Theme 4

• Globalisation


  The process in which national economies have become increasingly integrated and interdependant
• Trade liberalisation

  Trading blocs

  Growth of MNCs

  Technological advances

  Greater mobility of labour and capital

  Causes of globalisation (5)
• Advantages of globalisation (5)


  Lower prices

  Benefits of trade

  Greater employment

  Large economies of scale

  Free movement of labour and captial
• Disadvantages of globalisation (6)


  Growing inequality

  Higher structural unemployment

  Environmental costs

  Trade imbalances

  Risk of external shocks

  Less cultural diversity
• Absolute advantage


  When a country can produce a product using fewer factors of production than another nation
• Comparative advantage


  A country should specialise in the goods and services it can produce at the lowest opportunity cost, and then trade with another country
• Specialisation


  When a worker, firm, region or country produces a narrow range of goods and services
• Advantages of specialisation (5)


  Larger range of goods and services

  Greater output

  Greater quality

  Benefits of trade

  Reduces problem of scarcity
• Disadvantages of specialisation (5)


  Finite resources

  Over-reliance on weather

  Changing tastes/fashions

  Interdependence

  De-industrialisation
• Terms of trade equation

  (Weighted average of export prices) x (Weighted average of import prices) x100
• Terms of trade


  Indicates the quantity of exports that must be sold to purchase a given level of imports
• Factors influencing the terms of trade (short run)

  Change in demand/supply of exports/imports

  Inflation rates

  Exchange rate movements
• Factors influencing the terms of trade (long run)


  Incomes

  Productivity

  Technology
• Trading bloc


  A group of countries that join together and agree to increase trade between themselves
• Free trade area


  No trade barriers

  Can trade with other countries
• Customs union


  No trade barriers

  Common external barrier
• Common market


  No trade barriers

  Common external barrier

  Free movement of labour and capital
• Monetary union


  No trade barriers

  Common external barrier

  Free movement of labour and capital

  Common currency and central bank
• World Trade Organisation (WTO)


  International organisation that regulates world trade
• WTO's ideal world trade (5)


  Non-discriminatory

  Free from barriers/protectionism

  Predictable

  Promotes fair competition

  Beneficial for developing countries
• Role of WTO (7)


  Set and enforce rules of international trade

  Resolve trade disputes

  Provide a forum for negotiating trade liberalisation

  To monitor further trade liberalisation

  Increase transparency of decision making process

  Help developing countries benefit

  Cooperate with other major economic instituions
• How WTO conflicts with trading blocs (5)


  Distort world trade

  Averse effects on non-member states

  Inefficient allocation of resources

  Increased protectionism

  WTO loses power as trading blocs become more powerful
• Tariff


  Tax on imports

  
• Tariff revenue =


  (Sw+t-Sw) x (Q4-Q3)
• Quota


  Quantity limit on amount of imports

  
• Trade subsidy


  Subsidy given to domestic suppliers
• Aim of trade subsidy


  To reduce costs of production → passed onto consumer as lower prices → makes firm more competitive
• Non-tariff barriers


  Voluntary export restraint (countries limit exports to each other

  Intellectual property laws (patents, copyright etc)

  Technical barriers (health and safety etc)

  Financial protectionism (govt. tells banks to prioritise local firms when allocating loans)

  Hidden protectionism (discrimination against foreign workers)

  Exchange controls (limit of capital flows between countries)

  Currency intervention (competitive devaluation)
• Balance of Payments


  Measures the inflows and outflows of money into and out of a country
• Components of the current account

  Trade in goods (trade balance)

  Trade in services (trade balance)

  Income e.g. remittances (income balance)

  Transfers - govt. fees e.g. aid, EU payments (income balance)
• Causes of current account surplus (6)


  Exporting more than importing

  Recession

  Competitive exports (deflation/disinflation/high quality exports)

  High level of natural resources

  Exports worth more than imports

  High levels of exports
• Causes of current account deficit (6)


  Importing more than exporting

  Sustained economic growth

  Uncompetitive exports (inflation/poor quality products)

  Low level of natural resources

  Exports worth less than imports

  Low levels of exports
• Components of financial account (3)


  FDI

  Portfolio investment

  Reserves
• Capital account


  Minor payments/transfers
• Floating exchange rate


  Currency value set by market

  No govt. intervention

  No target for exchange rate

  Speculation causes change in floating exchange rate

  e.g. British Pound
• Advantages of a floating exchange rate (4)


  Reduces need to hold large foreign currency reserves

  Freedom to set interest rates

  Automatic correction

  Less risk
• Disadvantages of floating exchange rate (2)


  Can be volatile - reduces FDI

  A lower, more competitive exchange rate does not guarantee a current account surplus
• Fixed exchange rate


  Govt. fixes currency value to another currency

  Central bank must hold sufficient currency reserves

  e.g. Chinese Yuan
• Advantages of a fixed exchange rate


  Stability attracts FDI

  Stability controls inflation

  Leads to lower borrowing costs

  Less speculation
• Disadvantages of a fixed exchange rate


  Cannot use interest rates in macro policies (monetary policy)

  Developing countries may not have sufficient foreign currency reserves to fix

  Devaluation of exchange rate leads to cost-push inflation