The global economy

• Free trade refers to the absence of government intervention of any kind in international trade.
• foreign exchange earnings refers to the financial gain made by selling goods/services or by exchange currencies in global markets.
• Absolute advantage: refers to the ability of one country to produce a good using fewer resources than another country.
• Comparative advantage exists when a country can produce a given amount of output at a lower opportunity cost than another country.
• Tariffs definition: tax levied per unit on the price of imported goods and services.
• Quota: A quota is a physical limit on the volume of a particular good entering the country from abroad.
• A subsidy: is a payment per unit of output from the government to a specific industry to help lower production costs and boost production.
• ·       An infant (or sunrise) industry is one that has just opened up and is not yet large enough to take advantage of economies of scale.
• Export subsidy: government payments to exporters which is paid for each unit of the good that is exported.
• Benefits of free trade includes specialisation, greater choice, increased competition between firms, acquisition of resources, more foreign exchange earnings, access to larger markets, economies of scale, more efficient resource allocation and production
• Sources of comparative advantage includes factor endowments and levels of technology
• Limitations of the theory of comparative advantage: There are only 2 countries in the model, They only produce 2 goods, There is full employment of resources, There is perfect information, Technology is constant, There are zero transport costs
• Tariffs serve 2 purposes: 1. to protect domestic industry from foreign competition. 2. to raise revenue for the government
• Purpose of quota is in some circumstances, a country may prefer to protect the domestic economy through a quota rather than a tariff and some domestic firms benefit as they are able to supply more due to the lower level of imports which can increase employment levels.
• Administrative barriers are standards and regulations in place in order to effectively manage these goods and services and to hold foreign producers to account.
• Administrative barriers include product standards, voluntary export restraints, and 'Buy National' policies
• Protectionism refers to government policies that restrict international trade to help domestic industries.
• Arguments for protectionism includes protection of infant (sunrise) industries, national security, Health & Safety, Environmental standards, Anti-dumping, Unfair competition, Government revenue, Protection of jobs, Economically least developed country (ELDC) diversification:
• Arguments against protectionism includes: Misallocation of resources, Retaliation, Increased costs, Higher prices, Less choice, Domestic firms lack incentive to become more efficient, Reduced export competitiveness
• Economic integration: refers to economic cooperation between countries and coordination of their economic policies, leading to increased economic links between them.
• A preferential trade agreement is an agreement between two or more countries to lower trade barriers on particular products in trade between each other.
• A bilateral trade agreement is a preferential trade agreement between two countries and aims to reduce or eliminate barriers to trade.
• A regional trade agreement (RTA) is a preferential trade agreement usually between more than two countries in the same geographical region.
• A multilateral trade agreement is a legally binding preferential trade agreement between more than two countries or trading blocs and is usually negotiated and overseen by the World Trade Organisation (WTO).
• Advantages of trading blocs includes greater access to markets, greater employment opportunities, stronger bargaining power in new multilateral negotiations, greater political stability and cooperation between countries
• Disadvantages of trading blocs includes loss of sovereignty, multilateral trading negotiations become more challenging, trade diversion can distort the efficient allocation of resources.
• THE WORLD TRADE ORGANISATION: Brings countries together at conferences and encourages them to reduce or eliminate protectionist trade barriers between themselves. It acts as an adjudicating body in trade disputes.
• A trading bloc is a group of countries who come together and agree to reduce or eliminate any barriers to trade that exist between them.
• A free trade area is a bloc in which countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries.
• A customs union is an agreement between countries in which all goods/services produced by members are traded tariff free. Additionally, countries agree to a common policy (common tariff rates on imports) towards all non-member countries
• A common market:

  · Goods/services are traded tariff-free in common markets.

  · The four factors of production flow freely between member countries.

  · The goal is to improve the allocation of resources between the common market members and lower the costs of production.
• Monetary union: Members enjoy all of the benefits of a customs union and common market, but then also establish a common central bank which issues a common currency and controls the monetary policy of member countries.
• Advantages of monetary union includes Price stability, Reduction of uncertainties that come with multiple currencies fluctuating in value in relation to other countries, increased trade and market access leading to economic growth, inward investment increases due to increased certainty, enhanced monetary credibility promotes investors.
• DISADVANTAGES OF MONETARY UNION includes Political difficulties as decision-making is likely to be difficult when there are many different nations involved, Loss of control over monetary policy, no longer made by the national central bank, Restrictions on the use of fiscal policy, Large initial outlay to change currency as it costs time and lose ability to adjust exchange rates to maintain competitive.
• An exchange rate is the value of a currency expressed in terms of another currency.
• Floating exchange rate is a system where the value of the currency is determined by the forces of supply and demand for the currency on the foreign exchange market.
• The currency appreciates: If there is excess demand for the currency, then prices rise
• The currency depreciates If there is excess supply for the currency, then prices fall.
• Appreciation: an increase in the value of a currency in terms of another. (caused by a decrease in supply or an increase in the demand for a currency).
• Depreciation: a decrease in the value of a currency in terms of another.