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)
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).
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Note 
Flashcard (34)