Yr1 The International Economy Flashcards
(115 cards)
1
Q
PART 1
A
GLOBALISATION
2
Q
Why has globalisation occurred? (6)
A
- Improved communication
- Cheaper transportation
- bigger container ships + lower AC - Reduction in tariff barriers
- Improved political relations between nations, especially since the end of the Cold War
- Growth of trading blocs
- especially single market > EU - Growth of multi-nationals
- ease of doing business
3
Q
What is globalisation?
A
Process by which economies and cultures have become interdependent through global networks of trade, capital flows and the rapid spread of technology and global media
- driven by advancements in communication, transportation and technology
4
Q
Characteristics of globalisation?
A
- Incr ratio of overseas trade component of GDP
- Expansion of capital flows
- Incr FDI
- More global brands
- Deeper specialisation of labour
- Creation of global supply of chains, trade and investment
- High levels of labour migration
- Increasing connectivity
- incr international trade
- transnational brands
- labour migration
- global supply chains
5
Q
Benefits of globalisation? (4)
A
- Export led growth
- exploitation of comparative advantage
- incr employment
- incr incomes
- lower poverty - Improved current account position
- Increased competition
- greater choice
- improved quality
- lower prices > reduction in inflation - Shared managerial experiences
6
Q
Costs of globalisation? (8)
A
- Current account deficit worsens
- Inflationary pressures
- Increased competition
- unemployment - Increasing dependency on MNCs and trade
- Incr specialisation
- primary product dependency - Exploitation of natural resources / environment
- Exploitation of labour
- Greater pressure on the environment
7
Q
What are some external shocks in the global economy linked to globalisation?
A
- the global financial crisis (2007-2010)
- impact of the COVID pandemic
- volatile world commodity prices
- currency volatility and unexpected policy changes
- extreme weather events
- geo-political uncertainties + terrorism risk
8
Q
PART 2
A
TRADE
9
Q
Why do countries trade with one another? (10)
A
- Have access to goods + services they cannot produce domestically
- Cheaper products
- Political connections
- Form of income for the country (exports)
- Natural resources
- Labour costs + regulations
- Attract growth
- Surplus of material
- Better quality products + services
- Manage the exchange rate
10
Q
What is comparative advantage?
A
Relatively lower opportunity cost in production than another country relatively more productively efficient
11
Q
What is absolute advantage?
A
Can produce more of a product
12
Q
How do you show absolute and comparative advantage on a diagram?
A
PPF curves with straight lines
13
Q
Assumptions of comparative advantage?
A
- No externalities in production + consumption
- High mobility of labour + capital
- Low transport costs > signficant increases over recent years
- Constant returns to scale
- No trade barriers
14
Q
Factors affecting comparative advantage + elaborate them?
A
- Natural resources
- enough? Access? Cost of access? - Unit wage costs
- not taken into account e.g. UK vs China - Infrastructure
- resource, quality, spread - Non-price factors
- quality differences due to innovation patents - Import controls
- quality standards > Kyle mark on children’s toys - Exchange rates
- levels of trade, strength + consistency of X + M
15
Q
How do you show world trade on a diagram?
+ what does the diagram represent
A
Supply curve > Domestic supply
Demand curve > Domestic demand
Perfectly elastic supply below equilibrium > world supply
Improvement in economic welfare
16
Q
Advantages of international trade?
A
- Exploitation of comparative advantage > incr efficiency
- Produce higher volumes > economies of scale
- Incr purchasing power of consumers
- Breaks down domestic monopolies > international competition
- Improved quality of goods and services
- Incr employment in the export sector
17
Q
Disadvantages of international trade?
A
- Overspecialisation > severe structural unemployment
- reliance is too high - New infant industries may find it difficult to establish themselves
- international comp - Destruction of local markets
- UK > steel, clothing, cars - Diversity of output in an economy may diminish
- less choice
18
Q
Methods of protectionism?
A
- tariffs
- export subsidies
- quotas
- embargoes
- product standard regulation
19
Q
Reasons to restrict trade?
A
- Protect infant / sunrise industry
- new businesses > more difficult to trade - Protect senile (sunset) industry
- protect large well established businesses
- large employers - Dumping
- reducing price to sell large quantities - Strategic reasons
- political reasons > protect against other countries - Protect jobs
- decline of jobs due to imports - Raised revenue
- incr rev for firms > tax rev
20
Q
What are tariffs?
A
Tax on imports
- incr import prices, encouraging switch to domestic alternatives
21
Q
How do you show tariffs on a diagram? And what do the middle section, and mini triangles mean?
A
Incr in the world supply price
Mini triangles > deadweight welfare loss
Middle bit > new volume of imports
22
Q
Consequences of a tariff? (5)
1. Domestic output
2. Domestic demand
3. Imports
4. Gov tax rev
5. Overall economic welfare
A
- Domestic output > expansion
- incr M prices, signal to domestic producers to expand - Domestic demand > contraction
- incr prices, decr real incomes - Imports > fall in volume
- expenditure switching - Gov tax rev > increases
- Overall economic welfare > falls
- deadweight loss of economic welfare
23
Q
What are some examples of non-tariff barriers? (4)
A
- quotas
- export subsidy
- embargoes
- product + standard regulation
24
Q
What are quotas? + examples
A
Limits quantity of imports
EU - lamb
Brazil - ethanol
China - Cambodian rice (300,000 tonnes / year)
Algeria - car
25
How do you show a quota on a diagram?
+ which bit represents the quota
A shift in domestic supply to the right (incr supply)
Where the old and new domestic supply curves meet the world supply curve
26
IMPACT OF IMPORT QUOTA ON….
1. Domestic output GDP
2. Domestic demand
3. Import volumes
4. Tax revenues
5. Domestic producer revenue
6. Foreign producer revenue
7. Consumer surplus
8. Overall economic welfare
1. Incr
2. Contracts
3. Contracts
4. No direct gains
5. Incr
6. Falls
7. Falls
8. Falls
27
How do you show an export subsidy on a diagram?
Rightwards shift in supply
28
What is the key issue with an export subsidy?
Supports inefficient markets
29
Give an example of an export subsidy?
Chinese government have subsidised the car battery industry
30
What is an embargo? + example
Ban imposed on certain products
- about politics or enforcing law
Elephant ivory, drugs > Embargoes on Russia (fuel, electricity, wheats, grains)
31
What is product standard regulation and examples?
Foreign firms that don't comply cannot import
- to provide environmental / consumer protection
E.G.
- high safety standards or low emission requirements
- Kyle mark on children’s toys
- food > transported / processed
32
What are the arguments against protectionism? (4)
1. Market distortion
- incr price
- less choice
- reduction in consumer surplus
2. Protection inefficiencies (subsidy > artificially supported)
3. Retaliation
4. Regressive (inequality)
33
What is a free trade area?
A group of countries with no barriers to trade between members
34
What is a customs union?
Free trade area + common external tariff (tax) barrier against the rest of the world e.g. EU - set amount
35
What is a monetary union?
A group of countries that share a common currency e.g. Eurozone
36
What is a single market (SM)?
This is built around the four freedoms of movement of goods, services, labour and financial capital
37
What is a preferential trade area?
Trade agreements between the EU and the less developed countries
38
WORLD TRADE ORGANISATION
1. What % of trade goes through its members?
2. How many countries?
3. How many counties have observer status?
4. What does it handle?
5. What are some examples of free trade areas?
1. 95%
2. 168
3. 24
4. Trade disputes
5. Mercosur, ASEAN, EU
39
What are the 4 key roles of the World Trade Organisation?
- policies world trade between members
- campaigns to reduce tariffs between members
- acts as a arbitor during disputes
- establishes a set of rules
40
What are some examples of tree trade areas / trade blocs?
1. European Union > customs + monetary union
2. European Free Trade Areas
3. USMCA (originally NAFTA)
4. Mercosur > customs union (Brazil, Argentina etc)
5. ASEAN (AFT)
6. Common Market of Eastern and Southern Africa (COMESA)
41
What are the key reasons for participating in economic integration? (3)
1. Reduced transaction costs
- free trade with the EU makes UK exports more price competitive in other EU countries
2. Economies of scale
- larger markets > incr efficiency of production
3. Intensified competition
- encouraging them to improve rate + quality > eliminate X inefficiency
42
Advantages of a single market (5)
1. Greater comp > efficiency
2. Economies of scale
3. Greater consumer choice
4. Reduction in anti-competitive behaviour > decr monopoly power
5. Easier / cheaper to trade
43
Disadvantages of a single market (6)
1. Unemployment in countries that cannot compete
2. Little evidence for services
3. National utility providers remain
4. National fiscal policy systems remain different
5. Language / cultural barriers remain
6. Expensive transport limits freedoms
44
What is a customs union and what are the two things he causes?
Common external tariff plus free trade between members of the union
1. Trade creation
2. Trade diversion
45
What is trade creation and how do you illustrate it on a diagram?
Switch to a lower cost EU sources
- stimulates intra-EU trade
- leads to more efficient allocation of resources, incr producer and consumer surplus
Higher world supply = non EU supply
Lower world supply = EU supply price domestic demand
46
What is trade diversion and how do you illustrate it on a diagram?
+ what do the mini triangles and the middle bit mean?
Spending on higher cost EU product
- common external tariff plus free
- deadweight loss of welfare
- only short term
Higher world supply = world price + tariff
Lower world supply = world price
Mini triangles = deadweight loss of welfare
Middle bit = revenue from tariff
47
What is a monetary union? + example?
Own domestic monetary policy > share a single currency with a central bank
EUROZONE
- set up in 1999
- common circulation in 2002
- August 2023 > 20 nations
48
What are the issues with a monetary union?
- no control over monetary policy
- only control over supply-side + fiscal policy
49
Requirements to join the eurozone?
- debt <75%
- stable currency
50
Reasons to join a monetary union? (5)
1. Currency risks
- more stable
2. Trade
- encourages more cross boarder trade
3. Investment
- stimulate inward investment
4. Competition
- increases price transparency
5. Transaction
- eliminates cost conversion
51
What are the risks of joining the EU monetary union?
1. Loss of monetary policy autonomy
- cannot influence the exchange rate
2. Instability to devalue currency
3. Transaction costs
- criteria that has to be met
4. Dependence on the health of the eurozone
- all states have to be economically healthy
52
PART 3
THE BALANCE OF PAYMENTS
53
What is the main gov objectives linked to balance of payment?
Maintain a satisfactory balance of payment
54
Definition of balance of payments and what are the two types?
A record of all of the currency flows in and out of a country in a particular time period
1. Financial assets and liabilities
2. Acquisition or disposal of non-financial assets e.g. copyright, portfolio investment, changes in foreign exchange rates
55
Definition of trade deficit?
Imports > exports
56
Definition of balance of trade?
Difference between imports and exports and goods and services
57
Definition of trade surplus?
Exports > imports
58
What are the 3 things included in the balance of payments + definition of each?
1. Current account
- trade of goods in and out countries e.g. debit//credit
2. Capital account
- movement of money for investment purposes
3. Financial account
- included direct investment, portfolio investment , reserve assets
4. Net errors and omissions
- imperfections of data
59
What are the 4 part of the current account + definition?
1. Trade in goods
2. Trade in services
3. Primary income (Income investment)
- investment from abroad + remote working
4. Secondary income (current transfers)
- money contributions e.g. EU, aid, grant
60
What is the equation for a circular economy linked to the 3 types of account?
Current = capital + financial
61
What would cause a current account deficit?
1. Demand side
2. Supply side
Opposite for account surplus
1.
- strong domestic growth
- recession overseas
- strong exchange rate (SPICED)
2.
- low investment
- low productivity
- high relative inflation
- high unit labour cost
- poor quality/ reliability
- depletion of resources
62
What are the macro causes of a current account deficit?
1. Cyclical causes (demand)
- boom, incr real incomes, incr consumption, decr saving ratios, incr imports
2. Structural causes (supply)
- supply side weaknesses, decr capital investment, decr productivity, decr innovation
63
What are the short run causes of a current account deficit? (4)
1. Fall in value of exports > decline in world price
2. Boom in consumer spending > incr import demand
3. Strengthening (appreciating) exchange rate > export sector less price competitive
4. Broadly based economic boom > incr import demand
64
Long run causes of a current account deficit? (4) > often supply related
1. Low rates of capital investment
- limits productive potential > cost competitiveness of export industries
2. Relatively high costs and price inflation
- contrast to trade partners
3. Weaknesses in non-price competition
- branding and innovation
4. Long term decline of previously dominant export sectors
- deindustrialisation of manufacturing + decline in extractive sectors
65
Causes of the UK trade deficit in 2022-2023? (3)
- Brexit transition period, oil crisis, cost of living in the UK
1. Export growth weakened
- fall out of Brexit + end of EU non-tariff agreements
2. Incr in global prices for essential imports
- oil prices surges in 2022
- incr C of imports
3. Currency weakened against the dollar
- incr costs of imports
66
Reason for developing countries large current account deficit?
1. Lack of infrastructure / productivity to produce competitive exports
2. Rely on essential imports
- e.g. oil, incr prices, incr cost of imports
3. Value of exports being low and need to be sold in high quantities
4. Lack of FDI in the country
5. Weak currencies
6. Hyperinflation
67
What are the two key solutions to a current account deficit?
1. Incr competitiveness > supply-side policies
2. Devalue currency (if fixed)
68
What is the name of the curve that is a solution to a current account deficit?
Marshall-Lerner Condition
> J curve
69
What are the 3 policy solutions to a current account deficit?
1. Expenditure - reducing policies
2. Expenditure - switching policies
3. Improving the supply-side performance of the economy
70
What are expenditure reducing policies?
Contractionary monetary + fiscal policy
> aimed at reducing C in general
71
Evaluation points of expenditure reducing policies?
- reduced economic growth > recession
- output gap
- conflict of objectives
- marginal propensity to import (MPM)
- decr confidence > decr investment + productivity
- strong pound > exports more expensive
72
What are expenditure switching policies?
Protectionist policies and non-tariff barriers
> movement from imports to domestic supply
73
Evaluation points of expenditure switching policies
- retaliation
- WTO rules / EU rules
- inflationary
- loss of efficiency
- Marshall-Lerner condition
74
What is improving the supply side performance of the economy as a form of solution to a current account deficit? + evaluation points
Policies to boost international competition
> shifts in LRAS
EVAL
- time
- cost
- no guaranteed success
75
Overall evaluation points of solutions to a current account deficit? (5)
- conflict of objectives
- cause of the current account deficit
- time lags / costs
- is the current account deficit really a problem
- elasticity of imports + exports
76
What is a current account surplus and what are the countries that have this known as?
Net injections of income into a country’s circular flow of income are higher than outflows
Creditor countries > accumulation of foreign exchange
77
Causes of a current account surplus? (4)
1. Strong competitive advantage > fast export growth
2. Persistent surplus of savings over I from firms, households + gov > weaker demand for imports
3. Export surplus > high world prices for exports of commodities
4. Strong net inflows from investment income
> remittance (high % of GDP)
78
Positives of a current account surplus? (3)
1. Allows a country to run a deficit on the financial account
2. Large sovereign wealth funds > invest surpluses in assets
3. Floating currencies > stronger exchange rates
79
Negative effects of a current account surplus (3)
1. Increased aggregate demand
- incr exports (incr demand pull inflation)
2. Resource constraints
- domestic industries expand > resource constraints e.g. labour
- limited supply > incr prices, incr cost push inflation
3. Asset price inflation
- inflow of foreign currency > excess liquidity > asset price inflation
80
Advantages of a current account surplus?
1. Incr in national savings
- accumulation of foreign currency
- decr external debt + invest overseas
2. Net inflow of demand into the circular flow
- profits for overseas investments provide a flow of funds for corporate investment
81
Drawbacks of a current account surplus?
1. Appreciation of the currency
- domestic businesses less competitive in overseas markets
2. Consistent surplus > invite a protectionist response > trade war
82
What are the two types of investment flows?
1. Foreign Direct Investment (FDI)
2. Foreign Portfolio Investment (FPI)
83
What is foreign direct investment?
Taking controlling ownership in a company in one country by a company based in another
- acquire a substantial stake in a foreign business or buy it outright
*controlling stake
84
What is foreign portfolio investment?
When people / businesses from one country buy shares or other securities such as bonds in other nations
- e.g. UK investor buys shares in google
- e.g. German bank buys sovereign debt issued by the UK government
* shares + securities
85
PART 4
EXCHANGE RATE SYSTEMS
86
What are the 3 types of exchange rates?
1. A free floating currency
2. A managed floating currency
3. A fixed exchange rate system
87
What is a free floating currency?
External value of a currency depends wholly on market forces of supply and demand
88
What is a managed floating currency?
When the central bank may choose to intervene in the foreign exchange market to affect the value of a currency to meet specific macroeconomic objectives
89
What is a fixed exchange rate?
When it is set at a level and controlled by the government to keep it there
90
Advantages of a fixed exchange rate? (4)
1. Avoid currency fluctuations
2. Stability encourages investment
3. Keeps inflation low
4. Stable current account
91
Disadvantages of a fixed exchange rate? (5)
1. Conflicts with other macroeconomic objectives
2. Less flexibility to respond to temporary shocks
3. Join at the wrong rate
4. Difficulty in keeping it at the rate
5. Encourage speculative attacks
92
Advantages of a floating exchange rate? (4)
1. Reduces need for currency reserves
2. Useful instrument of economic adjustment
3. Less opportunity for currency speculation
4. Freedom (autonomy) for domestic monetary policy
93
Disadvantages of a floating exchange rate? (2)
1. Can be volatile which makes doing business harder
2. An unexpected fall in the exchange rate can also be a cause of rising inflation
94
How do interest rates affect exchange rates?
Incr IR, encourage D for currency, causes appreciation
95
How does economic growth affect exchange rates?
Incr growth, incr IR, therefore appreciation
96
How does inflation affect exchange rates?
Incr prices, incr X prices, decr X, decr D for currency
97
How does confidence affect exchange rates?
Incr confidence, incr demand, incr appreciation
98
How does a current account deficit / surplus affect exchange rates?
Incr deficit, depreciation, incr M, currency leaving the economy
99
Impact on … of appreciation?
1. Exports
2. Imports
3. Current account
4. Inflation
5. Economic growth
6. Unemployment
1. Decr
2. Incr
3. Decr (deficit)
4. Decr
5. Decr
6. Incr
100
Impact on … of depreciation?
1. Exports
2. Imports
3. Current account
4. Inflation
5. Economic growth
6. Unemployment
1. Incr
2. Decr
3. Incr (surplus)
4. Incr
5. Incr
6. Decr
101
What are the 3 key evaluation points of exchange rates and elaborate?
1. Elasticity of demand
- inelastic > less change occurs
2. Time lag
- by depreciating the currency, it takes time for X + M to change, therefore not as effective in the SR
3. Reasons for depreciation / appreciation
- strong economies experiencing appreciation will have little effect on D for X, economic growth my be unaffected
102
PART 5
ECONOMIC GROWTH AND DEVELOPMENT
103
What is the definition of economic growth?
An increase in the output that an economy produces overtime
- increase in an economy’s productive potential (outwards shift in the PPF)
104
Factors affecting short run economic growth?
- interest rates
- exchange rates
- consumer + business confidence
- fiscal policy
- commodity prices
- trading conditions in other countries
105
Factors affecting long run economic growth?
- labour supply
- investment
- productivity
- research
- innovation
- enterprise
106
Characteristics of a recession?
- two quarters of economic growth
- struggles to pay off debt
- decreasing consumer spending
- decreasing trade
- increasing unemployment
107
Characteristics of a slump (or trough)?
- low levels of employment and high unemployment
- low consumer spending
- high levels of business failure
- increase in redundancies, particularly in the service sector
108
Characteristics of a recovery?
- increasing economic growth
- increasing employment levels
- possible GDP growth
- house prices will rise
109
Characteristics of a boom (or peak)?
- incr in tax receipts + public spending
- low welfare or benefit claims
- rise in consumer spending and borrowing
110
What are some evaluation points of economic growth policies?
1. Incidence: state of the economy (recession vs boom)
2. Side effects: equality + environment
3. Speed of changes to the economy
4. Permanence of the growth
5. Interest rates
6. Comparison to other countries growth
7. Resource levels of the country
111
What does the importance of economic growth depend on compared to other economic objectives?
1. Consumer confidence levels
2. Impact of inflation
3. Stage of economic cycle the country is in
4. Importance of other macroeconomic objectives
5. Where on the PPF
6. Developed / developing economy
112
What is economic development?
An improvement in the quality of life and living standards e.g. measures of literacy, life-expectancy and healthcare etc
113
How can economic growth lead to development?
1. Raised out of extreme poverty
2. Households + firms given better financial resources (C + I)
3. Creates new jobs > accelerator effect
4. Reduction in income and wealth inequality
5. Higher profits reinvested
6. Accelerate changes in patterns of production
7. Higher tax revenues
114
Barriers to growth and development?
1. Unequal distribution as only a small % of the economy benefit
2. Corruption
3. Inefficient allocation of resources
4. Environmental problems
5. Military spending
6. Condition of the economy e.g. location + resources
115
Give some information on the economic growth and development of Sri Lanka?
- export heavy
- fiscal balance
> deficit since 2012
> further worsened by tax cuts + covid (-12% in 2020)
- 2022 > default on debt so 20% interest on borrowing
- low gross official reserves + incr poverty since 2022
- IMF approves $3bn bailout (0.0031 Sri Lankan Rupee = $1 USD) > decr 50%
