4.2.6 – The International Economy

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    4.2.6.1 – Globalisation

    Globalisation – process of growing economic integration
    of the world’s economy

    Main Characteristics of Globalisation

    WTO – a organisation to promote free trade by persuading countries to remove import tariffs and
    barriers to trade aiding globalisation
    • Multinational Corporations (MNC) – enterprises operating in several countries but with headquarters
    in one country (more FDI – more investment in other countries
    exploiting econs of scale there)
    • Greater International Mobility of Labour and Capital – high
    skilled and low skilled workers move to rich countries easier
    • Less Government power in Influencing MNCs Decisions
    • Improvements in Communication Technology – the Internet
    • Increase International Mobility of Labour and Capital

    MNCs for e.g. have Positive and Negative Effects
    Positive –
    • FDI by MNC’s – creates jobs, brings new skills to the economy. MNCs buy local goods and services
    creating income for foreign government (can occur in developed and developing countries)
    • Economies of Scale by MNC’s – more efficient and cheaper products produced
    • Raise Standard of Living – Provides Employment

    Negative
    • Exploit Workers – low wages
    • Force Local Workers out of Business due to Econs of Scale – so increased prices due to less choice
    • Mass Unemployment – If MNC’s Relocate can cause
    • Withdraw Taxes – moves HQ to new country with lower taxes so previous country gets no tax revenue
    on profits
    • Less Corporate Taxes – In order to keep MNC’s in the country lowering gov revenue from taxes,
    restricting gov policies and growth

    4.2.6.2 – Trade

    Model of Comparative Advantage
    • A country with ABSOLUTE ADVANTAGE can produce
    more of a good with the resources available than
    another
    • COMPARATIVE ADVANTAGE uses the concept of
    opportunity cost and has assumptions making it hard
    to implement in real world
    o Its assumptions are:
    ▪ constant returns to scale – costs remain the same, but this doesn’t occur in a real world
    ▪ perfect mobility of the factors of production – cant move machinery easily in real world
    ▪ no barriers to trade – there are tariffs, quotas and transport costs in real world
    ▪ perfect knowledge – doesn’t exist in reality

    Advantages
    • Provides trade of goods & services a country can’t produce
    • Markets abroad allow economies of scale for firms
    • International trade exposes firms to new ideas and skills
    • More competition internationally leading to lower prices
    • Trade allows countries to specialise making a good or service they are best at producing
    o Costs reduced which passes on to consumers
    • Larger variety and choice of goods and services
    • Countries can consume outside of their own PPF curve using specialisation and trade of other countries

    Disadvantages
    • Higher transport costs
    • Exchange rates affect profits
    • Local companies shut as foreign companies make it cheaper and more efficiently
    • Specialisation can lead to overreliance on one industry and may cause others industries to decline
    • Countries are vulnerable to cuts in supply of goods they don’t produce
    • International trade increases globalisation which has disadvantages
    o Disadvantages on Developing/ emerging countries
    ▪ Less strict Health and safety laws
    ▪ MNC’s Exploit workers with low wages
    o Disadvantages on Developed Countries
    ▪ Decline of industries due to other countries producing cheaper
    ▪ De-industrialisation
    ▪ More imports causing negative BOP

    Reasons for Changes in Pattern of Trade between UK and Rest of the Worlds
    • Before, developed countries had a comparative advantage in manufactured goods and developing countries has
    a comparative advantage in primary good – commodities
    • Now developed countries have a comparative advantage in high value services and developing countries have a
    comparative advantage in low value manufactured goods
    UK trade has seen imports > exports
    • Second largest exporter of services in the world
    o UKs main exported goods are cars, fuel and medicine
    o UKs main imported goods are cars, fuel and medicine
    • The UK has a trade deficit in goods and surplus in services
    o This is due to goods produced cheaper in developing countries (China and India)
    Protectionist Policies / Trading Blocs used by Governments
    The import controls a government can use to make the country more competitive are:
    • Quotas – maximum limit on imports
    • Tariffs – taxes on imports from other countries
    • Export subsidies – when governments encourage firms to sell abroad by making their goods cheaper
    in export markets
    Reasons for Using Import Controls:
    • Protect jobs – risk of job losses if domestic firms are outcompeted by foreign firms
    • Protect infant industries – aid new firms to get to the same level of econs of scale & returns to scale as
    established firms
    • To Ban Certain Goods – goods bad for society like drugs
    • To avoid Overdependence – specialisation leads to overdependence on one industry
    • Protect Against Dumping – companies sell goods below the price of their production cost pushing domestic
    firms out
    • To Correct BOP imbalances – large deficit means large debt ( exchange rates affect cost of X and M)

     

    Reasons Against Using Import Controls:
    • Restricting imports reduces specialisation – resources not used allocative or productively efficient
    • Protectionism causes price to be higher for consumer and producer (lack of specialisation)
    • Increase in inequality, as price rises of essential goods affects poor more than rich
    • Reduce choice for consumer
    • Trade barriers by one country can lead to trade barriers by other country
    • Firms may be too reliant on Protectionist Policies reducing the domestic efficiency

    Features of a Custom Union
    • Economic integration – process where economies of different countries become more linked via free trade
    agreements or common currencies
    • Theres several types of international economic integration
    o Free trade areas – all barriers to trade are removed between members, but individual members can still
    impose import controls on outside countries
    o Customs union – involve free trade but involve an external tariff on non-members
    o Common Markets – custom unions with free movement of the factors of production
    o Economic unions – economies becoming more integrated i.e. same economic policies, regulation and
    rules (economic union = monetary union)
    o Monetary unions – economies becoming more integrated i.e. same currency so same monetary policy
    (eurozone)
    Free trade v Custom Unions
    • Members of a free trade area can set their own tariffs against non-members
    • Members of a custom union have to abide by the external tariff set so can’t set their own

    The EU
    • The EU is a body with 28 countries and it made up of:
    o The European Commission – one commissioner from each member country that allocate funding and
    enforce laws
    o The European Central Bank – manages the euro, sets interest rates to control inflation, issues euro
    notes and manages foreign currency reserves to maintain euros exchange rate
    • In the EU theres free trade between members and common external tariffs – so the EU is a customs union and
    the eurozone is a monetary union.
    • The Single European Market (SEM) was made in 1993 and meant the EU became more like a common market
    • The SEM meant
    o As well as free trade of goods and services
    ▪ Free mobility of labour – people move freely between countries
    ▪ Free mobility of capital and currency between countries

    Addition of New Members into the EU has Impacts on New and Existing Members:

    For and Against the UK’s EU Membership
    For
    • Avoiding job losses, as firms would relocate and reduce FDI in the UK if they left the EU
    • Loss of trade with EU countries so less circulation of money in UK
    Against
    • Control over Migration – restrict migration from other countries
    • UK could remain in a free trade area but not part of customs union, so UK benefits from trade but be free of
    restriction ie quotas by the EU
    • The UK can make its own trade agreements with countries outside the EU
    The EMU is another stage in European Economic Integration
    • The Economic and Monetary Union involves:
    o Common monetary policy
    o All Member states coordinating fiscal and economic policies
    o All member states using a common currency – euro
    • Several members in the EU aren’t part of the EMU
    o To join the EMU the country’s budget deficit, inflation, exchange rate and interest levels must all be
    close to specific levels
    The Role of the WTO
    • The WTO objectives are to reduce import controls allowing trade to be as free as possible
    • The WTO has 150 members and they must follow rules
    o Countries must treat all trading partners, and foreign and domestic goods equally
    o Countries must encourage competitiveness and discourage trade barriers like subsidies

    4.2.6.4 – Economic Growth and Development

    Difference between growth and development:
    • Economic growth is the change in goods or services
    an economy produces or has the potential to
    produce
    • Economic development is economic growth with an increase in quality and human happiness
    o it can be measured by
    ▪ rise in living standards reducing poverty
    ▪ access to necessities like water to satisfy human needs
    ▪ access for human developments (education)
    ▪ sustainability and regeneration by reducing depletion
    ▪ access to healthcare
    Main Characteristics of less developed economies
    1. Traditional society are economies that lack economic development
    a. They have low production due to low methods of production available
    b. As a result, they produce agricultural goods
    2. Tradition economies that are preparing to take off come next
    a. They are economies being more productive and industrial growth is appearing
    b. Commerce and trade appear
    c. Banks and financial institutes appear
    3. Economies taking off into self-sustaining growth is next
    a. Primary sector in agricultural goes to manufacturing
    b. Output increases but only a few get better living standards
    c. Growth > economic development
    4. Higher-income developing countries
    a. This is reached from sustained growth
    b. Countries now try start economic development

    Indicators of Development
    • GDP per capita is the first indicator of economic development
    • National income can be used it fails to
    o Show how externalities & other quality of life factors affect economic welfare & living standards
    o Show the effect of resource depletion and environmental degradation – so NI doesn’t take
    sustainability into account
    • HDI – takes economic development and sustainability into account
    o It’s constructed by measuring
    ▪ Life expectancy
    ▪ Mean years/ expected years at school – education
    ▪ GNI per person, PPP
    • Max value of HDI is 1 – closer a country’s HDI is to 1 the greater it HDI
    Factors that Affect Growth and Development
    • Investment in new capital goods and technical progress are two big factors leading to long-term
    economic growth and these are necessary for economic development.
    • Investment in education and training is also import for growth and development
    o It develops knowledge and intellect and work skills
    Barrier to Growth and Development
    • The 5 factors which prevent/ reduce Growth and Development
    o Corruption – bribery in poor countries to governments & firms, preventing normal economic
    activity
    o Institutional factors – rules, laws and access to financial institutes – law of contract is very
    important for firms to supply goods or services to consumers
    o Infrastructure – public sector investment in building, roads, bridges, power, capital goods and
    broadband allowing economy to run efficiently
    o Inadequate human capital – the skills and knowledge relevant to work in humans, which are
    created with education and training
    o Lack of property rights – how a resource is used
    Policies Adopted to Promote Economic Growth and Development
    • Demand-side fiscal policy – achieve Economic Growth and Development
    • Supply side policies – achieve Economic Growth and Development
    • Microeconomic policies:
    o Reduce market failure with taxes and subsidies
    o Reduce Negative externalities and demerit goods
    o Promote positive externalities and merit
    o Redistribute income and wealth
    Role of Aid and Trade in Promoting
    • Some Economists believe Aid is more important than trade in promoting economic development
    o An Aid is the money, goods and services and loans a government or central bank gives to
    another country
    • Free market economists say trade is more important than aid
    o If a poor country gets a high tech piece of equipment but it breaks down, there may not be
    enough expertise to fix it

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