global economy

what are the benefits of trade?

• increased competition

• lower prices

• greater choice

• acquisition of resources (specifically needed resources

• more foreign exchange earnings

• access to larger markets

• economies of scale

• more efficient resources

• more efficient production

what is free trade

• total Adsense go any form of intrusion to barrier in the flow of goods and services between countries which disadvantages foreign firms in favour of domestic firms

should a country import or export a good?

if the domestic price without trade is lower than world price = export

if the domestic price is higher than world price = import

how export revenues and import expenditures

import expenditure is the amount of money spent to buy the goods

the free world market

involves many individuals to firms in countries around the world that buy and sell

the world price

determined by the world demand the world supply

world demand

the sum of all country demand

world supply

the sum of all country supply

a perfectly elactic supply curve

st the world price simply means that all are bought and sold at the world price and no other price

define absolute advantage

the ability of one country to produce a good using fewer resources than another country

theory of absolute advantage

if countries specialise in and export the good in which they have an absolute advantage the result is increased production and consumption for each country

comparative advantage

one country has a lower opportunity cost in the product of a good than another country

assumptions of competitive advantage

• no transport costs

• full employment

• no barriers of trade

calculations for opportunity cost

one good/ another

determined the ppc

intersection = one country has an absolute advantage in one of the 2 goods

ppc s do not interaction- the country on top has absolute advantage

parallel = they both have identical opportunity costs therefore no trade is nessecary

limitations of the theory of comparative advantage

• all factors of production are fixed

• technology is fixed

• there is perfect mobility of fops

• full employment of resources

• free trade in one country

• perfect competition

• 2 economies producing 2 goods

what is trade protection

involves government intervention in international trade through the imposition of trade restriction to prevent free entry of imports in an country

define tariff

taces on imported good can be ad volume or specific

types of protection

• tariffs

• quotes

• subsidies

• voluntary extort restraints

• administrative obstacle

• health and safety standards

• environmental standards

closed economy draw diagram

winners of tariff

• domestic producers

• domestic employment in the protected industry

• the government gains tarriff revenue

losers in tariffs

• domestic consumers

• domestic income distribution

• increased inefficiency of production

• friegn producers are worse off

• a global misallocation of goods and services

how to calculate surplus

b times h /2

import quotas

legal limit to the quantiy of good that can be imported over a particular time period and do not create revenue for government

winners of the quota

• domestic producers

• domestic employment increases

• the government neither gains or losses

losers

• domestic consumers

• domestic income distribution

• increased inefficiency in production

• the eporting countries may ne worse off

• misallocation of resources

production subsidies

a payment by the government to. firm for each unit of output produced

winners of production subsidy

• domestic producers

• domestic employment

• consumers are not effected

losers of production subsidy

• the government budget

• taxpayers

• incredible inefficiency in production

• exporting countries

• misallocation

export subsidies

the subsidy is paid for rah unit of good that is exported

winners of export subsidies

• producers

• domestic employment

losers

• consumers

• government budget

• taxpayers

• domestic income

• incredeys inefficacy in production

• the exporting countries

administrative barriers

when foreign producers face increased costs in complying with administrative issues in importing counties such as content documentation and sales licenses

what are these

• health and safety

• environmental standards

• nationalism

• currencies and exchange rates

arguments for trade protection

• protection of infant (sunrise) industries

• national security

• health and safety

• environmental standards

• anti-dumping

• unfair competition

• balance of payments correction

• government revenue

• protection of jobs

• Economically least developed country (ELDC) diversification

infant industry

a new domestic industry that has not had time to develop itself - all protections can help

explain anti dumping

dumping refers to the practice of selling goods in the international markets at a price below the cost of producing it

balance of payments

the monetary account of all the dealings a country has with another country so if the export is less than the import it not good

arguments against trade protection

• misallocation of resources

• retaliation

• increased costs

• higher prices

• less choice

• domestic firms lack incentive to become more efficient

• reduced export competitiveness

preferential trade agreements

is an agreement between 2 or more countries to lower trade barriers on particular products in trade between each other

bilateral trade agreement

between 2 countries and is designed to increase trade by lowering tariff and non tariff barriers on a rang of goods

multilateral trade agreement

between 3 or more countries

regional trade agreement

between several countries in a geographical region to reduce trade barriers and encourage free trade

economic integration

growing economic relations and cooperation between countries arising from trade or other agreement that link their economies together

trading bloc

groups of countries that join together in some form of agreement in order to increase trade themselves or to gain economic benefits from co-operation levels

types of trading blocs

• pta

• Free trade areas/agreements

• Customs unions

• Common markets

• monetary union

pta

preferential trading area is a trading bloc that giver preferential access to certain products from certain countries

• lower tariffs

free trade area

countries agree to freely trade among themselves but are also able to trade with countries in whichever way they desire

custom union

free trade amongst themselves but also similar eternal barriers against any country

common market

custom union with common polices on product regulation and free movement of goods and service s

advantages of trading blocs

• trade creation (HL only)

• greater access to markets offer potential for economies of scale

• with freedom of labour, there are greater employment opportunities

• membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations

• greater political stability and cooperation

disadvantages

• trade diversion (HL only)

• loss of sovereignty

• challenge to multilateral trading negotiations

monetary union

greater than common market when countries adopt a common currency and a common central bank

advantages of monetary union

• no risk and uncertainty

• no transaction costs

• price transparency

• higher level of investment

• low inflation

• higher rates of economic growth

disadvantages

• loss of the ability to consudtic monetary policy for domestic needs

• loss of economic sovereignty

• singly monetary policy

• no common fiscal policy

wto

the world trade organisation describes itself as an organisation for liberalising trade

functions

• administrates trade agreements

• forum for trade negotiations

• handles trade disputes

• monitors national trade polices

• technical and training assistance for small countries

• co-operation with integrations organisations

critics

• The WTO is accused of promoting trade rules that do not favour developing countries.

• The WTO has been unable to reach an agreement on agricultural protection and services.

• The WTO is accused of not distinguishing between developed and developing economies.

• The WTO is accused of ignoring environmental and labour issues.

• WTO members have unequal bargaining power.

• A key challenge faced by the WTO: fragmentation of global trade.

• Another key challenge faced by the WTO: the blocking of its power to resolve disputes.

define foreign exchange

Refers to foreign national currencies, i.e. for any country, it refers to currencies other than its own.

echange rate

the price of a currency expressed in form of another currency

fixed exchange rate

an exchange rate regime where the value of a currency is fixed or pegged to the value of another currency

floating exchange rate

an exchange rate system where the value of a currency is allowed to be determined solely by the demand for and supply of the currency on the foreign echnange market

managed exchange rate

where the value of the currency is able to float but with some interference by the government

how are the floating rates determined

by market forces aka the forces of demand and supply

dare the floating exchange rate

appreciation

when the value of the nations currency rises relative to the other currencies as the result of market forces

depreciation

when the value of a nations currency falls relative to other currencies as the result of market forces

draw graphs for appreciation

draw graphs for depreciation

what factors impact the demand for a currency

• buy foreign export goods and services

• invest in European firms

• save their money in European banks

• make money by speculating on the currency

so what factors could influence the demand for the euro to rise

• European inflation is lower than other countries

• making European goods more competitive

• foreign incomes have risen

• tastes have changes

• consumer confidence

factors that impact supply to foreign markets

• europeans to buy overseas goods and serves

• the want to invest outside the country

• consumer confidence is low

• incomes have risen

• tastes have changes to foreign

consequences of appreciation

• markes exports more expensive to foreigners

• imports are less expensive

• net export to decrease

consequences of depreciation

• net exports increase

• exports less expensive

• imports more expensive

consequences on inflation

consequences for unemployment

appreciation - unemployment increase

depreciation- unemployment decreases

consequences for economic growth

consequences for foreign debt

• appreciation = easer for indebted countries to repay depts

• depreciation = more difficult for countries to pay back their debts

devaluation

when the value of a nations currency falls relative to other currencies, as a result of intervention of the government or the central bank

revaluation

when the currencies value rises due to deliberate policy decision by the government or central bank

intervention used to maintain foxed exchange rates

• when they begin buying or selling its currency to adjust interest rates to induce investors to buy or sell the currency

• increase in interest rates to attract investors

how is the managed exchange rate managed?

the rate floats but there is periodic intervention by authorities to decrease change rate movement and at the same time maintain flexibility

• used by economically devolped countries

overvalued currency

a currency whose value is tainted lower that its market equilibrium, may occur is fixed or managed

undervalued currency

a currency whose value is maintained lower that the equilibrium, occurs in fixed and managed

what can undervalued and overvalued currencies can not do?

they can not enter came about in a freely floating exchange rates

advantages of overvalue?

makes imports less expensive, was used by less devilled countries in the past, to speed up industrialisation

disadvantages of overvalue?

• makes exports more expensive, hurting the export industry

• worsens the current account balance a

• cheap imports create unfair competition for domestic producers, leading to potential job losses.

advantages of undervalued currencies

• makes exports less expensive, promotes growth of some industries

• promotes employment

• promotes economic growth

disadvantages of undervalued currencies

• create unfair competition

• invites reptilian through competitive devaluations

• makes imports more expensive

reasons for government intervention

• lower exchange rates to increase employment

• raise exchange rate in order to fight inflation

• matin rates

• avoid large fluctuation

• achieve relative exchange rate stability

• improve a current account deficit which is where spending on imported goods and services is greater than the revenue received from exported goods and services

advantages and disadvantages of high exchange rates

advantage-

• makes imports easer to buy

• downward pressure on inflation

• forces domestic producers to improve efficiency

disadvantages-

• it will damage export industries

• it will damage domestic industries

low exchange rate ad and dis

advantages-

• greater employment

disadvantages-

• increases import costs

advantages of a fixed exchange rate-

• reduce uncertainty

• business are able to plan ahead

• more sensible government policies since controlling inflation rates will essential

disadvantages of a fixed exchange rate

• the government is compelled to keep exchange rate

• manipulation of interest rats

• low employment may be sacrificed

• a lot of variables come into play that can not be always accounted for

• may create international disagreement

floating rates advantages

• self adjusting

• less speculation

• less need for reserves

disadvantages of floating exchange rates

• uncertainty

• less control over inflation

• success depends of elastics

define balance of payment

a countries record of all transactions between residents of a country and its residents

what does is consist of

• current account

• capital account

• financial account

define inflow

consist of export revenue, payments received from other countries