The global economy Revision Notes

Benefits of International Trade

International trade encourages countries to specialise in producing goods and services where they have a comparative advantage. This specialisation leads to increased global efficiency and higher overall output. Consumers benefit from a wider variety of goods and services, often at lower prices, which enhances consumer welfare. Trade can also stimulate economic growth through increased competition, fostering innovation, and facilitating the transfer of technology and knowledge across borders.

Impact of Tariffs

A tariff is a tax imposed on imported goods. Its primary effect is to increase the domestic price of the imported product, making it less competitive against domestically produced alternatives. This typically results in a decrease in imports and an increase in domestic production. While domestic producers may gain from reduced foreign competition, consumers face higher prices, reduced purchasing power, and fewer choices. Tariffs can also provoke retaliatory measures from other countries, potentially leading to trade wars and a contraction of global trade volumes. Governments might use tariffs to protect emerging industries, generate revenue, or address balance of payments deficits.

What is an Exchange Rate?

An exchange rate states how much one currency is worth in relation to another. For example, £1 = $1.25. This allows for conversion when trading internationally. Understanding this value is vital for international economic activities like trade and investment.

Factors Affecting Exchange Rates

The supply and demand for a currency determine its exchange rate. Key factors influencing these include: relative interest rates (higher domestic rates attract foreign capital, causing demand for domestic currency to rise), relative inflation rates (lower domestic inflation makes exports more competitive, increasing demand), economic growth prospects, political stability, and speculative activity. Changes in these factors shift the demand and/or supply curves for a currency, leading to appreciation or depreciation.

Impact of Exchange Rate Changes

A currency appreciation (strengthening) means imports become cheaper and exports become more expensive, potentially leading to a decrease in net exports and a current account deficit. A currency depreciation (weakening) means imports become more expensive and exports become cheaper, potentially increasing net exports and improving the current account balance. These changes affect inflation, economic growth, and employment across economies.

What is Globalisation?

Globalisation refers to the growing interconnectedness of countries through various economic, social, technological, cultural, and political exchanges. Economically, it signifies the increased integration of national economies through international trade, foreign direct investment (FDI), and the movement of capital and labour. This leads to a single global market system.

Key Drivers of Globalisation

Technological advancements, particularly in communication (e.g., internet) and transportation (e.g., containerisation, air freight), have significantly lowered the costs of international transactions. Reduction of protectionist policies like tariffs and quotas by international agreements (e.g., WTO) has also fostered greater trade. The rise of multinational corporations (MNCs) plays a crucial role by coordinating global production and supply chains.

Economic Impacts of Globalisation

Globalisation can lead to increased efficiency due to specialisation and economies of scale, potentially lowering prices for consumers and increasing choice. It can also boost economic growth through increased exports, FDI, and technological transfer. However, it may cause structural unemployment in domestic industries unable to compete with foreign producers, and can exacerbate income inequality. There are also concerns about environmental degradation and the influence of powerful MNCs.

Measuring Globalisation

Globalisation can be measured by various indicators, including the volume of international trade (exports + imports) as a percentage of GDP, the flow of foreign direct investment, and the level of capital and labour mobility across borders. Higher values typically indicate a greater degree of economic integration.