International Economy

• The advantages of the UK joining the EU include free trade, market access, and extra costs.
• The disadvantages of the UK joining the EU include costs, inefficient policies, and problems of the Euro.
• Economic growth is an increase in the size of a country’s GDP.
• Economic development is a normative concept.
• Globalisation, from an economic perspective, can be defined as the ever-increasing integration of the world’s local, regional and national economies into a single international market.
• Trade in goods, a cause of globalisation, is increasing because developing countries are acquiring the capital equipment and the know-how to produce manufactured goods, there are efficient modes of transport to get goods to markets, and developing countries have a cost advantage in the form of very cheap labour.
• Trade in services, another cause of globalisation, is growing due to tourism and call centres for customers in developed countries being located in developing countries.
• Trade liberalisation, a cause of globalisation, has seen protectionist barriers fall since 1945, encouraging growth in world trade.
• Multinational companies, or transnational companies, are a result of globalisation, with the number of these companies growing in number and size in industries like car manufacturing and the oil industry due to their economies of scale and technological knowledge.
• Decreasing AD consumers will spend less and purchase fewer imports, supplying fewer pounds.
• The lower inflation rate will increase the value of the ER.
• The policy of decreasing AD has an obvious side effect of causing lower growth and higher unemployment.
• A supply-side measure to increase the competitiveness of the economy takes a long time to have an effect but, if successful, will increase the demand for Sterling.
• One method to influence the exchange rate is to join a fixed or semi-fixed exchange rate.
• The idea of joining a fixed or semi-fixed exchange rate is that if the government is committed to a particular target, it may encourage speculators to expect currency to stay within this range.
• In practice, investors may feel government exchange rate targets are never guaranteed and are actually an opportunity to speculate against the government.
• Advantages of floating exchange rates include reducing the need for currency reserves, helping to reduce a BOP current account deficit, and allowing a government to use monetary policy for other objectives.
• Disadvantages of floating exchange rates include wide fluctuations, speculation, and the risk of inflationary pressures.
• Advantages of fixed exchange rates include reducing speculation, placing competitive pressures on firms, and creating certainty, which is likely to encourage investment, including FDI.
• Disadvantages of fixed exchange rates include the risk of losing control of interest rates, difficulty in maintaining the exchange rate, and the possibility of speculators taking advantage of a fixed exchange rate by selling the currency.
• Advantages and disadvantages of joining a currency union include certainty, reduced speculation, and the ability to influence monetary policy, but also the loss of control over monetary policy, difficulty in maintaining the exchange rate, and the risk of inflationary pressures.
• International financial flows, a consequence of globalisation, have seen countries like China and Malaysia finance part of their fast-economic growth from inward flows of international capital.
• Foreign ownership of firms, a consequence of globalisation, has seen many large multinational companies invest in factories and companies in China.
• Developments and communications and information technologies have shrunk the time needed for economic agents to communicate with each other, a characteristic of globalisation.
• Trade in GDP ratios are increasing for most countries, a characteristic of globalisation.
• Low educational standards can lead to a workforce that is less productive as they have less human capital.
• Disease can affect a country’s economy by resulting in lower productivity if people are unable to work, and putting a strain on the country’s health care system.
• Investment can be limited in developing countries due to the savings gap, which is the difference between the level of domestic savings in an economy and the investment needed to grow the economy.
• Capital flight is when people start holding their savings abroad, limiting domestic investment and making economic growth more difficult to achieve.
• A foreign exchange gap means capital outflows from a country are greater than capital inflows, which is more likely when a country is dependent on exports of primary products or imports of manufactured goods, has to spend a lot of money servicing debt, or lacks property rights.
• Primary product dependency refers to the low value added for primary products, the inelastic demand for primary products, and the volatility of commodity prices.
• The Prebisch-Singer hypothesis describes how countries that rely on exporting primary products and importing manufactured goods may become steadily worse off over time, as there will be a decline in the terms of trade.
• Developed countries may use protectionist policies to protect their own primary industries, such as the EU’s Common Agricultural Policy (CAP).
• Market-oriented policies include trade liberalisation, promotion of FDI, and government subsidies.
• Trade liberalisation is the act of trading between nations without protectionist barriers, such as tariffs, quotas or regulations, and can increase world GDP, living standards, and economic growth.
• FDI can help create employment, encourage the innovation of technology and help promote long term sustainable growth.
• Government subsidies can distort price signals by distorting the free market mechanism, leading to government failure and an inefficient allocation of resources.
• Floating exchange rate systems allow the value of the exchange rate to be determined by the forces of supply and demand.
• Micro finances involve borrowing small amounts of money from lenders to finance enterprises, increasing the incomes of those who borrow, and can reduce their dependency on primary products.
• The share of world trade and the volume of manufactured goods exported by China and India have increased.