F585 The Global Economy

The Global Economy

• Macroeconomic Performance• Trade and Integration• Development and Sustainability• The Economics of globalisation• Questions are mainly “essay” type (shorter

and longer) and involve some data analysis• Questions link to pre-release stimulus material• 2 hours 60 marks

Trade and Integration

• Global trade• Exchange rates• Economic integration

AS Economics International Trade - Recap

• International trade has a key role. It enables specialisation and influences:– Output– Employment– Price level

FirmsPurchase from

overseas

Sell overseas

AS International Trade - Recap

• The UK is internationally competitive in which industries?

• Telecommunications• Aerospace engines• Computer Software• Financial services• What competitive advantage does the City of

London have as a financial centre?

AS International Trade - Recap

• AD = C + I + G + (X-M)• What is it called if X is larger than M?• Trade Surplus: the value of exports exceeding the

value of imports• What is it called if M is larger than X?• Trade Deficit: the value of imports exceeding the

value of exports• What sort of categories of trade might the UK

have a Trade Surplus in?

AS International Trade - Recap

• What are the major export destinations and sources of imports for the UK?

AS International Trade - Recap

Advantages gained from international

trade

AS International Trade - Recap

Advantages gained from international

trade

Enables country to specialise

More competition = lower prices / higher quality

Greater variety of products /

services = more choice

Wider range of sources for raw

materials = cheaper

AS International Trade - Recap

Problems arising from international

trade

AS International Trade - Recap

Problems arising from international

trade

Increased competition in domestic markets =

some industries contract

Contracting industries and need to shift

resources = Problem of occupational immobility

of labour

Restrictions on imports

“Red tape”

AS Recap - Protectionism

• The protection of domestic industries from foreign competition. Why?

• Eight methods (or more…!) – how many can you remember?

Protectionism

• Tariffs• Quotas• Voluntary Export Restraint (VER)• Foreign Exchange restrictions• Embargoes• Red Tape• Quality standards• Government Purchasing policies

A2 Trade and Integration

Learning Objectives• Understand what is meant by, and distinguish

between, absolute and comparative advantage in international trade

• Apply the concept of relative opportunity cost to understand comparative advantage

• Interpret data to identify comparative advantage• Understand the terms of trade and a trading

possibility curve• Understand the sources of comparative

advantage

Absolute and comparative advantage

• What determines international trade?• Countries specialise in the production of

certain goods / services which they can produce efficiently. By exporting these they earn revenue to import the goods / services they can’t produce as efficiently

• The goods / services they should specialise in are determined by their absolute and comparative advantages

Absolute and comparative advantage• Absolute and comparative advantage explained

(1)• Absolute and comparative advantage explained

(2)• Absolute advantage: the ability to produce one

good/service more efficiently (lower unit cost) – so more of a good with same amount of resources or same amount of a good with fewer resources

• Comparative advantage: the ability to produce a good/service at a lower relative opportunity cost (a smaller sacrifice in the production of another good/service)

Absolute advantage

• Zambia has an absolute advantage over many countries in the production of copper. It has reserves of copper ore or bauxite so can specialise and produce efficiently. It therefore exports copper.

Absolute advantage on a PPC• Country A has an Absolute Advantage in the

production of both Maize and Wheat. Its PPC lies to the right of Country B showing that due to abundance of resources or efficient techniques it can produce more wheat and maize.

Comparative advantage on a PPC