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Flashcards in globalisation and International Trade Deck (47)
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1
Q

Why is international trade important?

A

It allows countries to specialise in the production of goods or services in which they have a comparative advantage and allow countries to benefit by
trading with eachother based on differences in oppurtunity cost.

2
Q

What is a disadvantage of specialisation?

A

Once a country specializes in the production of a certain good or service it inevitably allows some sectors to run down, potentially leaving it vulnerable in a crisis e.g. if war comes and they can no longer import this good so they’re left without it.

if a country over -relies on its output of the good it specialises in there is a risk that as technology develops another country will produce a more advanced version of this good, causing the price of the good the country specialises to fall as demand falls.

3
Q

What is another disadvantage of specialisation?

A

Once a country specializes in the production of a certain good or service it inevitably allows some sectors to run down, potentially leaving it vulnerable in a crisis e.g. if war comes and they can no longer import this good so they’re left without it.

if a country over -relies on its output of the good it specialises in there is a risk that as technology develops another country will produce a more advanced version of this good, causing the price of the good the country specialises to fall as demand falls.

4
Q

What is meant by the terms of trade?

A

The ratio of export prices to import prices.

Essentially it calculates how much the prices of exports are changing in relation to the prices of imports.

5
Q

How do you calculate the terms of trade?

A

Average Import Price Index

6
Q

What does a fall in the terms of trade mean for an economy?

A

That the same amount of goods being exported will buy a smaller amount of imports than what it would have before.

7
Q

What does the terms of trade show?

A

How much exports need to be sold to buy the same amount of imports. This is especially important in developing countries that rely on export revenues to buy impported goods that are not produced in the country.

8
Q

What is an improvement of the terms of trade?

A

A larger number in the TOT means that from analysing the basket of export goods , more imported goods can be bought.

9
Q

Why is looking at only the terms of trade not sufficient in disclosing whether an economy is becoming worse or better off?

A

The TOT doesn’t measure the amount of imports and exports of a country, and although there may be a fall in the TOT if the volume of trade is increasing quickly this may be balanced out.

It is the income terms of trade that takes into account the volume of imports and exports.

10
Q

Why do many LDC’s face volatility in the prices of exports? (Explain the instability arising from the demand side of the economy).

A

The developed countries (that LDC’s export to) demand for commodoties such as minerals is volatile depending on the economic cycle. If it is doing badly and is at a trough, demand is low, so the price of the commodity falls. During an economic boom demand rises and so does the price (supply is relatively inelastic).

11
Q

Why do many LDC’s face volatility in the prices of exports? (Explain the instability arising from the supply side of the economy).

A

The LDC’s supply of agricultural goods as exports can be volatile depending on whether there is good harvest or poor, this greatly impacts price expecially since demand for this food is relatively price inelastic.

12
Q

Why is instability of export prices a serious problem for LDC’s?

A

Instability of export prices means instability of export reveenues so if an LDC is depending on LDC’s to pay back debt or to fund an investment project the country could be in a serious problem.

13
Q

What on the demand side of the economy can cause long run deterioration in the terms of trade for countries that rely on primary production?

A

As incomes of people in developed countries rise, the proportion that they spend on food items tends to fall as they increase their spending on luxury goods, this causes demand to increase only slowly in the long run.

14
Q

What on the supply side of the economy can cause long run deterioration in the terms of trade for countries that rely on primary production?

A

Throughout time technology advances allowing
producers to improve the efficiency at which they can turn inputs to outputs, allowing them to produce at a lower cost, increasing supply significantly. The large increase in supply of the agricultural good but small increase in demand shows the deterioration of the terms of trade.

15
Q

What factors influence the extent to which a country engages in trade?

A

Whether they have the resources that enables it to produce goods that people want to buy.
Whether the countries policy is open to international trade, or is it protectionist

16
Q

What do economists Heckscher and Ohlin believe determines what kind of good or service a country is more likely to have a comparative advantage in?

A

Countries are able to produce different commodities depending on their factors of production e.g.if they have an abundant labour force or capital.

Some commodities are efficiently produced using little capital but a lot of labour and so in such a commodity a country that has abundant labour will find it has a natural comparative advantage.

17
Q

What is the pattern of comparative advantage?

A

Following that countries will have a natural comparative advantage in producing certain goods depending on their factors of production it makes sense that LDCs specialise in land or labour intensive activities such as agriculture or other primary production.

While developed countries like the UK specialise in capital intensive activities such as financial services.

18
Q

Is it always beneficial for a country to follow its pattern of comparative advantage?

A

A country has to decide whether it is beneficial to exploit its natural comparative advantage.

It is not beneficial for LDC’s as generally, in the long run they face a deterioration in the terms of trade and commodities such as maize face instable prices, causing uncertainty for producers.

19
Q

What can a country do to alter its pattern of comparative advantage?

A

Countries may seek to alter their pattern of comparative advantage by diversifying their economies and specialising in a new area to meet changing patterns of global demand.
China has changed the structure of its economy rapidly using an exchange rate policy to make its exports globally competitive and expand its manufacturing sector.

20
Q

what is meant by globalisation?

A

A process by which the world’s economies become more closely integrated.

21
Q

What are the characteristics of globalisation?

A

A significant increase in the mobility (movement) of the factors of production between countries.

An increase in the flow of goods, services, capital, knowledge and people across international borders.

22
Q

What are the causes of globalisation?

A

Advances in the technology of transport and communication.
Reduction in trade barriers
Deregulation of financial markets

23
Q

How has technology led to globalisation?

A

The advances in the technology of transport and communication. This enabled firms to spread their production process across the world.

24
Q

How has the deregulation of financial markets led to globalisation?

A

This has enabled the financial system in different countries to become more interlinked, and has increased lending and sharing of bonds between nations as well as increasing foreign direct investment.

25
Q

Why may some argue that globalization causes more negatives than positives?

A

Countries may fear for the success of domestic producers in what they believe is excessive competition from global producers.

As economies become more closely integrated a crisi in one country can easily cause other nations to suffer also?

26
Q

What situations make cause global economic downturn?

A

A large rise or fall in oil prices as seen in 1973-4 and 1979-80 , 2008 the global recession that caused oil prices to fall.

A financial crisis in one country then spreading to others, as seen in the Asian Financial Crisis in 1997, the credit crunch in 2008 that affected many countries across the world.

27
Q

How can a shock to the oil prices cause global economic downturn?

A

A large rise in oil prices as seen in 1973-4 and 1979-80 due to insecurity of supply can cause a sudden deficit in the Balance of payments current account for countries that are large oil importers as in the short run demand for oil tends to be inelastic, only in the long run substitutes e.g. cars that use less oil are developed.

A fall in the oil prices as seen in the 2000s can cause a deficit in the BoP current account for oil exporters.

28
Q

What is Official development assistance (ODA)

A

It is foreign aid, when countries send flows of assistance 9funding ) to other countries?

29
Q

How is it decided where ODA (Officicial development Assistance) is channelled?

A

Humanitarians would focus on sending aid to countries with low average incomes, who are most in need of it.

Others will focus on giving funding to countries that are well equipped to make good use of this funding.

30
Q

What is foreign direct investment?

A

A key aspect of globalisation, FDI is investment taken in a country by firms (MNC’s) based in other countries.

31
Q

What is a MNC

A

A multinational corporation is a company whose production activities are carried out in more than one country.

32
Q

Why do MNC’s engage in FDI as set out by the UNCTAD?

A

Market seeking
Resource seeking
Efficiency seeking

33
Q

Explain the market seeking reason for FDI by MNC’s

A

They want access to new markets so they can sell their products in a certain market that they prefer.

34
Q

Explain the resource seeking reason for FDI by MNC’s

A

MNC’s may want to invest in a certain country to allow them to take advantage of a key resource such as oil, or to take advantage of a labour force with certain skills or perhaps to take advantage of cheap unskilled labour.

35
Q

Explain the efficiency seeking reason for FDI by MNC’s

A

MNC’s may discover that there is a region where they can produce the most efficiently.

36
Q

In what regions has the market seeking reason for FDI been especially prominent?

A

China, as many firms want to access its growing market

The EU’s single market

37
Q

What is the main reason why LDC’s will want to attract FDI inflows?

A

When multinational corporations invest in the LDC they are providing an injection into the circular flow of income, increasing national income and causing short term economic growth.

38
Q

What are the potential negatives of FDI for the host country (the country receiving the inward flow of investment).

A

MNC’s are profit making firms not humanitarians trying to seek equality:

They may be capital intensive and use technology that is not compatible with the factor endowments of the LDC.

They may only hire locals for unskilled jobs but hire expatriate (foreign) workers to be the skilled workers and managers

Domestic firms may be competed out of their market.

MNC’s that operate in LDC’s may indeed be in a globally oligopolistic market but may have monopoly power in the LDC that they exploit.

Some MNC’s locate to countries were environmental regulation is low, polluting the planet to keep their costs low.

MNC’s may take part in transfer pricing as a way to minimize the taxes they pay to the LDC government.

39
Q

What are the potential gains to the LDC from receiving FDI?

A

The investment will boost the circular flow of income, boosting national income

MNC’s are likely to supply capital and technology, fixing the LDC’s limited capacity to produce capital goods.

They may provide training and skills development to improve management expertise and entrepreneurial skills to improve the LDC’s human capital.

May provide modern sector jobs for locals.

LDC government can collect tax revenue indirectly from income taxes from workers and directly from MNC profits.
MNC will export its products providing foreign exchange for the LDC
May be positive externalities, as locals are trained and learn new skills they may benefit local firms if they leave the MNC and work for the local firm, or use their skills to start their own business.

40
Q

Why is it significant that MNC’s tend to provide capital and technology to LDC’s when they provide FDI inflows?

A

MNC’s are likely to supply capital and technology, fixing the LDC’s limited capacity to produce capital goods.
This could allow them to alter their pattern of production rather than having to remain dependent on the production of primary products which often have instable prices and long run deterioration in their terms of trade.
As according to the Heckscher- Olin theory if a country’s relative factors of production are so that they have good access to capital, (but limited labour) they’ll have a comparative advantage in capital- intensive
goods or services such as manufacturing or tertiary sector

41
Q

What is meant when MNC’s are described as capital intensive when they inject inward flows of FDI to LDC’s?

A

Thee technology these MNC’s use may not be suitable for LDC’s.

MNC’s often originate in developed countries and they use technology that suits the conditions of their country but not the factor endowments of the LDC (which are more land and labour rather than capital).

This means there may be a limited amount of jobs supplied to locals and instead only low skilled jobs are available.

42
Q

Explain how MNC’s that inject FDI inflows into LDC’s may negatively impact employment.

A

They may only hire locals to work in unskilled job roles but hire expatriates to be the skilled managers and workers.
This will reduce the spill over effects and likelihood that MNC’s will train locals enabling to in the long run use their entrepreneurial skills to benefit local firms or start their own business.

MNC’s may pay high wages to maintain good public image and attract the best local workers, causing local firms to be unable to hold onto workers, and potentially raising costs if they feel pressured to raise the wage..

43
Q

What is transfer pricing, in the context of MNC’s taking part in FDI in LDC’s

A

MNC’s may attempt to manipulate their balance sheets and could make sure that profits are taken in the regions of lowest tax.
This reduces the LDC governments tax revenue.

44
Q

Why is the MNC as a profit-maximising company rather than a humanitarian significant?

A

They may take advantage of their market power to maximise profits.
Local competitors will find it hard to compete and may even be competed out of the market.

They are likely to locate in urban areas (unless they are resource seeking and the resource is in a rural area).
This may increase rural- urban inequality and increase migration to the city, putting pressure on services here.

Some MNC’s locate to countries were environmental regulation is low, polluting the planet to keep their costs low.

MNC’s may take part in transfer pricing as a way to minimize the taxes they pay to the LDC government.

45
Q

What can the LDC government do to prevent he likelihood of being exploited by the MNC during FDI?

A

They can negotiate a good deal setting out certain demands the MNC must fulfil.

In Indonesia they negotiated conditions on the amount of local workers that had to be employed after 5 years.

46
Q

Why might an LDC not be in the position to negotiate a good deal with an MNC for FDI

A

They may not have a unique resource that the MNC can’t acquire elsewhere so the MNC may just locate somewhere else where the government isn’t issuing demands.

High levels of human capital makes a country more attractive to FDI inflows, explaining why China rather that sub-Saharan Africa gets large amounts of FDI.

47
Q

What are emerging economies?

A

Countries that have experienced rapid economic growth with some industrialisation and characteristics of developed economies but still haven’t made the full transition. This includes the BRIC countries and others e.g. Turkey, South Africa.