1 INTERNATIONAL ECONOMY MERGED

What is globalisation

The process of increasing integration between markets and economies around the world
— the process of removing barriers leading to increase in international trade

What are main barriers to movement

People

What are g&s barriers

• cost of transportation- cargo

What human barriers

Immigration laws- like visas- for example USA BANS ON LEBENON

What FOP barriers (other than labour)

Inability to co-ordinate over long distances

Main causes of globalisation- characteristics

• easing of immigration laws- e.g. through trading bloc
  -Information and Communication technology (ICT)- facilitates instant communication decreasing transport costs as can ZOOM or EMAIL over travel for trade agreement
• trading blocs- LIKE EU
• increased transport technology- JAPAN BULLET TRAINS AND CONTAINERISATION
• increased Multinational Corporations (MNCs)- facilitates transport of skills and tech and integration of markets and economies across globe—> NIKE SET UP FACTORIES IN MULTIPLE COUNTRIES LIKE PAKISTAN WHEREBY PRODUCTION HSSD MEANT NEW FACTORIES ETC TO MAKE FOOTBALLS- NEED WORKERS- TRANSFER SKILL AND TECH
• increased migration
• decreased protectionism
• decreased legal barriers

Factors contributing to globalisation over last 50 years

• technological advancements
  -trade liberalisation- international agreements like AGREEMENT ON TARIFFS AND TRADE (GATT) AND WTO
• economic liberalisation
• transport infrastructure- increased transportation
• financial integration- liberalisation of financial markets
• multinational corporations
• political stability- EVAL IRAN WAR

Benefits of globalisation

-lower prices-more international competition- competetive + contestable markets —> increase efficiency and lower cost— consumers and businesses benefit

• benefits of trade through more trading blocs + WTO—>
• greater employment—> firms grow in size as potential for trade increased- more workers to supply output- benefit to workers who eat higher RDI
• benefit of large EOS- benefit to firms who get higher profit
• free movement of labour and capital - FDI- increase AD + LRAS—> EVAL- depends on factors like skill level and how much remit to home country
• technological transfers and innovation- better communication and spread of MNCs increase tech flows

Costs of globalisation

• growing inequality- in 2015 top 1% of earners own 55% of total global wealth- benefits not spread equally- those in poverty still in poverty- cost to individuals + gov- need higher focus on policy to alleviate poverty
  -higher structural unemployment- as become more integrated nations struggle to compete- businesses go into decline- esp developing countries with no strong welfare state- firms + individuals + gov (developed countries paying more welfare)
• environmental costs- more pollution and depletion of resources like rivers- lack of sustainability in growth- this may outweigh benefits
• trade imbalances - export led growth v lucrative but if shock/ slowing of exports would cause imbalances- may lead to more protectionism and trade wars to rectify these imbalances
• greater risk of external shocks- 2008 GFC banking crisis in US- banking integrated - spread globally- deep crisis and recession
• less cultural diversity - countries lose identity

Why is world trade growing slowly atm

• since GFC slower growth of world trade- well below pre crisis trend
• weak economic growth
• slowing pace of trade liberalisation
• non tariff barriers- grown in regional trading blocks like ASEAN
• technological change- e.g. 3d printing used to manufacture things that used to have to be shipped around world

MNCs

• multinational corporations- globalisation makes it easer for firms to operate in multiple countries
• operate in huge scale as they provide g/s to global markets- so benefit from EOS
• avoid tax through : transfer pricing and setting up production in Tax havens

transfer pricing

• method of tax avoidance- pay less tax
• selling intermediate goods above market price between difference branches of the same firm (from low to high tax country ) at artificially high prices to pay the lowest possible tariff/ corporation tax in total
• intermediate goods- manufactured goods not sold directly to consumers but used to produce consumer goods
• EVAL- although gov loose money it increased FDI flows

Transfer pricing process

Firm A in UK have high corporation tax - 20%

• without TP- sell at £400- costs £100- profit £300- tax £60
  To avoid tax set up subsidiary in low tax company- 2% ct
• firm B make intermediate good - costs £50 but sell for artificially high price of £200 to A
• B make profit of £150 - tax £3
• now A buys for £200 - now costs look high so profits look lower so pay tax on less
  —> sell £400- costs £200- profit - £200- tax £40
  Overall CT- £43 vs 60 before

Transfer pricing APPLICATION

• STARBUCKS bought artificially inflated coffee beans from Swiss subsidiary
• made UK costs look higher and so profits lower- 24-28% ct
• profits instead appeared in Switzerland- 12% ct
• so despite over £3 billion in uk sales 1998-2012-> only paid 8.6 mill in UK corporation tax

Tax Havens

• country with very low corporation taxes used by MNCs to pay less tax
• may shift profits there

Tax Havens APPLICATION

IRELAND 12.5% CT- ATTRACTED COMPANIES LIKE APPLE AND GOOGLE
PANAMA PAPERS- UNPRECEDENTED LEAK OF 11.5 M FILES FROM DATABASE OF WORLDS FOURTH BIGGEST OFFSHORE LAW FIRM- MOSSACK FONSECA- HIDDEN IN 11.5 SECRET FILES ARE 140 POLITICIANS FROM OVER 50 COUNTRIES CONNECTED TO OFFSHORE COMPANIES IN 21 TAX HAVENS

Policies to correct transfer pricing

• independent tax regulators/ authorities now want MNCs to sell their intermediate goods at market rate that they would sell to other competitors
  — HOWEVER- GOOGLE AND AMAZON STILL AVOIDING TAX

Policies to correct tax havens

• global minimum cooperation tax at 15%
• 140 countries have signed this agreement from 2023
• HOWEVER NOT ALL TAX HAVENS WILL SIGHN UP- BHAMAS REFUSING TO SIGHN

How tax havens and transfer pricing used in essay globalisation

Evaluate likely effects of globalisation

• KAA: MNCS tp and tax havens as tax avoidance- EV: policies to correct this

Evaluate likely policies to correct any negative globalisation

• KAA policies to correct
  -EV why dont work

Absolute Advantage

An economy that can produce a good or service at lower monetary cost than other economies has AA in that g/s

• firms will produce in the lower cost economic and export to the higher cost economy

APPLICATION for AA

Saudi Arabia for oil

How can show that economies with AA should specialise

Can prove economies are better off when specialising in production in a g/s w AA using a PPF

• the economic with shallower PPF will always have absolute advantage - can produce at lower cost
• shows both economies individually benefit from specialisation and trade

comparative advantage

• AA can produce at a lower monetary cost
• Economy has comparative advantage if it can produce good at lower opportunity cost - specialisation in goods and services can produce w low opportunity cost cost
• David Ricardo came up with theory
• trade can become mutually beneficial

between countries- both economies better off specialising in production of the good in which they have CA and then trading

• have good quality/ quantity factor endowment - land labour capital

Opportunity cost equation

Sacrifice/ gain= opportunity cost

• cost of not producing other good
  Quantity of other good produced by same country
• whoever giving up less wins- should specialise and trade with eachother

How does it benefit both

• before specialisation can assume that both economies split their FoP evenly between the two goods

If country A max possible output 400 units cotton or 800 units iron- OPP cost of 400 cotton is 800 iron
Country B max possible output 500 cotton or 1500 iron

• Then global production will be divided by 2 as each is splitting time evenly - cotton 450 and iron 1150
  OPP cost: A- cotton is 2 units iron- iron is 0.5 units cotton
  B- cotton is 3 iron- iron is 0.33 cotton
  Lower OPP cost= CA- cotton is A and iron is B
  Now after specialisation global- A specialise cotton 400 units and B iron 1500 units- global is 400 cotton and 1500 iron
  Both economies are better off specialising as can produce at lower opportunity cost cost- then trade

No transport costs assumption

• In reality there will be transport costs which add to price of imported goods but not domestic ones
• as long as difference in prices between two markets outweighs transport costs- economies will still specialise and trade
• some economies can offer goods at lower price as they are nearby with good transport links rather then due to productivity
• thus economies trade disproportionately with some economies geographically closer to them
• global health crisis reduced international flights so increased cost of transport

Perfect mobility of goods and services assumption

• transport costs vary industry to industry
• some goods and services impossible or impractical to trade internationally
  E.G. cheap haircuts in India cannot be traded to England
• however services can still be traded- tourism

Fixed MC assumption

• assume that as an economy specialises and produces more and more of a good the cost of producing is constant
• unrealistic- diminishing marginal returns
• including increasing MC makes economies PPF curved rather than straight
• so economies still specialise

Homogenous goods assumption

• assume goods produced in different economies are identical- not the case
  — e.g. consumers may prefer German cars over French cars
• goods heterogeneous- comparative advantage likely understates level of trade between economies
• two economies that both specialise in same good may still trade if consumers in each consider goods 'exotic'
• trade can increase consumer happiness by increasing consumer choice and happiness

What are the advantages of Specialisation and Trade?

• increased output overall and both parties beenfit
  —— through CA
• goods and services become cheaper increasing CS in import market
  —— import diagram
• firms can still grow in economies with weak demand
  — export diagram
• consumers enjoy a greater variety of g&s

Disadvantages of specialisation and trade

-factor immobility may lead to inequality between industries and regions

• Specialisation in a small number of industries raises risk in economy
• interconnectedness of economies through trade increases contagion effect- shocks
• international trade involves more transport- neg externality— environmental cost
• decreased productivity as decreased morale of employees if doing same thing every day

AA evaluation- MS

• other factors have a bigger impact on growth- interest rates
• if energy costs change then AA may be eroded
• global health crisis reduced international flights so costs have risen - no spare capacity on flights

Main 4 factors influencing patterns of trade

1. Changes in comparative advantage
2. Emerging economies
3. Trading Blocs and bilateral trading agreements
4. Relative exchange rates

comparative advantage

• countries trade where there is CA— so a change affects trade pattern
• recent growth in Manila turned goods from developing to developed countries as developing countries have low labour costs
• deindustrialisation of UK and other countries meant manufacturing sector declined—> production of manufactured goods shifted to other countries like china whilst UK focuses on services like finance
• CA may change as result of factors like changing labour skills and productivity

Emerging economies

Growth of emerging economies like China means they have become large exporters

• CHINA CONTRIBUTES TO 20% OF LDC ECONOMIES COMPARED TO 8% OF US ECONOMY
• collapse of communism meant more emerging economies are participating in world trade

Trading blocs and bilateral trade agreements

• increase level of trade between certain countries so influence patterns of trade as trade increases and decreases between certain countries- removal or addition of protectionist barriers
• EU meant UK traded w more European countries than previously thought and less countries outside the EU

Real exchange rates

• affect relative price of goods between countries
• prices are important factor when determining weather consumers buy goods so a change in price will effect patterns of trade
• can be argued UK TRADE DEFICIT WITH EUROPE is due to strength of £
• CHINA KEPT CURRENCY WEAK TO INCREASE TRADE SURPLUS AND MAKE CURRENCY MORE COMPETITEIVE

Terms of trade calculation

(Index of export prices / index of import prices) x 100
Index- weighted avg of import/ export prices

What does the terms of trade measure?

The rate of exchange of one product for another when 2 countries trade

• Q of X needed to be sold to purchase a given level of M
• ratio of export prices to import prices

Movements in the terms of trade

• favourable if terms of trade increase as the country can buy more imports with same level of exports - IMPROVEMENT IN TOT- when numerical increases
• unfavourable if decrease when X prices fall or M prices rise- DETERIORATION

APPLICATION

Germany- 112- trade surplus
China- 111- surplus
USA- 103- deficit
UK- 84- deficit

Short run changes in terms of trade

• changes in demand/ supply of imports or exports e.g. via change of trends
• exchange rates- impacts price of imports
• relative inflation rates- if high rates then increased price of exports- improved TOT but decreased competitiveness
  Affect relative prices of M and X

Long run changes in terms of trade- substantial effect

-changes in incomes- affects pattern of demand for g/s— e.g. rise in world income leads to rise in demand for tourism and so country w strong tourism industry like SPAIN see rise in prices in that industry- increased tot

• productivity - improvement compared to LR trading partners will decrease tot since export prices will fall relative to import prices— caused by new tech and more efficient labour decreasing COP
• technology- advancement- lower cost of production so lower export price- deterioration- increase in C

Impacts of changes in TOT

• if PED of X and M is inelastic- a favourable movement in terms of trade would improve CA BOP- if elastic favourable movement would worsen
• improvement leads to fall in GDP and rise in unemployment as caused by rise in X prices- X falls- if caused by fall in M prices- M rise— long term decline in TOT suggests long term decline in living stnadards as less M can be bought
• important to look at the cause of change- if improvement from increased D for X- beneficial — if deterioration from improvement in international competitiveness— beneficial

APPLICATION

AUSTRALIA DETERIORATION

• terms of trade fallen since 2011- due to prices of main exports- iron ore and steel- have slumped
• led to real wages falling for first time since 1991
• unemployment rate increased
• fall in commodity prices—> major mining companies cutting back on investment and production

Effect on change in export prices on the CA and TOT

EOIS

• elastic: increase in price- improves TOT- worsen CA
• elastic: decrease in price- worsen TOT- improve CA
• inelastic: increase in price - improve TOT- improves CA
• inelastic: decrease in price- worsen TOT- worsen CA

Effect of change in import prices on TOT and CA

• elastic: increase in price- worsen TOT- improve CA
• elastic: price decrease- improve TOT- worsen CA
• inelastic: price increase- worsen TOT- worsen CA
• inelastic: price decrease- improve TOT- improve CA

EXAK TECHNIQUE- words to use for TOT and CA

Improve/ deteriorate

The Prebisch Singer hypothesis

Price of primary goods (raw materials and agricultural products) tend to decline relative to price of manufactured goods over time

• causing deterioration of terms of trade for developing countries
• developing countries exporting raw materials see fall in export prices as relative prices of raw goods fall over time
• as global income rises the demand for manufactures goods increases faster than demand for primary products- manufacturers hold higher price powers

What are Free Trade Areas FTA

Trading bloc with no tariffs or taxes or quotas on goods and/ or services between member countries

• No common external tariff- countries in FTA have own policy on trade for the rest of the world

FTA APPLICATION

• NAFTA- NORTH AMERICAN- USA

Advantages of FTA

• increased EG -macro objective- NAFTA INCREASES USA 0.5% YEARLY- outward AD and PPF
• more dynamic business climate- with protection removed local firms motivated to be globally competitive
• Lower Gov Spending- many govs subsidise local industry- FTA removes these- money better spent elsewhere
• FDI- investors flock to the country
• Expertise- global companies have more expertise- partner with local firms to develop resources training them w best practices- e.g. mining

Disadvantages of FTA

• more job outsourcing- w/out tariff imports from low cost of living countries cost less- US companies w same industries cannot compete - macro objective employment- CRITICISM IS NAFTA SENT JOBS TO MEXICO
• crowd out domestic industries- emerging economies rely on small fam farms for agriculture- cant compete with developed economy agri-business—> lose their farm leading to unemployment

What is a customs union?

Group of countries who have agreed to

• abolish protectionism between member states- free movement of g&s
  • common external tariff CET on non member states

Customs union APPLICATION

• EU
• g&s that originate in EU circulate freely
  EVAL- may be subjected to excise duty- e.g

Customs union advantages

• all benefits of FTA with one extra advantage:
• Trade creation - occurs when FTA but also CET
• movement from higher cost producer outside union to lower cost producer insider union as result of joining and removing tariffs
• DIAGRAM

Customs Union disadvantages

All disadvantages of FTA with one more:

• Trade diversion
• country joins CU with CET
• switch from lower cost foreign supplier outside CU to higher cost supplier in CE- cheaper now than outside due to CET
• higher prices may directly affect consumers- higher food costs
  DIAGRAM

What are Common Markets ( single markets)

• not only remove trade barriers but also allow for free movement of FOPs
  — Free trade in goods: businesses sell goods anywhere in member states and consumers can buy w no penalty
  — Mobility of Labour- citizens of EU member states can live study and work in any other country- improve mobility of labour
• free movement of capital- currencies and capital can flow freely between member states
  — Free trade in services- professional services like pensions

Common market APPLICATION

EU- prior to Brexit vote 2016

• EU accounts for 30% of total value of global GDP
• total population 56m
• avg unemployment 12%
  POST BREXIT 2021
• 5% growth 2021
• second largest economy behind USA
• 447m people
  Avg unemployment 7.2%

Advantages of joining EU (single common market)

• tariff free access to almost 500m people —> exploit EOS
• access to EU structural funds—> investment too improve infrastructure
• Easier to access foreign direct investment from inside/ outside EU—> Inward FDI can lift trend growth and raise factor productivity
• better access to EU capital markets- EU companies can raise investment funds from bond and capital markets

Disadvantages from joining the EU (single common market)

• costs- by end ONS said £7.1 billion a year
• inefficient policies- 40% EU spending goes to Common Agricultural Policy— for many years this distorted agricultural markets by placing minimum prices on food- higher consumer prices and over supply
• problems of Euro- great emphasis on single currency - many problems and contributed to low rates of economic growth and high unemployment- OBJECTIVES
• pressure towards austerity- many eastern euro countries have faced this- GREECE FORCED BY CREDITORS TO ACCEPT AUSTERITY WHEN SOME ECONOMISTS ARGUED IT WAS COUNTER PRODUCTIVE
• net migration- problem of overcrowding in UK cities- UK POP SET TO RISE TO 70 MIL NEXT DECADE- 50% migration EU 50% not

What are monetary unions?

Common currency shared by member countries

• European single currency created in 1999 and entered common circulation in Jan 2002- as of 2016 there are 19 nations in euro

Monetary unions APPLICATION

LATVIA JOINS EUROZONE

• Latvia small 2mill people produces 0.05% global g&s
• Jan 2014 joined EU currency
• population declining- 2000-11 fell by 13%
• national minimum wage- 284 euro per month

Arguments for Latvia join Euro

• boost trade and investment
• eliminating currency conversion increases tourism
• financial support and political stability
  — access to European Central Bank ECB- lender in last resort
  — long term political alignment with eu
• reduced vulnerability to external shocks

Risks of Latvia joining

• exposure to Euro Zone economic problems
  — continued weak growth
  — risk new member states will import deflation
• trade patterns/ trade diversion effect
  — main trade partners may be outside Euro Zone
  — might involve switch of trade to higher cost countries
• structural reforms and jobs
  — new euro member countries will have to accelerate process of structural reforms to improve competitiveness in EU

World Trade Organisation WTO

International organisation that regulates world trade- promotes global trade liberalisation

Key functions of WTO

• negotiation- facilitating trade negotiations among member countries to reduce trade barriers
• despite settlement- responding trade disputes through rule based system
• monitoring- monitoring trade policies and practices of member countries to ensure they comply with WTO rules
• Technical assistance- providing technical assistance to developing countries to help them participate in global trade

Advantages of WTO

• Disputes are intended to be handled constructively

Limitations of WTO

• WTO can be seen as too powerful. In effect

WTO APPLICATION

•GENEVA ROUND (1947) - This was the first meeting. It had 23 members and was the precursor to the WTO. They had managed the signing of 45

Possible conflicts between WTO and regional trade agreements

• trade discrimination- RTAs may discriminate against non members which potentially violates WTO most favoured nation principle
• trade diversions- if RTAs lead to trade diversion they can be seen as contrary to WTO goal of reducing barriers globally
• preferential treatment- WTO rules generally favor non discrimination while RTAs provide preferential treatment

What is protectionism

Use of economic policies to regulate between countries mainly to reduce imports

What is free trade?

International trade conducted without the existence of barriers to trade

What is dumping?

the sale of goods at less than cost price by foreign producers in the domestic market

What is a tariff?

Tax on imported goods which has the effect of raising the domestic price of imports thus raising domestic price of imports and restricting demand for them

What is a Quota?

Physical limit on quantity of imported group

When does a country export

• when another country does not produce a good
• when they can charge a higher price

When does a country import

When the world price is lower than the domestic price

Main reasons for protectionism

• protect domestic firms
• infant/ sunrise industries—> protect start up firm from international competition so can become competitive
• geriatric/ sunset industry - protect industry in decline and workers (TRUMP STEEL 2016)
• political gain/ protect legislation- helps come into power/ makes more popular
• maintain balance on CA
• retaliation- trade wars
• economic growth in domestic (x-m)- increase AD
• tariff like tax- increase gov revenue
• protection from potential dumping- china lots of illegal dumping which undercuts domestic economy

Tariff APPLICATION

• UK imposing 10% tariff on EU cars valued at more than £10

Quota APPLICATION

EU Q on steel 2024
Japan import Q on rice
EU import Q on fish

Domestic producer subsidy APPLICATION

India production- Linked incentive (PLI) scheme- India provides financial incentives to manufacturers in sectors like electronics

Economic effects of increase in protectionism

• increase in domestic producer TR
  —- EVAL- may be low demand and EOIS- elasticity of demand
• increase in protectionism like Quota- reduce CA deficit due to less imports
  —- EVAL- J curve- initially CA worsen

Quota and Tariff macro objectives

1- economic growth- domestic C increases- AD increases
2- increased employment - labour is derived demand
3- B.O.P CA- surplus or less deficit- less imports
4- inflation- demand pull inflation- conflict!!
5- environment- better as less cargo and air pollution- but could worsen due to domestic supplier pollution UK

Why does S curve shift out- Quota diagram

-Domestic producers are protected from inflows of imports

• therefore layer of protectionism will incentivise domestic producers to come into market
• thus supply increases- shift out

Effects of domestic producer subsidy (diagram)

Consumer:

• still get good at p world
• consumer surplus
  D producer:
• producer purples increase
• total revenue increase

Evaluation points of protectionism

• reference elasticity of D and S
• amount of tariff
• ability of domestic firms to increase output
• deadweight welfare loss- consumer producer surplus
• potential retaliation

Arguments against protectionism

—Higher prices and less choice for consumers- tariffs push up prices of imported goods- quotas and non tariffs restrict variety of goods
Inefficient allocation- CA is distorted so specialisation is reduced—> lower world output —-> lower standard of living
-Regressive effect of the distribution of income- higher prices that result from tariffs hit those lower incomes hardest

• production inefficiencies- firms protected from competition- little incentive to reduce production costs
• Trade Wars- protectionism leads to retaliatory action leading to decrease global trade
  Difficulty of removing barriers- hard to remove due to adverse effect on domestic producers

Trade wars APPLICATION- Banana wars

• 1993-2012
• long running WTO disputes between US

What is Balance of payments made up of?

The current account

What is the current account made up of?

• balance of trade in goods
• balance of trade in services
• net primary income (interest

Components of capital account

• sale/ transfer of patents

Components of financial account

• inc transactions that result in change of ownership of financial assets and liabilities in UK between residents and non residents
• Net balance of FDI
• net balance of portfolio investments ( inflows/ outflows of debt and equity)
• Balance of banking flows (hot money in and out of banking system )

What is overall balance

Zero
-is CA in surplus financial account will always be deficit- inverse relationship

What is Foreign Direct Investment (FDI)?

• investment made from one country to another (companies not countries) involving establishing operations or acquiring tangible assets inc stakes in other firms
• FDI flows:
  —> inward investment is a positive for the UK accounts - e.g. overseas buisness builds manufacturing factory in uk or retail firm invests in opening new stores in uk GARAGE
  —> outward investment is neg for financial account- investment made by UK firms overseas

APPLICATION- QATAR 20% stake in HEATHROW AIRPORT- terminal 4 and Qatar own SHARD

What is portfolio investments?

• people/ firm in one country buys shares or other securities like bonds in other nations
  Example:
• uk investor buy shares in google (-ve) portfolio investments outflows
• German investment bank buy sovereign debt issues by UK gov (+ve) portfolio investment inflow

Causes of CA surplus

Trade surplus- country exports more than it imports
High savings rate- nation with high savings rate can accumulate surpluses as it invests abroad
Foreign investment inflows- attracting FDI and portfolio investments can lead to surpluses

Causes of CA deficit

-imports> exports

• relative exchange appreciation SPICED
• relative high inflation rates- imports look cheaper- MPM
• costs are higher ( exports less competitive)
• recession in neighbouring countries

Reasons for UK CA deficit APPLICATION

• high value of sterling 1996-2008
• continuous EG 1992-228- had high MPI and so rising real incomes led to more imports
• relocation of manufacturing to countries with lower labour cost- like China- leads to less exports
• 2009 Eurozone crisis- led to slow growth and low demand for UK exports
• deterioration of 'net income balance' i.e. net income from interest