international economy

• What is globalisation?


  Globalisation refers to the increasing interconnection and interdependence of the world’s economies, societies, and cultures. It describes a process through which the world becomes more integrated, primarily driven by the expansion of international trade, investment, communication, and technology.
• What is one cause of globalization?

  Technological advancements
• How do technological advancements contribute to globalization?

  They reduce geographical constraints through communication
• What technology helps reduce geographical constraints?

  Internet and mobile communications
• How do advancements in transportation affect globalization?

  They make movement faster and cheaper
• What is trade liberalization?

  Reduction of tariffs and trade barriers
• What is an example of a technology that promotes global integration?

  Digital platforms
• Which organization is associated with trade liberalization?

  World Trade Organization (WTO)
• How do multinational corporations (MNCs) contribute to globalization?

  MNCs invest across borders for lower costs
• What do MNCs benefit from when they invest across borders?

  Lower production costs and new markets
• What does global financial integration encourage?

  International investments through capital flows
• What policy shifts encourage global business interactions?

  Adoption of free-market policies
• What is the effect of deregulation on globalization?

  Deregulation encourages global business interactions
• What role does innovation play in globalization?

  It promotes global integration
• What are the characteristics of globalisation?

  1. Increased Trade: Rise in the trade of goods, services, and ideas between countries.
  2. Global Supply Chains: Products produced in multiple countries, increasing global efficiency (e.g., smartphones).
  3. Cultural Exchange: Spread of culture, including food, language, fashion, and entertainment.
  4. Capital and Labour Mobility: Increased movement of people and capital across borders.
  5. International Financial Integration: Deeper integration of global financial markets.
• What are the consequences of globalisation for less-developed countries?

  • Positive:

  1. Increased Investment: FDI brings capital, technology, and management expertise.
  2. Job Creation: MNCs create job opportunities.
  3. Market Access: Local businesses can access international markets.

  • Negative:

  1. Exploitation of Labour: MNCs may exploit cheap labour, leading to poor working conditions.
  2. Environmental Degradation: Industrial growth can lead to deforestation and pollution.
  3. Unequal Growth: Benefits of globalisation often concentrated among elites and corporations.
• What are the consequences of globalisation for more-developed countries?

  • Positive:

  1. Access to Cheaper Goods: Consumers benefit from cheaper imports.
  2. Enhanced Global Influence: MDCs benefit from cultural, technological, and economic influence globally.

  • Negative:

  1. Job Losses: Outsourcing of jobs to cheaper locations leads to job losses in certain sectors (e.g., manufacturing).
  2. Income Inequality: Globalisation increases income inequality, benefiting the wealthy more than low-skilled workers.
• How do multinational corporations (MNCs) drive globalisation?

  • FDI and Technology Transfer: MNCs bring capital, technology, and know-how to developing countries.
  • Global Branding: MNCs promote global brands (e.g., Coca-Cola, Nike), fostering cultural exchange.
  • Global Supply Chains: MNCs set up operations in multiple countries, creating interconnected global supply chains.
• What is comparative advantage in trade?

  Comparative advantage occurs when a country specializes in producing goods at a lower opportunity cost than other countries, leading to mutual benefits from trade
• What is the difference between comparative and absolute advantage?

  • Absolute Advantage: When one country can produce a good using fewer resources than another country.
  • Comparative Advantage: Even if a country has an absolute advantage in producing all goods, it still benefits from specialising in the goods where it has the lowest opportunity cost.
• Illustrate the principle of comparative advantage with an example.

  • Country A: 1 unit of wheat = 2 hours, 1 unit of cloth = 3 hours.
  • Country B: 1 unit of wheat = 4 hours, 1 unit of cloth = 5 hours.
  • Conclusion:
  • Country A should specialise in wheat (lower opportunity cost).
  • Country B should specialise in cloth (lower opportunity cost).
  • Both countries benefit from trade by focusing on their comparative advantages.
• What are the benefits of international trade?

  • Specialisation: Countries can focus on what they do best, increasing efficiency.
  • Economies of Scale: Specialisation allows firms to produce at larger scales, reducing costs.
  • Enhanced Competition: Trade exposes firms to more competition, driving innovation and product quality improvements.
• What are the costs of international trade?

  • Domestic Industry Protection: Trade can harm domestic industries that can't compete with cheaper foreign products, leading to job losses.
  • Environmental Impact: Trade can increase pollution and environmental degradation due to increased production and transportation.
  • Cultural Homogenisation: Dominance of global brands may erode local cultures and traditions.
• What are protectionist policies?

  • Tariffs: Taxes on imports to make them more expensive and protect domestic industries.
  • Quotas: Limits on the quantity of a good that can be imported, reducing trade.
  • Export Subsidies: Government payments to domestic producers to make their goods cheaper on international markets.
• What is the role of the World Trade Organization (WTO)?

  • Promote Free Trade: The WTO works to reduce tariffs and other barriers to trade.
  • Resolve Trade Disputes: The WTO provides a forum for resolving trade conflicts.
  • Set Trade Rules: The WTO establishes rules for international trade, covering areas like intellectual property rights, anti-dumping measures, and agricultural subsidies.
• What is the balance of payments (BoP)?

  The BoP is a record of all financial transactions between a country and the rest of the world. It includes:

  • Current Account: Trade in goods/services, primary and secondary income.
  • Capital Account: Transfers of assets like gifts and debt forgiveness.
  • Financial Account: Transactions involving financial assets (e.g., FDI, portfolio investment).
• What does the current account consist of?

  • Trade Balance: The difference between exports and imports of goods and services.
  • Primary Income: Income from investments abroad (e.g., dividends, interest).
  • Secondary Income: Transfers like remittances and foreign aid.
• What is a deficit and surplus on the current account?

  • Current Account Deficit: When a country imports more than it exports, financed by borrowing or selling assets.
  • Current Account Surplus: When exports exceed imports, leading to an increase in foreign exchange reserves.
• What factors influence a country’s current account?

  1. Exchange Rate: A depreciated currency makes exports cheaper and imports more expensive.
  2. Inflation: High inflation makes a country’s goods less competitive, worsening the current account.
  3. Productivity: Higher productivity makes goods more competitive internationally, improving the current account.
• What policies can be used to correct balance of payments imbalances?

  • Expenditure-Switching Policies: Shift demand from foreign goods to domestic goods (e.g., tariffs, depreciation of the currency).
  • Expenditure-Reducing Policies: Reduce domestic demand through higher interest rates or reduced government spending.
• How are exchange rates determined in freely floating exchange rate systems?

  • In a floating exchange rate system, exchange rates are determined by the market forces of supply and demand for a currency in the foreign exchange market.
  • Factors that influence floating exchange rates:
  • Interest rates: Higher interest rates attract foreign capital, increasing demand for a currency.
  • Inflation rates: Higher inflation erodes purchasing power, decreasing demand for a currency.
  • Economic performance: Strong economic growth and stability attract investors, raising demand for the currency.
• What are the advantages and disadvantages of fixed exchange rates?

  • Advantages:

  1. Stability: Fixed exchange rates provide certainty in international trade and investment.
  2. Inflation Control: Countries with high inflation can tie their currency to one with lower inflation, stabilizing prices.

  • Disadvantages:

  1. Loss of Monetary Autonomy: Countries must adjust their domestic monetary policies to maintain the fixed rate.
  2. Susceptibility to Speculative Attacks: If markets believe a currency is overvalued, they may sell off large quantities, forcing a devaluation.
• What is one advantage of joining a currency union?

  Elimination of exchange rate risk
• How does a common currency increase price transparency?

  It helps compare prices across borders
• What does greater economic integration promote among member states?

  Deeper economic and political ties
• What is a disadvantage of joining a currency union?

  Loss of independent monetary policy
• What are asymmetric shocks in the context of a currency union?

  Economic challenges requiring different policy responses
• How does the loss of independent monetary policy affect member states in a currency union?

  They can't control their own interest rates
• Why can asymmetric shocks be difficult to address in a currency union?

  Different economies need different policy responses
• What is the difference between economic growth and economic development?

  • Economic Growth: An increase in a country's output of goods and services, measured by changes in GDP (Gross Domestic Product). It focuses on quantitative growth in the economy.
  • Economic Development: A broader concept, encompassing improvements in living standards, education, health, and poverty reduction, along with economic growth. It involves both qualitative and quantitative changes to the economy.