Section 4 - International trade and the global economy

What is international trade?

The exchange of goods and services between countries — made up of imports and exports

What are imports?

Goods and services bought from abroad — produced by producers based in a different country — money flows from the domestic country to the overseas country

What are exports?

Goods and services sold abroad by domestic producers to other countries — money flows from the overseas country to the domestic country

Why do countries trade?

Different countries have different allocations of resources (land, labour, capital, enterprise) — resources are relatively fixed in quantity over short periods — countries are more suited to and efficient at making particular goods — specialisation increases productive potential and encourages economic growth — improves political relationships between countries — may help solve the economic problem by using fewer scarce resources globally

What are the benefits of imports and exports for consumers?

Producers compete against a wider range of international producers so may reduce price to keep market share — producers invest in R&D so goods and services become better quality — consumers have access to a greater variety of goods especially those countries do not have resources to produce

What are the benefits of imports and exports for producers?

Access to more potential consumers — greater output needed means greater economies of scale and lower average costs leading to greater profits — can buy resources for production worldwide at lower prices or resources not available in own country

What is a free trade agreement?

An arrangement to move goods and services between countries without any restrictions — the receiving country does not impose any restrictions on imports or exports

What is protectionism?

The opposite of free trade — measures governments take to give domestic producers an advantage over imports — examples include tariffs (tax added to imports) and quotas (maximum quantity of imports allowed)

What is the European Union (EU)?

An economic and political group of countries in Europe that have free trade with each other — no import taxes or fixed quantities of imports and exports between EU countries — prevents anti-competitive business practices — member states agree to a common trading policy with the rest of the world — EU has more bargaining power with other countries due to its size

What is the balance of payments?

The record of all financial transactions between one country and the rest of the world — shows how much a country is spending on imports and how successful domestic firms have been at exporting — inflows from overseas are positive entries (e.g. exports) — outflows to overseas are negative entries (e.g. imports)

What are the four components of the current account?

Trade in goods (visible balance — tangible goods e.g. agricultural products) — trade in services (invisible balance — intangible e.g. tourism, financial, IT services) — income flows (earnings on investments abroad e.g. interest earned by foreigners in UK) — transfers (movement of money or goods without payment e.g. foreign aid)

What is the balance of payments on current account?

The total of net trade in goods and services, income flows and transfers between one country and the rest of the world — the difference in monetary value of the four components

What is a balanced current account?

Where the sum of exports plus the inflow of income and transfers is equal to the sum of imports plus the outflow of income and transfers — revenue from overseas equals spending overseas — unlikely and unnecessary as other sections of the balance of payments automatically cancel any surplus or deficit

What is a current account surplus?

Where the sum of exports plus inflow of income and transfers is greater than the sum of imports plus outflow of income and transfers — a country's revenue from overseas is greater than its spending overseas — it is a positive number — the economy is consuming less than it is producing in value

What is a current account deficit?

Where the sum of exports plus inflow of income and transfers is less than the sum of imports plus outflow of income and transfers — a country's revenue from overseas is less than its spending overseas — it is a negative number — the economy is consuming more than it is producing

How do you calculate a surplus or deficit on the current account?

Add together all items under trade in goods, trade in services, income flows and transfers — if the total is positive there is a surplus — if the total is negative there is a deficit — often represented as a percentage of GDP to show proportion and significance

When is a current account deficit of particular importance and concern?

If caused by problems in the economy such as falling total demand and low international competitiveness — if due to a factor taking a long time to change such as low productivity making the deficit long-lasting — if large in size as this is harder to finance and increases national debt — may require harmful action such as cutting government spending

When may a current account deficit not be a concern?

If it is only temporary e.g. importing capital goods that will eventually increase exports — if it reduces inflation as imports greater than exports decreases total demand — if it leads to a fall in the exchange rate increasing international competitiveness — if it is only a small percentage of GDP so the debt can be paid off more easily

When is a current account surplus of importance and benefit?

Reflects rising total demand for domestic goods linked to lower unemployment and more income tax revenue — decreases the country's debt as more money flows in from exports than out for imports

When may a current account surplus not be a benefit?

May cause rising inflation as exports greater than imports increases total demand and puts upward pressure on prices — may hide protectionist policies that give domestic goods an artificial advantage — may lead to a rise in the exchange rate which decreases international competitiveness and eventually decreases exports

What are the causes of a current account surplus?

Strength of the economy (high quality products sold at low prices) — lack of growth in domestic economy (consumers buy fewer imports, firms compete more to sell exports) — fall in the exchange rate increasing the quantity of exports — net inflow of investment income (foreigners' investments in the country earn less than the country's investments abroad)

What are the causes of a current account deficit?

Structural problems in the economy e.g. firms overpricing or producing poor quality goods — falling incomes overseas leading to falling exports — rising incomes in the domestic economy leading to rising imports — rise in the exchange rate decreasing quantity of exports — net outflow of investment income (foreign residents earn more from investments in the country than vice versa)

What is a currency?

The system of money used in a country or group of countries

What is an exchange rate?

The price of one currency in terms of another currency

How is the exchange rate determined?

Set at the equilibrium of demand and supply — demand for pounds comes from overseas economic groups wanting to buy UK goods, services and financial assets — supply of pounds comes from UK economic groups supplying pounds to buy foreign goods, services and financial assets [DRAW: supply and demand diagram for pounds with price of £s in € on vertical axis and quantity of £s on horizontal axis showing equilibrium at P and Q]

What causes a rise in the exchange rate?

An increase in demand for the currency or a decrease in supply of the currency — the currency becomes stronger — also referred to as an appreciation of the currency [DRAW: exchange rate diagram showing demand curve shifting right from D to D¹ causing price to rise from P to P¹]

What causes a fall in the exchange rate?

A decrease in demand for the currency or an increase in supply of the currency — the currency becomes weaker — also referred to as a depreciation of the currency [DRAW: exchange rate diagram showing supply curve shifting right from S to S¹ causing price to fall from P to P¹]

What are the factors affecting demand for pounds?

To buy UK exports of goods and services — to save in UK bank accounts — to speculate on the pound (flows of hot money) — to invest in the UK — demand increases when: UK goods become more desirable, eurozone incomes rise, UK interest rates rise relative to others, corporation tax falls in UK, speculators think pound will rise

What are the factors affecting supply of pounds?

To buy imports of EU goods and services — to save in eurozone bank accounts — to speculate on the euro — to invest in the eurozone — supply increases when: eurozone goods become more desirable, UK incomes rise, eurozone interest rates rise relative to others, speculators think euro will rise, productivity rises in eurozone, eurozone becomes more attractive for foreign investment

What is the summary of exchange rate changes and their causes?

Rise in exchange rate = decreased supply of £s (supply curve shifts left e.g. fewer imports from eurozone) OR increased demand for £s (demand curve shifts right e.g. more exports sold to eurozone) — Fall in exchange rate = increased supply of £s (supply curve shifts right e.g. more imports from eurozone) OR decreased demand for £s (demand curve shifts left e.g. fewer exports sold to eurozone)

How do you calculate currency conversion?

To convert pounds into euros: multiply the amount in pounds by the exchange rate (e.g. £5.70 × €1.20 = €6.84) — To convert euros into pounds: divide the amount in euros by the exchange rate (e.g. €3.45 ÷ €1.20 = £2.88)

What are the effects of a rise in the exchange rate on consumers?

Import prices fall so consumers may be more willing to buy imported goods — improved standard of living as income can buy more imported goods — increased tourism overseas as British pound buys more foreign currency — fall in inflation rate as total demand falls putting downward pressure on price level

What are the effects of a rise in the exchange rate on producers?

Fall in import prices (benefit for producers importing raw materials — lower average costs and possible increased profits) — increased tourism overseas benefits travel firms but hurts domestic leisure providers — rise in export prices leads to fall in demand from overseas consumers and lower profits unless PED is inelastic — fall in inflation rate means less pressure for wage rises, lower menu costs and British products become more internationally competitive

What is globalisation?

The interdependence of countries due to international trade — integration of countries through trade — more freedom of movement of goods, services, people and money — global sourcing means almost any good can be made anywhere using resources from anywhere — seen in global brands such as McDonald's and Coca-Cola

What are the four driving factors of globalisation?

Reduction of barriers to international trade — improvements in transport — worldwide foreign investment — advances in technology and communications

How has reduction of barriers to trade driven globalisation?

After events such as WWII countries worked together and traded to grow economies — resulted in removal of barriers such as taxation and regulations — led to easier movement of people, raw materials, money and goods — costs associated with trading internationally were reduced making it more profitable

How have improvements in transport driven globalisation?

Enabled producers to source inputs and distribute goods worldwide — employing overseas producers to take on parts of production — cut average costs e.g. container ships created economies of scale for transport — cut transport time making it possible to trade perishable goods — investment in transport infrastructure globally increased integration

How has worldwide foreign investment driven globalisation?

Foreign investment is now a significant contributor to flows of money between countries — promotion of free trade and removal of restrictions on foreign investment have ensured significant growth — growth of multinational corporations (MNCs) such as Shell and Nestlé — MNCs have a base in one country but conduct business in others — MNCs significantly increase world trade and integration of countries

What is a multinational corporation (MNC)?

A business that has a base in one country but will then conduct business via production or retail outlets in other countries — e.g. Shell, Nestlé — in order to produce or sell in another country these businesses have to invest in buying factories, building roads etc.

How have advances in technology and communications driven globalisation?

Made it easier and less costly to trade around the world — easier for producers to have parts of business in other countries e.g. accounts and IT departments — internet allows producers to find suppliers worldwide — enables consumers to find wider range of products from countries around the world — online banking and e-commerce have made buying and selling worldwide faster, more secure and easier

What is development?

The process of increasing people's standard of living and wellbeing over time

What are the four measures of development?

GDP per capita (increase = economic growth, workers paid more, can afford more) — life expectancy (average age a person lives, reflects overall health of population) — access to healthcare (availability of hospitals, medical facilities and professionals) — technology (access to mobile phones and internet, link to education, communication, trade and personal banking) — education (literacy rate, increases future productivity and growth, reduces inequality)

What is a developed country?

A country with high GDP per capita and established industry and service sectors — human indicators include high levels of education and healthcare

What is a less developed country?

A country with a developing economy that has lower GDP per capita, lower levels of industrialisation and weaker indicators of wellbeing — greater risk of poverty and less resilient when economic problems arise

What are the costs of globalisation for producers in developed countries?

Possible decline of industry as less developed countries may have cost advantages such as low wages meaning developed country producers cannot compete — vulnerability to problems in the worldwide economy e.g. if incomes fall abroad producers cannot export as much — increased production costs e.g. administration costs for trading across the world and set-up costs for overseas facilities

What are the benefits of globalisation for producers in developed countries?

Wider markets to sell into — vastly increased potential sales as producers can sell virtually anywhere leading to greater economies of scale or specialisation — cheaper and wider range of resources worldwide — access to cheaper and more skilled labour force from overseas workers

What are the costs of globalisation for workers in developed countries?

Decline of industry and structural unemployment — firms may replace workers with machinery to increase productivity and be more internationally competitive — dependence on world markets means if incomes fall abroad fewer workers needed — more immigration may negatively affect workers who are not competitive in skills or price

What are the benefits of globalisation for workers in developed countries?

Increased employment due to increased output to meet demands of international trade — increased employment due to increased foreign investment creating new businesses — increased geographical mobility as workers from developed countries have opportunity to live and work anywhere in the world

What are the costs of globalisation for consumers in developed countries?

Rising prices as more consumers competing worldwide can increase global prices — less choice due to global brands e.g. rise of Starbucks meaning smaller local coffee shops close — volatile prices if prices fluctuate greatly on goods traded globally such as oil leading to worldwide uncertainty

What are the benefits of globalisation for consumers in developed countries?

Wider range of goods from around the world — lower prices for goods due to increased worldwide competition — better quality and more innovative goods as producers must focus on quality to stay ahead of rivals — greater opportunity to travel due to opening up of borders — improved services due to more skilled professionals moving from less developed countries

What is the impact of globalisation on economic sustainability in developed countries?

Initially negative if an industry is less efficient than in other countries — cannot compete on price leading to decline of the whole industry, unemployment and knock-on effects — over time developed economies should adjust production to more profitable activities where they have greater efficiency e.g. services and high-tech industries — should result in increased GDP, less unemployment and greater tax revenue

What is the impact of globalisation on social sustainability in developed countries?

Benefits of more and lower-priced goods contribute to increased standard of living — however if there is increased unemployment leading to lower income and less ability to afford goods and services this can create much hardship in society

What is the impact of globalisation on environmental sustainability in developed countries?

Positive impact through increased international trade as countries specialise in goods they can produce most efficiently using fewest resources — however if environmental problems due to globalisation and industrial practices in less developed countries such as pollution and resource usage are allowed to continue these may impact the rest of the world including developed countries

What are the costs of globalisation for producers in less developed countries?

Vulnerability to problems in the worldwide economy — fewer resources to deal with economic shocks — a reduction in foreign investment or demand for exports can make it difficult to survive — increased migration and loss of skilled workers leaves a less productive workforce — smaller developing industries may go out of business as they cannot compete with bigger businesses worldwide

What are the benefits of globalisation for producers in less developed countries?

Wider markets to sell into with potential for increased sales worldwide — advances in technology through sharing of scientific information and joint research may reduce costs — increased foreign investment combined with government attempts to attract investment may reduce costs e.g. more roads built helping movement of people and goods

What are the costs of globalisation for workers in less developed countries?

Increased use of machinery and unemployment as workers replaced to increase productivity — increased vulnerability and unemployment if global demand for exports falls fewer workers are needed — increased gap between rich and poor as increased revenue from trade may not filter down to workers — poor working conditions due to less regulation which creates cost advantages for global firms but leads to poor treatment of workers

What are the benefits of globalisation for workers in less developed countries?

Increased employment due to increased output to meet international trade demands — increased employment due to increased foreign investment providing more jobs — increased geographical mobility as opening up of markets means workers can live and work anywhere in the world

What are the costs of globalisation for consumers in less developed countries?

Rising prices as more consumers competing to buy some goods can increase global prices so consumers may no longer be able to afford essential goods e.g. rice — poor quality of services due to migration as freer movement of people may mean a loss of skilled professionals

What are the benefits of globalisation for consumers in less developed countries?

Wider range of goods due to lowering of barriers to trade and the internet including access to life-saving medicines — access to global brands — greater opportunity to travel as opening up of borders allows greater tourism — better infrastructure due to foreign investment e.g. better transport links

What is the impact of globalisation on economic sustainability in less developed countries?

Greater tax revenues, less unemployment, increased output and economic growth due to increase in international trade — however benefits may not last if multinational companies leave after finding another country with lower costs — tax avoidance by MNCs with large legal and finance departments may mean fewer benefits for the economy

What is the impact of globalisation on social sustainability in less developed countries?

Increased employment should lead to increased income reducing poverty as workers can afford more goods and services — however these positives should be balanced with negative effects such as essential goods rising in price, cultural diversity being lost and workplace conditions worsening

What is the impact of globalisation on environmental sustainability in less developed countries?

Should have a positive impact as countries specialise in goods they can produce most efficiently leading to best use of scarce resources — however less developed countries may specialise more in primary and secondary sector markets with production processes more likely to damage the environment — less developed countries sometimes rely on natural resources as a key driver of trade and growth meaning serious problems when resources are depleted