INTERNATIONAL ECON

• Globalisation


  The growing interdependence of countries and the rapid rate of change it brings about
• OECD definition of globalisation

  The geographic dispersion of industrial and service activities, for example research and development, sourcing of inputs, production and distribution and the cross border networking of companies, for example through joint ventures and the sharing of assets
• Globalisation


  The increasing integration of the world's local, regional and national economies into a single international market
• Factors contributing to globalisation

  • Improvements in transport infrastructure and operations
  • Improvements in IT and communication
  • Trade liberalisation and reduced protectionism
  • International financial markets
  • TNCs (large companies operating around the world)
• Impacts of globalisation on consumers

  • More choice
  • Lower prices
  • Rise in prices
• Impacts of globalisation on workers

  • Some have gained, others have lost
  • Large scale job losses in manufacturing sectors
  • Increased migration affecting wages
  • Fall in wages for low skilled workers, increase for high skilled workers
  • TNCs provide training and create new jobs
  • Poor conditions and low wages in sweatshops
• Impacts of globalisation on producers

  • Able to source products from more countries and sell in more countries
  • Reduced risk
  • Able to employ low skilled workers cheaper in developing countries
  • Exploit comparative advantage and have larger markets
  • Firms unable to compete internationally will lose out
• Impacts of globalisation on government

  • Higher taxes
  • Tax avoidance
  • TNCs can bribe and lobby governments, leading to corruption
  • Correct policies can maximise gains and minimise losses
• Impacts of globalisation on the environment

  • Increased demand for raw materials
  • More emissions
  • Can work together to tackle climate change and share ideas and technology
• Impacts of globalisation on economic growth

  • Increases investment within countries
  • TNCs bring world class management techniques and technology
  • Trade allows exploitation of comparative advantage
  • Power of TNCs can cause political instability
  • Comparative cost advantages change over time, causing structural unemployment and reduced growth
• Absolute advantage


  A country can produce a good more cheaply in absolute terms than another country
• Comparative advantage


  A country is able to produce a good more cheaply relative to other goods produced
• Specialisation and trade


  1. Identify absolute and comparative advantage

  2. Determine optimal specialisation and trade based on comparative advantage

  3. Produce more through specialisation and trade
• Assumptions and limitations of the theory of comparative advantage

  • No transport costs
  • Constant costs and no economies of scale
  • Homogenous goods
  • Perfectly mobile factors of production
  • No tariffs or trade barriers
  • Perfect knowledge
  • Depends on terms of trade
• Advantages of specialisation and trade

  • Increases world output and global economic growth
  • Allows economies of scale
  • Makes use of different factors of production
  • Provides greater consumer choice and competition
  • Prevents economic stagnation
• Disadvantages of specialisation and trade

  • Over-dependence on particular exports and imports
  • Structural unemployment
  • Environmental damage
  • Loss of sovereignty
  • Loss of culture
• The UK used to be the 'workshop of the world', exporting huge amounts of goods but the 1970s and 1980s saw a process of deindustrialisation with exports of services becoming increasingly important. The UK's entry to the EU led to an increase in trade with Europe.
• Factors influencing the pattern of trade

  • Comparative advantage
  • Emerging economies
  • Trading blocs and bilateral trading agreements
  • Relative exchange rates
• Terms of trade


  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.
• Favourable movement in terms of trade

  The terms of trade increase, so the country can buy more imports with the same level of exports
• Unfavourable movement in terms of trade

  The terms of trade decrease, when export prices fall or import prices rise
• Calculation of terms of trade

  (average export price index/average import price index) x 100
• Factors influencing a country's terms of trade


  • Exchange rates, inflation and changes in demand/supply of imports or exports (short run)
  • Improvement in productivity compared to trading partners (long run)
  • Changes in incomes affecting demand (long run)
• Terms of trade


  The ratio of a country's export prices to its import prices (export price index/import price index) x100
• Factors influencing a country's terms of trade

  • An improvement in the terms of trade will be caused by a rise in export prices or a fall in import prices
  • A deterioration will be caused by a fall in export prices or a rise in import prices
• Short-run factors affecting terms of trade

  • Exchange rates
  • Inflation
  • Changes in demand/supply of imports or exports
• Long-run factors affecting terms of trade

  • Improvement in productivity compared to trading partners
  • Changing incomes affecting demand patterns
  • Prebisch-Singer hypothesis - long run price of primary goods declines relative to manufactured goods
• Anything which affects the price of a country's imports or exports will affect its terms of trade
• Inelastic PED of exports and imports

  A favourable movement in terms of trade would improve the current account on the balance of payments
• Elastic PED of exports and imports

  A favourable movement in terms of trade would worsen the current account
• Improvement in terms of trade

  Likely to lead to a fall in GDP and a rise in unemployment
• A long term decline in the terms of trade suggests a long term decline in living standards as less imports can be bought
• For an improvement in terms of trade to be beneficial, export revenues must increase
• Regional trading bloc


  A group of countries within a geographical region that protect themselves from imports from non-members by reducing or eliminating tariffs, quotas and other protectionist barriers among themselves
• Types of trading blocs

  • Preferential trading areas (PTA)
  • Free trade areas (FTA)
  • Customs unions
  • Common markets
  • Monetary unions
• Preferential trading area (PTA)


  Tariff and other trade barriers are reduced on some but not all goods traded between member countries
• Free trade area (FTA)

  Two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members, while each member imposes its own tariffs and quotas on goods it imports from outside the trading bloc
• Customs union


  Removal of tariff barriers between members and the acceptance of a common external tariff against non-members, allowing members to negotiate as a single bloc with third parties
• Common market


  Members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed, with a common external tariff on imported goods from outside the markets, and harmonisation of micro-economic policies, common rules regarding monopoly power and anti-competitive practices, and the removal of custom posts
• Monetary union


  Two or more countries with a single currency, with an exchange rate that is monitored and controlled by one central bank or several central banks with closely coordinated monetary policy