trade Flashcards
(48 cards)
define globalisation
Characteristics of globalisation- internationalisation of economies:
• Free trade of goods and services across national boundaries
• Free movement of labour within countries
• Free movement of capital within countries
• Free interchange of technology and intellectual capital across national boundaries
During the great depression the US had very protectionist policies
causes of gloablisation
Causes of globalisation:
• Trade in goods- being manufactured abroad because its cheaper, cost advantage
• Trade in services
• Trade liberalisation
• Multinational companies- they have grown
• International financial flows
• Foreign ownership of firms- harrods not owned by british
• Communications and IT
impact of globalisation on consumers
Impact on consumers:
• Greater consumer choice
• Lower prices due to being more cost efficient
Incomes in developing countries are better but in developed countries they are stagnant
impact of globalisation on producers/workers
Impact on workers:
• More employment in developing countries, less in developed however
• More migration between countries or cities
• Wages for those in developed countries decreases
Multinationals create jobs but often in developing countries
exploitation of workers
Impact on producers:
• Specialisation and economics dependency- allows use of comparative advantage and reduces risk
• Costs and markets- more markets and lower costs
• Footloose capitalism- multinationals have the power to move production from country to country
Tax avoidance like amazon
larger markets available
impact of globalisation on governments
Impact on governments:
• Employment affects tax revenue/budget spending
• Governments prone to bribery and taxation and that can distort development and lead to lower incomes
• Affects monetary policy
Depends whether the country had trade creation or trade diversion
Closer relations with trading
countries
impact of globalisation on environment
Impact on environment:
• Bad for the environment since firms are more cost orientated then environmentally
Transport costs would affect environment
negative externalities of pollution
impact of globalisation on individual countries
Impact on individual countries:
• Depends on country- can lead to rapid unsustainable growth like china has
Can encourage shift in sector ie becoming more services based
absolute and comparative advantage
Absolute advantage- when a country is able to produce goods cheaper in absolute terms in comparison
to another country
Comparative advantage- when a country is able to produce a good more cheaply relative to other goods produced domestically in another country (look at opportunity cost)
assumptions and limitation of comparaive advantages (evaluation)
Assumptions and limitations of theory of comparative advantage:
• Does not account for transport costs, the international trade may be expensive bc of difficulty to export and that decreases comparative advantage
• Does not account for economies or diseconomies of scale, a firm with a comparative advantage would likely have economies of scale but all costs are fixed in our calculations
• CA only talks about within 2 countries, there are far more players
• Depends on the quality or make of the good, SK does not necessarily have CA on phones just because Apple is from US, different brands
• Assumes firms are mobile
• No tariffs or other trade barriers which you would expect with international trade
Assumes there is perfect knowledge, may be imperfect knowledge in a country to promote protectionism
advanatges of specialisation and trade
Advantages of specialisation and trade (internationally)
• Taking advantage of comparative advantage means increased world output and more likely, at a lower price
• Trade allows economies of scale to be maximised and therefore reduces cost for everyone
• More choice, if a company has comparative advantage, chances are it is of higher quality, higher quality of life
Free trade encourages competition which should promote innovation, cheaper prices and better quality
disadvantages of specialisation and trade
Disadvantages of specialisation and trade (internationally)
• Overdependence on foreign trade, esp countries with small economies which rely so much on exports, if the price of the export falls then so does the GDP, greatly
• Can lead to a lack of jobs, this however may be short term. If it is moving forward sectors then short term but if its exports suddenly fall, leads to unemployment
• Unpredictability of trade, economic events or supplies can change whether two countries trade or not and this would lead to greater expenses
Globalisation and taking advantage of workers- widens inequality gap
what affects terms of trade
Factors influencing terms of trade:
• Change in exchange rate- rise in exchange rate leads to fall in price to import goods, so terms of trade improves
• Inflation- high inflation means that price of home goods rise quicker than other goods, home goods become less competitive so trade decreases since home exports are less in demand. There will be less demand for currency and will decrease value of £. Terms of trade improves
In the long term:
• Rise in productivity- should lead to reduction in relative price of exports bc of lower production costs. Could be due to better education. Terms of trade deteriorates
• Change in incomes- income rises, demand rises in the economy, prices rise so there will be improvement in terms of trade
define free trade
Free trade areas- all tariffs and quotas are removed on trade in goods between all member countries but each member country can impose individual quotas and tariffs on non-member countries e.g. NAFTA (usa, mexico and canada)
define customs union
Customs union- free trade within the bloc but common external tariffs on goods coming from outside, there is an EU customs union, can develop into common market- single market
define common market
Common markets- custom unions where labour and capital have freedom of movement, product standards and laws concerning free movement of goods and services is common between the countries. Common markets can lead to economic and monetary union
define economic and monetary unions
Monetary unions- where all member countries have the same currency and monetary policy.
Economic unions- economies of member countries are fully integrated as different region within a country. It implies there is some degree of fiscal and monetary union
advantages of monetary union
- Fixed prices- a single currency creates fixed prices and eliminates risks that would have arisen from exchange rate fluctuations between member countries
- Reduced exchange rate costs- not only saving on commission costs, but also costs arising from risk factor of floating exchange rate systems
- Greater price transparency- easier to compare prices , means that it is harder for companies to monopolise and charge higher prices. Results in lower prices for consumers, rightward shift in AS curve, less inflationary pressures
- More trade and great economies of scale- less trade costs and greater transparency leads to more trade in cross-border mergers and takeovers to create large firms to supply all over the eurozone. Leads to greater economies of scale and lower prices for consumers
- Inward investment- creates incentive for multinationals to locate in their country
- Price stability- countries such and Greece or Portugal benefit from central bank not controlled by government because it controlled their inflation
disadvantages of a monetary union
- Loss of policy independence- countries have limited control over their fiscal policies because of their fiscal contract
- Transition costs- foreign exchange departments may be cut in size, had to become accustomed to new money
- Inability to change the value of a currency- if in great fiscal deficit, it could be handled by austerity and devaluing currency, cannot work with a monetary union
- Structural problems- cannot adjust exchange rates to increase exports e.g.
- Break up of monetary union- monetary union can collapse and transition costs in a break-up would be significant
- Trade cycle may not sync- cannot have the same policy for countries where one is in a boom, recession or recovering
advantages of a trading bloc
Allows developing country to make good use of their comparative advantage, trading blocs make them more competitive
Trading blocs has helped countries like Romania improve their poor governance and improve quality of state institutions and rule of law
Trade protection- protected from competition, but inefficient producers may also be protected
disadvanatges of a trading block
Trade blocs distract from larger gains e.g. Free trade between everyone
Trade agreement distribute trade unequally, a developing country may have less access to EU markets than the USA which is unfair
Free trade doesn’t cover all goods, only some meaning that the economic benefits are very limited
Trading bloc can lead to more trade diversion than creation, reducing overall economic output
Trade blocs lessen national sovereignty which is why UK would like to leave the EU
Retaliation of non-trade bloc members (trade wars)
trade creation vs diversion
Trade creation- when country moves trade from high-cost country to lower cost country, could be because of trade blocs
Trade diversion- when a country moves from buying from low-cost countries to high cost countries, may be because they just entered a customs union so they have to impose high tariffs on previous trade partners, so now have new trade partners
role of WTO and critisizms
• It encourages lower protectionist barriers to bring around trade liberalisation
• Can file complaints against countries to the WTO and they must comply
• Allows rich countries to exploit developing countries workers by paying them low wages and making them work in unacceptable conditions
• Rich countries use up more natural resources and give very little to poor countries
• Forces developing countries to have lower barriers bc they need it but developed countries can keep their high barriers
• Destroying culture and replacing with a materialistic life-style
Allows the rich countries to make the rules and strip poor countries
free trade vs customs union
• Economic efficiency would be maximised if there were no barriers as comparative advantage would determine trade patterns, not trade blocs. Trade blocs distorts efficiency and trading patterns.
• Economies of scale can be achieved through unions, also, diseconomies of scale
• Common market would lead to more domestic competition and lead to efficiency
Common market allows for transfer of resources
reasons for restriction on free trade
want to reduce free trade as an act of protectionism, they want to reduce the amount of imports their country demands
• Infant industries do not grow behind trade barriers, helps creates new industries
• Protectionism keeps/preserves jobs by e.g. Prevention of a plant closing down
• To prevent cheap labour, cheap labour allows for comparative advantage but labour in high-wage countries struggle. But then there would be a misallocation of resources
•Terms of trade will rise in favour of the importing country
