In class test (Ch35-42): Global Economics

Drivers of Globalization

Transportation, Communication, Technology, MNCs, Strong Institutions

Pros of Globalization

International expansion of markets and trade, Lower prices, Higher consumer choice, Higher innovation, Higher quality products

Cons of Globalization

Less domestic business, Transnational corporations dominate society, Cultures lose their individuality, Uniqueness replaced with brands, Higher economic inequality, Encourages big firms to seek cheap labour

Definition of MNC

A company that does business in many countries

What does MNC stand for?

Multinational company/corporation

Definition of FDI

Cross-border investment by a company with lasting and significant interest in a business in a foreign country.

What does FDI stand for?

Foreign Direct Investment

Pros of Free Trade

Larger market, Higher output, Higher employment, More competition, Higher innovation, Lower prices, Lower production costs, Higher choice

Cons of Free Trade

Less domestic business, Lower domestic employment, Environmental harm, No support for infant industries, Dependent for strategic products on foreign supply

Three Forms of Protectionism

Tariff, Quota, Subsidy

What is a tariff?

A tax on imports

What is a quota?

A physical limit on imports

What is a subsidy?

Money transfer from government to lower cost or encourage production

What is dumping?

Selling at a price lower than cost in a foreign country

Reasons for Protectionism

Protection of:

• Infant industries

• Declining industries

• Strategic industries

• Domestic employment

• Industries from low wage competition

To prevent dumping, To counter other forms of unfair foreign competition

Reasons against Protectionism

Misallocation of resources, Could lead to a trade war, Higher priced imports, Reduced competitiveness

Effect of Tariff/Quota on Supply Curve

Shifts supply curve inwards

Effect of Subsidy on Supply Curve

Shifts supply curve outwards

Effect of Tariff on Foreign Producer (Positive/Negative)

Negative (They pay the tariff, quantity decreases)

Effect of Tariff on Domestic Producer (Positive/Negative)

Positive (Price increases, quantity increases)

Effect of Tariff on Domestic Consumer (Positive/Negative)

Negative (Price increases, quantity decreases)

Effect of Tariff on Government (Positive/Negative)

Positive (recieves tariff)

Effect of Quota on Foreign Producer (Positive/Negative)

Negative (Quantity decreases)

Effect of Quota on Domestic Producer (Positive/Negative)

Positive (Quantity increases)

Effect of Quota on Domestic Consumer (Positive/Negative)

Negative (Less choice, price increases)

Effect of Quota on Government (Positive/Negative)

No impact

Effect of Subsidy on Foreign Producer (Positive/Negative)

Negative (Quantity decreases)

Effect of Subsidy on Domestic Producer (Positive/Negative)

Positive (Receives subsidy, lower costs, quantity increases)

Effect of Subsidy on Domestic Consumer (Positive/Negative)

Positive (Price decreases)

Effect of Subsidy on Government (Positive/Negative)

Negative (Pays subsidy)

Overall effect of tariff

Raise import price, imports fall, overall price falls

Overall effect of quota

Quantity imported falls, Quantity demanded rises, Price rises

Overall effect of subsidy

Quantity demanded rises, Quantity imported falls, Price falls

Economic Union

Most developed type of trade bloc (e.g. Gulf Cooperation Council)

Common Market

Freer movement of labour and capital (e.g. Mercosur)

Customs Union

Common set of trade barriers on non-members (e.g. EU)

Free Trade Area

Completely free of trade barriers for members (e.g. NAFTA)

Preferential Trading Areas

Removal of trade barriers on a range of (but not all) goods and services (e.g. India, Nepal, Mauritius, Chile)

Pros of Trading Blocs

Goods are cheaper, More consumer choice, Faster economic growth, Barrier-free (no tariffs), Reduced conflict

Cons of Trading Blocs

Financial cost to government and taxpayer, Firms merging and becoming too powerful, Countries start to rely on trade, Inequality between members

What are the roles of the WTO?

Trade Negotiations, Implementation and Monitoring, Settling trade disputes, Building membership

Trade Negotiations

The WTO aims to reduce/eliminate trade barriers through negotiation (e.g. They encourage countries to draw up trade agreements on anti-dumping, subsidies, and product standards), They aim to bring about trade liberalisation

Implementation and Monitoring

The WTO employs various councils and committees to administer and monitor the application of their rules (examining trade policies to ensure trade agreements are clear)

Settling Trade Disputes

Countries bring their disputes to the WTO if they think their rights under the agreements have not been preserved

Building Membership

The WTO helps and encourages new members to join up (There are around 20 countries yet to join)

Supporters' view on the WTO

They promote peace, have constructive handling of disputes, have a rule-based system, Lower cost of living, Greater consumer choice, Boosts income and economic growth, Encourage efficiency and simplicity

Critics' view on the WTO

Favours rich countries over poor countries, Favours corporations over workers, Poor countries do not have accurate representation, Rich-poor gap has been widening (which indicates rich countries benefit more), Agricultural subsidies in rich countries have a negative impact on the agricultural sector of poor countries, Harmful environmental effects

Trade patterns in developed countries

Decrease in manufacturing, Increase in imports, Increase in tourism, Increase in air travel

Trade patterns in developing countries

Increased dependency on commodities, Increase in FDI, Increase in emigration

Trade pattern in both developed and developing countries

Lower trade barriers

Definition of exchange rate

The value of a currency in another currency

Who determines exchange rate in a floating fx system?

Free market

Who determines exchange rate in a fixed fx system?

Government

Who determines exchange rate in a managed floating fx system?

Both free market and government

What is money?

A medium of exchange, A store of value, A unit of account

What are the determinants of the exchange rate?

Imports and exports, Interest, Inflation, Speculations on currency

Impact of depreciation on imports

The price of imports increases, demand for imports decreases, imports decrease

Impact of depreciation on exports

The price of exports decreases, demand for exports increases, exports increase

Impact of depreciation on current account balance

Improves, as (X-M) increases

Impact of depreciation on Aggregate Demand

Increases, as (X-M) increases

Impact of depreciation on economic growth

Aggregate demand increases, GDP increases, Economic growth increases

Impact on depreciation on inflation

Increases

An increase in demand for exports of your home country (increases, decreases) demand for home currency.

Increases

When exports of your home country increase, your home currency is likely to (appreciate, depreciate).

Appreciate

An increase in demand for imports (increases, decreases) supply of home currency.

Increases

When imports of your home country increase, your home currency is likely to (appreciate, depreciate).

Depreciate

An increase in interest rates (increases, decreases) demand for home currency.

Increases

When interest rates of your home country increase, your home currency is likely to (appreciate, depreciate).

Appreciate

An expectation of an increase in the value of a currency (increases, decreases) demand for the currency.

Increases

When the value of your home country is expected to increase, your home currency is likely to (appreciate, depreciate).

Appreciate