4.1 International Economics

Globalisation

Growing interdependence of countries and the rapid rate of change it brings about/increasing integration of the world’s local, regional and national economies into a single international market 

Factors Contributing to Globalisation

• Improvements in transport infrastructure and operations 

• Improvements in IT and communication

• Trade liberalisation

• International financial markets 

• TNCs - large companies operating around the world to take advantage of low labour costs  

Impacts of Globalisation on consumers

• More choice - wider range of markets 

• Lower prices - firms taking advantage of comparative advantages, eg/. Lower labour cost

• Rise in prices - incomes are rising, and there is higher demand for goods and services 

• Loss of culture

Impact of globalisation on workers

• Both losing and gaining jobs - eg/. Loss in the Western world’s manufacturing sector, as this is transferred to China or Poland

• Increase migration - bringing skills and an increase in AD, which increases the number of jobs 

• International competition has led to a fall in wages or reduced growth for low-skilled workers in developed countries 

• Wages are up for high skilled workers; however, increasing inequality 

• Those in sweatshops will see poor conditions and low wages 

Impact of globalisation on producers

• Able to source from more countries 

• Risk reduction since of collapse of the market in one country will have a smaller impact on globalised businesses

• Able to exploit comparative advantage and have larger markets, increasing profit

Impact of globalisation on government

• May be able to receive higher taxes, however, higher levels of tax avoidance 

• Could lead to corruption by TNCs, bride and lobbying 

Impact of globalisation on environment

• Increased demand for raw materials, which is bad for the environment 

• Increased trade and production have led to higher emissions 

• However, the world can come together and tackle climate change and share ideas and tech

Impact of globalisation on economic growth

• Increases investment within countries, investment of TNCs is an injection into the economy, which will have a larger impact due to the multiplier 

• May bring world class managements techniques and tech which can have a knock on effect to all industries 

• TNCs can cause political instability 

• Comparitive cost advantage will change over time

Comparative advantage

States that countries find specialisation mutually advantages if the opportunity costs of production are different

Absolute advantage

Producing more of a good using the same (or fewer) resources, or the same amount using fewer resources/lower cost.

Specialisation and trade advantages

• Comparative advantage shows how the world output can be increased in countries that specialise in what they are best at producing

• Different countries have different factors of production, and so trade allows countries to make use of factors of production 

• Trade enables consumers to have greater choice, greater consumer welfare 

• Trade means there is greater competition, which provides an incentive to innovate 

• Countries which isolate themselves for political reasons, like North Korea, have found that their economies tend to stagnate

Specialisation and trade disadvantages

• Trade can lead to an overdependence 

• It can cause structural unemployment, as jobs are lost to foreign firms that are more efficient and competitive 

• The environment will suffer

• May see a loss of sovereignty, eg/. With the EU

• May result in a loss of culture

Factors influencing the pattern of trade 

• Comparative advantage

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

• Emerging economies

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

• Trading blocs and bilateral trading agreements 

  • Increases the level of trade between certain countries 

• Relative exchange rates 

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

Reasons for restriction on free trade

• Infant industry argument: Need to build up a reputation and customer base, and will have to cover a lot of sunk costs, meaning their AC will be higher 

• Job protection: Imports mean that domestic producers will lose out to international firms 

• Protection from potential dumping: When countries with surplus goods sell these goods off to other areas at a very low price, harming domestic producers in those countries 

• Protection from unfair competition: Domestic producers may be unable to compete with a firm that has very low labour costs 

• Terms of Trade: If a country buys a large amount of imports of a certain good, this will increase demand for that good and therefore the price, worsening the terms of trade 

• Danger of over-specialisation: No country should become totally reliant on another for important products or materials, so it is important to introduce protectionism on these goods to prevent firms and consumers from becoming reliant on them 

Types of restrictions

• Tariffs

  • Taxes placed on imported goods 

• Quotas

  • Limits are placed on the level of imports allowed into a country 

• Subsidies to domestic products

  • Payments to domestic producers which lower their costs, helping them become more competitive by enabling lower prices 

• Non-tariff barriers

  • Embargo: total ban on imported goods 

  • Import licensing: Firms/countries need a license to be able to import

Impact of protectionist policies on consumers

• Higher prices 

• Less choice

Impact of protectionist policies on producers

• Domestic producers can sell goods at a higher price due to lower competition 

• However, there could be higher costs if the controls are on imports that are needed for production 

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

Impact of protectionist policies on workers

• Little difference in employment figures 

• The market would reallocate resources and create new jobs, with greater security

Impact of protectionist policies on government

• Gain tariff revenues in the short run, and they are politically popular 

• However, it can lead to an inefficient economy, which stifles growth 

Impact of protectionist policies on living standards

• Imports control results in deadweight welfare loss

• It can also cause trade wars in retaliation 

Impact of protectionist policies on equity

• Regressive effect on the distribution of income as the rise in price affects the poorer members of society far more 

Free Floating exchange rate system

• where the value of the currency is determined purely by the market demand and supply of the currency 

  • No need for reserves to buy pounds to keep at target

  • Able to partly autocorrect a trade deficit 

  • Reduces the risk of currency speculation 

Factors affecting free floating system

• Determined by the interaction of demand and supply

• Demand for pounds is determined by the amount of British goods foreigners want to buy and investment 

• Supply of pounds is determined by the amount of foreign goods people want to buy in the UK/invest

• Therefore, currency is affected by the level of exports and imports,the  level of investment and those going on holiday and speculation 

Managed floating system

• where the value of the currency is determined by demand and supply, but the central bank will try to prevent large changes in the exchange rate on a day-to-day basis 

Fixed system

• when the government sets their currency against another, and that exchange rate does not change 

  • Avoids currency fluctuations, which encourages trade and investment 

  • May reduce inflation 

  • Trying to regulate the currency will decrease growth 

  • It is easy to set an exchange rate wrong

Marshall-Lerner condition and J-curve

• States the sum of the price elasticities of imports and exports must be more than one if a currency devaluation is to have a positive impact on the trade balance. The J-curve shows how the current account will worsen before it improves  

Impact of changes in exchange rates 

• Economic growth and unemployment: A weaker exchange rate is likely to increase exports, since they become cheaper, and decrease imports so lead to an increase in AD - increase employment and economic growth 

• Rate of inflation: Falls in the exchange rate will increase inflation as imports become more expensive, causing a rise in prices and a fall in SRAS. Also, the net exports section of AD will increase, and so inflation will rise further 

• FDI: A fall in the currency may increase FDI because it becomes cheaper to invest. However, if the currency continues to fall, then this is an indication that an economy has serious economic difficulties, which will discourage investment

Measures of international competitiveness

• Relative unit labour costs: Unit labour costs are total wages divided by real output 

• Relative export prices: This is the price of the UK exports compared to the exports of the UK’s main trading partners