Flashcards · 0455 · Topic 6

International trade and globalisation flashcards

23 cards on Topic 6, subtopics 6.1 to 6.4. Pick a subtopic or study them all.

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Specialisation at national level: A country concentrates on producing a narrow range of goods and services, and trades for the rest.
Two bases of international specialisation: Superior resource allocation (putting land, labour and capital where they are most productive) and cheaper production methods (lower unit cost through technology, cheap inputs or economies of scale).
Country P makes 12 tea or 6 machines per worker; Country Q makes 8 tea or 8 machines. Which should specialise in machines?: Opportunity cost of 1 machine: P = 12 ÷ 6 = 2 tea; Q = 8 ÷ 8 = 1 tea. Q has the lower opportunity cost, so Q makes machines and P makes tea.
Advantages of specialisation for consumers, firms and the economy: Consumers: lower prices, wider choice. Firms: bigger markets, economies of scale. Economy: more output and income, export earnings, growth.
Why can overspecialisation be risky?: An economy relying on one export is exposed: if its price falls, export earnings, incomes and jobs fall, and workers may face structural unemployment. The risk depends on the share of income from that product and how easily workers can retrain.

Globalisation: Growing integration and interdependence of the world's economies through trade, capital, labour, technology and information.
Multinational company (MNC): A firm that owns or controls production in more than one country. The home country holds its headquarters; a host country is where it operates but is not based.
Benefits and costs of an MNC for a host country: Benefits: jobs, income, tax revenue, technology and skills, exports. Costs: profits sent abroad, local firms squeezed out, weak pay or environmental standards, it may leave.
Tariff, import quota and embargo: Tariff: a tax on imported goods. Import quota: a limit on the quantity (or value) of a good that can be imported in a period. Embargo: a ban on trade in a good or with a country.
Four reasons given for protection: Infant industry (time to grow and cut costs); declining industry (slow job losses); strategic industry (food, energy, defence); avoiding dumping (selling abroad below cost or below the home price).
Consequences of protection: Home producers gain sales and jobs; the government gains tariff revenue. Consumers pay higher prices and have less choice; protected firms face less pressure to cut costs; trading partners may retaliate, hurting home exporters.

Foreign exchange rate: How much of one currency buys a unit of another: the price of one currency in terms of the other.
Appreciation vs depreciation: Appreciation: a rise in the value of a currency against another. Depreciation: a fall in its value against another.
What determines a floating exchange rate?: Demand and supply in the foreign exchange market. Demand for the home currency comes from foreigners buying its exports and assets; supply comes from residents buying imports and foreign assets.
What happens to a currency when the country's interest rates rise, or when it buys more imports?: Higher interest rates: foreign savers buy the currency (demand shifts right), so it appreciates. More imports: residents sell the currency (supply shifts right), so it depreciates.
A table costs 300 miras. The rate falls from 1 mira = 1.50 nubi to 1.20 nubi. What happens to its price in nubi?: Before: 300 × 1.50 = 450 nubi. After: 300 × 1.20 = 360 nubi, a fall of 20%. A depreciation makes exports cheaper abroad and imports dearer at home.
Floating vs fixed exchange rate system: Floating: set by the market; self-correcting and needs no reserves, but uncertain and open to speculation. Fixed: set and held by the government or central bank; gives traders certainty, but reserves can run out and interest rates are tied to defending the rate.

Current account of the balance of payments: The record of a country's trade in goods and services, primary income and secondary income with the rest of the world over a period.
Primary income vs secondary income: Primary income: income from assets and work abroad (profits, dividends, interest, wages of cross-border workers). Secondary income: transfers with nothing in return (remittances, aid, gifts).
Goods −40, services +50, primary income −20, secondary income +20. Find the current account balance: Current account = −40 + 50 − 20 + 20 = +10, a surplus, even though there is a deficit on trade in goods.
Four causes of a current account deficit: High spending on imports (fast income growth); uncompetitive exports (high costs, low quality); higher inflation than trading partners; an overvalued currency; recession among trading partners; a fall in the price of a main export.
Consequences of a current account deficit: Lower net exports reduce demand, growth and jobs in export and import-competing firms; pressure on the currency to fall; the deficit must be financed by borrowing or selling assets, which brings interest payments later.
Will a depreciation improve the current account?: It depends on price elasticity of demand. If demand for exports and imports is elastic, export earnings rise and import spending falls, so the balance improves. If both are inelastic, the import bill can rise and the balance may worsen.