Theme 4: A global perspective

CARD 56 (4.2), CARD 65 (4.3), CARD 105 (4.4), CARD 106? (4.5)

Globalisation definition

The process in which national economies have become increasingly integrated and interdependant

Causes of globalisation (5)

Trade liberalisation
Trading blocs
Growth of MNCs
Technological advances
Greater mobility of labour and capital

Advantages of globalisation (5)

Lower prices
Benefits of trade
Greater employment
Large economies of scale
Free movement of labour and captial

Disadvantages of globalisation (6)

Growing inequality
Higher structural unemployment
Environmental costs
Trade imbalances
Risk of external shocks
Less cultural diversity

Absolute advantage

When a country can produce a product using fewer factors of production than another nation

Comparative advantage

A country should specialise in the goods and services it can produce at the lowest opportunity cost, and then trade with another country

Specialisation

When a worker, firm, region or country produces a narrow range of goods and services

Advantages of specialisation (5)

Larger range of goods and services
Greater output
Greater quality
Benefits of trade
Reduces problem of scarcity

Disadvantages of specialisation (5)

Finite resources
Over-reliance on weather
Changing tastes/fashions
Interdependence
De-industrialisation

Terms of trade equation

(Weighted average of export prices) x (Weighted average of import prices) x100

Terms of trade

Indicates the quantity of exports that must be sold to purchase a given level of imports

Factors influencing the terms of trade (short run) (3)

Change in demand/supply of exports/imports

Inflation rates

Exchange rate movements

Factors influencing the terms of trade (long run) (3)

Incomes

Productivity

Technology

Trading bloc

A group of countries that join together and agree to increase trade between themselves

Free trade area

No trade barriers
Can trade with other countries

Customs union

No trade barriers
Common external barrier

Common market

No trade barriers
Common external barrier
Free movement of labour and capital

Monetary union (4)

No trade barriers
Common external barrier
Free movement of labour and capital
Common currency and central bank

World Trade Organisation (WTO)

International organisation that regulates world trade

WTO's ideal world trade (5)

Non-discriminatory
Free from barriers/protectionism
Predictable
Promotes fair competition
Beneficial for developing countries

Role of WTO (7)

Set and enforce rules of international trade
Resolve trade disputes
Provide a forum for negotiating trade liberalisation
To monitor further trade liberalisation
Increase transparency of decision making process
Help developing countries benefit
Cooperate with other major economic instituions

How WTO conflicts with trading blocs (5)

Distort world trade
Averse effects on non-member states
Inefficient allocation of resources
Increased protectionism
WTO loses power as trading blocs become more powerful

Tariff

Tax on imports

Tariff revenue =

(Sw+t-Sw) x (Q4-Q3)

Quota

Quantity limit on amount of imports

Trade subsidy

Subsidy given to domestic suppliers

Aim of trade subsidy

To reduce costs of production → passed onto consumer as lower prices → makes firm more competitive

Non-tariff barriers

Voluntary export restraint (countries limit exports to each other
Intellectual property laws (patents, copyright etc)
Technical barriers (health and safety etc)
Financial protectionism (govt. tells banks to prioritise local firms when allocating loans)
Hidden protectionism (discrimination against foreign workers)
Exchange controls (limit of capital flows between countries)
Currency intervention (competitive devaluation)

Balance of Payments

Measures the inflows and outflows of money into and out of a country

Components of the current account

Trade in goods (trade balance)
Trade in services (trade balance)
Income e.g. remittances (income balance)
Transfers - govt. fees e.g. aid, EU payments (income balance)

Causes of current account surplus (6)

Exporting more than importing
Recession
Competitive exports (deflation/disinflation/high quality exports)
High level of natural resources
Exports worth more than imports
High levels of exports

Causes of current account deficit (6)

Importing more than exporting
Sustained economic growth
Uncompetitive exports (inflation/poor quality products)
Low level of natural resources
Exports worth less than imports
Low levels of exports

Components of financial account (3)

FDI
Portfolio investment
Reserves

Capital account

Minor payments/transfers

Floating exchange rate

Currency value set by market
No govt. intervention
No target for exchange rate
Speculation causes change in floating exchange rate
e.g. British Pound

Advantages of a floating exchange rate (4)

Reduces need to hold large foreign currency reserves
Freedom to set interest rates
Automatic correction
Less risk

Disadvantages of floating exchange rate (2)

Can be volatile - reduces FDI
A lower, more competitive exchange rate does not guarantee a current account surplus

Fixed exchange rate

Govt. fixes currency value to another currency
Central bank must hold sufficient currency reserves
e.g. Chinese Yuan

Advantages of a fixed exchange rate

Stability attracts FDI
Stability controls inflation
Leads to lower borrowing costs
Less speculation

Disadvantages of a fixed exchange rate

Cannot use interest rates in macro policies (monetary policy)
Developing countries may not have sufficient foreign currency reserves to fix
Devaluation of exchange rate leads to cost-push inflation

Managed exchange rate

Currency value set by market forces
Central bank occasionally intervenes
Currency is a key target of monetary policy
e.g. Japanese Yen

Competitive devaluation intentions

Make exports cheaper and imports more expensive
Increases growth
Increases inflation
Improved current account

Revaluation

When the value of the currency is adjusted

Appreciation

When the value of the currency increases

Devaluation

When the value of the currency is lowered in a fixed exchange rate system

Depreciation

When the value of the currency falls

Factors influencing exchange rates

Inflation
Speculation
Other currencies
Govt. finances
Balance of payments
International competitiveness

Government intervention in the currency markets - interest rates (hot money)

An increase in interest rates is more attractive for foreign investors
This increases demand for currency, appreciating the value of the currency

Government intervention in the currency markets - quantitative easing

Increases supply of money and depreciates currency

Government intervention in the currency markets - foreign currency transactions

Buying and selling foreign currency to manipulate domestic currency

International competitiveness

The ability of a nation to compete successfully overseas and to sustain improvements in living standards and output

Components of international competitiveness

Price competitiveness
Non-price competitiveness
Ability to attract FDI

Unit labour costs =

Total labour cost / output

Relative export prices

Ratio of one country's export prices relative to another country

Factors that influence international competitiveness (8)

Unit labour costs
Labour flexibility
Labour skills
Tax regimes
Innovation
Infrastructure
Regulation
Economic stabilility

Absolute poverty

Cannot access the most basic, life sustaining goods and services

Relative poverty

Incomes below a given average in society

Equity

Fair distribution of income

Equality

Equal distribution of income

Causes of poverty (10)

Unemployment - structural and cyclical
Poor education/skills
Poor health/healthcare
Born into poverty
Tax cuts for the rich
Subsistence agriculture
Natural disasters
Corruption
Wars and conflicts
Regressive taxes

Income

A flow measured over a given period of time

Wealth

A stock; assets with a market value that can generate income

What are the 2 measurements of inequality?

Lorenz curve - visual indicator
Gini coefficient - mathematical indicator

Causes of inequality

Wages - underemployment and discrimination
Regressive payments and taxes
Unemployment
Inequality between countries

What 3 areas does the Human Development Index (HDI) measure and how?

Education - adult literacy, school enrolment
Health - life expectancy
Living standards - GDP/capita, PPP

How is each measure in the HDI weighted?

Equally

Advantages of the HDI

Broad measure
Focuses on development outcomes
Allows progress to be measured over time

Disadvantages of the HDI

Distribution of income/inequality not measured
No weighted averages
No measures of freedom and choice
Other factors not measured (e.g. crime, corruption, negative externalities, poverty)

Other indicators of development

Gender-related Development Index (GDI)
Human Poverty Index (HPI)

Factors influencing growth and development (11)

Primary product dependency
Harrod-Domar Model
Foreign currency gap
Capital flight
Demographic factors
Debt
Access to credit and banking
Infrastructure
Education/skills
Property rights
Non-economic factors

Primary product dependency

Developing countries rely on primary products/raw materials
Volatile prices makes long-term planning difficult
Fall in prices leads to fall in export incomes, funding for infrastructure and education falls
Not sustainable as resources are finite

Harrod-Domar Model

Investment, saving and technological change are required for economic growth
(Developing countries do not have this)

Harrod-Domar Model: rate of growth =

Savings ratio / capital output ratio

Foreign currency gap

Current account deficit > value of capital inflows

Capital flight

When money leaves the economy through outward investment
Triggered by economic threat (e.g. hyperinflation)

Demographic factors

High birth rate links with poverty and environmental damage

Debt

Links with poverty and inequality

Access to credit and banking

Difficult to save in a country with a poor banking system

Infrastructure

Poor infrastructure discourages FDI due to high production costs

Education/skills

Important for developing human capital
Ensures that the economy can be productive and produce high quality goods and services

Property rights

No property rights mean that entrepreneurs cannot protect their ideas
No incentive to innovate

Non-economic factors (3)

War
Corruption
External shocks

Market-orientated strategies for growth and development (7)

Trade liberalisation
Promotion of FDI
Removal of subsidies
Floating exchange rate systems
Microfinance schemes
Privatisation

Trade liberalisation

Free trade increases world GDP

Promotion of FDI

Creates employment
Encourages innovation
Promotes long-term, sustainable growth
Provides developing countries with funds to invest and develop

Removal of subsidies

Subsidies distort the free market
Leads to inefficient allocation of resources
However, certain goods will be under-provided (e.g. farming)

Floating exchange rate systems

Determined by the market mechanism

Microfinance schemes

Distribution of small loans to individual entrepreneurs to stimulate growth
Reduces dependency on primary products
Reduces inequality

Privatisation

Govt. sells a firm to a private company
Increases efficiency
Increases quality
Increases allocative effieciency
Increases govt. revenue

Interventionist strategies for growth and development (6)

Development of human capital
Protectionism
Managed exchange rates
Infrastructure development
Joint ventures with global companies
Buffer stock schemes

Development of human capital

Improves productivity
Helps countries move up supply chain

Advantages of protectionism

Reduces trade deficit
Protects infant industries

Disadvantages of protectionism

Distorts the market → loss of allocative efficiency
Higher prices
Less choice
No competition → no incentive to increase efficiency
Tariffs are regressive
Risk of retaliation

Infrastructure development

Lower supply costs
Increases mobility of labour
Attracts FDI
Increases employment

Joint ventures with global companies

Partnership between 2 global firms
Increases technological knowledge
Foreign markets

Advantages of buffer stock schemes

Reduces price volatility
Incomes of farmers remain stable

Disadvantages of buffer stock schemes

Historically unsuccessful
Govt. may not have financial resources to buy up stock
Storage is difficult and expensive

Other strategies for growth and development (3)

Fairtrade
Aid
Debt relief

Advantages of fairtrade schemes

Ensures farmers recieve fair price for goods
Helps farmers plan for long-term due to stable income
Encourages sustainability, environmental protection and stops child labour

Disadvantages of fairtrade:

Distorts market
Non-fairtrade