Flashcards · 2281 · Topic 6

International trade and globalisation flashcards

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

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6.1 International specialisation

Specialisation at national level: A country puts most of its productive capacity into a limited range of products and swaps part of that output with other countries for products it does not make.
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.
Country X pays 18 a day and a worker makes 6 units; Country Y pays 20 a day and a worker makes 10 units. Which has the lower unit labour cost?: Unit labour cost = daily wage ÷ output per worker per day. X: 18 ÷ 6 = 3. Y: 20 ÷ 10 = 2. Y, the higher-wage country, has the lower unit cost because its workers are more productive.

6.2 Globalisation, free trade and protection

Globalisation: Economies becoming steadily more tied together and dependent on each other, through trade, investment and the movement of information and technology.
Multinational company (MNC): A business with production or other operations in two or more countries, run from one of them. The home country holds its head office; a host country is any other country where it operates.
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 charged on imports (specific = a set amount per unit; ad valorem = a share of the value). Import quota: a ceiling on the number of units that may be brought in during a period. Embargo: a complete stop to trade with a country or in a good.
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.

6.3 Foreign exchange rates

Foreign exchange rate: How many units of one currency are swapped for one unit of another.
Appreciation vs depreciation: Appreciation: a rise in the value of a currency in a floating system. Depreciation: a fall in its value in a floating system. In a fixed system, a deliberate rise or fall set by the authorities is a revaluation or devaluation.
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.

6.4 Current account of balance of payments

Current account of the balance of payments: A country's yearly record of trade in goods and services plus income and gift flows (primary and secondary income) with other countries.
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.