2 main sections of the balance of payments?
1) current account
2) Capital & financial account
76
What are the 4 parts that make up the current account?
1) trade in goods
2) trade in services
3) investment income
4) current transfers
77
What does investment income include?
Any rent or profit earned on an investment made abroad.
78
What do current transfers include?
money that is transferred abroad without getting any goods or services back in exchange.
79
What are current transfers?
Current transfers are when money is transferred abroad without getting any goods or services back in exchange.
80
Can you give 2 examples of a current transfer?
Remittances and aid
81
What is a current account deficit?
When total outflows from the current account are greater than total inflows.
82
What is a current account surplus?
When total inflows to the current account are greater than total outflows.
83
What is a current account equilibrium?
When total outflows from the current account are equal to total inflows.
84
What is a trade balance?
Total value of exports minus total value of imports.
85
What are the 2 types of transactions that appear in the capital and financial account?
1) FDI
2) Hot money flows
86
What is hot money flows?
Money that investors move internationally between banks to maximise the interest they receive.
87
What are the 6 factors that affect the current account?
1) exchange rates
2) relative inflation
3) productivity and costs
4) quality
5) growth
6) protectionism
88
How do exchange rates affect the current account?
- An appreciation of the exchange rate will decrease the current account
- A depreciation of the exchange rate will increase the current account.
89
How do Relative Inflation Rates affect the current account?
- High relative inflation rates will decrease the current account
- low relative inflation rates will increase the current account.
90
Explain the impact of low productivity on production costs and the current account
Low productivity will increase production costs and decrease the current account.
91
Explain the impact that the quality of exports have on a country’s current account
- A decrease in quality will decrease the current account.
- An increase in quality will increase the current account.
92
Explain the impact that growth has on a country’s current account
- High economic growth will decrease the current account.
- Low levels of economic growth will put upward pressure on the current account.
93
Explain the impact of protectionism on the current account
- The removal of protectionist measures will decrease the current account
- The implementation of protectionist measures will increase the current account.
94
What is an exchange rate?
An exchange rate tells us the price of one currency in terms of another
95
Draw an exchange rate diagram
96
What are the 2 factors that determine the supply of a currency?
1) tourism abroad
2) imports
97
What are the 2 factors that determine the demand of a currency?
1) domestic tourism
2) exports
98
What is exchange rate appreciation?
The value of the currency increases (gets stronger).
99
What is exchange rate depreciation?
The value of the currency decreases (gets weaker).
100
What is the effect of appreciation on imports and exports?
Strong pound means imports get cheaper and exports get more expensive (SPICEE).
101
What is the effect of depreciation on imports and exports?
Weak pound means imports get more expensive and exports get cheaper.
102
What are the 6 factors influencing exchange rates?
1) imports and exports
2) speculation
3) relative interest rates
4) relative inflation rates
5) FDI
6) quantitive easing
103
How do imports and exports affect exchange rates?
Imports effect supply and exports affect demand
104
What is speculation?
When investors predict changes in a currency’s exchange rate to make a profit
105
Give 2 ways about how speculation affect exchange rates?
- Speculation of depreciation -> more likely to depreciate -> more investors to sell now and buy later
- Speculation of appreciation -> more likely to appreciate -> more investors to buy now and sell later
106
Give 2 ways about how relative interest rates affect Exchange rates?
- High interest rate -> hot money flows into that country -> appreciates -> increase demand
- low interest rate -> hot money flows out of that country -> depreciates -> increase supply
107
Give 2 ways about how relative inflation rates affect exchange rates?
- High inflation rate -> expensive exports -> low demand -> depreciates
- Low inflation rate -> cheaper exports -> high demand -> appreciates
108
Give 2 ways about how FDI would affect exchange rates
- Increase FDI -> more demand for currency -> appreciates
- Decrease FDI -> less demand for currency -> depreciates
109
how does QE affect exchange rates?
Quantitative easing is when a Central bank creates new money to purchase financial assets from high street banks. This increases the supply of pounds and causes the currency to depreciate.
110
What is quantitative easing?
An extreme type of monetary policy which is the last resort for economic growth when interest rate is at low level
111
What are the 4 impacts of changes in exchange rates?
1) Growth and employment
2) inflation rate
3) FDI flows
4) Current account
112
How does an appreication of an exchange rate impact growth and employment? (Give 5 chains of reasoning)
When the exchange rate appreciates -> Imports get cheaper and exports get more expensive -> This leads to an increase in import expenditure and a decrease in export revenue -> As a result, aggregate demand decreases -> which in turn causes a decrease in growth and employment.
113
How does a depreciation of an exchange rate impact the inflation rate? (Give 5 chains of reasoning)
A depreciation of the exchange rate -> will increase aggregate demand, -> leading to demand-pull inflation. -> It will also decrease aggregate supply -> leading to cost-push inflation.
114
How does an appreciation of an exchange rate impact FDI flows? (Give 3 chains of reasoning)
If a country’s exchange rate appreciates, -> foreign direct investments will become more expensive. -> This is likely to decrease the amount of FDI going into the country.
115
How does an appreciation in an exchange rate impact the current account? (Give 3 chains of reasoning)
When the pound appreciates, -> import expenditure will increase and export revenue will decrease. -> This will lead to a decrease in the UK current account.
116
What is the 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.
117
What is a 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).
118
What can be an evaluation for the depreciation of the exchange rate impacting the current account? (Give 5 chains of reasoning)
In the short run, demand for imports is inelastic -> meaning a depreciation will increase import expenditure and worsen the Current Account. -> As demand becomes more elastic over time (like when companies finish their contracts), the demand for imports decreases -> leading to a decrease in import expenditure. -> This will then improve the Current Account.
119
Draw a J-Curve
The graph should to show the Current Account starting in a deficit. It should then get even worse before eventually improving.
120
What are the 2 ways to manage exchange rates?
1) changing interest rates
2) foreign currency transactions
121
What are infant industries?
Industries which are too young to benefit from economies of scale
122
What is a currency war?
When countries depreciate their exchange rates to make their exports more competitive than other countries’.
123
What is competitive depreciation?
When a country depreciates their own currency to keep their exports cheap and competitive.
124
What are the 3 types of policies to reduce current account deficit?
1) expenditure-reducing policies
2) expenditure-switching policies
3) supply-side policies
125
What are the 2 types of expenditure-reducing policies that the government can use to reduce a current account deficit?
1) increase in income tax
2) decrease in government spending (reducing benefits)
126
What are the 2 types of expenditure-switching policies?
1) trade barriers
2) Lower interest rates
127
How would trade barriers reduce a current account deficit? (Give 5 chains of reasoning)
- The tariff will increase the price of imports.
-> This means domestic producers are able to charge a higher price (and don’t have to pay the tariff)
-> and so they will be willing to supply more and so there is an extension in domestic supply.
-> There is also a contraction in domestic demand
-> and so the quantity of imports will fall and the current account should improve.
128
How does lowering the interest rate reduces a current account deficit? (Give 5 chains of reasoning)
- Low interest rates both reduce the demand for a given currency (as fewer investors want to save in the country it belongs to)
-> and increase the supply of the same currency (as more investors will sell it in order to save in other countries).
-> This increase in supply and decrease in demand will depreciate the currency.
-> A weaker currency makes imports more expensive.
-> This means that consumers will demand fewer imports and switch to comparatively cheaper domestic goods.
129
What are the 3 types of supply-side policies that the government can use to reduce a current account deficit?
1) reducing corporation tax
2) increasing government spending
3) reducing minimum wage
130
What are the 3 types of exchange rate systems?
1) fixed exchange rates
2) managed exchange rates
3) floating exchange rates
131
What are fixed exchange rates?
When the government, or central bank, fix the value of one currency to the value of another.
132
What are managed exchange rates?
When the government, or central bank, will only intervene to keep their exchange rate within a certain range.
133
What are floating exchange rates?
When the government or central bank does not intervene at all. The exchange rate is simply determined by market forces.
134
What are the 2 policies that a country can use to maintain a fixed exchange rate?
1) changing the interest rate
2) using foreign currency transactions
135
What if the exchange rate is higher than the fixed value?
- If the exchange rate is higher than the fixed value, the central bank will take measures to decrease it.
- To do so, they can either decrease demand by lowering the interest rate
- or they can increase supply by using foreign currency transactions.
136
What if the exchange rate is lower than the fixed value?
- If the exchange rate is lower than the fixed value, the central bank will take measures to increase it.
- To do so, they can either increase demand by increasing the interest rate
- or they can decrease supply by using foreign currency transactions.
137
How can a country change the value of their fixed exchange rates?
Countries can change the value of their fixed exchange rates by either revaluing or devaluing their currencies!
138
What is revaluation?
When a country raises their fixed exchange rate.
139
What is devaluation?
When a country lowers their fixed exchange rate.
140
What are the 2 types of exchange rates?
1) nominal exchange rate
2) real exchange rate
141
What is the nominal exchange rate?
The nominal exchange rate tells us the price of one currency in terms of another.
142
What is the real exchange rate?
The real ER tells us how much a currency is worth relative to the prices of goods and services in another country.
143
What is the real exchange rate formula?
Real Exchange Rate = (Nominal Exchange Rate x Domestic Price Level)/Foreign Price Level
144
What are the 3 ways to measure the international competitiveness of a country?
1) export prices
2) unit labour costs
3) the global competitiveness inde
145
What is international competitiveness?
When a country is more competitive if their exports are sold at a lower price or a higher quality than other countries.
146
What is unit labour costs?
the cost of wages per unit of output produced.
147
What is the unit labour cost formula?
Unit Labour Cost = Total Wage Cost/Total Output
148
What is the global competitiveness index?
An index which attempts to rate the international competitiveness of different countries based on a variety of factors.
149
How do export prices affect the measure of international competitiveness?
If export prices are lower = country is more competitive
If export prices are higher = country is less competitive
150
How does unit labour costs affect the measure of international competitiveness?
- Increase in unit labour costs = country less competitive
- Decrease in unit labour costs = country more competitive
151
How does the global competitiveness index affect eye measure of international competitiveness?
Higher rating on the GCI = country more competitive
Lower rating on the GCI = country less competitive
152
What does the Global Competitiveness Index seek to measure that other measures of competitiveness cannot?
Quality
153
What are the 4 factors that influence international competitiveness?
1) Exchange Rates
2) Wage costs
3) Non-wage costs
4) Supply-side policies
154
How do exchange rates affect international competitiveness of a country?
Depreciation = more competitive
Appreciation = less competitive
155
How do wage costs affect international competitiveness of a country?
Increase = less competitive
Decrease = more competitive
156
How do non-wage costs affect international competitiveness of a country?
Decrease = more competitiveness
Increase = less competitiveness
157
How do supply-side policies affect international competitiveness of a country?
Reduction = less competitive
Increase = more competitive
