Joseph Thomson 13.3
Chapter 10 Summary Questions Friday 15th November 2019
1. For developed economies like the UK, globalisation opens up larger international
markets, allows firms to tap into a wider pool of talent and the removal of barriers to
trade. The many disadvantages of globalisation like social injustice, poor working
conditions and businesses influencing political decisions are actually bad for developing
countries, and come from the exploitation of an advantage by developed economies,
these being cheap labour and political influence respectively. In this respect it is clear
that for developed economies the advantages of globalisation far exceed the
disadvantages.
2. Both absolute and comparative advantages are products of specialisation, and compare
production of goods between countries. Absolute advantage is the ability for a country to
produce more of a good than another nation using the same quantity of raw materials,
where the country that can do this possesses an absolute advantage in production over
the other. Comparative advantage looks similarly at the efficiency of production, but is
measured in opportunity cost. If a country can produce more of a good with less of an
opportunity cost than another country could, then it possesses a comparative advantage
over that nation. Together these concepts allow the creation of trade, where countries
don’t domestically produced goods in which they possess no advantage, and instead
import them.
3. A deficit on the current account of the balance of payments is when a country is
spending more on imports than it is earning in exports, and investing more in other
countries than it is receiving in investment. There are many policies that can help to
reduce a deficit. One is devaluation of the currency, an expenditure-reducing policy,
which is done by selling it, which increases the price of imports and reduces the price of
exports. For this to be successful the combined demand elasticity of imports and exports
must be greater than 1, as explained by the Marshall Learner condition. The J-curve
shows that this is more likely to occur in the long run, and an initial worsening of the
deficit should be expected. Another method of reducing a trade deficit is the use of
protectionist policies, which are expenditure-switching, like tariffs, which increase the
price of imports so that demand is turned to the cheaper domestically produced goods.
This can lead to retaliation from other countries, and an overreliance on the tariff
protection from domestic firms; no incentive to cut costs.
4. Supply-side reforms improve the productive potential of an economy through expanding
spare capacity to produce, meaning if there is increased overseas demand then the level
of production will be able to meet this new demand and provide a strong level of exports.
This will enable the UK to have a sustained ability to earn more revenue from exports,
improving the current account in the long run.
5. A freely floating exchange rate system is when exchange rates are decided by market
forces with no government intervention, as opposed to fixed exchange rates set by the
Chapter 10 Summary Questions Friday 15th November 2019
1. For developed economies like the UK, globalisation opens up larger international
markets, allows firms to tap into a wider pool of talent and the removal of barriers to
trade. The many disadvantages of globalisation like social injustice, poor working
conditions and businesses influencing political decisions are actually bad for developing
countries, and come from the exploitation of an advantage by developed economies,
these being cheap labour and political influence respectively. In this respect it is clear
that for developed economies the advantages of globalisation far exceed the
disadvantages.
2. Both absolute and comparative advantages are products of specialisation, and compare
production of goods between countries. Absolute advantage is the ability for a country to
produce more of a good than another nation using the same quantity of raw materials,
where the country that can do this possesses an absolute advantage in production over
the other. Comparative advantage looks similarly at the efficiency of production, but is
measured in opportunity cost. If a country can produce more of a good with less of an
opportunity cost than another country could, then it possesses a comparative advantage
over that nation. Together these concepts allow the creation of trade, where countries
don’t domestically produced goods in which they possess no advantage, and instead
import them.
3. A deficit on the current account of the balance of payments is when a country is
spending more on imports than it is earning in exports, and investing more in other
countries than it is receiving in investment. There are many policies that can help to
reduce a deficit. One is devaluation of the currency, an expenditure-reducing policy,
which is done by selling it, which increases the price of imports and reduces the price of
exports. For this to be successful the combined demand elasticity of imports and exports
must be greater than 1, as explained by the Marshall Learner condition. The J-curve
shows that this is more likely to occur in the long run, and an initial worsening of the
deficit should be expected. Another method of reducing a trade deficit is the use of
protectionist policies, which are expenditure-switching, like tariffs, which increase the
price of imports so that demand is turned to the cheaper domestically produced goods.
This can lead to retaliation from other countries, and an overreliance on the tariff
protection from domestic firms; no incentive to cut costs.
4. Supply-side reforms improve the productive potential of an economy through expanding
spare capacity to produce, meaning if there is increased overseas demand then the level
of production will be able to meet this new demand and provide a strong level of exports.
This will enable the UK to have a sustained ability to earn more revenue from exports,
improving the current account in the long run.
5. A freely floating exchange rate system is when exchange rates are decided by market
forces with no government intervention, as opposed to fixed exchange rates set by the
