Notesale: Turn your study into money

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Standard Level
Advantages to consumers of trade
1
...
Increased choice
3
...
Increased economic efficiency
...
More competition = more
firms = more output = more allocatively efficient
...
Source of foreign currency
...

Types of Trade Protection
1
...
Quotas
3
...
Administrative barriers
Advantages of tariffs
...
Quotas
A quota is a physical limit on the numbers of a
particular product that can be imported into a
country
...
Economies of scale
...

2
...
Raw materials from
abroad etc
Trade Protectionism
Trade protection are policies by a country to reduce
imports from other countries and/or increase exports
...


1
...

It increases the cost of the imported good and
therefore decreases their demand
...

Disadvantages of tariffs
...

Advantages of quotas:
 protects domestic producers from foreign
competitors and therefore increases
employment
 limits imports (helps improve balance of
payments)
3
...


Disadvantages of subsidies:
- subsidies decrease the need for producers to
increase efficiency to produce at a lower price to stay
competitive as the subsidy will lower the price of
their products anyway
...
Administrative barriers
Governments can use the following administrative
barriers to reduce imports:
- Red tape
- Health and safety or environmental
standards
- Embargoes
1
...

Evaluation:
- Uncompetitive industries will probably
decline in the long run anyway and
protecting it will merely draw out the
process
- Supporting uncompetitive industries is
hugely costly
3
...

Evaluation:
- How does a government know whether an
overseas firm is dumping or not?

- the domestic consumer must pay for the subsidy
given to producers in the form of higher taxes
...
Protecting domestic employment
2
...
Prevent dumping
4
...
The maintenance of standards
6
...
Increase government revenue
2
...

Evaluation:
- Governments don’t pick industries very well;
need to be able to spot winners
...
Protectionism raises prices for the consumer
...
Increased costs for domestic producers
...
Trade protection can lead to trade wars
...
Increased costs of domestically produced goods
due to lack of competition caused by trade protection
5
...


WTO (World Trade Organisation)
Aims to promote free trade between all nations
...
It favours wealthy nations over poor ones
...

2
...
WTO rules are written by and
in favour of corporations
...

3
...


Exchange rate
The value of one currency expressed in terms of
another currency
...


Appreciation
An increase in the value of a currency in terms of
another in a floating exchange rate system
3 types of exchange rate mechanisms
1
...
Managed

3
...

Demand for exports increase = more currency is
demand from forex = appreciation
Demand for imports increase = more currency is
supplied to forex = depreciation

Supply of a currency depends on reverse 4 reasons:

- Imports
- Interest rates lower than other countries (domestic
savings in foreign banks increase)
- Outward FDI/Portfolio investment overseas
- An increase in speculative demand for the US
dollar (a belief that the US dollar is going to become
relatively stronger in the future)
Link between a country’s interest rates and the
strength of its currency
If the interest rate in a country is higher than that of
other major currencies then more of that currency
will be demand in order to put funds into the
country’s banks etc, therefore appreciation
...


Link between a Inward/Outward FDI and the
strength of the currency
An increase in Inward FDI will increase demand
for a currency (as foreign firms need to buy local
currency in order to build factory) and therefore
the currency will appreciate
...


Link between speculation on a currency and the
strength of the currency
If speculators think a currency will appreciate they
will demand the currency = more demand =
appreciation
...

Fixed exchange rate
When the price of a currency is fixed to another
currency
...


An exchange rate is managed/fixed in two ways:
1
...


Floating exchange rate
When the value of a currency is determined by
demand and supply without interference from the
government
...
Downward pressure on inflation
An appreciation causes imports to cost less
...
Improved living standard
Cheaper imports mean domestic citizens can buy
more foreign goods
...


2
...


3
...

Possible disadvantages of a high exchange rate:
1
...

This will decrease the demand for a country’s
exports may leads to a CA deficit and this may
cause unemployment
...
Increased pressure on domestic industries as
imports are cheaper leading to lower demand and
therefore higher unemployment
...
Exports are cheaper
A depreciation will make exports cheaper abroad,
therefore increasing the demand for them and
possibly increasing employment in domestic firms
...
Decreased pressure on domestic industries as
imports become more expensive
...
Maintaining the fix can have high costs
...

This has 2 problems:
- It ties up the governments most powerful
tool for running the economy
- It is contractionary and may well decrease
AD and employment
2
...


Evaluation of a high (or appreciating) exchange
rate:
-

Good for consumers, but maybe not so good
for producers
- Impact will depend up how much the
exchange rate has appreciated
- Impact will depend on how long the currency
has appreciated for – X & M inelastic in the
short run but more elastic in the long run
...
Upward pressure on inflation
A depreciation causes imports to become more
expensive
...
Standard of living decreases
More expensive imports mean domestic citizens can
buy less foreign goods, lowering their standard of
living
...
Reduced uncertainty for firms regarding
prices of raw materials bought from abroad
and revenue from goods sold abroad;
encouraging trade
...
Under a fixed exchange rate system
governments are forced to keep inflation
under control
...
Fixed exchange rates should ensure that there
is no speculative demand for the currency
Advantages of floating exchange rates:
1
...

A Current Account deficit should lead to a
depreciation in the value of a currency because:
- Less is exported, therefore the demand for
the currency falls
- More in imported, therefore there is greater
supply of a currency
This depreciation of the currency will:
- Decrease the price or exports and therefore
demand for exports should grow
- Increase the price of imports and therefore

demand for imports should fall
This will help decrease a Current Account deficit
...
Because a floating exchange rate can move freely
it does not need to be manipulated by interest rates
...

3
...


Disadvantages of floating exchange rates:
1
...

Floating exchange rates means firms have more
uncertainty when calculating the costs of their
imported raw materials and the revenue from
goods sold abroad
...
Floating exchange rates may not re-adjust to
eliminate a Current Account deficit
...

3
...

Current Account (4 parts):
A
...
Trade in services (invisibles)
C
...
Current transfers
Capital Account
Component of the balance of payments
...
Capital Transfers
B
...

The Financial Account is manipulated by a
government to produce a surplus to offset a
Current Account deficit in two ways:
- interest rates are increased to attract ‘hot
money’ to domestic bank accounts in
search of the highest return
- foreign currencies and gold held by the
central bank are transferred to the Reserve
Asset account in order to produce a surplus

Balance of payments
A record of all financial transactions between one
country and the rest of the world in one year
...

Balance of Trade in Services (invisibles)
Export of services minus import of services
...
Direct Investment
B
...
Reserve Assets
Current Account deficit = currency depreciation
A Current Account deficit is likely to lead to a
depreciation of a currency in a floating exchange rate
system
...


Current Account surplus = currency
appreciation
A Current Account surplus is likely to lead to an
appreciation of a currency in a floating exchange
rate system
...

1
...
Tariffs are reduced on these products,
but not eliminated
...
Customs union
Free trade amongst bloc members and they agree
to set the same tariffs against non bloc member
countries – Common External Tariff
...
Economic and monetary union
Free trade between bloc members
...

Free movement of factors of production and
Common currency and a common central bank
...
Loss of control over interest rates
In a monetary union the i/r is no longer set by the
county’s government – it is set by the central bank
for the bloc of countries
...
Loss of control over the exchange rate of
the currency
In MU a country uses the bloc’s currency and
therefore they have no control over the exchange
rate
...
Initial costs of changing to the ‘new’ currency
Disadvantages of a trading bloc to member
countries:
1
...

- a country’s exports will decrease
...

- unemployment will increase and most of it will
be structural
...
Loss of government revenue if tariffs had been
in place

Economic integration
Occurs when countries take steps to co-ordinate and
link their economic policies
...
Preferential trade area
2
...
Customs Union
4
...
Economic and Monetary union
2
...
However, countries are allowed
to set their own trade policies with countries outside
the bloc
...
Common or single market
- Free trade between bloc members
...
Products produced in
bloc meet the same standards
...
Labour
and capital can move freely throughout the bloc
...
Eliminates of exchange rate fluctuations
2
...
Stable currency
4
...
Better access to markets of fellow bloc members
(lower/no tariff barriers)
...
Protection from competition from more developed
economics outside the bloc (CET etc)
...
Lower prices for the consumer because:
- firms able to exploit economies of scale
- access to members state goods without tariffs,
many of which will be cheaper etc
4
...

Non Members
Non member of a trading bloc will face the common
external barrier (Customs Union and after) when
they try to export their goods to members of the
trading bloc
...


3
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