UNIT 4 Flashcards
(22 cards)
benefits of international trade
Int’l trade is the exchange of goods and services between countries
it is “free” when there are no quotas/tariffs
Benefits: greater choice, lower prices, international competition, flow of ideas, access to resources, economic growth, development
Excess domestic demand or supply can easily be met through trade
tariffs
A tariff is a tax levied on an imported good or service
This raises the selling price of the good or service within the country, decreasing the volume of imports
shifts Pw up to Pw + tariff
EVALUATION:
Increased government revenue
Downstream producers (if they rely on this good as a raw material) experience increased costs of production
There is allocative inefficiency because less efficient domestic producers are tasked with producing an increased amount of output
quotas
A physical limit on imports - raises the market price and creates a shortage
Domestic firms benefit because they are able to supply more because of the decreased volume of imports
shifts S to the right to S + quota, but the S+quota stops above the Pw
EVALUATION
Government does not receive tax revenue
This may create jobs due to the increased supply
Global efficiency worsened
Domestic consumers pay a higher price
export subsidies
Lowers the cost of production for domestic firms, specifically for exports
Improves competitiveness on the international market
In a diagram, the supply curve shifts to the right, but unlike quotas, still exists below Pw
EVALUATION
Increased international competitiveness
Foreign firms find it more difficult to compete with domestic firms
Consumers do not experience a benefit as they already buy at the lower world price
Opportunity cost with government
Welfare loss as inefficient domestic producers are producing instead of efficient foreign producers
The WTO aims to limit export subsidies as it disadvantages smaller economies
administrative barriers definition, aim and types
Barriers to trade created by governments in order to reduce the volume of imports
types:
Health and safety regulations
Product specifications, e.g. EU’s regulations on the Type C USB
Environmental regulations
Product labelling
Inefficient administrative systems, e.g. at borders
arguments for trade protection
Infant industries
Sunset industries
Strategic industries (e.g. energy, defence)
Dumping
PROTECTION OF JOBS
Current account deficit (to bring an current account surplus, since current account = X-M)
Labour/environmental regulations
arguments against trade protection
Reduced consumer choice
Increased prices
Increased costs
Retaliation
Reduction in export competitiveness
Resource misallocation (opportunity cost)
Domestic inefficiency
economic integration
cooperation between countries and coordination of their economic policies, leading to increased economic links
types of preferential trade agreements
bilateral = between 2 countries
multilateral = between many countries
regional = between countries within a geographical region
types of trading blocs
Free trade area
Abolish internal barriers to trade; outside barriers are dealt with by individual countries, e.g. NAFTA (CUSMA)
Customs union
Fully abolished internal trade barriers, with a unified outside trade policy (common tariff rates on third countries)
Common market
Customs union, but factors of production flow freely as well
Monetary union
A common market with a common central bank, with a common currency
Eurozone
role of the WTO
Promote free trade and economic integration
Adjudicate trade disputes
Monitoring trade policies
factors affecting the WTO’s influence
Factors affecting the WTO’s influence
MEDCs subsidise many industries, while LEDCs do not have the tax revenue to do so (difficulty in reaching agreement)
Larger, wealthier countries can pressure the WTO (unequal bargaining power)
Firms and individuals from MEDCs are better networked (unequal bargaining power)
floating exchange rate
Floating exchange rate
The exchange rate of the currency is determined by the market forces of supply and demand
If there is an excess supply of the currency on the market, the prices fall
fixed exchange rate
Fixed exchange rate
The country’s central bank determines an appropriate exchange rate relative to another currency
Appreciation or depreciation of the currency can be controlled by purchasing that currency on the forex market
Revaluation/devaluation can occur
managed exchange rate
Managed exchange rate
The exchange rate is allowed to fluctuate within a predetermined band around a desired valuation (for most ‘fixed’ exchange rates, this is what is actually happening)
Bands are generally not published so that speculators do not profit
causes in fluctuations in exchange rate
Relative interest rates change the demand for the currency itself
Relative inflation rates change the demand for imports and exports
Net FDI - FDI into a country creates a demand for that country’s currency
The current account
Changes in tastes/preferences
Speculation
Net portfolio investment
Remittances
Relative growth rates attract FDI and portfolio investments
Central bank intervention
consequences of changes in the exchange rate
Current account - a depreciation in the exchange rate makes exports more competitive and imports more expensive
Economic growth - net exports are a component of AD
Inflation - cost-push inflation as a result of depreciating currency because raw materials cost more
Unemployment/living standards
fixed vs floating exchange rate (HL)
Fixed ERs have greater stability but are less able to conduct monetary policy
Floating ERs are better manipulated for monetary policy purposes
Current account
Records the net income a country gains from international transactions; generally the most important
Balance of trade in visible imports/exports
Balance of trade in invisible imports/exports
Net income (interest, profits, dividends, remittances)
Current transfers (e.g. payments to the World Bank)
capital account
Small capital flows between countries
Small flows of money between countries, e.g. debt forgiveness
Transactions in non-produced non-financial assets, e.g. copyright
financial account
Changes in ownership of the country’s assets and liabilities
FDI (flows of money to purchase interest in a foreign firm)
Portfolio investment to purchase foreign company shares and securities (see Saudi Arabia)
Official borrowing (from other countries or the IMF)
Reserve assets used to achieve monetary policy goals
interdependence between accounts
The balance is always zero
The current account equals the capital and financial account; a current account surplus means a capital/financial account deficit
There is always some net error and omissions in real life
