In class test (Ch35-42): Global Economics

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Drivers of Globalization

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Drivers of Globalization

Transportation, Communication, Technology, MNCs, Strong Institutions

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Pros of Globalization

International expansion of markets and trade, Lower prices, Higher consumer choice, Higher innovation, Higher quality products

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Cons of Globalization

Less domestic business, Transnational corporations dominate society, Cultures lose their individuality, Uniqueness replaced with brands, Higher economic inequality, Encourages big firms to seek cheap labour

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Definition of MNC

A company that does business in many countries

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What does MNC stand for?

Multinational company/corporation

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Definition of FDI

Cross-border investment by a company with lasting and significant interest in a business in a foreign country.

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What does FDI stand for?

Foreign Direct Investment

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Pros of Free Trade

Larger market, Higher output, Higher employment, More competition, Higher innovation, Lower prices, Lower production costs, Higher choice

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Cons of Free Trade

Less domestic business, Lower domestic employment, Environmental harm, No support for infant industries, Dependent for strategic products on foreign supply

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Three Forms of Protectionism

Tariff, Quota, Subsidy

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What is a tariff?

A tax on imports

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What is a quota?

A physical limit on imports

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What is a subsidy?

Money transfer from government to lower cost or encourage production

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What is dumping?

Selling at a price lower than cost in a foreign country

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Reasons for Protectionism

Protection of:

  • Infant industries

  • Declining industries

  • Strategic industries

  • Domestic employment

  • Industries from low wage competition

To prevent dumping, To counter other forms of unfair foreign competition

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Reasons against Protectionism

Misallocation of resources, Could lead to a trade war, Higher priced imports, Reduced competitiveness

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Effect of Tariff/Quota on Supply Curve

Shifts supply curve inwards

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Effect of Subsidy on Supply Curve

Shifts supply curve outwards

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Effect of Tariff on Foreign Producer (Positive/Negative)

Negative (They pay the tariff, quantity decreases)

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Effect of Tariff on Domestic Producer (Positive/Negative)

Positive (Price increases, quantity increases)

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Effect of Tariff on Domestic Consumer (Positive/Negative)

Negative (Price increases, quantity decreases)

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Effect of Tariff on Government (Positive/Negative)

Positive (recieves tariff)

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Effect of Quota on Foreign Producer (Positive/Negative)

Negative (Quantity decreases)

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Effect of Quota on Domestic Producer (Positive/Negative)

Positive (Quantity increases)

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Effect of Quota on Domestic Consumer (Positive/Negative)

Negative (Less choice, price increases)

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Effect of Quota on Government (Positive/Negative)

No impact

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Effect of Subsidy on Foreign Producer (Positive/Negative)

Negative (Quantity decreases)

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Effect of Subsidy on Domestic Producer (Positive/Negative)

Positive (Receives subsidy, lower costs, quantity increases)

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Effect of Subsidy on Domestic Consumer (Positive/Negative)

Positive (Price decreases)

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Effect of Subsidy on Government (Positive/Negative)

Negative (Pays subsidy)

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Overall effect of tariff

Raise import price, imports fall, overall price falls

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Overall effect of quota

Quantity imported falls, Quantity demanded rises, Price rises

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Overall effect of subsidy

Quantity demanded rises, Quantity imported falls, Price falls

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Economic Union

Most developed type of trade bloc (e.g. Gulf Cooperation Council)

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Common Market

Freer movement of labour and capital (e.g. Mercosur)

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Customs Union

Common set of trade barriers on non-members (e.g. EU)

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Free Trade Area

Completely free of trade barriers for members (e.g. NAFTA)

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Preferential Trading Areas

Removal of trade barriers on a range of (but not all) goods and services (e.g. India, Nepal, Mauritius, Chile)

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Pros of Trading Blocs

Goods are cheaper, More consumer choice, Faster economic growth, Barrier-free (no tariffs), Reduced conflict

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Cons of Trading Blocs

Financial cost to government and taxpayer, Firms merging and becoming too powerful, Countries start to rely on trade, Inequality between members

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What are the roles of the WTO?

Trade Negotiations, Implementation and Monitoring, Settling trade disputes, Building membership

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Trade Negotiations

The WTO aims to reduce/eliminate trade barriers through negotiation (e.g. They encourage countries to draw up trade agreements on anti-dumping, subsidies, and product standards), They aim to bring about trade liberalisation

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Implementation and Monitoring

The WTO employs various councils and committees to administer and monitor the application of their rules (examining trade policies to ensure trade agreements are clear)

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Settling Trade Disputes

Countries bring their disputes to the WTO if they think their rights under the agreements have not been preserved

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Building Membership

The WTO helps and encourages new members to join up (There are around 20 countries yet to join)

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Supporters' view on the WTO

They promote peace, have constructive handling of disputes, have a rule-based system, Lower cost of living, Greater consumer choice, Boosts income and economic growth, Encourage efficiency and simplicity

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Critics' view on the WTO

Favours rich countries over poor countries, Favours corporations over workers, Poor countries do not have accurate representation, Rich-poor gap has been widening (which indicates rich countries benefit more), Agricultural subsidies in rich countries have a negative impact on the agricultural sector of poor countries, Harmful environmental effects

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Trade patterns in developed countries

Decrease in manufacturing, Increase in imports, Increase in tourism, Increase in air travel

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Trade patterns in developing countries

Increased dependency on commodities, Increase in FDI, Increase in emigration

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Trade pattern in both developed and developing countries

Lower trade barriers

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Definition of exchange rate

The value of a currency in another currency

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Who determines exchange rate in a floating fx system?

Free market

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Who determines exchange rate in a fixed fx system?

Government

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Who determines exchange rate in a managed floating fx system?

Both free market and government

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What is money?

A medium of exchange, A store of value, A unit of account

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What are the determinants of the exchange rate?

Imports and exports, Interest, Inflation, Speculations on currency

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Impact of depreciation on imports

The price of imports increases, demand for imports decreases, imports decrease

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Impact of depreciation on exports

The price of exports decreases, demand for exports increases, exports increase

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Impact of depreciation on current account balance

Improves, as (X-M) increases

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Impact of depreciation on Aggregate Demand

Increases, as (X-M) increases

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Impact of depreciation on economic growth

Aggregate demand increases, GDP increases, Economic growth increases

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Impact on depreciation on inflation

Increases

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An increase in demand for exports of your home country (increases, decreases) demand for home currency.

Increases

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When exports of your home country increase, your home currency is likely to (appreciate, depreciate).

Appreciate

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An increase in demand for imports (increases, decreases) supply of home currency.

Increases

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When imports of your home country increase, your home currency is likely to (appreciate, depreciate).

Depreciate

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An increase in interest rates (increases, decreases) demand for home currency.

Increases

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When interest rates of your home country increase, your home currency is likely to (appreciate, depreciate).

Appreciate

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An expectation of an increase in the value of a currency (increases, decreases) demand for the currency.

Increases

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When the value of your home country is expected to increase, your home currency is likely to (appreciate, depreciate).

Appreciate

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