UNIT 4 NOTES

Question 1

why do countries trade with each other? x4 (4.1)

Answer 1

↪ difference in factor endowments
↪ variety & quality of goods
↪ gains from specialisation
↪ political motivation

Question 2

implication of free trade x3 (4.1)

Answer 2

↪ cheaper prices for domestic consumers
↪ increase in output and export revenue for exporting country
↪ loss in domestic production with will lead to closure of businesses and increase in domestic UE

Question 3

benefits of free trade x9 (4.1)

Answer 3

↪ increased competition
↪ lower prices
↪ greater choices
↪ acquisition of resources
↪ more foreign exchange earnings
↪ access to larger markets
↪ economies of scale
↪ more efficient resource allocation
↪ more efficient production

Question 4

aims of a tariff x2 (4.2)

Answer 4

↪ lower the amount of imports
↪ increase domestic production

Question 5

effect of a tariff x6 (4.2)

Answer 5

positive:
↪ protecting domestic economy
↪ maintain/restore jobs
↪ domestic safety and environmental concerns

negative:
↪ allocative inefficient (welfare loss created)
↪ loss of consumer benefits
↪ helping inefficient domestic producers

Question 6

effect of a quota x6 (4.2)

Answer 6

positive:
↪ domestic producers better off
↪ domestic employment increases

negative:
↪ domestic consumers worse off
↪ government has no financial rewards
↪ increase in inefficiency w/ global misallocation of resources

neutral:
↪ foreign producers may be worse or better off (depending on whether they can get inside the quota

Question 7

benefits of using a quota x3 (4.2)

Answer 7

↪ lowers quantity of imports
↪ no pressure on the government budget
↪ simple and easy to use

Question 8

limitations of using a quota x5 (4.2)

Answer 8

↪ politically unfriendly (against WTO principles)
↪ inefficient (waste of resources)
↪ unfair punishment to efficient importers
↪ need to decide which country to put quota on
↪ lack of government revenue (compared to tariffs)

Question 9

aims of an export/production subsidy x2 (4.2)

Answer 9

↪ promote exports (export subsidy)
↪ reduce quantity of imports (production subsidy)

Question 10

benefits of using a subsidy in international trade x4 (4.2)

Answer 10

↪ domestic producers become more competitive
↪ decreases the cost of production to domestic producers
↪ maintain jobs
↪ relieve political pressure

Question 11

limitations of using a subsidy in international trade x5 (4.2)

Answer 11

↪ domestic producers will become more dependent on the subsidy
↪ inefficiency (welfare loss produced)
↪ opportunity cost for the government
↪ risk of budget deficit
↪ unfair to foreign importers who are competitive

Question 12

aim of administrative barriers x2 (4.2)

Answer 12

↪ to increase overall costs of importing
↪ reduce the amount of imports

Question 13

protection of infant industries as an argument for trade protection (4.3)

Question 14

national security as an argument for trade protection (4.3)

Question 15

health and safety/environmental standards as an argument for trade protection (4.3)

Question 16

anti-dumping as an argument for trade protection (4.3)

Question 17

unfair competition as an argument for trade protection (4.3)

Question 18

balance of payment correction as an argument for trade protection (4.3)

Question 19

government revenue as an argument for trade protection (4.3)

Question 20

protection of jobs as an argument for trade protection (4.3)

Question 21

economically least developed country diversification as an argument for trade protection (4.3)

Question 22

misallocation of resources as an argument against trade protection (4.3)

Question 23

retaliation as an argument against trade protection (4.3)

Question 24

increased costs as an argument against trade protection (4.3)

Question 25

higher prices as an argument against trade protection (4.3)

Question 26

less choice as an argument against trade protection (4.3)

Question 27

domestic firms lack incentive to become more efficient as an argument against trade protection (4.3)

Question 28

reduced export competitiveness as an argument against trade protection (4.3)

Question 29

free trade vs. trade protection

Answer 29

depends on a country's: ↪ CA and AA (HL concept) ↪ economic performance ↪ political climate

Question 30

is the PTA effective in achieving economic integration? x6 (4.4)

Answer 30

advantages: ↪ reducing/eliminating tariffs on selected goods and services ↪ lower overall trade barriers ↪ improved relationship between countries disadvantages: ↪ against WTO principles ↪ discriminatory against non-members ↪ threat of corruption

Question 31

types of trading bloc x3 (4.4)

Answer 31

↪ free trade area (FTA) (i.e. NAFTA) ↪ customs union (i.e. CEFTA) ↪ common market (i.e. treaty of Rome)

Question 32

differences between FTA + customs union, customs union + common market x2 each (4.4

Answer 32

FTA vs customs union ↪ members in both trading blocs have no trade barriers on exports within themselves ↪ FTA members can have their own trade policies to non-members, but customs union must have the same policies customs union vs common market ↪ customs union = limited freedom of movement of capital and labour whereas common market = complete freedom of movement of all factors of production ↪ customs union = abolition of visible trade barriers but not on invisible trade barriers (i.e. technical, environmental standards), whereas common market can

Question 33

disadvantages of the formation of a trading bloc x3 (4.4)

Answer 33

↪ loss of sovereignty ↪ challenge to multilateral trading agreements ↪ trade diversion (inefficient)

Question 34

aims and objectives of the WTO x2 (4.4)

Answer 34

↪ help their members on different trade policies to raise living standards ↪ operates global system of trade rules and helps LICs to build their trade capacity

Question 35

functions of the WTO x4 (4.4)

Answer 35

* = important ↪ * set & enforce rules for international trade ↪ * resolve trade disputes ↪ monitor further trade liberalisation ↪ provide a forum for negotiating trade liberalisation

Question 36

factors affecting the influence of the WTO x2 (4.4)

Answer 36

↪ difficulties in reaching agreement on goods and services ↪ cannot prevent high income countries from putting trade barriers on primary goods from low income countries/giving subsidies to domestic farmers ↪ unequal bargaining power of members

Question 37

why do we need exchange rates? x4 (4.5)

Answer 37

↪ international trade ↪ foreign direct investments (long term capital movement) ↪ government intervention to achieve macroeconomic objectives ↪ speculation (international traders)

Question 38

appreciation and depreciation within a floating ER system (4.5)

Answer 38

↪ if there is excess demand for the currency on the forex market, then prices rise (the currency appreciates) ↪ if there is an excess supply of the currency on the forex market, then prices fall (the currency depreciates)

Question 39

changes in demand and supply for a currency x10 (4.5)

Answer 39

↪ foreign demand for exports ↪ domestic demand for imports ↪ inward/outward foreign direct investment ↪ inward/outward portfolio investment ↪ remittances ↪ speculation ↪ relative inflation rates ↪ relative interest rates ↪ relative growth rates ↪ central bank intervention

Question 40

devaluation and revaluation of a currency in the fixed exchange rate (4.5)

Answer 40

DEVALUATION ↪ if the currency has a higher value than it can be maintained, the government will change the fixed rate to a new, lower value ↪ decrease currency strength REVALUATION ↪ if the currency has a lower value than it can be maintained, the government will change the fixed rate to a new, higher value ↪ increase currency strength

Question 41

debits and credits of the balance of payments (4.6)

Answer 41

in 1 year, all inflows of payments (credits) must exactly equal the outflows of payments (debits)