4.1 international economics

globalisation

refers to the growing interdependence of countries and the rapid change it brings about

characteristic of globalisation

• movement towards free trade of goods and services

• free movement of labour and capital

• free interchange of technology and intellectual capital

factor contributing to globalisation

• improvements in transport and infrastructure

• improvements in IT and communications

• trade liberalisation

• TNCs 

• international financial markets

impacts of globalisation on consumers

• consumers have more choice- wider range of goods available all around the world

• lead to lower prices as firms take advantage of comparative advantage and produce in countries with lower costs

• lead to rise in prices

• loss of culture

impacts of globalisation on workers

• some gain others lose

• increased migration

• inequality

• sweatshops

impacts of globalisation on producers

• firms are able to source to more countries

• reduces risk of collapse of the market

• firms who are unable to compete internationally and will lose out

impacts of globalisation on governments

• may receive higher taxes

• maximise gains and minimise losses

impacts of globalisation on the environment

• increased demand for raw materials

• more emissions

• globalisation may aim to tackle climate change

impacts of globalisation on Economic growth

• increases investment within countries

• TNCs may bring world class management techniques and technology

• political instability

comparative advantage

Countries should specialise in goods at which they produce the lowest opportunity cost

absolute advantage

• a country can produce a good more efficiently than its competitors, using the same amount of resources

assumptions and limitations of the theory

• comparative advantage assumes there are no transport costs- these could lower or prevent any comparative advantage

• assumes costs are constant and there are no economies of scales

• goods are assumed to be homogenous

• assumes factors are perfectly mobile- no tarrifs or other trade barriers

• depends on the terms of trade between countries

advantages of specialisation and trade

• show how the world output can be increased

• allows countries to benefit from economies of scale

• Different countries have different factors of production and so trade allows countries to make use of factors of production, or the things produced by these factors, which they otherwise may have been unable to

• greater competition

disadvantages of specialisation of trade

• lead to over dependence

• cause structural unemployment- jobs are lost to foreign firms

• the environment will suffer- transport

Patterns of trade

refers to changes in a country’s imports and exports

Factors influencing the pattern of trade

• comparative advantage

• impact of emerging economies

• growth of trading blocs and bilateral trading agreements

• changes in relative exchange rates

comparative advantage

• countries will trade where there is a comparative advantage to trading

• there has been a recent growth in the exports of manufactured goods fro developing countries to developed countries

• because developing countries have gained an advantage in the production of manufactured goods due to their lower labour costs

emerging economies

• countries grow at different rates and when they grow they are more likely to need to import more goods and services than before exporting more to pay for this

• emerging economies take up a larger proportion of a countries imports and exports than they had previously

trading blocs and bilateral trading agreements

• these increase the level of trade between certain countries and so influence the pattern of trade 

• because trade increases between these countries and decreases between others

Relative exchange rates

• affects the relative prices of goods between countries

• prices are an important factor in determining whether consumers buy goods and so a change in price will affect the pattern of trade

terms of trade

• prices

• measures the rate of exchange of one product for another when two countries trade

• tells us the qty of exports that need to be sold in order to purchase a given level of imports

calculation of terms of trade

(average export price index/ average import price index) x100

factors influencing a country’s terms of trade

• an improvement in the terms of trade will be caused by a rise in export prices or fall in import prices

• short run- exchange rates, inflation and changes in demand/ supply of imports or exports

• improvement in productivity

• changes in incomes

impacts of changes

• if imports and exports are inelastic- improvements to the current account on the balance of payments

• if its elastic it would worsen the current account

• improvement in terms of trade is likely lead to a fall in GDP- rise in price of exports, exports fall

trading blocs

• a group of countries within a geographical region that trade together with reduced or eliminated trade barriers

preferential trading areas

• where tariff and other trade barriers are reduced on some goods traded between member countries

free trade areas

two or more countries in a region agree to eliminate trade barriers on all goods from other members

customs union

• acceptance of a common external tariff against non members

common markets

• free movement of goods, services, capital and labour

• significant level of harmonisation of micro economic policies

• common policies such as common agricultural policy

monetary unions

• adopting the same currency

• exchange rate is monitored and controlled by one central bank

EU zone

o The European Central Bank distributes notes and coins, sets interest rates, maintains a stable financial situation and manages the foreign currency reserves.

o In the EU, the governments agreed not to exceed a fiscal deficit of more than 3% and not to have a National Debt of more than 60%.

• for monetary unioun to be successful there should be free movement of labour, capital mobility and wage and price flexibility

economic union

the final step of economic integration

• there will be a common market with coordination of social,fiscal and monetary policy

advantages of free trade

Encourages increase specialisation, and this increases output, according to comparative advantage

• this specialisation also helps firms to benefit from economies of scale, causing lower prices and costs

Firms can grow larger by creating customer market, economies of scale will be increased further over time as countries expand

Firms inside the bloc are protected from cheaper imports from outside, e.g those in the EU are protected from chinese imports

disadvantage of free trade

-Countries ae no longer to benefit from trade with countries in other blocs and the blocs are likely to distort world trade, reducing the benefits of specialisation

-There may be a reduction in competition as inefficient firms are driven out of the business and the market becomes oligopolistic

-They distribute the gains from trade unequally with developed countries often gaining most and developing being impacted little

Trade creation and diversion

• trade creation is when trade is created by the joining of a trade union. It is when consumption shifts from a high cost domestic producer to a low cost partner producer higher cost domestic producer to a low cost partner producer

• trade diversion is when consumption shifts from low cost producer outside the trading bloc to a higher cost producer within it

tariff diagram

role of WTO

• bring about trade liberalisation

• ensure countries act according to the trade agreements they have signed

conflicts with the WTO

• regional trade agreements contradict WTO’s principles

• complement the trading system and the WTO strives to ensures non-members can trade freely and easily with members of a trade bloc

• it ignores the developing countries

reasons for restrictions

• job protection- governments may be concerned that allowing imports will ean domestic producers will lose out to international firms

• protection from unfair competition- around the world different rules apply meaning that producers in different countries can produce at different prices

• Terms of trade- restrictions will reduce supply of good and lead to a fall in the price recieved by the importer

tariffs

taxes on imported goods

quotas

limits placed on the level of imports allowed into a country

subsidies to domestic products

payments to domestic producers which lower their costs

impact of protectionist policies on consumers

• there are higher prices for consumers as they are unable to buy imports at the cheaper price

• raises the price of domestic producers as goods and services needed for the production of these goods may also suffer from import controls

impact of protectionist policies on producers

• less competition so can sell more goods at a higher price

• foreign producers will lose out as they are limited in where they can sell their goods

impact of protectionist policies on workers

the market would reallocate resources and create new jobs

impact of protectionist policies on governments

• gain tariff revenues and are politically popular and can lead to an inefficient economy

balance of payments

A record of all the financial transactions that occur between a country and the rest of the world

the current account

• It records the net income that an economy gains from international transactions

• Current transfers are typically payments at government level between countries e.g. contributions to the World Bank

causes of current account deficits

• Relatively low productivity

• high value of the country’s currency

• high rate of inflation

• Non-price factors such as poor quality and design

how to reduce imbalances on the current account

• expenditure switching- use of protectionism (tarriffs or quotas)

• expenditure reducing- reduce ad, deflationary fiscal policy

• supply side policies- aim to improve factors of production to raise output

• do nothing- floating exchange rate acts as a self correcting mechanism

benefits of expenditure switching

Successful in changing the buying habits of consumers

• by switching consumption on imports to consumption on domestically produced goods

costs of expenditure switching

Protectionist policies lead to retaliation by trading partners

• may consist of reverse tariffs which will decrease exports- trumps tariffs

benefits of expenditure reducing

Deflationary fiscal policy reduces disposable income

• leads to a fall in the imported goods and services

• improves deficit

costs of deflationary fiscal policy

Deflationary fiscal policy dampens domestic demand which can cause output to fall

• when output falls GDP growth slows and unemployment may increase

benefits of supply side policies

Improves quality of products and lowers the cost of production

• help the level of exports to increase

• reducing the deficit

Cons of supply side policies

Policies tend to be long term so the benefits may not be seen for some time

• they usually involve government spending in the form of subsidies and this always carries an opportunity cost

Floating exchange rate

Supply and demand for a currency determines the exchange rate

• excess demand= prices to rise

Fixed exchange rate

A country’s central bank intervenes in the currency market to fix the exchange rate

Managed exchange rate

The free market determines the value of a currency but also central banks will intervene from time to time to keep currency value in a desired range

Factors influencing exchange rate

• interest rates- hot money flows

• inflation rate- value of imports and exports

• net investment- FDI into countries

• The current account- trade surplus= appretiation of the pound