Unit 4: global interactions

[Unit 4.1 | 2 marks] Outline what is meant by comparative advantage.

"Countries specialise in producing the goods they are relatively most efficient at producing

[Unit 4.1 | 2 marks] Outline the main gain from international trade.

(1) The ability to buy goods and services at a lower price than the domestic price. (2) Consumers buy less expensive products and producers buy cheaper raw materials.

[Unit 4.1 | 4 marks] Explain two reasons why the price of a good may be lower in one country than in another.

"Any two

[Unit 4.1 | 4 marks] Explain how differences in labour force quality shape a country's pattern of trade. Use a real-life example.

"Education

[Unit 4.1 | 4 marks] Explain how international trade gives consumers greater choice.

(1) Consumers can choose between domestically produced products AND products from a range of other countries. (2) Increased competition also tends to improve the quality and variety of products available.

[Unit 4.1 | 4 marks] Explain why countries may need to trade because of differences in resources.

(1) Different countries possess different resources. (2) To produce certain products a country may need to import commodities it lacks. (3) To pay for these imports it must export goods and services to earn foreign currency.

[Unit 4.1 | 4 marks] Explain how international trade can lead to economies of scale.

"(1) Producing for international markets means higher demand

[Unit 4.1 | 2 marks] Distinguish between specialisation and division of labour.

"Specialisation: a country/area concentrates on providing particular goods. Division of labour: the breakdown of jobs into simple

[Unit 4.1 | 4 marks] Explain how increased competition from international trade can benefit consumers.

"(1) Domestic firms must compete with foreign firms. (2) This leads to greater efficiency

[Unit 4.1 | 4 marks] Explain how free trade leads to a more efficient allocation of resources.

"(1) When international trade takes place without government interference

[Unit 4.1 | 3 marks] Explain why trade is a source of foreign exchange and why this matters.

(1) International trade (exports) enables countries to obtain foreign exchange. (2) This means countries have the means to buy (pay for imports) from other countries.

[Unit 4.1 | 3 marks] Explain one downside of international trade.

"Local industries and workers can be displaced by foreign competition

[Unit 4.1 | 2 marks] Outline what is meant by mercantilism.

An early approach to trade: accumulating wealth through exports while limiting imports (the historical starting point before modern trade practice).

[Unit 4.1 | 2 marks] Outline the role of the WTO and how it developed.

Trade institutions evolved from the GATT to the WTO. The WTO sets the rules for global trading and helps settle disputes between countries.

[Unit 4.1 | 2 marks] Why are free trade diagrams microeconomic rather than macroeconomic?

"They look at ONE product

[Unit 4.1 | 2 marks] Why is the world supply curve (Sw) drawn perfectly elastic at the world price?

"Under free trade

"[Unit 4.1 | 4 marks] Using a diagram

explain when a country should EXPORT a good."

"[Unit 4.1 | 4 marks] Using a diagram

explain when a country should IMPORT a good."

[Unit 4.2 | 2 marks] Define trade protectionism.

Government intervention in international trade through the imposition of trade restrictions (barriers) to prevent the free entry of imports into a country.

[Unit 4.2 | 4 marks] Explain why domestic producers and their workers often favour trade protectionism.

(1) A good is imported when its domestic price is higher than the world price (the country is relatively inefficient at producing it). (2) Producers are worse off because they are forced to receive the lower world price and produce a smaller quantity. (3) This reduces producer revenues. (4) Limiting the quantity of imports makes them better off.

[Unit 4.2 | 2 marks] Define a tariff and state two purposes of tariffs.

A tax on imported goods (the most common form of trade restriction). Purposes: (1) protect domestic industry from foreign competition; (2) raise revenue for the government.

"[Unit 4.2 | 4 marks] Using a diagram

explain the effects of a tariff."

[Unit 4.2 | 4 marks] Identify the winners and losers from a tariff.

"WINNERS: domestic producers

[Unit 4.2 | 3 marks] Explain how a tariff on imported wheat could affect the wider economy.

"Importers have to pay a higher price for the imported good. In the case of wheat

[Unit 4.2 | 2 marks] Define an import quota and state one difference from a tariff.

"A legal limit on the quantity of a good that can be imported over a period of time. Effects are similar to a tariff

"[Unit 4.2 | 4 marks] Identify the winners

losers and neutral party from an import quota."

"[Unit 4.2 | 4 marks] Using a diagram

explain the effects of an import quota."

[Unit 4.2 | 2 marks] Define a production subsidy and an export subsidy.

Production subsidy: an amount paid to a firm by the government for each unit it produces. Export subsidy: an amount paid by a government for each unit of output exported.

[Unit 4.2 | 4 marks] Identify the winners and losers from an export subsidy.

"WINNERS: domestic producers

[Unit 4.2 | 4 marks] Explain how 'red tape' can act as an administrative barrier to trade.

"(1) Imports must go through lengthy

[Unit 4.2 | 4 marks] Explain how health and safety or environmental standards can restrict imports.

"(1) Restrictions may be placed on types of goods in a market

[Unit 4.2 | 3 marks] Define an embargo and give an example.

"An extreme quota: a complete ban on imports

[Unit 4.2 Arguments | 4 marks] Explain the infant industry argument for protectionism. Give an example.

"(1) A new domestic industry cannot match established global firms

"[Unit 4.2 Arguments | 4 marks] Explain the low-cost labour argument for protectionism

and evaluate it."

[Unit 4.2 Arguments | 4 marks] Explain the over-specialisation (self-sufficiency) argument for protectionism. Give an example.

"(1) Instead of completely specialising

[Unit 4.2 Arguments | 3 marks] Explain how protectionism can be used to protect domestic employment.

"(1) Some industries decline because they cannot compete with foreign competition. (2) If the firm is large

[Unit 4.2 Arguments | 4 marks] Explain the strategic argument for protectionism and give one limitation.

"(1) In times of war

[Unit 4.2 Arguments | 4 marks] Explain the argument that protectionism is needed to prevent dumping.

"(1) Dumping: selling a large quantity of a good at a lower price than the price of production (e.g. due to a surplus). (2) It can damage domestic producers

"[Unit 4.2 Arguments | 4 marks] Explain the argument that protectionism protects product standards

and give two limitations."

[Unit 4.2 Arguments | 3 marks] Evaluate the argument that import taxes are a good way to raise government revenue.

"Used in countries where it is hard to collect taxes. But your notes argue it is NOT a real reason for protectionism

[Unit 4.2 Arguments | 4 marks] Explain the argument that protectionism can correct a current account (payment) deficit. Give an example and a limitation.

(1) Measures reduce import expenditure to improve a deficit (spending more on imports than earned from exports). (2) Example: Bangladesh suppressed imports of luxury goods (27 categories of luxury and non-essential imports) given its large trade deficit. LIMITATION: it only works in the short run and does not directly address the underlying problem.

[Unit 4.2 Arguments | 4 marks] Explain the argument that protectionism leads to an inefficient use of resources.

"With tariffs and quotas

[Unit 4.2 Arguments | 3 marks] Explain the argument that protectionism leads to higher prices.

"Trade barriers raise prices for both everyday shoppers and local firms. Tariffs on imported goods raise the price of foreign goods and services

[Unit 4.2 Arguments | 4 marks] Explain the argument that protectionism reduces choice and productivity.

"(1) Less choice for consumers: less variety

[Unit 4.2 Arguments | 4 marks] Explain how protectionism can cause retaliation. Give an example.

(1) Tariffs and quotas often cause targeted countries to strike back with their own restrictions. (2) This can damage exporters and create trade wars. Example: US-China trade war from 2018 - Donald Trump imposed a 25% tariff on steel and a 10% tariff on aluminium.

[Unit 4.2 Arguments | 4 marks] Explain how trade protectionism can hinder economic growth.

"(1) Misallocation of resources

[Unit 4.2 Arguments | 15 marks] Evaluate the view that governments should use trade protectionism. (15 marks - essay plan)

"INTRO: define protectionism (barriers to prevent free entry of imports); name tools (tariffs

[Unit 4.4 | 2 marks] Define economic integration.

"The process whereby countries coordinate and link their economic policies. As integration increases

"[Unit 4.4 | 3 marks] Distinguish between bilateral

multilateral and regional trade agreements."

[Unit 4.4 | 2 marks] Why are regional trade agreements more common?

Countries in the same region find it easier to transport goods and to work together.

[Unit 4.4 | 2 marks] What is a trading bloc and what is its aim?

"A group of countries that join together in an agreement to increase trade between them

"[Unit 4.4 | 4 marks] List the stages of economic integration in order

from least to most integrated."

[Unit 4.4 | 3 marks] Define a preferential trading area and give an example.

"Certain products from certain countries get preferential access

[Unit 4.4 | 3 marks] Define a free-trade area and give an example.

"Trade is free among member countries only

[Unit 4.4 | 3 marks] Define a customs union and give an example.

Members trade freely among themselves AND adopt common external barriers against any country outside importing into the union. All common markets and economic and monetary unions are also customs unions. Example: EU.

[Unit 4.4 | 3 marks] Define a common market and give an example.

"A customs union with common policies on product regulations and free movement of goods and services

[Unit 4.4 | 3 marks] Define an economic and monetary union and give an example.

A common market with a common currency and a common central bank. Example: the euro zone (EU members that have adopted the euro).

[Unit 4.4 | 3 marks] Distinguish between a free-trade area and a customs union.

Free-trade area: free trade among members only; each member sets its OWN external barriers. Customs union: free trade among members AND common external barriers against non-members.

[Unit 4.4 | 4 marks] Explain two advantages of membership of a trading bloc.

"Any two

[Unit 4.4 | 4 marks] Explain two disadvantages of membership of a trading bloc.

"Any two

[Unit 4.4 | 2 marks] Define the World Trade Organisation (WTO).

An international organisation that sets the rules for global trading and resolves disputes between its member countries.

[Unit 4.4 | 4 marks] Explain two aims of the WTO.

"Any two

[Unit 4.4 | 3 marks] State three functions of the WTO.

Any three: administer WTO trade agreements; forum for trade negotiations; handle trade disputes; monitor national trade policies; provide technical assistance and training for developing countries; cooperate with other international organisations. It works through trade negotiations or 'rounds'.

[Unit 4.4 | 10 marks] Discuss the factors that limit the effectiveness of the WTO in achieving its objectives. (10 marks - plan)

"(1) UNEQUAL BARGAINING POWER: all countries should have an equal vote

[Unit 4.4 | 15 marks] Evaluate the view that countries benefit from joining a trading bloc. (15 marks - plan)

"FOR: larger markets and economies of scale; competition (efficiency

[Unit 4.5 | 2 marks] Define an exchange rate.

The value of one currency expressed in terms of another. Currencies are traded on foreign exchange (forex) markets.

[Unit 4.5 | 2 marks] Outline what is meant by 'forex'.

Short for foreign exchange - the global decentralised market where national currencies trade.

[Unit 4.5 | 3 marks] Name the three types of exchange rate system.

"Floating (flexible)

[Unit 4.5 | 3 marks] Define a floating exchange rate system.

"The value of the currency is determined solely by demand for and supply of the currency on the foreign exchange market

[Unit 4.5 | 2 marks] Distinguish between appreciation and depreciation.

Appreciation: a rise in the value of a currency (in a floating system). Depreciation: a fall in its value. Appreciation of one currency in terms of another means the other has depreciated.

[Unit 4.5 | 2 marks] Distinguish between revaluation and devaluation.

Fixed systems: revaluation = the currency's (pegged) value is raised; devaluation = it is lowered. Revaluation makes exports dearer and imports cheaper; devaluation makes exports cheaper and imports dearer.

"[Unit 4.5 | 4 marks] Using a diagram

explain a $ APPRECIATION caused by an INCREASE IN DEMAND for the $."

"[Unit 4.5 | 4 marks] Using a diagram

explain a $ APPRECIATION caused by a DECREASE IN SUPPLY of the $."

"[Unit 4.5 | 4 marks] Using a diagram

explain a $ DEPRECIATION caused by a DECREASE IN DEMAND for the $."

"[Unit 4.5 | 4 marks] Using a diagram

explain a $ DEPRECIATION caused by an INCREASE IN SUPPLY of the $."

[Unit 4.5 | 3 marks] US$1 = 0.8 euro. Calculate the euro price of a good selling for US$75.

75 x 0.8 = 60 euro.

[Unit 4.5 | 2 marks] US$1 = 0.8 euro. Calculate how many US$ one euro is worth.

1 / 0.8 = US$1.25.

[Unit 4.5 | 3 marks] The exchange rate changes from US$1 = 0.8 euro to US$1 = 0.9 euro. State what happens to the US$ and to the euro price of a US$75 good.

"The US$ appreciates (each $ buys more euros)

[Unit 4.5 | 4 marks] Identify four determinants of exchange rates.

"Any four: demand for imports and exports; demand for financial investments and capital flows (interest rates

[Unit 4.5 | 4 marks] Explain how a rise in interest rates may affect a country's exchange rate.

"(1) Higher interest rates attract investors to deposit money in the country (FDI and portfolio investment). (2) Inward financial investment rises

[Unit 4.5 | 4 marks] Explain how relative inflation rates affect the exchange rate.

"Lower inflation: foreign demand for exports increases

[Unit 4.5 | 4 marks] Explain how speculation and central bank actions can change the exchange rate.

"SPECULATION: if speculators expect currency X to rise they buy it (demand up

[Unit 4.5 | 3 marks] Explain how growth rates of trading partners and the home country affect the exchange rate.

"High growth in trading partners: foreign demand for exports rises

[Unit 4.5 | 2 marks] What does the mnemonic SPICED stand for in your notes?

"Strong Pound Imports Cheaper

[Unit 4.5 | 4 marks] Explain two possible advantages of a HIGH exchange rate.

"Any two

[Unit 4.5 | 4 marks] Explain two possible disadvantages of a HIGH exchange rate.

"(1) Damage to export industries: exports are relatively expensive overseas

[Unit 4.5 | 4 marks] Explain two possible advantages of a LOW exchange rate.

"(1) Greater employment in export industries: exports are relatively less expensive and more competitive. (2) Greater employment in domestic industries: imports are relatively more expensive

[Unit 4.5 | 3 marks] Explain one possible disadvantage of a LOW exchange rate.

"Inflation: a low currency value makes imported goods

[Unit 4.5 | 4 marks] Define a fixed exchange rate system and explain how a government maintains it.

"The currency's value is pegged to another currency

[Unit 4.5 | 4 marks] Define a managed exchange rate system and explain why businesses value it. Give examples.

"No real-world currency floats completely freely. Under a managed system the currency floats to its equilibrium in the long term but the central bank intervenes periodically to stabilise it in the short term

[Unit 4.5 | 2 marks] Compare the exchange rate systems of Canada and Mexico.

"Canada: Canadian dollar (CAD)

[Unit 4.5 | 15 marks] Evaluate the advantages and disadvantages of a fixed exchange rate compared with a floating exchange rate. (15 marks - plan)

"FLOATING: value set by demand and supply with NO intervention; appreciation/depreciation as demand or supply shift. FIXED: value pegged; requires constant intervention. COSTS OF FIXED: using official reserves

[Unit 4.5 | 15 marks] Discuss the consequences for an economy of a high (strong) exchange rate compared with a low exchange rate. (15 marks - plan)

"HIGH: lower inflation (cheaper imported inputs)