Globalisation

Question 1

What is economic integration

Answer 1

Process whereby countries coordinate to reduce trade barriers and maybe harmonise monetary and fiscal policy

Question 2

What is a trading bloc

Answer 2

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

Question 3

What are bilateral and multilateral trade agreements

Answer 3

Bilateral: agreement to reduce tariffs and quotas between 2 countries
Multilateral: agreement to reduce tariffs and quotas between multiple countries

Question 4

What are the 6 types of trading bloc in order of least to most integrated

Answer 4

1. Preferential Trading Area (PTA)
2. Free Trade Area (FTA)
3. Customs union
4. Common Market
5. Economic and Monetary union
6. Full economic integration

Question 5

What is a Preferential Trading Area (PTA)

Answer 5

Where countries join together to reduce tariffs or quotas on certain goods and services i.e. the country has preferential access to goods and services

e.g. Between the EU and African nations where the EU gets reduced tariffs for primary commodities and African nations get back certain manufactured goods with less tariffs

Question 6

What is an FTA

Answer 6

• Where countries join together to eliminate all trade barriers between each other but they are free to trade with any country outside the FTA whenever they want
• e.g. could be an FTA where some of the countries impose a tariff or quota on a country outside the FTA but others have free trade with that country
• NAFTA is an FTA between Mexico, USA and Canada

Question 7

What is a Customs Union

Answer 7

Type of FTA where countries do not have freedom to trade with countries outside the customs union whenever or however they want

Therefore, each country in the union has to impose common external barriers on non-member nations

e.g. EU is a customs union with a tariff as the common external barrier

Question 8

What is a common market

Answer 8

Type of customs union where there is common policy e.g. on regulation, and there is free movement allowed of factors of production e.g. labour and capital can move to another country in the common market free of charge

e.g. the EU

Question 9

What is a monetary union

Answer 9

Type of common market where countries adopt the same currency, same central bank, so same monetary policy

e.g. the Eurozone

Question 10

What is full economic integration

Answer 10

Where countries completely harmonise all policy, e.g. fiscal and monetary policy. Political power is given to 1 governing body

e.g. UK is a close example which is governed by the UK parliament

Question 11

What is trade creation

Answer 11

When a country enters a customs union and there is a movement from a high cost domestic producer to a low cost producer inside the customs union

e.g. Before France was selling a good at a high price but UK joined the customs union and produces at a lower cost, creating trade for UK with all the other member nations. Created trade for France and other member nations as well as they can sell its own comparative advantage goods to the UK

Question 12

How can you show trade creation on a diagram

Answer 12

e.g. French market for a good where the UK is outside the EU
- Draw free trade diagram where UK has comparative advantage but given the common external tariff by France, Q2-Q1 = volume of UK imports
- If the UK were to join customs union, tariff goes away so UK supply curve shifts down, causing extension of French demand and contraction of French supply, volume of UK imports increase to Q4-Q3
- Gain of CS with area of unit tariff reduction x increase in quantity demanded
- Gain in world efficiency with area of unit tariff reduction x fall in quantity of domestic supply

(Think of pros and cons of free trade and cons and pros of a tariff with advantages and disadvantages)

Question 13

What is trade diversion

Answer 13

When a country enters a customs union and there is a movement from a low cost foreign producer to a high cost producer within the customs union

Question 14

How can you draw trade diversion on a diagram

Answer 14

e.g. UK market for good where UK is outside the EU and Thailand have comparative advantage
- Initially, no tariff on Thailand so excess demand satisfied by volume of imports from Thailand = Q2-Q1
- If UK join customs union, they put common external tariff on Thailand, causing shift up of Thailand supply curve and increase price past that of EU suppliers within customs union
- UK domestic supply extension to price of EU suppliers Q3 and domestic demand contracts to Q4 so excess demand satisfied by volume of imports from EU = Q4-Q3

Question 15

How can you show the impact of trade diversion on CS, domestic efficiency and EU efficiency

Answer 15

• DWL of CS of area between Peu an Pthai x contraction in demand
• Loss of domestic efficiency of area between Peu and Pthai x extension in domestic supply as UK produces at higher cost than Thailand
• Loss of EU efficiency as excess demand Q4-Q3 is being satisfied by imports from the EU instead of Thailand so area between Peu and Pthai x Q4-Q3

(With pros and cons, think of tariffs and loss of free trade)

Question 16

What are the advantages of being part of a monetary union e.g. eurozone

Answer 16

1. Non-fluctuating exchange rate
2. Less costs from currency conversions so consumers and businesses save money
3. Increased business confidence due to more stable currency, so easier to plan investment
4. Currency less prone to speculative attacks as it won’t be over or under valued due to confidence in its stability
5. Easier to compare prices between member nations, saving time and money

Question 17

How does joining monetary union mean a more stable exchange rate

Answer 17

Smaller nations have more volatile ERs as they rely more heavily on certain sectors and industries so more prone to economic shocks which influence exchange rate and less stable FDI flow

Adopting stable currency like the Euro means foreign investors have more confidence in currency so the nation has more stability, greater business confidence, more investment, more international trade

Question 18

What are the disadvantages of being part of a monetary union e.g. eurozone

Answer 18

1. Loss of monetary policy autonomy to ECB and policies picked may not suit your economic circumstances e.g. UK needed lower interest rates during financial crisis
2. No potential for countries to change exchange rate to boost performance e.g. boost growth by devaluing currency not possible
3. Very high cost to convert to the new currency e.g. printing new notes and coins, taking away old notes and coins, menu costs, changing databases
4. Lack of fiscal union so countries may be reckless with fiscal policy causing destabilisation of union e.g. Greece, Spain Italy all had to use austerity recently

Question 19

What is globalisation

Answer 19

Process by which national economies become increasingly integrated and inter-dependent

Question 20

What have been the causes of globalisation

Answer 20

1. Trade liberalisation as WTO means trade barriers reduced, so more free trade
2. More trading blocs and deepening of existing trading blocs like EU in recent times
3. Growth of MNCs
4. Technology in transport and internet allowed businesses to operate in many countries
5. Greater mobility of labour and capital due to trading blocs and gov policy which encouraged migration and spread of capital

Question 21

What are the pros of globalisation

Answer 21

1. Lower prices as global market means higher int competitiveness, improving efficiency
2. Benefits of free trade
3. More employment as firms produce higher quantities to meet international demand, labour is a derived demand
4. Benefits from large EoS as they grow, leading to higher profit so more investment, innovation
5. Free movement of labour and capital so individuals can work wherever they want more easily and businesses can move across the world and more FDI, leading to economic growth, employment, innovation

Question 22

How does lower prices due to globalisation benefit consumers and firms

Answer 22

Greater CS, greater market size means more choice, quality, more innovation and technology for them to use

Business can access raw materials elsewhere for lower costs

Question 23

What are the cons of globalisation

Answer 23

1. Growing inequality as benefitted wealthy more and trickle down effect not occurred
2. Higher structural unemployment due to deindustrialisation e.g. North England but especially problem in developing countries with no welfare state
3. Environmental costs as foreign firms deplete resources in other countries and firms cut costs in unsustainable ways, bad for future generations so outweighs benefits of globalisation
4. Trade imbalances as countries very reliant on exports to grow e.g. China but prone to shocks to exports. Could lead to trade wars to rectify trade imbalances like CA deficit
5. Greater risk of external shocks e.g. financial crisis started in USA but globalisation meant banks working in many countries so shocks spread to other countries more easily
6. Every country with same MNCs, goods and services so loses cultural identity

Question 24

What is the terms of trade

Answer 24

weighted average of export prices / weighted average of import prices x 100

(weighted by how much revenue each good/service brings in or how much spending on imports for each good/service)

Question 25

What does a change in the terms of trade mean

Answer 25

- Improvement in the TOT is a rise (e.g. 100 to 102), means the country is generating enough export revenue to fund 2% more import spending from abroad than before Important for developing countries who rely on export revenue to buy imports more - Either the export prices have increased or import prices decreased

Question 26

What short run factors change the terms of trade

Answer 26

Short run factors: - Demand for imports and exports e.g. change in tastes/preferences or change in weather affects price - High relative inflation rates increases price of basket of exports improving terms of trade, but less competitive exports - Exchange rate changes affect price of imports and exports

Question 27

What long run factors affect the terms of trade

Answer 27

- Long run rise in incomes in developing countries deteriorates terms of trade (Prebisch Singer hypothesis) - Productivity and technology improvements lowers costs of production leading to lower prices of exports. This causes deterioration of terms of trade

Question 28

Explain the Prebisch-Singer hypothesis

Answer 28

- Developing countries exports primary more goods and import more manufactured goods from developed countries - Therefore, as global incomes rise, the demand for imports rises - However, the demand for imports of manufactured goods from developed countries rises more because they are more income elastic as they are luxuries. The demand for imports of primary goods doesn't rise much as they are income inelastic - Therefore, the demand and therefore price of imports for developing country is greater than demand and therefore price of exports from developing country - Terms of trade position weakens whereas terms of trade position strengthens for developed country

Question 29

Under what circumstances does an improvement in the terms of trade increase export revenue

Answer 29

- If there is a shift out in demand for exports, revenue will increase so improvement in terms of trade is good - If e.g. there is an increase in relative inflation TOT improves but export revenue only rises if the elasticity of demand for exports is <1 as the fall in Q won't be as much

Question 30

Under what circumstances does a deterioration in the terms of trade be good for an economy

Answer 30

Deterioration might be due to improved international competitiveness, which is good for economy Elastic ped for exports means fall in price causes big rise in quantity so revenue rises