Question spotting for F585 Economics The Global Economy OCR A level June 2011

Original post by Hits1

If the 20 marker was regarding trade liberalisation, I would assume this is possibly the correct way of doing it:

Trade Liberalisation is the removal of barriers to trade, deregulation aimed at opening up a market or industry to full competition.

One benefit of Trade Liberalisation/free trade is that countries can achieve economies of scale - this is the ability for a country to produce at a larger scale and therefore results lower average costs enabling it to gain a comparative advantage and economic efficiency. Therefore this is will enable goods and services at cheaper prices hence a gain in consumer surplus/welfare. If countries can specialise in what they produce, other countries can also trade what they specialise in especially technological imports which determine the long run productive capability of an economy. However it depends as economies of scale and eventually can lead to diseconomies of scale whereby the result of economies growing too rapidly/much resulting in higher average costs, such an outcome would imply allocative and productive inefficiencies. Another problem is domestic companies may wish to protect thier infant industries therefore this can only be done through trade barriers and subsidies, as these premature industries may lack the ability to compete through price and other factors as international competitors are reaping the benefits of enormous economies of scale.

Another benefit of trade liberalisation/free trade is that by reducing the barriers leads to trade creation, this occurs when consumption switches from high cost producers to low cost producers - therefore a gain in consumer surplus/welfare. Therefore this enables consumers/firms to import goods and services cheaper without having to pay a tariff - and an increase in imports than otherwise if there was protectionism. [Insert Trade Creation Diagram Here] However... this will impose a threat on domestic firms as they will sell less and there is a loss of producer surplus as they cannot afford to compete with international firms through price and other factors.

Another benefit of trade liberalisation/free trade leads to an increase in exports. An increase in exports therefore improves/corrects the current account deficit. Exports also leads to employment - hence reduces unemployment as the country will potentially need to employ more with the increase in demand for goods and services which the domestic country specialises in. This enables governments to reduce their spending on unemployment benefits, as this is an opportunity cost in which they could spend elsewhere within the economy such as health, education. Export is a component of Aggregate Demand and therefore any increase in exports will lead to an increase in Aggregate demand. [Insert Diagram] However this will depend on many factors. For example the EU; if countries are in a recession, this may not necessarily lead to an increase in exports, as this will widely depend on the disposable incomes of those within the various countries and in addition during this economic cycle - consumer/business confidence is likely to be low therefore may not have such an impact. In addition this would also depend on Inflation - if inflation is high in such countries - then these goods and services are not likely to be as competitive therefore this may lead to a decrease in export led markets.

Another benefit is there will be an increase in Competition/Contestability etc..

I'm not sure.. i hope im on the right track lol sorry for the long answer

Although what else?

your answer is really good add somethings which would argue that its bad and not good and then conclusion and evaultion points and as far i know it will get lyk 18/19

Reply 263

nini27

Original post by Hubb

Domestic unemployment? (more imports so less domestic production needed)
And worth knowing a little about development as may be question on distinguish between ec growth and ec development. And may be a 20marker related to how trade can benefit development. So as long as you know pos/negs of trade, and can stick a few key development terms and concepts in (eg poverty cycle, etc etc) should be fine :smile:

Wouldn't the domestic unemployment seen as a good thing as if the firms are taken out of the market is because they couldn't compete with the other domestic and international firms? So they will 'move' on to another market where they could be more efficient, and face the competition?

Reply 264

Original post by Hits1

You could argue on the other hand depreciation increases the costs of imports for example rising prices for raw materials and components and imported technology - which all assist international competitiveness in the long-run (supply-side) this can lead to an inward shift of AS and increase inflation - domestic inflation problem worse over time and require further currency depreciation to maintain international competitiveness - basically its unsustainable.

Also yes it may lead to increase in exports however there has been a weak global demand which has dampned the beneficial effects of a lower currency - it is harder to export when key markets are in a recession - therefore will not improve international competitveness.

And the other which you have is the elasticiy of demand.. use J-curve theory/concept and marshall lerner

whats the J-curve theory

Reply 265

Hubb

Original post by nik2111

so for that would you say that openning trade can help development in countries through raising GDP from trade sorta thing?
yh i think that domestic unemplyoment is a good point

yeah

and also that it allows developing countries to get foreign currency which is key. then good evaluation point is that yes trade = ec growth for developing countries BUT development needs more than just growth aka health, education, good government etc etc

sorry im being quite vague, frantically revising fp4 maths tonight!!!

Reply 266

Hubb

Original post by nini27

Wouldn't the domestic unemployment seen as a good thing as if the firms are taken out of the market is because they couldn't compete with the other domestic and international firms? So they will 'move' on to another market where they could be more efficient, and face the competition?

yeah that makes sense! but that would be only if they are flexible. so could be an evaluation point to the argument

Reply 267

Original post by nik2111

whats the J-curve theory

it s theory used to explain the trend of falling export income during fluctuations in the exchange rate

for example, if the exchange rate was decreased

elastic goods would increase in demand - cheaper goods, export more
inelastic goods would decrease in value - cheaper goods, demand is the same = less value

so in the short term you lose income as the inelastic goods are reduced in value, but over time, the higher demand for elastic goods will outweigh the losses on the inelastic goods, so the current account will begin to improve

hence the shape of the graph is like a'J'

Reply 268

Original post by nik2111

whats the J-curve theory

Theres a diagram try and find it on google but the theory suggests depreciation does not always imrpove the balance of payments/restore international competitveness ESP in the short run.

If the demand for imports is price inelastic, rising import prices will raise the value of imports, making trade and the current account deficit worse, not better.

If the PED for exports is also inelastic, falling export prices would reduce the value of exports sold, further reinforcing the tendency of the trade and current account worsen.

So basically the current account deficit worsens before it starts to improve. SR= worse LR = Improves

(edited 12 years ago)

Reply 269

Although what arguements can you say against trade liberalisation/free trade???

Reply 270

nini27

Original post by nik2111

perhaps the interest rates is more important to business's therefore exchange rates may not be affective

perhaps business confidence is low no matter what the exchange rate is if confidence is low then countrys cannot be competitive

also devaluing exchange rates will mean imports will go up and countrys need imports as well so in the long run devalueing may not be the saver of all.

thanks

But what do you mean by: "perhaps the interest rates is more important to business's therefore exchange rates may not be affective" ?

Reply 271

Original post by nini27

Wouldn't the domestic unemployment seen as a good thing as if the firms are taken out of the market is because they couldn't compete with the other domestic and international firms? So they will 'move' on to another market where they could be more efficient, and face the competition?

not really, there's pros and cons to every macroeconomic variable

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high unemployment = less tax revenue and more government spending on automatic stabilisers/benefits - governments fiscal position will worsen

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high unemployment also means that there is a contraction in AS due to the hyserisis effect whereby the labour force becomes deskilled when out of work

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high unemployment means people will not be spending more, they have no income, so consumtion will fall, AD will decrease - GDP will contract

HOWEVER...

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high unemployment means masses of labour, people are desperate for jobs and will work for coconuts...this can reduce costs making firms more competitive in the international market

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high unemployment reduces cost-push and demand-pull inflation as firms can reduce costs and people cannot spend money, so AD will contract reducing inflationary pressure - again making firms more competitive

Reply 272

Original post by nini27

thanks

But what do you mean by: "perhaps the interest rates is more important to business's therefore exchange rates may not be affective" ?

if your looking for a counter argument for exchange rates then the obvious one to go for is that depreciating exchange rates means imports are more expensive...this increases output costs - induces cost push inflation so exports are more expensive even though, theoretically they should be cheaper

also depreciating exchange rates makes in more expensive to import capital goods such as machinery, therefore investment would be likely to fall and hence productivity will decrease thereby increasing costs of production and export costs - this will reduce competitiveness

low exchange rates will make exports cheaper (ceteris paribus) so AD will increase, generating demand pull inflation...this will increase domestic price levels hence increasing export prices which will reduce competitiveness

Reply 273

Original post by Hits1

Although what arguements can you say against trade liberalisation/free trade???

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not all economies will benefit - there will be 'winners' and 'losers'

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just because trade has been liberalised does not neccerily mean that international trading will increase....economies would still rather trade in their regional trading blocs due to cheaper transport costs

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this would mean that developing countries would still find it difficult to enter markets even the trade is 'free'

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although it reduces monopoly power, this is only in the short run...in the long run, cross border mergers are likely to increase monopoly power and hence reduce choice for consumers and increase prices

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smaller domestic economies may feel threatened with the entrance of larger economies into the market as they have great power (economies of scale)

Reply 274

Original post by viksta1000

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not all economies will benefit - there will be 'winners' and 'losers'

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just because trade has been liberalised does not neccerily mean that international trading will increase....economies would still rather trade in their regional trading blocs due to cheaper transport costs

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this would mean that developing countries would still find it difficult to enter markets even the trade is 'free'

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although it reduces monopoly power, this is only in the short run...in the long run, cross border mergers are likely to increase monopoly power and hence reduce choice for consumers and increase prices

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smaller domestic economies may feel threatened with the entrance of larger economies into the market as they have great power (economies of scale)

Thats awesome! Also in context, are you just arguing the relevant points FOR protectionism..

Reply 275

Original post by Hits1

Thats awesome! Also in context, are you just arguing the relevant points FOR protectionism..

yeah, most of the points could fit into reasons FOR protectionism :wink:

Reply 276

Original post by viksta1000

yeah, most of the points could fit into reasons FOR protectionism :wink:

any tips for revisen from now till exam?

Reply 277

Original post by nik2111

any tips for revisen from now till exam?

aye, chillout for abit, watch some wimbledom, then have a good kip

wake up refreshed and memorise the heck out of the OCR economics book and just list everything you can relate to the extracts

Reply 278