4.1 International Economics

Aims of Globalisation

Increase integration of economies, increase international trade, greater movement of labour

Contributing factors of globalisation

Lower transport costs, trade liberalisation, faster economic development

Impact of globalisation on countries

Higher growth but increased vulnerability to global shocks

Impact of globalisation on governments

Increased difficulty to regulate multinational corporations and more FDI

Impact of globalisation on producers

Larger markets and lower costs which increases competition

Impact of globalisation on consumers

More choice, lower prices

Impact of globalisation on workers 

More new jobs

Impact of globalisation on the environment

Increased pollution and resource depletion but could spread green technology

Absolute advantage

When a country can produce more of a good than another country with the same resources

Comparative advantage

When a country can produce a good at a lower opportunity cost than another country

Terms of trade

Index of export prices / Index of import prices × 100 

Factors influencing terms of trade

Global demand for exports, global supply of imports, trade restrictions, exchange rates

The effects of an improvement in the terms of trade

A country can buy more imports per unit of exports; may worsen competitiveness 

The effects of a deterioration in the terms of trade

A country must export more to buy the same imports; can harm living standards

Free trade area

No tariffs between members and each country sets its own external tariff on non-members

Customs union

Free trade between members and a common external tariff on non-members

Common market

Free trade between members and free movement of labour and capital

Monetary union

A common currency and shared monetary policy with significant integration

Tariffs

Taxes on imports imposed by a government

Quotas

A limit on import quantities of a specific good

Subsidies

Government granted money to domestic businesses in order to keep the price of their goods low

Non-tariff barriers

Regulations on standards qualities and origin of ingredients/parts

The effects of protectionism on consumers

Higher prices and less choice

The effects of protectionism on producers

Domestic firms gain short-run protection, foreign firms lose demand (depending on PED)

The effects of protectionism on governments

Increased tax revenue

The effects of protectionism on living standards

Fall due to increased prices

Current account

Records trade in goods, trade in services, income, transfers

Trade balance

Value of exports - Value of imports

Income (Current account)

Flows such as remittances for UK workers working abroad

Transfers (Current account)

Government transfers such as EU fees or foreign aid

Capital account

Records capital transfers and transactions in non-produced, non-financial assets like debt forgiveness or trademarks. 

Financial account

Records transactions involving financial assets and liabilities between residents and non-residents like FDI, portfolio investments 

Structural current account defecit

A persistent trade imbalance caused by underlying economic weaknesses like low productivity, lack of competitiveness, or deindustrialisation. 

Cyclical Current Account Deficit

A temporary trade imbalance due to economic fluctuations, such as a boom increasing imports or a recession reducing exports. 

Floating exchange rate

The value of the currency is determined fully by market forces of supply and demand, with no government intervention.

Fixed exchange rate

The government or central bank sets the currency’s value at a specific rate against another currency and actively intervenes to maintain that level.

Managed exchange rate

The currency is mostly determined by market forces, but the central bank occasionally intervenes (buying or selling currency) to keep it within a preferred target range.

Revalutation

Government raises value of fixed currency

Appreciation

Market forces raise value of floating currency

Devaluation

Government lowers value of fixed currency

Depreciation

Market forces lower value of floating currency

Factors influencing floating exchange rates

Interest rates, inflation, trade balance, speculation, FDI

Effect of buying domestic currency

Increases demand and raises exchange rate

Effect of selling domestic currency

Increases supply and lowers exchange rate

Effect of depreciation on current account

Improves if PED for exports and imports is strong

Effect of depreciation on imports

Raises prices, potentially causing demand-pull/cost-push inflation

Effect of depreciation on FDI

Increases due to cheaper cost of investing

Relative unit labour costs

The cost of labour per unit against other countries

Relative export prices

The prices of exports compared internationally

Benefits of international competitiveness

Export growth, higher employment, stronger GDP