A2 econ session 3
- 1. A Level Economics – Year 2 (A2) Revision Workshop Session 3 International Trade and Exchange Rates 26
- 2. Welcome Back Settle down quickly and get ready to play The Great Economics Snail Race
- 3. 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!
- 4. 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 annual rise in GDP (as a percentage) in 2015? 1
- 5. 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 of unemployment (LFS measure) in 2015? 2
- 6. 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
- 7. 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 rate that was closest to 2.0% in 2015? 4
- 8. A Level Economics – Year 2 (A2) Revision Workshop Session 3 International Trade and Exchange Rates 26
- 9. A Level Economics – Year 2 (A2) Revision Workshop Session 3 Outline 26 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
- 10. 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
- 11. 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
- 12. A Level Economics – Year 2 (A2) Revision Workshop The changing pattern of global trade 26 • 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%
- 13. A Level Economics – Year 2 (A2) Revision Workshop Relative share of world exports 26 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
- 14. 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 26 Energy Agriculture and Energy Agriculture Africa US & Canada
- 15. A Level Economics – Year 2 (A2) Revision Workshop Drivers of change in the global trade pattern 27 • 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)
- 16. A Level Economics – Year 2 (A2) Revision Workshop The Balance of Payments Accounts - Outline 27 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)
- 17. A Level Economics – Year 2 (A2) Revision Workshop Why is a current account deficit harmful? 28 • 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
- 18. A Level Economics – Year 2 (A2) Revision Workshop Why is a current account deficit not harmful? 28 • 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
- 19. A Level Economics – Year 2 (A2) Revision Workshop Do people care about BoP issues? 28
- 20. A Level Economics – Year 2 (A2) Revision Workshop 28 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.
- 21. A Level Economics – Year 2 (A2) Revision Workshop Theory of Comparative Advantage 28 Phones Jeans 120 70 Phones 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?
- 22. A Level Economics – Year 2 (A2) Revision Workshop Theory of Comparative Advantage 28 Phones Jeans 120 70 Phones 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
- 23. A Level Economics – Year 2 (A2) Revision Workshop Theory of Comparative Advantage 28 Phones Jeans 120 70 Phones 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
- 24. A Level Economics – Year 2 (A2) Revision Workshop Problems with the theory of comparative advantage 28 Ignores transport costs Ignores externalities Assumes perfect factor mobility Assumes constant opportunity cost Static rather than dynamic Ignores “strategic industries” Overly simplistic
- 25. A Level Economics – Year 2 (A2) Revision Workshop Types of protectionist measures 29 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
- 26. A Level Economics – Year 2 (A2) Revision Workshop The Tariff Diagram 29 A B AB CD C D
- 27. A Level Economics – Year 2 (A2) Revision Workshop Why do countries use protectionist measures? 29 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
- 28. 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.
- 29. A Level Economics – Year 2 (A2) Revision Workshop Exchange Rates – Key Terms 30
- 30. A Level Economics – Year 2 (A2) Revision Workshop Exchange Rates – Key Terms 30
- 31. A Level Economics – Year 2 (A2) Revision Workshop Exchange rate movements – appreciation or depreciation? 31 Increased demand for £ Decreased demand for £ Inc D for £ Decreased supply of £ Increased supply of £
- 32. A Level Economics – Year 2 (A2) Revision Workshop Additional Activities More 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 32
Editor's Notes
- #21: Data from the 2015 Pink Book – the data for the Financial Account has been simplified. Worth pointing out that in theory it should balance but in practice we need to use a Net Errors and Omissions term
- #26: Chart comes from here: c
- #33: Algerian car import quotas: http://country.eiu.com/article.aspx?articleid=343929018&Country=Algeria&topic=Economy&subtopic=Forecast&subsubtopic=Policy+trends&u=1&pid=93913793&oid=93913793&uid=1 Boeing and Airbus have both received subsidies from their respective governments China imposed a 104.2% tariff on imports of US poultry a few years ago in the tit for tat trade wars between the two countries EU-Russia embargoes and sanctions – tit for tat - http://www.bbc.co.uk/news/business-28539928