Beruflich Dokumente
Kultur Dokumente
Unit 4 by Turner
GLOBALISATION
Increased Economic
b a lisa tio n is th e p ro ce ss b yIntegration
w h ich w o rld m a rke ts a re b e co m in g in cre a sin g ly
g ra te d .
s im p lie s:
Causes
Benefits
Costs
Normative Effects
Globalisation Effects
Summary
• Increased dependency of economies
on the output of other economies
• Greater consumer choice
• Lower prices, through specialisation
according to comparative
advantage
• Increasing environmental destruction
and other negative externalities
• ‘Footloose’ companies (which can cause
unemployment as they move from
place to place)
• Possible loss of culture/national
identities.
Globalisation – Nothing New
• 1600s international sea trade
– 19,000 kgs of gold and 3m kgs of silver
• 1914 world was possibly more globalised
than now
– Abolition of corn laws encouraging imports
of food
– Britain imported food, cotton and raw
materials and exported manufactures
– London was (still is?) the centre of global
finance
– Steamboats, railways and telegrams
– Migration to America by 60 million
Europeans
PATTERNS OF TRADE
Patterns of Trade
• Law of Comparative Advantage
• Trading Blocs
– Free Trade Areas
• Free trade area is a type of trade bloc, a
designated group of countries that have
agreed to eliminate tariffs, quotas and
preferences on most (if not all) goods
and services traded between them.
• A customs union is a type of trade bloc
which is composed of a free trade area
with a common external tariff.
• WTO
– an organization that intends to supervise
and liberalize international trade
Comparative Advantage
Comparative Advantage
• Specialisation and trade can Potentials Wool Wine
prove beneficial to both UK 100 150
nations as long as an appropriate
price for exchange can be agreed. Spain 50 100
• W oo
• This price is known as the l
terms of trade and must lie between
the domestic opportunity cost 1
ratios for trade to be mutually
beneficial.
•
• Doesn’t take account of Spai
UK n
benefits from economies of scale
• W in
• Doesn’t take account of e
transport costs (can be up to 20% 1 .5 2
of Cost) Problems with Specialisation:
• •Vulnerability to shocks
•Long Term Price falls as
•Non Homogenous Hoods productivity increases
• •Limited potential of agriculture
•Protectionism as a source of economic growth
distorts P omparative •Diminishing Marginal Returns
P dvantages •Soil-Degradation due to over-
cultivation
•Unfair Competition due to
Subsidies
Gains From Free Trade
• Mutual gains from trade – increased welfare
• Increased exports boost domestic employment
• Economies of Scale due to specialisation
– Leading to lower LRAC and therefore Prices
• Increased Competition
– Further incentive to be efficient, decreases
monopoly power
• Economic Growth
– World trade has increased by 7% a year on
average since 1945 it is a big factor behind
increased economic growth
• Make use of surplus resources
– Marginal benefit is low when resource pools are
high and other economies can gain more than
domestic ones ie Quatar is oil rich, Japan is
resource poor.
Losses From Free Trade
• Infant Industry
– Domestic industries may be able to compete in the long
run but not now due to economies of scale and a lack of
experience in emerging industries
• Senile Industry
– Declining and inefficient industries may need
reinvestment, protectionism may increase investment
• Over-specialised economy
– Volatile prices
– Prebisch-Singer
• Lost Revenue for the Government
– Insignificant as a proportion of total G.ment Revenue
• Cultural Identity
– Americanisation, homogeneity
• Dumping
– E.g EU food surplus sold at low prices depressing world
prices
• Environmental
Protectionism
• Tariffs - import taxes.
• Quotas - quantitative limits on the level of imports
allowed.
• Voluntary Export Restraint Arrangements –
where two countries make an agreement to limit
the volume of their exports to one another over an
agreed period of time.
• Embargoes - a total ban on imported goods.
• Intellectual property laws (patents and copyrights).
• Export subsidies - a payment to encourage domestic
production by lowering their costs.
• Import licensing - governments grants importers the
license to import goods.
• Exchange controls - limiting the amount of foreign
exchange that can move between countries.
•
Protectionism
•R e a so n s Fo r •Reasons Against
y •Higher prices
–Impose costs that would not exist if free trade were allowed
ia l co m p a ra tive a d va n ta g e•Reduction
w ith e coinn omarket
m ie saccess
o f scafor
le foreign producers
–EU CAP hurts Brazilian, Thai & South African farmers sugar export
•
BALANCE OF PAYMENTS
Balance of Payments
Automatically Balances
with
a Floating Exchange
Rate
Imbalances on the Balance of
Payments
• UK has led a large Current Account Deficit since 1992
• Net importer of manufactured goods since 1983
• Imbalances matter if they put a strain on the domestic
economy
• Doesn’t Matter due to:
– Partial Auto-Correction over the economic cycle
– Investment and supply-side, imports of capital and
technology will have a beneficial effect on productivity
and competitiveness in the long-run
– Capital inflows despite low interest rates (high compared to
the Eurozone)
• Matters due to:
– Symptom of uncompetitive UK industry
– Unbalanced economy, with too high consumption
increasing household debt
– Leakage from the circular flow decreasing output and
employment
– Problems in financing a current account deficit. Higher
interest rates needed.
Measures to “Correct” Balance
of Payments composition
• Expenditure Reducing Policies
– These are policies that aim to reduce
the real spending power of
consumers
• Fiscal and Monetary
• Expenditure-Switching Policies
– Lower inflation
– Tariffs
– Depreciation
• Are any measures needed due to
Floating ER?
EXCHANGE RATES
Floating Exchange Rates
• A floating Price
exchange of G B P
in
rate is a type te rm s
of exchange of U SD
rate regime P
wherein a
currency's
value is
allowed to
fluctuate
according to Q Q u a n ti
ty
the foreign
exchange
Impact of Appreciation and
Depreciation
• Impact on X and M components of
AD
– SR J-Curve
– LR change in incentives to import
• Impact on Exporters
• Impact on Importers i.e Consumers
who import and price of oil
• Reduces value of external debt
Marshal-Lerner Condition
a te to in cre a se a co u n trie s cu rre n t a cco u n t su rp lu s / re d u ce d e ficit th e su
m e , th is a ssu m p tio n fe e d s in to th e J-cu rve
The J-Curve and Inverted J
curve
J-C u rve fo r
d e p re cia tio n , a s in lo n g
ru n in cre a se in C u rre n t
A cco u n t S u rp lu s
•
Lorenz Curves and Gini
Coefficients
G in iIn d e x = A / A + B
Causes of Unequal Income
Distribution
• Receipt of different wages
– Different abilities/skills – level of
productivity
– Discrimination
– Compensating differentials – rewarding
word is more attractive and so pay is
lower
– Regional pay differences
• Unemployment
• Ownership of financial assets
– Those on higher income can afford these,
which generate more income. Virtuous
e cycle
U n eGqlou ba al lwisa – Matthew
atilothn d e cre a se s g lo b a l effect
e q u a lity b u t in cre a se s in e q u a lity in in d iv
d istrib u tio n :
•U n e q u a l In co m e
ECONOMIC GROWTH AND
DEVELOPMENT
Economic Growth and
Development
Economic Growth
• •Development
• An increase in real • An increase in living
GDP standards — this
could relate to
• An increase in the income per head
productive potential
of a country • Levels of education,
healthcare, access
• Measured by to housing etc.
To d a ro ’ s T h re eassessing
O b je ctive s o f D e ve growth
lo p m e n t in
B A S IC ( life su sta in in g ) G O O D S • Measured by the HDI
To iGDP ( eora va iGDP
la b ility a npc)
n cre a se th d d istrib u tio n o f
n e ce ssitie s su ch a s: Fo o d , d rin k , w a rm th , which provides a
sh e lte r, clo th in g , g o o d h e a lth , e d u ca tio n
S TA N D A R D S O F LIV IN G
score between 0
In cre a se d co n su m p tio n a b o ve th e le ve lo f and 1 based on GDP
b a sic n e e d , in co m e is a fa cto r a s a re se lf-
e ste e m , se n se o f o w n w o rth , b e lo n g in g per capita, literacy
C H O IC E
E xp a n d th e ra n g e o f e co n o m ic a n d so cia l
rates and life
ch o ice s. R e la te d to se n se o f o w n w o rth expectancy.
( above ). Choice of what to consume , free
sp e e ch , fre e d o m o f w o rsh ip .
Global Economies
Developed
• Developing
•
Countries/First Countries/Third
World/MDCs World/LDCs
• De-industrialisation • Africa, South America and Asia
• NICs
– Emergence of a – Tiger economies
strong service • South Korea, Taiwan
sector (Finance and – Industrialise
IT) d, good
education
• High GDP per Head ,
transport
ation and
• High Education and other
Healthcare infrastruc
ture
of Living or exclusion
HDI Life expectancy Adult Literacy rate GDP pc N/A
at birth Combined (USD@PPP)
enrolment ratio
HPI-1 Probability at Adult illiteracy ratePercentage of N/A
birth of not people not using
surviving until improved water
age 40 sources
Percentage of
HPI-2 Probability at Percentage of children
Percentage under
of 5 Long-term
birth of now adults lacking who
peopleareliving unemploym
surviving until functional literacy underweight
below the poverty ent rate (12
age 60 skills line (50% median months or
THE ROLE OF THE STATE
Role of Markets
• Price mechanism directs FoP where needed to increase allocative
efficiency
• Government Failure
– Information, political priorities, corruption
• Government production has X-inefficiency – lacks motive to cut
costs, lowers output from given input
• Investment is higher due to profit incentive (FDI and
entrepreneurship)
• Problems with markets:
– Infrastructure: roads, airports, shipping ports, free rider
– Financial institutions
– Property rights
– Entrepreneurship culture – traditional ways make it difficult producing
to sell to others vs. subsistence
– Stability: inflation, currency as a “store of value” to encourage S
therefore I
– Transition to markets: mistakes, may not work as in developed
countries
– Market failure due to externalities
– Merit goods, public goods, missing markets (insurance)
Fiscal Policy
• Inflationary in SR due to effect on AD
• Can be anti-inflationary in LR due to effect on LRAS
• Budget deficit:
– Government spending exceeds tax revenue
• Caused by:
– Economic recession or slump
– Increase in supply side policy
– Economic shock requiring government response
– Funded by rise in current borrowing, to be repaid by
increasing future taxes, or issue of gilts
• Consequences can include:
– Rise in productive potential of country if spending
improves education
– Increased dependency on benefits
– Inflation (and resulting loss in international
competitiveness and rise in inequality)
– This may be wiped out if the supply side improves and
LRAS increases
– Reduced attractiveness for FDI if government seen as
incompetent
– Could raise FDI if the deficit has led to an improvement
in the supply-side etc
Key Terms
• Automatic stabilisers/automatic fiscal policy —
government spending/taxation vary automatically over
the course of the economic cycle
• Discretionary fiscal policy — deliberate alteration of G
and T
•
Reasons For
• for Tax
• Reduce 1. The cost of collection
consumption/producti should be low
on of goods with relative to the yield
negative externalities of the tax.
• Raise funds to provide 2. The timing of collection
public goods eg and the amount to
defence, roads be paid should be
• Redistribute income, clear.
reducing inequality. 3. The timing of collection
• Fund government and the means of
payment should be
• Provide goods with convenient to the
positive externalities taxpayer.
such as education and
healthcare 4. Taxes should be
imposed according to
the ability of the
Monetary Policy
• Any policy concerned with manipulation of
interest rates, the money supply or
exchange rates.
• Inflation is difficult to influence due to
globalization
• Domestic Causes:
– Government Spending
– Confidence
– House/ Asset Prices
• International Causes:
– International demand for raw materials
– Imported Inflation/Deflation
Monetary Policy
Strengths
• Weaknesses
•
capital stock:
I = ∆K
•
Desired level of saving may be difficult to stimulate, absolute poverty
is priority e.g MPC very high, MPS very low
• If £5 worth of capital Savings may be deposited abroad (capital flight)
produces £1 of output, k = 5.
Lower is better. Problems matching supply of funds to demand from investors
S=I
•
Offsetting by external finance may be tied and serve donor nation
sY= ∆K
•
Bank, MNCs for keeping wages and raw material prices low and discouraging diversification into areas developed co