Macroeconomics 2

Front 1

Why do countries trade?

Back 1

1) Most efficient use of scarce resources.

2) More variety of and better quality goods and services.

3) Allows countries to specialise.

Front 2

What is the main benefit of international trade?

Back 2

It permits countries to specialise, increasing global output. This increases global economic welfare since countries can produce goods and services which they are most efficient at producing and trade the surplus for other goods and services.

Front 3

Present international specialisation as a simple model, involving 2 countries.

Back 3

Front 4

What is specialisation for countries?

Back 4

When a country focuses on producing a good or service where it's cost if production are lowest.

Front 5

What is 'Absolute advantage'?

Back 5

Where a country is more efficient than others at producing a particular good or service. This implies they should specialise in this product and trade the surplus with other countries, increasing world production.

Front 6

What are the advantages of international trade and specialisation for consumers?

Back 6

1) Access to a wider range of goods and services.

2) Access to lower priced and better quality goods and services.

3) Income from exports finances spending on imports ab can increase GDP and standard of living

4) Creates employment in export industries.

5) Increased global output and economic welfare.

Front 7

What are the advantages of international trade and specialisation for producers?

Back 7

1) Increased competition increases efficiency and innovation.

2) Firms can increase their market size and benefit from economies of scale.

3) Firms have access to cheaper raw materials and components.

Front 8

What are the disadvantages of international trade and specialisation?

Back 8

1) Countries can become dependent on imports of essential goods and services from other countries. Political and international disputes that affect these imports could have a serious effect.

2) Specialisation in a particular good or service can lead to increased vulnerability to a fall in global demand, leading to unemployment in export industries.

3) Environmental costs arising from increased production and low environmental standards in developing countries and transport.

Front 9

What is the balance of payments?

Back 9

A record of economic transactions between residents f a country and the rest of the world.

Front 10

What is the current account of the balance of payments?

Back 10

This records money flow between the UK and overseas residents arising from trade in goods and services (exports and imports), income from assets and overseas transfers (payments where nothing is received in return. It's an important measure of the UK's relative performance in the global economy.

Front 11

What are exports?

Back 11

Goods and services sold to foreigners by UK firms. The money received will enter the UK. Exports are a positive on the current account.

Front 12

What are the 2 types of export?

Back 12

Visible exports: Goods sold to foreigners by UK firms (E.g. Whiskey, Weapons)

Invisible exports: Services sold to foreigners by UK firms (e.g. banking, insurance and tourism).

Front 13

What are imports

Back 13

Goods and services bought by UK residents and firms from foreigners. The money paid will leave the UK and go to the foreign country. Imports are a negative on the current account.

Front 14

What are the 2 types of imports?

Back 14

Visible imports: Goods bought by UK residents or firms from foreigners. (E.g. Cars, tables, etc.)

Invisible imports: Services bought by UK residents and firms from foreigners (E.g. tourism).

Front 15

What is income from investment?

Back 15

Profits earned by foreign companies operating in the UK or UK companies operating in other countries.

Front 16

What are transfers?

Back 16

Money earned by foreign nationals in the UK and sent back to their home country. Also, foreign aid, contributions to the EU, money gifts and donations to charity.

Front 17

Is net income from investment and transfers a positive or negative on the current account?

Back 17

Either, depending on whether more comes into the UK (positive) or goes out (negative).

Front 18

Net trade in goods + Services =

Back 18

Net trade in goods + Net trade in services.

Front 19

Current account balance =

Back 19

Net trade in goods and services + Income + Transfers

Front 20

When does a current account deficit occur?

Back 20

When more money is leaving the country than entering it. (Exports and income and transfers from abroad are less than imports and income and transfers going abroad).

Front 21

When does a current account deficit matter?

Back 21

It depends on:

1) The size duration and cause if the deficit.

It is less of a problem if:

2) The size of the deficit is a small % of GDP.

3) A boom in the economic cycle causes an increase in imports if raw materials and components that can then be exported as finished goods.

4) It is caused by the import of capital goods and technology that enables economic growth and helps increase long-term competitiveness.

Front 22

When does a current account surplus occur?

Back 22

When more money is entering the country than leaving it. (Exports and income and transfers from abroad are larger than imports and income and transfers going abroad).

Front 23

What are the effects of a current account surplus?

Back 23

1) May increase total spending in the economy, leading to demand pull inflation.

2) May mean the country can pay off international borrowing.

3) May reduce unemployment as increased exports require increased output.

Front 24

What are the causes of a current account surplus?

Back 24

1) High levels of investment, innovation and productivity leading to an increase in competitiveness.

2) Low exchange rate/inflation leads to more expensive imports and cheaper exports.

3) Absolute advantage in many goods and services, so lower costs of production than competitors.

4) A low level of economy growth, so consumers and firms spend less on imports.