4.1 International Economics

• What is Globalisation?

  An increased freedom in movement of people, goods/services, technology and finance.
• What are the main characteristics of Globalisation?

  • Increasing foreign ownership of companies
  • Increasing movement of labour and technology
  • Easy flows of capital
  • Free trade in goods/services
• What are the Factors that contribute to Globalisation?

  • Economies of Scale generated by containerisation
  • Increased effectiveness of WTO
  • Improved ability in connecting firms globally through communications and technology
  • Deregulation of financial markets led to expansion in global financial services
• What are the benefits of Globalisation on Stakeholders?

  • More competition = lower prices
  • Fall in absolute poverty
  • Rising levels of education
  • Increased consumer choice
• What are the drawbacks of Globalisation on Stakeholders?

  • Structural unemployment from shifting sectors
  • Tax evasion becomes easier
  • Rapid depletion of natural finite resources
  • Monopoly power of multinationals
• What is meant by the term 'Comparative Advantage' ?

  Theory which states that a country should specialise in the goods/services it can produce at the lowest opportunity cost.
• What is meant by the term 'Absolute Advantage' ?

  The ability of a party to produce a good/service using fewer factors of production than another party.
• What are assumptions of Comparative Advantage?

  • There are no transport costs
  • Perfect information
  • Factor substitution is easily achieved
  • Constant costs of production
• What are the Limitations of Comparative Advantage?

  • Over-dependence: creates vulnerability on economies
  • Environmental damage: negative externalities of production - misallocation of resources
  • Unequal distribution of income
  • Structural unemployment: certain industries are likely to shut down in order for smallest opportunity cost
• What are the benefits of International Specialisation and Trade?

  • Lower prices
  • More choice
  • More competition = better quality products
  • Economies of Scale = more efficient
  • Higher economic growth
  • Improved living standards
• What are the Factors affecting Patterns of Trade?

  • Comparative advantage
  • Impact of emerging economies
  • Growth of trading blocs and bilateral trading agreements - results in trade creation and/or diversion
  • Changes in relative exchange rates
• What is meant by 'Terms of Trade' ?

  The ratio of a country's avg. price of exports to their imports
• What are the Factors influencing Terms of Trade?

  • Relative inflation rates: if exports are price inelastic, it will improve terms of trade
  • Relative productivity rates
  • Changes in exchange rates: if prices change then so will terms of trade.
• What are the Impacts of Changes in Terms of Trade?

  • Changes to Current Account
  • Changes to GDP
  • Changes to Living standards
  • Changes to level of international competitiveness
• What is meant by the term 'Trading Bloc' ?

  Group of countries that agree to reduce/eliminate trade barriers amongst its members
• Preferential Trade Area:

  • Only lowers trade barriers amongst its members
• Free Trade Area:

  • Eliminates internal barriers
  • Maintains external barriers independently
• Customs Union:

  • Eliminate internal barriers
  • Agree on common external barriers
• Common Market:

  • Eliminate internal barriers
  • Agree on common external barriers
  • Free movement of resources (labour etc.)
• Economic Union:

  • Eliminate internal barriers
  • Agree on common external barriers
  • Free movement of resources
  • Uniform set of economic policies
• Full Integration:

  • No more countries, instead states
  • Free trade amongst them (e.g USA)
• What is WTO's main objective?

  To promote free trade
• What is meant by the term 'Protectionism' ?

  Process by which an economy reduces its movement of resources and trade of its exports.
• What are the possible reasons for Protectionism?

  • Avoid dumping: anti-competitive and can harm country's industries
  • Respond to chronic trade gap: Helps balance out current account
  • Manage currency: Can devalue currency to encourage spending of it internationally
  • Protect infant industries: Gov. can subsidise to let them grow and not be replaced by imports
• What are the types of Protectionism?

  • Tariffs: place a tax on imported goods/services
  • Quotas: placing a physical limit on imports
  • Subsidise domestic producers
  • Non-tariff barriers
• What are the types of Non-Tariff Barriers?

  • Health & Safety Regulations
  • Product Specifications
  • Environmental Regulation
  • Product Labelling
• What are the impacts of Quotas on Domestic Producers?

  • Increases output
  • Raises selling price
  • Increases revenue
• What are the impacts of Quotas on Foreign Producers?

  • Decreases output
  • Firms who manage to export in quota receive higher profits
• What are the impacts of Quotas on Consumers?

  • Higher prices and less choice
• What are the impacts of Quotas on the Government?

  • Do not receive any tariff revenue
  • May receive higher tax revenue due to firms paying more via corporation tax
• What are the impacts of Subsidies on Domestic Producers?

  • Decreases costs of production
  • Increases output
  • Increases international competitiveness
• What are the impacts of Subsidies on Foreign Producers?

  • Makes it harder for domestic producers to compete against foreign producers
• What are the impacts of Subsidies on Consumers?

  • Lower prices
• What are the impacts of Subsidies on the Government?

  • Costs the Gov. to give the subsidy
  • Possible opportunity cost
• What are the impacts of Non-tariffs on Domestic Producers?

  • Limits foreign competition
  • Protects level of outputs
  • May increase revenue
• What are the impacts of Non-tariffs on Foreign Producers?

  • Acts as a disincentive to sell in foreign markets
  • Costs of meeting non-tariff barriers may reduce profit margins
• What are the impacts of Non-tariffs on Consumers?

  • May reduce choice in market
• What are the impacts of Non-tariffs on the Government?

  • May lose credibility with WTO
  • Enforcing non-tariff barriers can be time consuming and expensive
• What is meant by the term 'Balance of Payments' ?

  A record for all financial transactions that occur between an economy and the rest of the world
• What is meant by the term 'Current Account' ?

  Measures a country's trade in goods/services with the rest of the world.