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What is International Trade?
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What are the gains of International Trade? (1)
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Economics Unit 3
| Question | Answer |
|---|---|
| What is International Trade? | When firms in different countries specialise and trade with one another. |
| What are the gains of International Trade? (1) | Efficient use of world resources - goods will be produced where it is most efficient to produce them. Reduced unit costs, greater output + better quality. |
| What are the gains of International Trade? (2) | Increased competition for producer - increased efficiency. Increased choice. Lower prices. Closer political links. |
| What acronym is used to remember the gains from trade? | Specialisation occurs. Monopolies are crushed nationally (competition). Increased choice for consumers. Links between countries. Economies of scale created through bigger market sizes. (SMILE) |
| What does free movement mean? | There are no restrictions. |
| Why are there trade restrictions? | Protect employment. Protect strategic industries - (food, energy, defence supplies). To improve a weak balance of payments. Retaliation. Prevent dumping. Help the environment. Protecting consumers. Exerting political pressure. |
| What is dumping? | The selling of goods, (by foreign producers) below the cost of production. |
| What are some methods of protection / barriers to trade? | Tariffs. Quota. Embargoes. Subsidies. Soft loans. Favouring. Standards. |
| What is a Tariff? | A tax on imported goods and services - increase price - lowers competitiveness. |
| What is a Quota? | Restrictions on the quantity of an import allowed in the country. |
| What is an Embargoes? | A complete ban on certain goods, imports from certain sources, exports to certain destinations. |
| What is a Subsidy? | A sum of money from the Government to domestic producers which allow them to compete more strongly in their home, and foreign markets. |
| What are Standards? | Imposing strict health and safety standards on imported goods. Might involve extra cost for producers - increase price. |
| What are the effects of restrictions? | Retaliatory action - against country's exports. Reduces competition - allows inefficiency among domestic producers - rising costs + prices. Reduced choice for consumers. Reduced trade - unemployment (industries dependant on exporting). Political ill will |
| What is a single market? | Restrictions on the free movement of goods + services between member countries have been removed. |
| What is the World Trade Organisation? (WTO) | A group of around 120 countries - to negotiate reductions + removal of trade barriers between member countries. |
| What countries are members of North America Free Trade Agreement? (NAFTA) | Canada, Mexico, US |
| What does SAARC stand for? | South Asian Association Regional Cooperation. |
| What is a Balance of Payments Account? | A statement of the flows of money between the UK and the rest of the world in 1 year. |
| What is the Current Account? | A statement which records transactions in goods and services. Earnings = (+) Payments = (-) |
| What are the 4 various parts of the Current Account? | 1. Records transactions in g's + s's. 2. Shows distinction between visible trade (ex's + im's of goods), and invisible trade (trade in services, investment income, transfers) Trade in g + s shows how desirable our output is to others. |
| What services does the Current Account include? | Travel and Financial services, Government Services, Sea transport, civil aviation. |
| What does Travel services include? | Covers, earnings from foreign tourists (export), spending by Uk tourists abroad (imports) |
| What does Sea Transport and Civil aviation include? | Includes earnings by British shipping companies + airlines = providing passenger and freight transport for foreigners (exports). Payment for the use of foreign-owned ships + computers by British companies and citizens (imports) |
| What are Financial Services? | Fees and commissions paid to foreign banks + insurance companies or earned by UK banks and insurance companies. |
| What do Government Services include? | Earnings + Payments for (embassies overseas and troops overseas) |
| What is an exchange rate of a currency? | Its price in terms of other currencies. |
| What does appreciated mean? | Risen in value. |
| A strong (£) is troubling for who? | UK exporters (raise price + keep revenue same) or (keep price the same + receive less revenue) |
| A strong (£) is beneficial for who? | UK importers (after converted into (£) it is cheaper) |
| What effect might a stronger (£) have on the Current Account? | Less exports (they lose price competitiveness). Increase in demand for imports (they are cheaper). |
| What is likely to happen to the Current Account as a result of a stronger (£) | It will deteriorate. (deficit = less exports, more imports.) |
| How is a price determined? | By supply + demand. |
| How are exchange rates determined? | They are determined on the foreign exchange market (the FOREX) by demand and supply forces. |
| Why you would buy a foreign currency? (Short-term motives) | Speculation = you think a currency will rise in value (buy it). Or fall in value (sell it). Returns (interest rates) = buy currency if interest rates rise, sell it if interest rates fall. |
| Why you would buy a foreign currency? (Medium-term motives) | Buying imported goods and services. Foreigners buying exports of goods and services. |
| Why you would buy a foreign currency? (Long-term motives) | Investing in other countries - (Foreign Direct Investment / FDI). Foreign Multinational firms investing in the UK (FDI) |
| Why do we need foreign currencies? | Trade abroad, buy foreign goods. |
| What is the Foreign Exchange Market? | The market of foreign exchange (buying + selling) |
| Who demands (£) in the foreign exchange market? | Governments, Firms, Individuals. (Foreign) |
| Who supplies (£) in the foreign exchange market? | Government, Firms, Individuals. (British) |
| What is the sterling exchange rate index? | A weighted index of the value of the (£) against a basket of goods of other currencies. |
| When the (£) becomes weaker, what happens to UK imports + exports? | Imports become more expensive, Exports become cheaper. |
| When the (£) becomes stronger, what happens to UK imports + exports? | Imports become cheaper, Exports become more expensive. |
| What are some motives for overseas expansion? | To reduce production costs, travel costs. To penetrate new markets. To take advantage of host-government financial assistance. To escape government regulations at home. To earn higher profit after taxes. |
| How does "overseas expansion" reduce production costs? | 1. By taking advantage of lower wage costs in some countries. 2. By specialising internationally (produce different components where it is cheapest). |
| How does "overseas expansion" reduce transport costs? | Components may be cheaper to transport than the finished product. Transport components - assemble product in country of sale. |
| How does "overseas expansion" penetrate new markets? | Presence of US, Japan firms in Europe - evade tariffs imposed by the EU. |
| How does "overseas expansion" take advantage of host-government financial assistance? | Many governments are keen to attract foreign firms - various incentives are offered (low-cost premises, grants, low-interest loans, training subsidies.) |
| How does "overseas expansion" escape government regulations at home? | To escape restrictions - minimum wage, minimum working conditions. |
| How does "overseas expansion" help earn higher profits after tax? | By moving production to countries with low taxes on profits. (e.g. Starbucks - Holland - Low corporation tax.) |
| What are the benefits to trade of multinational companies to the 'host' country? | If investment by a multinational allows 'host' country to produce more cheaply than other countries - imports will be cut, exports boosted. |
| What are the benefits to employment of multinational companies to the 'host' country? | It is created by the multinational firm, and firms asked to supply services and components. |
| What are the benefits to technology and management of multinational companies to the 'host' country? | New ones are brought in - copied by other firms - lead to improves efficiency. |
| What are the benefits to economies of scale of multinational companies to the 'host' country? | The large scale of operation enables the firm to be efficient. (Higher wages) |
| What are the problems with multinational companies? | Trade (imports increase if it imports components). Employment (low skilled). Profits are transferred out to home country. Tax avoidance (robs government of funds to finance public services). |
| What is a single market? | E.g. Europe - a group of countries trading without any restrictions / barriers. |
| What are the advantages of a single market? | No trade barriers - more trade. Bigger firms - leads to economies of scale (buying in bulk - efficient). Increased competition - better price, choice, quality. Mobility of resources - more efficient / productive. Rules - improve equality of society. |
| What are the disadvantages of a single market? | Tariffs put on outside countries - decrease demand. Economic activity is centred on the geographical centre of EU - effects like income+opportunity for countries further away. Disagreements on fiscal taxes. Movement of labour - low wages in poor counties |
| What are some main points For the UK joining the euro? | Single currency - promotes trade, reduces costs. No fluctuation in exchange rate - lowers risks firms take. Low inflation environment - forced to be competitive (can't alter exchange rate). Price transparency - better decisions. ECB - set interest rates. |
| What is the ECB? | European Central Bank - it is independent and can alter interest rates according to its inflation target. |
| What are some main points Against the UK joining the euro? | Instability - weak members (Greece) and strong members. Can't devalue your currency to increase competition. ECB decides interest rates - may not fir all countries. Transition costs - adjust price lists, adapt machines to take euro (one-off cost). |
| How does EU enlargement effect the UK? (exports) | Increased efficiency - resources are diverted to areas where there is low opportunity cost of production. |
| How does EU enlargement effect the UK? (market) | As the size of the European market increases - there will be new demand for goods and services (especially ones that the UK specialise in). |
| How does EU enlargement effect the UK? (Foreign Direct Investment) | Foreign investment by British firms into Europe's new states - improves from of (IPD) interest, profits and dividends. (Boosts national income, supports current account) |
| How does EU enlargement effect the UK? (Labour) | Greater opportunities to import low-cost skilled labour (in areas of labour shortages). Also helps with the ageing population. |
| What are the risks of EU enlargement for the UK? | Extra costs for financing EU programmes (new members tend to be poor). Social and economic pressures - poorer migrants depresses wages in certain industries. Shift of foreign direct investment and jobs to Europe (driven by tax competition + lower wages). |
| What are some characteristics of Developing Economies (looking at the quality + quantity of resources available) | Poverty, High population growth, Agricultural dominance, unemployment, under - employment, Lack of industrial capital, Lack of infrastructure, high dependance on few exports, poor education. |
| Why do Developing countries remain poor? (Internal Factors) | Lack of investment. Low income levels. Difficult to obtain other sources of finance. Large debts. Population growth. |
| Why do Developing countries remain poor? (External Factors) | Uncertain Revenue. Lack of access to certain markets. Multinationals can bring (too much political power, environmental damage, export profits, avoid tax.) |
| What is the problem with increasing agricultural productivity? (INTERNAL) | People who are currently employed on the land will be replaced by machines. |
| What is the problem with encouraging savings to increase investment? (INTERNAL) | Aimed at only the few rich people - most of the population don't have enough to live on. |
| What is the problem with investing in infrastructure to encourage geographical mobility? (INTERNAL) | where does the money for investment come from? |
| What is the problem with giving gifts (medicine, food etc)? (EXTERNAL) | Only lasts for a short period of time - doesn't solve the source of the problem. |
| What is the problem with giving grants? (money given with no expectation of repayment) (EXTERNAL) | Can be abused - kept by corrupt leaders - doesn't reach desired targets. |
| What is the problem with writing off debts? (EXTERNAL) | Who checks that this is done - open to abuse. |
| What are the characteristics of Emerging Economies? | High growth rates, export sales, levels of education + training, Manufacturing industry dominates, capital intensive production, reliance on international trade. |
| What does "BRIC" and "MINT" stand for? (2 groups of emerging economies) | BRIC = Brazil, Russia, India, China. MINT = Mexico, Indonesia, Nigeria, Turkey. |
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