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?
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
- 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)
Effect of Subsidy on Foreign Producer (Positive/Negative)
Negative (Quantity decreases)
Effect of Subsidy on Domestic Producer (Positive/Negative)
Quantity imported falls, Quantity demanded rises, Price rises
Overall effect of subsidy
Quantity demanded rises, Quantity imported falls, Price falls
Most developed type of trade bloc (e.g. Gulf Cooperation Council)
Freer movement of labour and capital (e.g. Mercosur)
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
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
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?
Who determines exchange rate in a fixed fx system?
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
An increase in demand for exports of your home country (increases, decreases) demand for home currency.
When exports of your home country increase, your home currency is likely to (appreciate, depreciate).
An increase in demand for imports (increases, decreases) supply of home currency.
When imports of your home country increase, your home currency is likely to (appreciate, depreciate).
An increase in interest rates (increases, decreases) demand for home currency.
When interest rates of your home country increase, your home currency is likely to (appreciate, depreciate).
An expectation of an increase in the value of a currency (increases, decreases) demand for the currency.
When the value of your home country is expected to increase, your home currency is likely to (appreciate, depreciate).