Theme 4: A Global Perspective

Flashcards on Global Economics

Globalisation

The growing interdependence of countries and the rapid rate of change it brings about.

Factors contributing to globalisation

Improvements in transport infrastructure and operations, IT and communication, trade liberalization, international financial markets, and TNCs.

Impacts of globalization on consumers

More choice and lower prices.

Impacts of globalization on workers

Job losses in the western world, increased migration, fall in wages for low skilled workers, increased demand for high skilled workers, and training provided by TNCs.

Impacts of globalization on producers

Firms are able to source products from more countries and sell them in more countries. They are able to employ low skilled workers much cheaper. Firms who are unable to compete internationally will lose out.

Impacts of globalization on governments

The government may be able to receive higher taxes, but they could lose out through tax avoidance. TNCs also have the power to bride and lobby governments, which could lead to corruption.

Impacts of globalization on the environment

The increase in world production has led to increased demand for raw materials, Increased trade and production has also led to more emissions.

Impacts of globalization on economic growth

Globalisation increases investment within countries; the investment of TNCs represents an injection into the economy, and which will have a larger impact due to the multiplier.

Theory of comparative advantage

Countries find specialisation mutually advantageous if the opportunity costs of production are different.

Absolute advantage

Exists when a country can produce a good more cheaply in absolute terms than another country.

Comparative advantage

Exists when a country is able to produce a good more cheaply relative to other goods produced.

Assumptions and limitations of the theory of comparative advantage

No transport costs , costs are constants and that there are no economies of scales, goods are assumed to be homogenous, factors of production are perfectly mobile , there are no tariffs or other trade barriers and there is perfect knowledge.

Advantages of specialisation and trade

World output can be increased if countries specialise in what they are best at producing, this will increase global economic growth, trading and specialising allows countries to benefit from economies of scale , which reduces costs and therefore decrease prices globally and trade enables consumers to have greater choice about the types of goods they buy, and so there is greater consumer welfare.

Disadvantages of specialisation and trade

It can lead to over-dependence, where some countries become dependent on particular exports whilst others become dependent on particular imports, It can cause structural unemployment, The environment will suffer due to the problems of transport as well as the increased demand for resources e.g. deforestation and They may see a loss of culture as trade brings foreign ideas and products to the country.

Comparative advantage influencing the pattern of trade

Countries will trade where there is a comparative advantage to trading. A change in the comparative advantage will affect the trade pattern.

Emerging economies influencing the pattern of trade

Countries grow at different rates and when they grow, they are likely to need to import more goods and services than before as well as exporting more to pay for this.

Trading blocs and bilateral trading agreements influencing the pattern of trade

These increase the level of trade between certain countries and so influence the pattern of trade because trade increases between these countries and decreases between others.

Relative exchange rates influencing the pattern of trade

The exchange rate affects the relative prices of goods between countries. Prices are an important factor in determining whether consumers buy goods and so a change in price will affect the pattern of trade.

Terms of trade

Measures the rate of exchange of one product for another when two countries trade. It tells us the quantity of exports that need to be sold in order to purchase a given level of imports.

Calculation of terms of trade

(average export price index/average import price index) x100

Factors influencing a country’s terms of trade

Exchange rates, inflation and changes in demand/supply of imports or exports affect the terms of trade since these affect the relative prices of imports and exports and an improvement in productivity compared to a country’s main trading partners will decrease the terms of trade since export prices will fall relative to import prices.

Impacts of changes in the terms of trade

If PED of exports and imports is inelastic, a favourable movement in terms of trade would improve the current account on the balance of payments whilst if it is elastic, a favourable movement would worsen the current account and an improvement in the terms of trade is likely to lead to a fall in GDP and a rise in unemployment, since if it is caused by a rise in export prices, exports will fall and if it is caused by a fall in import prices, imports will rise.

Regional trading bloc

A group of countries within a geographical region that protect themselves from imports from non-members. They sign an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers among themselves. They are a form of integration.

Preferential trading areas (PTA)

These are where tariff and other trade barriers are reduced on some but not all goods traded between member countries.

Free trade areas (FTA)

These occur when two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members. Each member is able to impose its own tariffs and quotas on goods it imports from outside the trading bloc.

Customs unions

Involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members. This means that members may negotiate as a single bloc with third parties such as other trading blocs or countries.

Common markets

This is the first step towards full economic integration and occurs when members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed.

Monetary unions

Two or more countries with a single currency, with an exchange rate that is monitored and controlled by one central bank or several central banks with closely coordinated monetary policy.

Economic union

There will be a common market with coordination of social, fiscal and monetary policy.

Advantages of trading blocs

Free trade encourages increased specialisation, and this increases output, according to comparative advantage and the increased trade may create more jobs if it leads to an increase in output.

Disadvantages of trading blocs

Countries are no longer able to benefit from trade with countries in other blocs and the blocs are likely to distort world trade , reducing the benefits of specialisation and they lessen national sovereignty.

Trade creation

Is when a country moves from buying goods from a high cost to a lower cost country.

Trade diversion

Occurs where consumption shifts from a lower cost producer outside the trading bloc to a higher cost producer within it.

World Trade Organisation (WTO)

Was set up in 1995 to replace the GATT, which had aimed to reduce protectionism. It has two main aims: to bring about trade liberalisation and to ensure countries act according to the trade agreements they have signed.

Infant industry argument

An infant industry is one that is just being established within a country. They need to be able to build up a reputation and customer base and will have to cover a lot of sunk costs, meaning their AC will be higher.

Job protection

Governments may be concerned that allowing imports will mean domestic producers will lose out to international firms, and so there will be job losses within the country. Not only would this have negative economic consequences, it would be politically unpopular.

Dumping

Is when a country or company with surplus goods sells these goods off to other areas of the world at very low prices, harming domestic producers in those countries.

Tariffs

These are taxes placed on imported goods which make them more expensive to buy, making people more likely to buy domestic goods.

Quotas

These are limits placed on the level of imports allowed into a country , meaning people are forced to buy domestic goods if they want that good and the quota is already used up.

Subsidies to domestic producers

These are payments to domestic producers which lower their costs and help them to be more competitive by enabling cheaper prices.

Non-tariff barriers

Countries can introduce an embargo, which is a total ban on imported goods, they can introduce import licensing when countries/firms need a license to be able to import and the use of legal and technical standards means that some products cannot be sold in the country

Impact of protectionist policies

There are higher prices for consumers as they are unable to buy imports at the cheaper price and domestic producers tend to benefit from import controls since they have less competition so can sell more goods at a higher price than otherwise.

Equity

The poorer members of society far more than the well off as it is they are no longer able to afford the products

Balance of payments

A country who participates in foreign trade will be sending and receiving money from other countries and they keep track of these transactions in a balance sheet.

Current account

Trade in goods, trade in services and income and current transfers.

Financial account

Foreign direct investment (FDI), portfolio investment and other investments.

Deficits and surpluses on the balance of payments

There can be deficits and surpluses on particular part of the accounts; a country can run a deficit on the current account if they are able to have a surplus on the capital account.

Expenditure switching policies

Tariffs or quotas will reduce the attractiveness of imports. However, they are likely to cause trade wars as other countries implement protectionist policies

Significance of global trade imbalances

Since the late 1990s, there have been concerns about global imbalances which can be measured in two ways: imbalances on the current account and imbalances in assets owned abroad or borrowing owned abroad.

Exchange rate

The purchasing power of a currency in terms of what it can buy of other currencies.

Free floating system

Is where the value of the currency is determined purely by market demand and supply of the currency, with no target set by the government and no official intervention in the currency markets.

Managed floating

Is where the value of the currency is determined by demand and supply but the Central Bank will try to prevent large changes in the exchange rate on a day to day basis.

Fixed system

Is when a government sets their currency against another and that exchange rate does not change.

Competitive devaluation/depreciation

One problem is that other countries may follow and reduce their currency as well. This is unlikely if there is a current account deficit but if the country who devalues has a surplus, other countries are likely to retaliate.

Marshall-Lerner condition

States that the sum of the price elasticities of imports and exports must be more than one (i.e. elastic) if a currency devaluation is to have a positive impact on the trade balance.

International competitiveness

The lower the level of international competitiveness, the more likely that the country will face a current account deficit. For goods to be competitive internationally, they need to be cheap, have good quality, design or after-sales and good marketing.

Unit labour costs

Total wages divided by real output: the cost of employing workers for each unit of good.

Productivity

A rise in productivity will cause a rise in the UK’s competitiveness because costs are lower and so prices will fall. Labour productivity is important.

Regulation

High levels of regulation slow down business decisions, making them less adaptable to changes in the global market.

Benefits of competitiveness

There will be economic growth, both by supply side improvements due to efficiency and investment and by demand side improvements relating to X-M.