International economics

Terms in this set (94)

Define international trade
International trade is the exchange of G&Ds between countries/beyond internal borders.
It involves the sales of exports (goods and services sold to overseas buyers) and imports (foriegn G&S bought by domestic households and firms)
List the gains to be made from trade
- Lower prices for consumers: reduces cost of trading.
- Greater choice for consumers: access to greater variety
- Economies of scale: larger markets, cost savings that can be passed onto consumers in the form of lower prices
- Ability to acquire needed resources: access to natural resources and capital goods not domestically available (singapore imports most food sources, not having the land to self-grow it)
- Efficient allocation of scarce resources: forces domestic produces to improve efficieny and quality of output due to foreign competition
- A source of forign exchange: when countries sell exports they acquire foreign exchange (foreign currencies). This enables them to make payments to other countries for the purchase of forign G&Ss.
- Increased market size: firms earn larger revenues and profits
- Improved international relations: the abscence of trade barriers encourages international trade and cooperation between countries.
Define free trade
occurs when nations can exchange goods and services without any trade barriers, such as quantitative limits or taxes being imposed on imports.

Takes place between countries when there are no barriers to tade pu in place by governments or international orginisations. Goods and services move freely between countries.
Who loose out from international trade
- Firms that are unable to compete with international ones, like sunset/sunrise industries.
Discuss the WTO
- The World Trade orginisation is an international orginisation that sets the reules for global tradin and resolves disputes between its member countries.
- Was established in 1995 to promote trade liberalisation and resolve disputes between member states.
- has 153 members.
- It has 6 objective:
1.) administer WTO negotiations
2.) be a forum for trade negotiations
3.) handle trade disputes between member states
4.) monitor national trade policies
5.) provide technical assistance and training for developing countries
6.) Cooperate with other international organisations
Define: specialisation
A method of production where a business or area focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency within the entire system of businesses or areas. Many countries specialize in producing the goods and services that are native to their part of the world (comparative advantage)
- For example brunie focuses on the extractino of oil
- India (with large low skilled labor force focuses on manufactured goods, like sneakers).
Discuss the division of labour
The division of labour occurs where production is broken down into many separate tasks. Division of labour raises output per person as people become proficient through constant repetition of a task - "learning by doing". This gain in productivity helps to lower cost per unit and ought to lead to lower prices for consumers.
What are the limitations of division of labour
- repetitive tasks, hits productivity (counter-productive)
- High worker turn-over as workers seek other work
- Structural unemployment - dont get wide range of skills from working, resulting in occupational immobility.
Define trade protectionism
- is the use of barriers to trade to safeguard a country from excessive international trade and foreign competition
Define barriers to trade
are obstacles to free trade, imposed by a government to safeguard national intersts by reducing the competitiveness of forieng firms.
Evaluate the arguments for protectionism
1.) Protecting domestic employment (US clothing industry)
2.) Protecting the economy from low-cost labor (South Korea vs. American ship producers)
3.) Protecting infant/sunrise industry (Saudi Arabia)
4.) To avoid the risks of over-specialisatoin (Malaysia & Ethiopia)
5.) strategic reasons
6.) to prevent dumping (China)
7. to protect product standards
8. to raise gov. revenues
9. to correct balance of payments
Discuss protecting domestic employment as a form of protectionism
1.) Protecting domestic employment: sun-rise industries that represent a large industry in the economy, represents unemployment (both structural & frictional), to save these the governmnet might protect the industry. >>>Not strong arguments since the industry will likely continue to decline & protectinism will only prolong the process. Although short-run social cost, perhaps more effective to let the resources employed in the industry move to other, expanding industrie (US clothing industry)
Discuss Protecting the economy from low-cost labor as a form of protectionism
2.) Protecting the economy from low-cost labor: there is large job insecurities in the developed world, as they fear they will loose their jobs to cheaper manufacturers in China. For example the world ship building industry: in 2004 US=23dollar per hour, south korea=19 dollar per hour, not surprisingly south korea is now the largest ship builder in the world.>>> goes against whole argument of comparative advantage, as domestic consumers pay higher prices and production occurs at an inefficient level.
Discuss protecting infant/sunrise industry as a form of protectionism
3.) Protecting infant/sunrise industry: developing industry do not have economies of scale and so not be competitive. However in most developed countries there are highly efficient capital markets, thus no basis for businesses in developed world to set up small scale. For example the Saudi Arabian gov. has been diversifying into petrochemical production, the plants constructed have been some of the largest in the world.
Discuss "avoiding over-specilisation" protectionism
- Gov. dont want to be over-dependent on a narrow range of industries, because changes in these markets will have severe effects on the economy.
- the introduction of new products of changes in the pattersn of demand and supply, can have serious effects on the economies of developing countries that tent to over-specialize in the production of primary products without choice. Forexample the investino of synthetic rubber had a large neg. effect on the rubber industry in Malaysia, and the over-supply of coffee on the world market, causing falling prices, did the same for Ethiopia.
Discuss protectionism because of strategic reasons
- Some industries need to be protected because they are needed in times of war (agricultural, steel, power generation) >> Argument overstated, unlikely some countries go to war, likely excuse used for protectionism.
Discuss anti-dumping to justify protectionism
- Dumping ruins the domestic producers for the product. An example was solar panels from china being dumped in Europe. However it is very difficult to prove. A danger of retaliation, as the the chinese president said (tit for tat retaliation).
Define dumping
"dumping" is a kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product in a large quantity to another country at a price either below the price charged in its home market or below its cost of production.
Discuss the jusificatin of protectinism of product standards
- A country may wish to impose safety, health or environmental standards on goods being imported into its domestic market in order to make sure the imported products match the standards of the domestic ones.
- For example EU banned US beef in the 1990s because it was treated with hormones.(WTO allows it as long as based on scientific research).>> The cost involved in standards being approved are high. Makes it diff. for producers in developing countries.
Discuss raising gov. revenue as a justification for protectionism
- In developing countries it is difficult to collect taxes and so gov. imposes import taxes (tariffs) on product to raise revenue. Internatinal Monetary Fund estimates 15% of developing countries gov. revenue comes from import duties.>> The import duties are actually a tax on the consumers. Not an argument for protectionism but a means to raise revenue.
Discuss correcting a balance of payments deficit to justify protectionism
- Impose taxes to reduce import expenditure and thus improve a current account deficit (country spending more on imports than iti is earning for its exports)
>>>This will only work in the short-run, because it does not rectify the actual problem/source of the deficit. Other countries retaliate.
List arguments against protectinoism/ for free trade
1.) Misallocation of scarce resources: relatively ineffcient domestic producers are producing products, foreign firms have a comparative advantage in. Inefficiency. Competition diminishes as competitors are kept out of the market, increases costs of production.
2.) Consumers experience higher prices and less choice
3.) Retaliation/trade wards (hinder global economic growth)
4.) Import inflation= producers need to pay higher prices for imported component and raw materials
5.) Reduced export competitiveness: without foreign competition to create an incentive for innovation, domestic producers may become inefficient.
Define tariff + example
A tax charged on imported goods.
Japan has an 800% tariff on imported rise. The worlds highest.
Define dead wieght loss
The costs to society created by market inefficiency.
Define: quotas
quantitative limits on the sale of a foreign goof into a country
Forexample indonesia imposes import quotas on fruits and vegtables from Thailand.
Define subsidies
are a form of financial assistance to local firms to help them compete against foriegn imports by lowering the costs of production.
For example the EU subsidises its farmers to encourage agricultural output.
Evaluate tariffs
1.) Conclusion: protecst domestic producers at the expense of forieng producers
2.) Long-term/Short-term: Effective in the short-run, enables domestic producers to compete. However not a long-term solution= may be protecting a sunset industry and only prolong the time before the industry closes fully. In the long-term the economy may be worse of, as it may worsen international relations and result in tit-for-tat retaliations.
3.) Assumptions:
4.) Stakholders:
- Domestic producers benefit, as they are better able to compete with the artificially higher world price
- Consumers loose out: they face higher prices and a loss of consumer surplus
- Gov.: recieve tariff revenue. Can be used to improve standard of living, economic growth through current expenditur, capital expenditure and transfer of payments, as well as rectify a gov. budget deficit.
Foriegn: producers loose out. There products are made less productive and are unable to take advantage of their comparative advantage.
5.) Prioritising:
- Domestic firms over international relations. May be justified if the specific industry represent a large share of the GDP of the country, such that a decline in the industry would have a sig. social and economical impacts on the country.
6.) Pros/Cons
- Cons. misallocation of resources. Worlds scarce resources are used inefficiently.
Evaluate Quoatas
1.) Conclusions: Limit imports, such than domestic producers will meet the demand instead
2.) Long-term/Short-term: Short-term it protects the domestic industry from the international market. However in the long-run the firms may become inefficient without the incentive for efficiency when competition is kept out of the market.
3.) Assumptions: domestic producers are able to increase supply to fulfill the excess demand.
4.) Stakeholders:
Domestic producers: they win, their market share increases and potential profects.
Domestic consumer: they face higher prices and possibly lower qualitity if the domestic producers are unable to meet the quality standards set by international producers.
International producer: May loose huge market shares. May loose economies of scale.
Foreign economy: If the industry is sig. in this country, it will have sig. effects on employment, standard of living and GDP.
Gov: recieves no revenue
5.)Priorities:
6.) Pros/cons: Tit for tat retaliation
Evaluate subsidies
1.) Conclusions: reduce cost of production for domestic producers to increase their supply
2.) Long-term/short-term: Short-term makes the firms more able to compete. Not a long-term solution. Reduces incentive for firms to reserach and develope strategies or technologies to become more efficient, which is neccesary if they are going to comepete with foreign firms without financial assistance from the gov. May just prolong the decline of an industry. Country may be accused of dumping.
3.) Assumptions: domestic producers will become more efficient, not likely to happen, when competitors are kept out of the market.
4,) Stakeholders:
- Consumer= face the same prices, but maybe lower quality. May loose out as more of the gov. revenue is directed towards financing the subsidy.
- Domestic producers= increase supply, higher revenues, represents employment.
- Foreign producers= Loose market share, are unable to compete with the artificially low prices of the domestic G&S.
Gov. opportunity cost of revenue. Less spending on capital expenditure (that in the long-term mean economic growth).
Cons: Inefficient allocation of the worlds scarce resources. (seen on graph)
List the 3 types of administrative barriers gov.s may impose and define them
1.) Red tape (administrative processes before importing. If lengthy and complicated they can act as restriction to imports)
2.) Health and safety standards and environmental standards (US beef in the 1990s treated with hormones)
3.) Embargoes (an extreme quoata, a complete ban on imports, usually as a political punishment). For example US has an embargo on all products from Cuba.
Discuss nationalist campaigns as a form of protectionism
- Gov. may sometimes run marketing campaigns to encourage ppl to buy domestic goods instead of forign ones in order to generate more demand for domestic goods and save domestic employment. >> Currently there is a commercial on Norwegian MTV about a campaign they have imposed, where all food products produced in norway have a sticker on them, to encourage the purchase of these over internationally produced goods.
Define exchange rate
Is the value of one currency expressed in terms of another. For example 1€=7.5 dkk. This means one euro may be exchanged for one dansh kroner.
Define foreign exchange markets
The foreign exchange market is the marketplace where national currencies can be bought and sold.
List the 3 types of exchange rate regimes
- The way a country manages its exchange rate is known as its exchange rate regime.
- There are 3 main types:
1) a fixed exchange rate
2) a floating exchange rate
3) managed exchange rate
Define fixed exchange rate
is an exchange rate regime where the value of a currency is fixed, or pegged, to the value of another currency, to the average value of a selection of currencies, or to the value of some other commodity, such as gold.
- As the value of the valuable the currency is pegged to changes, so does the value of the currency.
- A fixed exchange rate is maintained by gov. intervention (central bank buys or sells foreign currency to ensure value of the currency stays pegged)

1 usd=0.13 HKD
HKD 1= 7.8 dollar. used to be 1HKD=5.6 US dollar
Discuss a scenary in which the demand for a fixed currency increases and how the gov. keeps it pegged.
- Demand for the Hong Kong Dollar may increase if more tourists want to visit the country. This shifts demand to the right, as more HKD are demanded at everyprice.
- To prevent the value of the currency from increasing, the government needs to supply more of its currency. It sells its currency on the foreign exchange markets.
Discuss a scenary in which the supply pf a fixed currency increases and how the gov. keeps it pegged
- The supply of the Hong Kong dollar may increase if many consumers within the country are buying imports from abroad.
- To prevent the reevaluation of the currency, the Hong Kong gov. must buy the extra HKD on the foreing exchange market. Thus shifting demand rightwards to the equilibrium, at which point the price of the HKD=the pegged value of the currency. The government uses previously accumulated foreign exchange.
Define reevaluation
occurs when the price of a currency operating in a fixed exchange rate system officially and deliberatley increases.
- The international competitiveness of the country can be improved, as exports become relatively cheaper.
Define devaluation
occurs when the price of a currency operating in a fixed exchange rate system is officially and deliberatley lowered.
- The international competiveness can decrease, as exports become relatively more expensive.
- HDK reevaluated against the UDD, from 1UDS=5.6HKD, to 1UDS=7.8 HKD
Define floating exchange rate regime
A floating exchange rate regime is an exchange rate regie where the value of a currency is allowed to be determined solely by the demand for, and supply of, the currency on the foreign exchange market.
There is no government intervention to influence the value of the currency.
- Tourists buy (demand) the currency by selling their own (foreign) currency.
- Sweden and New Zealand have free floating exchange rates.
Define appreciation
- An appreciation of the currency occurs when there is an increase in the value of the exchange rate relative to another currency operating in a floating exchange rate system.
- Exports become more expensive, while imports become cheaper
Define depreciation
- A depreciation of the currency occurs when the value of the currency decreases in a free floating exchange rate system.
Discuss what causes changes an appreciation of a currency
DEMAND INCREASES
- Increase in demand for the country´s G&S caused by (a) its inflation rates being lower than another country´s, (b) an increase in other countrry´s income, so they increase thier demand for all things including , (c) a change in tastes of foreign consumers in favor of the country´s exports.
- The country´s investment prospect´s improve.
- The conutry´s interest rates increase, making it more attractive to save there
- Speculators think the currency of the country will appreciate and so they buy it now. If correct, they will be able to sell it in the future and make a financial gain.

Foreingers need the countrys currency to do this, thus they exchange it for the country´s currency and thereby increases demand for the currency
Discuss what causes a depreciation of a currency
DEMAND DECREASES:
- Country increases their demand for foreign goods , thus exchanging more of its own currency for other ones, and increasing its supply on the foreing exchange market. This may be caused by: (a) The country´s inflation rate being higher than foreign ones and thus foriegn G&S become relatively less expensive, (b) increase in the incomes of the country, so people will spend more including foreign imports, (c) a change in the tastes of the contry in favor of imports
- Foriegn investment prospects improve
- Forieng interest rates rise, so it becomes more attractive to save their.
- Speculators in the country think a forign currency will appreciate and so they buy it.
Define managed exchange rate system
Is one where the gov. or central monetary authority intervenes periodically in the foreign exchange market to influence the exchange rate by affect the demand for, and supply of, the domestic currency.
- In reality, no exchange rate system is fully freely floating, there is always some intervention >>to prevent large fluctuations, to create certainty and confidence
- The most common system is where the central bank sets an upper and lower limit, in between which the currency can fluctuate. When it reaches the upper and lower values the central bank intervenes.
Discuss the affects of a currency appreciation on the macoreconomic goals
- Low stable economic growth: long-run likley to fall, due to lower exports and higher unemployment resulting from the higher exchange rate
-Low unemployment= export demand decreases, leading to reducing profits. In long-term unemployment.
- Inflation rate= unemployment cause by currency appreciation leads to lower consumption, thus reducing inflation. If the country relies heavily on certain imports (oil/food) the higher exchange rate, helps to reduce the price level even further.
- Balance of Payments= exports falll, imports increase, therefore worsens.
How does currency appreciation affect customer, exporters and importers?
Customer: have higher purchasin power when exchange rate increases.
Exporters: face more difficult trading coditions
Importers: potentially gain from currency appreciation, as its cheaper to import final G&S as well as semi-finished components for production and raw materials
What are the advantages of a high exchange rate
Advantages:
1) Downward pressure on inflation>> imported parts of G&Ss produced are cheaper, and creates incentive for firms to become efficient to compete with relatively cheaper imports
2.) More imports can be bought>> Each unit of currency will bye more imports. Both visible (Goods, technology to help economic growth for example) and invisible (foreign travel)
3.) A high value of a curency forces domestic producers to improve their efficiency: Reaseach and development, in the long-run positive influence on economic growth
What are the disadvantages of a high exchange rate
Disadvantages:
1.) Damage to export industries: could lead to unemployment
2.) Damage to domestic industries: more imports (relatively cheaper), mean reduced demand for domestic goods. Further unemployment.
What are the advantages of a low exchange rate
1.) Greater employment in export industries: more competitive, demand increases, in turn lead to more employment
2.)Greater employment in domestic industries: imports more expensive, higher demand for domestic G&Ss
3.) Current account may improve (more exports than imports)
What are the disadvantages of a low exchange rate
- Inflation= make imported final G&SS, imported raw materials, and imported components more expensive. These are needed by firms, thus raise costs of production. >> Import inflatino
Discuss overall what a high and low exchange rate are good/bad for
A high value currency may be goos to fight inflation, but may create unemployment problem
A low value currency may be good for solving unemployment problems, but may create inflationary pressure.
Why might a gov. intervene with the exchange rate
- To improve unemployment (high exchange rate)
- To stabilise it/prevent high fluctuations to improve business confidence and certainty
- To improve current acount deficit
How does a gov. manipulate exchange rate
1.) Use their reserves of forign currencies to buy or sell foreing currencies
(to increase currecy, use reserve to buy its own currency)
(to decrease currency, use own currency to buy foreign currency)
2.) Changing interest rates
(increase currency = increase in interest, making domestic rates higher than foreign ones, making it more attractive, to put money in country they will have to exchange it)
(decrease currency = lower interest rates, those saved in the country may exchange it to the currency of another country with a higher interest rate)
What are the advantages and disadvantages of fixed exchanged rate system
Advantages:
- Reduces uncertainties for international trade (allows forign and domestic firms to be certain about the costs, thereby allowing them to plan ahead and encouraging international trade)
- In theory reduce currency fluctuations due to specualtion, not always the case
Disadvantages:
- Economy unable to use monetary to affect the economy. If exchange rate is falling and in times of a recession, gov. will have to rise interst rates to increase currency, but this will create a deflationary gap, thus maybe creating unemployment.
- High lievel of foreign reserves need to be kept, high opportunity cost
- Not simple to set level of fixed exchange rate.
- If it is set artificially low, may create international disagreement
What are the advantages and disadvantages of a free floating exchange rate regime
Advantages:
- Interests are free to be employed as domestic monetary tools (because not needed to fix currency)
- In theory currency should adjeust itself (current accont deficit, demand for exports is low, so currency will decrease)
- Not neccesary to keep high levels of reserves
Disadvantages:
- Create uncertainty (difficult for businesses to plan about costs and revenues)
Define balance of payments
is a record of the value of all the transactions bwtween the residents of one conutry and the reidents of all other countries in the world, over a given time period of time. This period is uaually one year.
Consists of 3 accounts: the current account, the capital account and financial account.
Define credit items
Any transaction that leads to money entering the conutry from abroad is a credit in the balance of payments and is given a positive value.
Define debit items
Any transaction that leads to money leaving the country to go abroad is a debit item in the balance of payments and is given a neg. value.
Outline the basic structure of the balance of payments
Current account = (Capital account, Financial account, net errors and omissions)
Defien the current account balance and lists its components
- The current account is a measure of the flow of funds from trade in G&S, plus other income flows.
- Divided into 4 parts:
1) Balance of trade in goods
2) Blance of trade in services
3) Net Income flows
4) Net trasnfers
Define balance of trade in goods
Aka the visible trade balance.
It is a measure of the reveneue recieved from the exports of trangible (physical) goods minus the expenditure on imports of trangible goods over a given time period.
When export revenue is higher than import expenditre = surplus in the balance of trade in goods
When export revenue is lower than import expenditure= deficit in the balance of trade
Define balance of trade in services
- Aka the invisible trade balance
- It is a measure of the revenue recieved from the exports of servieces, minue the expenditure on imports of services over a given time period.
- Including the exchange of all services (baking, insurance, tourism)
Define Income
aka net investment incomes.
It is a measure of the net monetary movement of (PID) profit, interest and dividends moving into and out of the country over a given time period.

PROFITS: domestic frims may set up braches in other countries and send profits home=credit in this account.
-Foreign firms in country send money out of country=debit.

INTEREST: Residents and insitutions in the country may have invested in banks and financial institutions in other countries and any interst recieve from these=Credit. Any interest to forieng investoers leaving the conutry=debit.

Dividends: Residents and insitutions may have purchased shares in foreign companies and any dividends recieved form those companies will count as a positive item. Any dividens paid by domestic firms to foreighn share holders= debit.
Define current transfers
A measure of the net transfers of money.
Payments made between contries when no goods or services change hands.
Gov. payments=forign aid and grants
Individual= forign workers sending money back to family in hom country or private gifts.
Define the capital account
A relatively small part of the balance of payments account, does not have sig. effect on the account.
Has 2 components:
1) Capital transfers
2) Transactions in non-produced, non-financial assests
Define capital transfers
a measure of the net monetary movements gained or lost through actions such as the transfers of goods and finanacial assts by migrants entering or leaving the country, debt forgiveneness, transfers relating to fixed assets (tangible assets firms own/use in production, with a life of at least 1 year), gifts taxes, inheretance taxes, death and duties.
Define: transaction in non-produced, non-finanacial assets
consisting fo the net international sales and purchases of non-produced assets, such as land or the rights to natural resources,
and the net international sales and purchases of intangible assets, such as patents, copyrights, brand names or franchises.
Define financial account
- The financial aacount records a countrys net transactions in external financial assets and liabilities
- It records the diff. between sales of domestic assets to foreign buyers and purchases of forieng assets by domestic buyers.
Consists of 3 components
Direct investment
Portfolio investment
Reserve assests
Define direct investment
- Refers to the inflows and outflows of long-term investments in physical capital, for example ownership of domestic assets such as property and land.
Mainly undertaken MNCs (FDI)
- The asset is expected to have a positive return
Define Portfolio investment
- The buying and selling of stocks, shares and gov. bonds.
- Essentially internaitonal borrowing and lending.
Defiene reserve assets
- The reserves of gold and foreign currencies which all countries hold.
- It is movement into and out of this account that ensure that the balance of payments will always balance to zero.
Discuss the balance in the balance of payments
- In the long-term the balance of payments should balance, that is the current account should equal the capital account and finanalcial account
- In reality the balance of pyaments account does not actually balance, because there are too many individual transactions taking place for the measurment to be exact, so "net errors and omissions" are included.
- Over time inacurracies decrease.
Discuss how a country can run a deficit in one of the components of the balance of payments
- It is possible to run a deficit in one component of a contry´s BOP so long as it can "balance " this by having a surplus in one of the other components.
Foexample:
Hong Kong = defict in the current account, as it imports more than it exports. It balances this by having a surplus in the financial accont due to favorable conditions for FDI.
Norway=current account deficit. But can balance it by running a deficit in one of the other components, like financial account (investing the surplus in foreign countries (direct investment) and/or accumulating foreign currency reserve (reserce))
Current account surplur= major oil exporters like Saudi Arabia>> has boosted their GDP and living standards
Define current account deficit
- exists when the sum of the outflows from the current account exceeds the inflows into the account (for example, net import expenditure is higher than net export expenditure)
Discuss the effect of a current account deficit on the exchange rate in a floating exchange rate system
- Outflow of money to other countries is higher than the inflow of money to the country.
- This means more foreing exchange is required and the demand for its own currency lowers, so the currency depreciates.
- In a floating exchange rate the current account should automatically correct itself, as the low currency makes the country´s exports relatively more competitive and so demand for them should increase and demand for imports increase, resulting in equilibrium.
The revers applies to current account surplus.
--The exchange rate automatically eliminates any current account surplus or deficit
Discuss the effect of a current account deficit on the exchange rate in a fixed exchange rate sysmte
- In a fixed exchange rate system, the current account will not balance itself, unless the currency is devalued.
Discuss the effect of a current account deficit on the exchange rate in a managed exchange rate sysmte
- Current account deficit managed by combining market forces and central bank intervention by buying and selling of foreign currencies to reduce the value of the domestic currency in oversease markets.
When does a current accont surplus occur?
- when the sum of the inflows to the current account exceded the outflows from the account.
- Due to higher export demand (higher income overseases, increased competitiveness, lower currency)
- Due to lower import demand (lower quality, lower currency)
Is a current account surplus a good thing?
- Depends on the cause of the current account surplus: is desirable if due to export-orientated growth (country should experience economic groath), undesirable if due to increased protectionism or lower incomes (lower standards of living/welfare losses)
- Generally seen as positiv for an economy, esp. if it is due to export orientated growth strategies, like used by the 4 Asian tigers (hong kong, singapor, taiwan and south korea)
- Could be bad >> relatively less spending on imports due to lower incomes.> lower standards of living.
Define economic integration
Economic integration refers to the process of countries becoming more interdependent and economically unified.

As the degree of integration increases, the trade barriers between countries decrease and their fiscal and monetary policies are more closely harmonised.
List different forms of economic integration
- preferential bilateral and multilateral trade agreements
- trading blocs, such as free trade areas, custom unions and common markets
- monetary union
- FDI
- globilisation and expansion of MNCs
Define bilateral trade aggreement
- is an agreement relating to trade between 2 countries.
- the aim is usually to reduce or remove tariffs and/or quotas that have been placed on items traded between the 2 countries.
- For exmple Hong Kong and Chins CEPA signed in 2004 created improved cross-border trade and invesment between the 2 countries.
Define multilateral trade agreement
-is an agreement relating to trade between multiple countries.
- usually aimed to reduce or remove tariffs and/or quotas that have been placed on traded items (the agreement here, unlike bilateral ones, applies to all the multiple countries involved).
Define preferential trade agreement
- is a trade deal between 2 or more countries that gives special or favorable terms and conditions, such as tax exemptions (not needed to pay) or tax concession (favorable rate).
- give a country special and easier access to products in a market due to advantages such as reduction or removal of tarrifs and non-tariff bariers to international trade.
Define trading block
- a group of contries that jon together in some form of agreement in order to increase trade between themselves and/or to gain economic benefits from cooperation on some level.
Discuss the effects of economic integration in the form of trading blocks on a countries producers
- intensify the degree of competition within the member countries
- However firms benefit from access to a larger market without trade barriers, thus can take advantage of any comparative advantage and make cost gains from economies of scale.
List the 3 types of trading blocks
- free trae area
- customs union
- a common market
Define and give an example of a free trade area
- is the least economically integrated trading bloc, where member countries agree to remove trade barriers with one another, but impose SEPERATE trade barriers with non-memer countries
- North American Free Trade Agreement (NAFTA) between Canada, United States and Mexico
Define a customs union
- is a an agreement made between countries, where the countries agree to trade freely among themselves, and they also agree to ADOPT COMMON EXTERNAL BARRIERS against any country attempting to import into the customs union.
- All common markets are also costums unions. Therefore the EU is also a customs union.
- Another example is the Switzerland-Liechenstein customs union.
Define: common market
- is the most integrated trading block. This is a customs union that, in addition to imposing the same trade restrictions on non-member nations, has common policies on product regulation and allows the free movemtn of goods, services, capital and labour.
- The EU is the most known example.
Define monetary union
A monetary union exists when member states of a common market adopt a single currency and hence common central bank that oversees monetary policy.
- The best example of this is the 17 member states of the European union, collectively known as the eurozone that use the euro as their common currency. Monetary policy is exercised through the European Central Bank (ECB)
>> For full monetary union, a single (common) currency is used by all member countries. This is not the case within the European Union member states.
What are the advantages of a monetary union
- Exchange rate fluctuations that used to exist between countries will disapear with a common currency and this should eliminate exchange rate uncertainty between involved countries which should increase investment and trade.
- Business confidence in the member countries tends to improve as there is less of a percieve involved in cross-border trading. >> economic growth.
- Trade creation will occur between members of a single currency area due to the preferential trade agreement and the confidence in the use of a common currency.
- Eliminates transaction costs as there is no need to exchange foreign currencies between members of the monetary union.
- Attracts inward investment from non-member states due to the removed risks assosciated with exchange rate fluctuations. >> employment and economic growth.
- Price transparency, firms/households can compare prices across diff. member states, long-term lead to equalizing across borders.
- More efficiency
- Greater market
- More choice + lower prices for consumers
- Political stability and cooperation
What are the disadvantages of a monetary union
- Interest rates are decide by the central bank>> countries are no longer free to set their own interest rates and so the tool of monetary policy is no longer an option to influence the inflation rate, the unemployment rate and the rate of the economic growth.
>> Esp. damaging if member states are experiencing diff. economic situations. i.e. contrating rates of inflation and unemployment in greece and germany mean that a common policy might not work for either country.
- Unable to change exchange rates to affect international competitiveness or combat balance of payments deficit. A common one is set by the central bank not by members themselves.
- Initial costs of converting individual currencies into one currency are large (taking old currency of market, printing&distributing and rewriting all price lists, re pricing all goods)
- Actions by central bank may have an assymetric impact on different countries due to their varying circumstances.
- Short-term unemployment due to competition
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