a2 econ session 3
TRANSCRIPT
A Level Economics – Year 2 (A2) Revision Workshop
Session 3International Trade and Exchange Rates
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Meet Winston. He’s representing the UK in ‘The Great Economics Snail Race’! He is going to compete against snails from other countries over 4 different heats. Your task is to decide which position you think that Winston will finish (out of 5)
and which snail will win in each race.
Get ready to start!
China
Spain
Australia
India
UK
6.4%
3.5%
2.5%
7.4%
1.9%
2nd
3rd
4th
1st
5th
Which of these countries had the highest annualrise in GDP (as a percentage) in 2015?
1
Italy
France
Japan
USA
UK
11.4%
10.6%
3.3%
5.0%
5.1%
5th
4th
1st
2nd
3rd
Which of these countries had the lowest rate ofunemployment (LFS measure) in 2015?
2
Spain
Japan
USA
France
UK
97.7%
230.00%
102.98%
95.0%
89.4%
3rd
5th
4th
2nd
1st
Which of these countries had the lowest Government debt(as a percentage of GDP) in 2015?
3
China
Russia
Brazil
Germany
UK
1.6%
12.9%
10.7%
0.5%
0.2%
1st
5th
4th
2nd
3rd
Which of these countries had an inflation ratethat was closest to 2.0% in 2015?
4
A Level Economics – Year 2 (A2) Revision Workshop
Session 3International Trade and Exchange Rates
26
A Level Economics – Year 2 (A2) Revision Workshop
Session 3 Outline26
The changing pattern of global trade
The balance of payments, and current account deficits
Theories of free trade and protectionism
Analysis and evaluation of exchange rate systems
A Level Economics – Year 2 (A2) Revision Workshop
What is “global trade”?26
The global trade flow associated with production
of the England football team’s suits for Euro 2016
A Level Economics – Year 2 (A2) Revision Workshop
What is “global trade”?26
The global trade flow associated with production
of tennis balls for Wimbledon
A Level Economics – Year 2 (A2) Revision Workshop
The changing pattern of global trade
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• China’s growth in exports (due to WTO membership & relaxing of trade barriers)
• Improvements in global transport and communications links
• Increase in scale/scope of global production chains
• Credit Crunch still affecting access to trade credit• Some countries increased barriers to trade following
recession to protect their economies
• 50% • 25%
• 16%• 6%
A Level Economics – Year 2 (A2) Revision Workshop
Relative share of world exports26
The EU continues to have the highest share –
but its share is falling
China is the only country/region that has seen an increase in its
share of exports
Russia continues to have the lowest share –
out of the countries shown
The US share has fallen, but its decline has stalled since 2006
A Level Economics – Year 2 (A2) Revision Workshop
Using the chart, identify….• The only sector in which Emerging Asia will see a decline in its world
share • The two sectors in which the US and Canada will see an increase in
their world share• The only sector in which Africa will see a decline in its world share• Which region currently has just a 1% share in the export of
manufactures• Which region is expected to have a 30% share in the export of
agricultural goods by 2060
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Energy
Agriculture and Energy
Agriculture
Africa
US & Canada
A Level Economics – Year 2 (A2) Revision Workshop
Drivers of change in the global trade pattern
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• Slowdown in China, not matched by boom elsewhere (yet!)• Increased “protectionist mood” – anti-immigrant policies, “buy local” programmes, new
“Cold War”• Gains from improved transport and communications tech already heavily exploited
• “Death of Distance”• Process of increased interconnectedness across the globe; increasingly integrated
markets, cultures, policies, economies and industries
• International organisations – WTO, IMF, World Bank, NATO, UN• Agreements on freer movement of goods, services, capital and labour• Technology (e.g. communication & transport) allowing global production / rise of MNCs /
global media / containerisation / global financial system
• Increasing role of governments rather than free markets following the financial crisis• Trade blocs promote trade diversion away from the rest of the world• Reduced free movement of labour – tighter visa regs, border checks etc (terrorist threat)
A Level Economics – Year 2 (A2) Revision Workshop
The Balance of Payments Accounts - Outline
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Visible Trade (UK -£123.7bn)
Invisible Trade (UK £89.1bn)
“Primary Income” (UK -£33.1bn)
“Secondary Income” (UK -£25.1bn)
Transfer of asset ownership & debt forgiveness (UK -£0.8bn)
FDI / shares (UK £73.9bn)
Currency, deposits etc (UK £81.0bn)
Gold, SDR (UK £7.1bn)
A Level Economics – Year 2 (A2) Revision Workshop
Why is a current account deficit harmful?
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• Deficit a sign of undesirable / uncompetitive exports – leads to reduction in AD, increase in structural unemployment which is expensive to tackle
• Example: possibly the US with its strong $ and inefficient production facilities
Structural issues (unemployment and
growth)
• Dependent on importing food and essential items, which can be problematic politically and cause imported inflation; indicates lack of diversity
• Example: Ethiopia remains dependent on food imports
Over-reliance on other countries
• The BOP must balance, so a deficit on the current account could be financed by hot money / currency on the financial account – hot money is “footloose” and can cause a currency crisis
• Example: many South American countries are struggling following the US interest rate increase
Financed by hot money
A Level Economics – Year 2 (A2) Revision Workshop
Why is a current account deficit not harmful?
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• During times of economic boom, incomes rise and with a high MPM, demand for imports will rise (luxuries, choice etc)
• Example: deficits caused by imports of oil, whose price fluctuates alongside the economic cycle
May be cyclical
• This is the case for many LEDCs – such imports increase LRAS and allow non-inflationary economic growth, which can lead to development
• Example: South Korea’s Import Substitution Industrialisation policy encouraged imports of tech and capital, but not imports of consumer goods and services
May be importing technology and capital
• Because the BoP must balance, there could be an inflow of FDI on the financial account – this increases capital, and therefore AS, leading to LR growth, and a chance to build an export market
• Example: UK manufacturing and hi-tech industry
Accompanied by strong inwards FDI
A Level Economics – Year 2 (A2) Revision Workshop
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Producing for a larger worldwide market means that businesses can benefit from economies of
scale
Competition forces prices down due to increased number of
suppliers, and lower production costs
Greater variety of goods and services, different cultures and
their products
Greater specialisation according to comparative advantage allows
output to increase from the same inputs
Countries that trade with each other rarely go to war –
improves international relations and global confidence
Trade is not just in consumer goods but in capital goods. Also
MNCs and global production encourages diffusion.
A Level Economics – Year 2 (A2) Revision Workshop
Theory of Comparative Advantage
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Phon
es
Jeans
120
70
Phon
es
Jeans
90
60
A B
Countries should specialise in producing the goods that they can produce at a lower opportunity cost than other countries and then trade. Total world output will rise as a result of the increase in productivity.
Which country has an absolute advantage in producing phones and jeans?
A Level Economics – Year 2 (A2) Revision Workshop
Theory of Comparative Advantage
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Phon
es
Jeans
120
70
Phon
es
Jeans
90
60
A B
Countries should specialise in producing the goods that they can produce at a lower opportunity cost than other countries and then trade. Total world output will rise as a result of the increase in productivity.
Which country has comparative advantage in producing phones?
Give up 0.583 jeans to make 1
phone
Give up 0.667 jeans to make 1
phone
Country A has the comparative advantage in producing phones
A Level Economics – Year 2 (A2) Revision Workshop
Theory of Comparative Advantage
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Phon
es
Jeans
120
70
Phon
es
Jeans
90
60
A B
Countries should specialise in producing the goods that they can produce at a lower opportunity cost than other countries and then trade. Total world output will rise as a result of the increase in productivity.
Which country has comparative advantage in producing jeans?
Give up 1.71 phones to make 1 pair of jeans
Give up 1.5 phones to make 1 pair of jeans
Country B has the comparative advantage in producing jeans
A Level Economics – Year 2 (A2) Revision Workshop
Problems with the theory of comparative advantage
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Ignores transport
costs
Ignores externalities
Assumes perfect factor
mobility
Assumes constant
opportunity cost
Static rather than dynamic
Ignores “strategic
industries”
Overly simplistic
A Level Economics – Year 2 (A2) Revision Workshop
Types of protectionist measures29
Tariffs
Quotas
Embargoes
Non-tariff barriers /red tape
Export subsidies
Boeing (US) & Airbus
(France)
China’s hefty tariffs on US
poultry
Algeria’s car import quotas
– and Volkswagen’s production in
AlgeriaEU and Russia sanctions
Safety regulations on
imports
A Level Economics – Year 2 (A2) Revision Workshop
Why do countries use protectionist measures?
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Infant industry and sunset industry argument• New industries need time to benefit from economies of scale and become competitive enough to survive international
competition; in old industries, workers need time to retrain
Improve economic diversity
• Economies don’t want to suffer from a “resource curse” or struggle with over-reliance on one industry
Protect jobs and encourage growth• Import Substitution strategies can increase AD, and since demand for labour is a derived demand, jobs are protected
Strategic industries argument• These could include food, weapons, energy, water etc
A Level Economics – Year 2 (A2) Revision Workshop
29Protectionist measures can protect jobs, especially for low-paid or low-skilled workers who would otherwise struggle to find work
Low-skilled workers are often occupationally and geographically immobile, and may work in industries which are increasingly suffering from competition from low-cost producers overseas
Thousands of jobs in the UK were lost in 2015 from the closure of Tata’s and SSI’s steel-plants in places such as Scunthorpe and Glasgow due to Chinese competition. Many workers and MPs believe that subsidies would have helped prevent the crisis.
However, overseas manufacturers are more competitive and efficient, so it is better for the UK economy if cheap steel is imported – it keeps down cost-push inflationary pressures, and can stimulate steel-using UK industries, such as car manufacturing.
Furthermore, steel subsidies to protect against overseas competition would be expensive and difficult to justify in the current economic climate of continued austerity. The money could be better spent providing retraining for displaced workers.
The benefits of protectionist measures, such as subsidies, in order to protect jobs, will only be felt in the short-term; in the long term they are likely to prove too costly. The gov’t should instead help with retraining and improving occupational mobility of steel workers.
A Level Economics – Year 2 (A2) Revision Workshop
Exchange rate movements – appreciation or depreciation?
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Increased demand for £
Decreased demand for £
Inc D for £
Decreased supply of £
Increased supply of £
A Level Economics – Year 2 (A2) Revision Workshop
Additional ActivitiesMore detail on the changing nature of international trade
Calculating comparative and absolute advantage
Analysis of the role of the WTO
Understanding Optimal Currency Areas
Evaluating Brexit
Types / levels of economic integration
Evaluating the impact of changing exchange rates
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