Economics Theme 4

• Trade Liberalisation 


  Refers to the lowering or complete removal of trade barriers such as tariffs, quotas and non-tariff barriers.
• Globalisation

  The increasing interconnection and interdependence of economies around the world.
• Absolute advantage exists when a country can produce a good more cheaply in absolute terms than another country.
• Comparative advantage exists when a country is able to produce a good more cheaply relative to other goods produced.
• The cycle that links a savings gap to low economic growth is called the Harrod-Domar model.
• Property rights give people the legal right to their property meaning they can go to court if their property is stolen.
• Possessions without property rights are called dead capital.
• Absolute poverty is when people are unable to afford sufficient necessities to maintain life.
• The World Bank defines anyone living on less than $2.15 a day as living in absolute poverty.
• In the UK, relative poverty is classed as those with an income of less than 60% of median household income.
• 1 in 5 people in the UK live below the official relative poverty line.
• Poverty is caused by unemployment, a lack of skills, health problems and income dependency.
• Absolute poverty tends to fall as GDP increases.
• The two main causes of growth in relative poverty are if those on higher salaries see larger growth than those on lower salaries or if there are changes in government spending or taxation.
• In the UK, relative poverty has grown for a number of reasons:

  • Growth in inequality in wages.
  • De-industrialisation has increased the number of lower-paid service jobs.
  • Growth in underemployment, zero-hour contracts and part-time jobs.
  • Decline in trade unions.
  • State benefits have fallen.
  • Long-term and structural unemployment has risen.
• Income is a flow of earnings, whilst wealth is a stock of asset.
• Wealth is likely to be more unequally distributed than income because assets that makeup wealth can be accumulated over time.
• The Lorenz curve shows the cumulative percentage of the population plotted against the cumulative percentage of income.

  
• What graph is this?

  Lorenz Curve

  
• What is on the x-axis of the Lorenz curve?

  Cumulative Percentage of population
• What is on the y-axis of the Lorenz curve?

  Cumulative percentage of income

  
• The bigger the Gini Coefficient the more unequal the country is.
• Gini Coefficient = A/(A+B)
• The terms of trade measures the rate of exchange of one product for another when two countries trade. It tells us the quantity of exports that need to be sold in order to purchase a given level of imports.
• Factors influencing the pattern of trade:

  • Comparative advantage
  • Emerging economies (As economies grow, they tend to increase trade.)
  • Trading blocs and bilateral trading agreements
  • Relative exchange rates
• Complete this table...

  A) Free Trade Area

  B) Customs Union

  C) Common Market

  D) Monetary Union

  
• Factors contributing to globalisation:

  1. Improvements in transport infrastructure and operations.
  2. Improvements in IT and communication.
  3. Trade Liberalisation.
  4. International Financial markets. (Raise money and move it around the world).
  5. TNCs
• Impacts of globalisation:

  1. Consumers have more choice.
  2. Can lead to lower prices as firms use comparative advantage.
  3. Rise in prices, due to rise in incomes.
  4. Possible loss of culture.
  5. Large inequalities have led to migration.
  6. LIDC sweatshop poor conditions.
  7. Firms that are unable to compete internationally will lose out.
  8. Large tax revenues, despite lobbying from TNCs.
  9. Increased trade and production leads to greater emissions.
  10. Globalisation will increase investment in many countries.
• Absolute advantage


  Exists when a country can produce a good more cheaply in absolute terms than another country.
• Comparative advantage


  Exists when a country is able to produce a good more cheaply relative to other goods produced.
• The theory of comparative advantage states that countries find specialisation mutually advantageous if the opportunity costs of production are different . If they are the same, there will be no gain from trade.
• Is trading worthwhile here and how do you know that?

  No, the gradients of the lines are the same meaning that the opportunity costs are the same which highlights that neither has a comparative advantage.

  
• Assumptions and limitations of the comparative advantage theory:

  • No transport costs.
  • Assumes costs are constants and that there are no economies of scale.
  • Assumes goods are homogenous.
  • Assumes that factors of production are perfectly mobile.
• Advantages of specialisation and trade:

  • Comparative advantage can grow global economic growth.
  • Specialising allows countries to exploit economies of scale.
  • Consumers have a greater choice.
  • Trade means greater competition.
• Disadvantages of specialisation and trade:

  • Over-dependence.
  • Structural unemployment.
  • Environmental issues.
  • Loss of sovereignty and culture.
• Factors influencing the pattern of trade:

  1. Comparative advantage
  2. Emerging economies.
  3. Trading blocs and bilateral trading agreements.
  4. Relative exchange rates.
• The terms of trade measures the rate of exchange of one product for another when two countries trade. It tells us the quantity of exports that need to be sold in order to purchase a given level of imports.
• Movement in the terms of trade is said to be favourable if the terms of trade increase as the country can buy more imports with the same level of exports. This is called an improvement in the terms of trade. It is unfavourable if they decrease, when export prices fall or import prices rise. This is called a deterioration.
• Terms of Trade = (average export price index/average import price index) x100
• An improvement in the terms of trade will be caused by a rise in export prices or a fall in import prices.