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Flashcards · 4EC1 · Topic 2.2

The global economy flashcards

20 cards on Topic 2.2, subtopics 2.2.1 to 2.2.3. Pick a subtopic or study them all.

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2.2.1 Globalisation

Globalisation
Increased integration and interdependence of economies.
Multinational corporation (MNC) and foreign direct investment (FDI)
MNC: a firm that carries on business in two or more countries. FDI: investment by a firm in business assets (building a plant, buying a majority stake) in another country.
Four reasons for globalisation
Fewer tariffs and quotas; cheaper transport; cheaper communication; the growing significance of MNCs.
Why do MNCs and FDI emerge?
Economies of scale from selling in many markets; access to natural resources and cheap materials; lower transport and communication costs; access to customers in different regions (avoiding import taxes and delivery costs).
Advantages and disadvantages of MNCs for a host country
Advantages: jobs, investment in infrastructure, skills, capital, tax contributions. Disadvantages: tax avoidance, environmental damage, profits moved abroad, pressure on local firms, jobs may leave if the firm moves.
Tax avoidance vs tax evasion
Tax avoidance: using legal rules to reduce a tax bill. Tax evasion: illegally not paying tax that is owed.

2.2.2 International trade

Free trade: advantages and disadvantages
Advantages: lower prices and more choice for consumers, lower input costs for firms, wider markets for businesses. Disadvantages: foreign competition harms domestic businesses; unemployment rises in affected industries.
Tariff, quota and subsidy (as methods of protection)
Tariff: a tax on imported goods. Quota: a limit on the quantity of a good that can be imported. Subsidy: government money paid to producers, which cuts what each unit costs them to supply.
Dumping
Exporting at a price under the cost of making the good, or under the price in the exporter's own market.
Reasons for protection
Prevent dumping; protect employment; infant industries; tariff revenue; keep out unsafe products; reduce a current account deficit; retaliation.
World price 20; a 25% tariff is imposed. Home demand falls to 85 and home supply rises to 70 (thousands). Find imports and tariff revenue
Tariff = 0.25 × 20 = 5, so the price is 25. Imports = 85 − 70 = 15 thousand. Revenue = 5 × 15 = 75 thousand. Use imports after the tariff, not before.
Free-trade area vs customs union vs common market
Free-trade area: no barriers between members; each sets its own barriers on outsiders. Customs union: free trade between members plus one common tariff on outsiders. Common market: a customs union plus free movement of labour and capital.
Trade creation vs trade diversion
Trade creation: buying from a lower-cost partner instead of a higher-cost home producer. Trade diversion: buying from a higher-cost partner instead of a lower-cost outsider.
Roles of the World Trade Organization (WTO)
Negotiates lower trade barriers; promotes equal treatment of members; settles disputes (a panel rules on a complaint); allows limited retaliation; monitors members' policies; supports developing countries; allows duties on dumped goods.

2.2.3 Exchange rates

Exchange rate
The number of units of one currency needed for one unit of another.
Appreciation vs revaluation; depreciation vs devaluation
Appreciation / depreciation: market forces push a currency's value up / down (floating rate). Revaluation / devaluation: a rise / fall chosen by the government or central bank that sets the rate (fixed rate).
Sources of demand for and supply of a currency (AC) on the foreign exchange market
Demand for AC: foreigners buying exports, visitors to Country A, foreigners buying Country A assets. Supply of AC: residents buying imports, travelling abroad, sending money abroad.
What happens to a currency when the country raises its interest rate?
Saving there offers a better return → foreign savers buy the currency → demand shifts right → the exchange rate rises (appreciation).
1 AC = 2.50 BC; a toy costs 30 AC and a jacket 12 BC. The AC depreciates to 2.00 BC. What happens to the two prices?
Toy (export) in BC: 30 × 2.50 = 75 → 30 × 2.00 = 60, down 20%. Jacket (import) in AC: 12 ÷ 2.50 = 4.80 → 12 ÷ 2.00 = 6.00, up 25%.
Will a depreciation improve the current account?
Exports become cheaper abroad and imports dearer at home, so the current account tends to improve, but only if demand for exports and imports is price elastic enough. Imported inputs also cost more, and effects take time.

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