international Economics - 4.1

• Globalisation


  increased economic integration between countries economically, socially and culturally
• Key characteristics of globalisation

  -increased trade as proportion of GDP

  - increased FDI

  -increased capital flows between countries

  -increased movement of people between countries
• Causes of globalisation

  -decreased transport costs

  -decrease in cost of comms

  -reduction in world trade barriers

  -opening up of China and collapse of communism in Eastern Europe

  -growth of trading blocs

  - increased importance of global companies or TNCs
• impact of globalisation on living standards

  increased living standards = countries can specialise in goods they have CA in = higher world output
• impact of globalisation on trade balance

  deterioration of trade balance = countries with no CA may rely on M b/c of decreased X
• Impact of globalisation on inequality

  increased inequality in some countries = decreased demand for unskilled labour in developed countries = bigger gap between highest and lowest paid workers.

  decreased inequality on other countries
• impact of globalisation on govt finances

  increased tax revenues = more money on public services like health e.t.c
• impact of globalisation on producers

  larger scale producers benefit from economies of scale and higher profits = increased productivity BUT small businesses suffer
• impact of globalisation on consumers

  lower prices = increased consumer surplus = greater choice
• impact of globalisation on environment

  increased external costs = increased trade = increased air + noise pollution e.t.c = exploitation and depletion of resources
• impact of globalisation on workers

  increased employment opportunities = small increase in real wages
• impact of globalisation on supply chains

  lenghtier and more complex supply chains
• Specialisation

  concentrating on and becoming an expert in a specific subject/skill
• trade

  Exchange of goods and services
• absolute advantage

  one country can produce more than another country with equal resources
• comparative advantage

  one country can produce a good at a lower opportunity cost than another country with equal resources
• law of comparative advantage

  -constant returns to scale (PPF is straight line)

  -no transport cost

  -no trade barriers

  -perfect mobility of FoP between different uses

  - externalities are ignored
• opportunity cost

  sacrifice of next best alternative that is forgone when a choice is made
• advantages of specialisation and trade

  -higher living standards, increased employment

  -decreased prices = higher consumer surplus

  -increased choice

  -transfer of management expertise and tech

  -economies of scale

  -reduced power of domestic monopolies
• disadvantages of specialisation and trade

  -deficit in trade in G+S balance if uncompetitive

  -danger of dumping causing bankruptcy of local producers = dependency of M in long run

  -increased u/e in some countries

  -TNCs may become global monopolies and exploit customers

  -could be unbalanced development
• what are patterns of trade

  mix of X + M, examines who trade happens between
• key factors influencing patterns of trade

  -changes in CA

  -growing emerging economies

  -trading blocs emerging + bi lateral trade agreements
• terms of trade

  measures price of X relative to price of M
• calculating terms of trade

  (Index of export prices / index of import prices) x 100
• factors influencing terms of trade

  -inflation

  -exchange rates

  -changes in productivity
• impact of changes in a country's ToT

  -increased living standards

  -dampens inflationary pressures

  -increased net X and increased AD

  -increased derived demand for labour
• trading bloc

  group of countries that reduce/remove trade barriers between member countries
• Free trade area


  no barriers between members, trade restrictions on non-members
• customs unions

  free trade between members, common external tariff on goods from outside customs union
• common markets

  same as customs union BUT includes free movement of FoP between member countries
• monetary unions

  Custom unions that adopt a common currency
• benefits of trade unions

  -trade creation

  -increase in FDI

  -increase in economic power
• costs of trade unions

  -trade diversion

  -distortion of CA
• benefits of monetary unions

  -elimination of transaction costs

  -price transparency

  -elimination of currency fluctuations between non-members
• balance of payments


  summary of all transactions between residents and non-residents of a nation for a country over a period of time
• two main components of BoP

  -current account

  -capital/financial account
• current account of BoP


  shows a country's day-to-day transactions with other countries
• 4 main elements of current account

  -balance on goods

  -balance on services

  -balance on prim income

  -balance on secondary income
• current account deficit

  leakages > injections

  -can be sign of economic weakness

  -as long as its <6% of GDP - not major problem

  -not bad if debt is used to build up capital of nation
• current account surplus

  injections >leakages