Edexcel A-level Economics Theme 4 questions and answers.

Globalisation Increased interdependence between countries and the rapid rate of change it brings about Factors contributing to globalisation (5) Improvements in infrastructure (Quicker, more reliable and cheaper methods enabling production) Improvements in IT and communication (Allows global operations) Trade Liberalisation (Reduces protectionism and makes trade cheaper - specialisation) International financial markets (Raising money and transferring it globally) TNCs (Low prices due to exploiting cheap labour) Parties affected by globalisation (4) Consumers Workers Producers Governments Impacts of globalisation on consumers (2A+2D) Greater choice due to global products Lower prices as firms take advantage of comparative advantage Possible rise in prices as incomes are rising globally so demand increases Possible loss of culture Impacts of globalisation on workers (3A+3D) Movement of manufacturing sector to countries such as China Increased migration fills job that have skill shortages globally TNCs provide training for workers and create new jobs Increased competition has caused a fall in wages due to profit maximisation Increased inequality as rich keep getting richer Sweatshop workers experience poor conditions and very low wages Impacts of globalisation on producers (3A+1D) Firms can source from all countries and sell in all countries. Diversification prevents firm from shutting down if market fails somewhere Employ low skilled workers for cheap in developing countries Exploit comparative advantage Firms who can't compete internationally lose out Impacts of globalisation on governments (2A+2D) Possible higher taxes due to higher employment With the correct policies, they could maximise gains Could lose out if firms decide to avoid tax Could become corrupt if they start getting controlled by TNCs Impacts of globalisation on the environment (1A+2D) Sharing ideas and technology can help fight climate change globally Depletion of raw materials due to significant increases in demand Increased trade and production = More pollution due to greater emissions Impacts of globalisation on economic growth (3A+2D) Increased investment so more injections into economies. Enhanced by the multiplier TNCs provide sophisticated management techniques and technology. Beneficial to all industires Trade increases output due to exploitation of comparative advantage Power of TNCs can cause political instability as they could support unpopular and undemocratic regimes Comparative advantage levels change over time so TNCs could move regularly Specialisation the process by which individuals, firms and economies concentrate on producing those goods and services where they have an advantage over others Absolute Advantage When a country can produce a product using fewer resources than another country Country is classified as technically and productively efficient Comparative Advantage The ability to produce a good at a lower opportunity cost than another producer Assumptions and limitations of comparative advantage (5) No transport costs Costs are constant due to EoS Goods are homogenous Factors of production are mobile Trade taking place is dependent on terms of trade Advantages of Specialisation and Trade (5) Comparative advantages increases global output due to specialisation. This accelerates global economic growth Countries benefit from EoS which reduces costs so lower prices globally Different countries have different factors of production further increasing specialisation Consumers have a greater choice so consumer welfare increases Greater competition incentivises firms to innovate Disadvantages of Specialisation and Trade (5) Over dependence on exports/imports. Problematic is export prices drop or imports are suspended Structural unemployment as jobs are lost to foreign firms that are more efficient and competitive Environmental damage due to transportation and increases in demand for resources Loss of sovreignity due to international treaties and joining trade blocs Loss of culture due to global products Factors infleuncing patterns of trade (4) Comparative Advantage Emerging Economies Trading Blocs and Bilateral trading agreements Relative Exchange rates How does comparative advantage influence patterns of trade? Countries will trade where there is a comparative advantage Growth of exports of manufactured goods from developing countries due to specialisation and low labour costs Decline of industrial sector in developed countries Developed countries now export services How do emerging economies influence patterns of trade? As wealth grows, trade increases meaning a country will import and export more goods Important for LICs as it makes up 20% of GDP on average Increasingly more developing countries are participating in trade How do Trading blocs and Bilateal agreements infleunce patterns of trade? Trade between certain countries (within agreement and trading bloc) increases while decreases with other countries Joining EU means that a country will execute majority of trades between EU members How do relative exchange rates influence patterns of trade? Prices are an important factor when consumers buy goods and so a change in price will affect the pattern of trade China has kept their currency artificially weak in order to increase their trade surplus and make their exports more competitive Terms of Trade Measures the rate of exchange of one product for another when two countries trade Terms of Trade calculation Average Export Price Index/Average Import Price Index x 100 Improvements in terms of trade Rise in export prices Fall in import prices Deterioration of terms of trade Fall in export prices Rise in import prices Factors influencing terms of trade in the Short Run (3) Exchange Rates Inflation Changes in Demand/Supply of imports and exports Factors influencing terms of trade in the Long Run (2) Improvements in productivity Changing incomes How does prodictivity influence terms of trade? improvements in productivity will cause export prices to fall relative to import prices Caused by improvements in technology, more efficient labour etc. How do changing incomes influence terms of trade? Increase in incomes leads to an increase in demand. This increases prices so exporting countries have better terms of trade Impacts of changes of Terms of Trade (3) If PED of imports and exports in inelastic, a favourable movement improved balance of payments. Vice Versa Improvements in terms of trade causes a rise in unemployment and a fall in GDP. This is because there will be a fall in production Long term decline in terms of trade suggests a long term decline in living standards as less imports can be bought Trading Bloc Regional group of countries that co-operate and reach a trade agreement that reduces or eliminates barriers to free trade Barriers to Free Trade (4) Tariffs Quotas Non-Tariff barriers Subsidies Free Trade Area No barriers to trade between each other. Every country sets their own barriers against other non-member countries E.g. NAFTA Customs Union No internal barriers plus a common external barrier against other countries E.g. SACU (South African Customs Union) Common Market Customs union plus free movement of labour and capital E.g. COMESA Economic and Monetary Union Common Market with a common currency and common central bank Eurozone European Central Bank distributes money, sets interest rates and maintains a stable financial situation Governments agreed not to exceed a fiscal deficit of over 3% and not to have a National Debt of over 60% Free movement of labour, capital mobility and wage and price flexibility, fiscal transfers from one country to another all required! Advantages of Trading Blocs (4) Encourages specialisation causing lower costs and prices as well as greater output Larger customer markets allowing firms to grow easier and exploit EoS Protection of firms from cheaper imports from outside the trading bloc Domestic industries face greater competition so more innovation, lower prices, and improvements in productive and allocative efficiency Disadvantages of Trading Blocs (3) Distortion of world trade as restrictions are placed on non-members. Reduces benefits of specialisation and decreases world output Reduction in competition as inefficient firms are eliminated from the market Increase in regional inequalities as rich countries experience faster growth rates whereas developing countries are exploited due to cheap low skilled labour Trade Creation Switching imports from a non-member country to a member country who has lower costs of production Trade Diversion Switching imports away from the cheaper, more efficient producer outside the trading bloc to a less efficient, higher cost producer within the trading bloc Trade Creation and Diversion diagram Aims of the WTO (2) Bring about Trade Liberalisation Ensure countries act according to the trade agreements they have signed Possible conflicts within the WTO (4) All countries must agree for an agreement to take place Trade agreements contradict WTO aims so not all trading partners are treated equally WTO strives to ensure non-members can trade freely and easily with members of a trade bloc Some say WTO is too powerful or that it ignores the developing countries, as developed countries do not trade freely with developing countries Protectionism When trade between countries is restricted in some way, normally through government measures to reduce the amount of imports coming into a country Reasons for Protectionism (3) Infant industry protection Protection from dumping Danger of overspecialisation Infant Industry Protection When the government helps protect new industries from excessive competition until they are fully established This can be in the form of subsidies to help with high AC and help the firm be internationally competitive Protection from Dumping Suplus goods are sold at very low prices to other countries therefore harming local producers Gov may have to intervene in the form of subsidies in order to keep domestic producers competitive Danger of Overspecialisation No country should become totally reliant on another for imports so protectionism measures are introduced in order to prevent this Quotas Limit number of goods coming into a country Subsidies Money granted by the government Non - Tariff Barriers Regulations regarding product content or quality, and other non-financial conditions that hinder imports. Embargo A complete ban on trade with a particular country Impacts of protectionism on consumers (4) Higher prices as imports become more expensive Domestic producer costs increase rise due to higher imports. Reflected by higher prices Limits efficiency of domestic producers as subsidies cause less incentive to be efficient Consumers have less choice Impacts of protectionism on producers (3) Domestic producers sell more goods at higher prices as they have less competition Suffer higher costs due to controls on imports of goods that they need for production Efficient foreign producers lose out while inefficient domestic producers are kept in business