4.1- International economics

def globalisation

the increasing integration of the world’s economies through trade, capital flows, migration and the spread of technology + culture

Causes of globalisation

• reduction in trade barriers

• improved transport

• ICT revolution- internet enables global communication from remote areas around the world

• growth of MNC’s (multinational corporations) operating across borders

• financial deregulation - capital moves freely between countries

Benefits of globalisation

• lower prices for consumers due to increased competition + access to cheaper imports

• greater choice of goods + services

• Higher economic growth - countries access larger markets

• FDI inflows → jobs created, technology transfers to developing countries

• Economies of scale - firms produce for global market → lower unit costs

Drawbacks of globalisation

• structural unemployment in developed nations as jobs move to lower wage countries

• increased inequality- gains unevenly distributed within + between countries

• environmental damage- increased transport emissions, race to the bottom on regulations

• countries become interdependent → financial crisis spreads rapidly (e.g 2008 GFC)

Define MNC

firm operating in multiple countries

define FDI

Foreign direct investment

investment by a firm into productive assets in another country

def ‘race to the bottom’

countries compete by lowering tax / regulations to attract business

def absolute advantage

• A country has absolute advantage if it can produce a good using fewer resources than another country

• both countries benefit by specialising in what they produce most efficiently and trading

def comparative advantage

• A country has comparative advantage if it can produce a good at a lower opportunity cost than another country

• even if one country is absolutely better at producing everything, both countries still benefit from specialising in their comparative advantage and trading

• fundamental argument for free trade

ADV of specialisation + trade

• both countries consume outside their PPF- more than they could alone

• lower prices for consumers through access to cheaper imports

• greater efficiency- resources allocated to most productive uses globally

• encourages innovation + competition

• economies of scale - specialising increases output → lowers average costs

Limitations of Comparative Advantage theory:

• Assumes no transport costs — unrealistic

• Assumes perfect factor mobility — workers can't always switch industries easily

• Ignores economies of scale — may favour large established producers

• Static theory — doesn't account for how comparative advantage changes over time

• Trade may not be free — tariffs, quotas and subsidies distort the theory

def pattern of trade

refers to which goods and services countries export + import, and who they trade with

DIS of specialisation + trade

• over dependence / vulnerability = specialising in one industry makes a country vulnerable if global demand for that product falls E.g- oil price collapses

• structural unemployment = as countries specialise, some domestic industries shrink or disappear- skills may not be transferable to new sectors

• Infant industry problem = developing nations may never be able to build new industries if they face immediate competition from established foreign producers

What are factors determining pattern of trade?

• natural resources

• comparative advantage

• level of development

• geographical proximity

• exchange rates

def terms of trade

the ratio of a country’s average export prices to average import prices

• calculated by: (index of export prices DIVIDED BY index of import prices) x 100

What are causes of improvements in ToT

1. inflation in the home country (raises export prices)

2. higher global demand for the country’s exports

3. appreciation of the exchange rate → export prices rise in foreign currency terms

4. a fall in global commodity prices → lowers import costs for manufacturing nations

Causes of a deterioration in ToT

1. depreciation of the exchange rate

2. increased global supply of the country’s export commodity → price falls

3. rising global commodity prices (worsens ToT for commodity importers)

4. lower inflation relative to trading patterns

Effects of a deterioration in ToT

1. standard of living falls- need more exports to buy the same imports

2. may improve export competitiveness if caused by exchange rate depreciation

3. developing nations particularly vulnerable - often export primary commodities whose prices are volatile and trend downward relative to manufactured imports

Reasons for patterns of trade

1. comparative advantage

2. Trade blocs

3. protectionism

4. transport costs

5. non - price factors

6. exchange rate

7. inflation rates

define trade bloc

A trade bloc is a group of countries that reduce or remove trade barriers between themselves and often apply common policies towards non-members.

• These agreements can enhance economic cooperation and promote trade among member countries→ improving access to markets and increasing competitiveness.

define protectionism

when a government restricts international trade to protect domestic industries from foreign competition