Globalisation and International Trade

Assignment Brief

Question 1

What are the economic, political and cultural drivers of globalization?

Question 2

What does the law of comparative advantage state?

Question 3

What are tariffs and non-tariff barriers?

Question 4

 What is trade diversion and trade creation?

Question 5

How does the Common Agricultural Policy (CAP) affect trade in the European Union?

Question 6

What is the economic rationale behind trade? Explain with an example.

Question 7

Why do countries adopt policies that restrict international trade?

Question 8

How do countries benefit from being a part of the European Union?

Question 9

Explain why a firm might expand into the international market.

Question 10

What are the factors that limit the success of globalization?

Question 11

What is meant by the devaluation of a currency? How is devaluation related to speculative attacks?

Question 12

Explain the concept of purchasing power parity. What are the essential conditions for purchasing power parity to occur?

Question 13

What is meant by official financing?

Question 14

What is a real exchange rate? How is the real exchange rate between the pound and the euro calculated?

Question 15

Explain the concept of perfect capital mobility.

Question 16

Explain the benefits and drawbacks of fixed and floating exchange rates.

Question 17

What are the different accounts in a nation`s balance of payments? Give examples of transactions that are recorded under each of these accounts.

Question 18

Explain the effectiveness of monetary and fiscal policy under fixed and under floating exchange rates.

Question 19

What are the criteria for the success of an optimal currency zone? Is Europe considered an optimal currency zone?

Question 20

 What are the benefits and disadvantages of the UK joining the eurozone?

Question 21

What is an output gap in an economy?

Question 22

Explain the real business cycle effect graphically.

Question 23

Explain the impact of deflation on economies that are trying to move towards long-run equilibrium.

Question 24

Consider an economy that is in short-run and long-run equilibrium. If there is a drop in consumer confidence, how will this impact the equilibrium? Explain diagrammatically.

Question 25

Can an economy`s potential output change over time? Explain your answer.

Question 26

Explain the impact of supply-side shock on long-term equilibrium. Illustrate your answer with a relevant graph.

Question 27

What does the short-run Phillips curve show?

Question 28

What are the views of the new classical economists and the gradual monetarists with regards to the speed of adjustment of an economy to long-run equilibrium?

Question 29

Why is it important for businesses to understand the interest rate path? How do companies use debt to leverage their financial returns? Illustrate with an example.

Question 30

What does the short-run Phillips curve show?

Question 31

List the three potential ways of measuring the level of output in an economy.

Question 32

How is national income at basic prices calculated from gross national product at market prices?

Question 33

What is fiscal drag?

Question 34

What are the costs of deflation?

Question 35

How does fiscal policy differ from monetary policy?

Question 36

Explain the trade-off between inflation and GDP.

Question 37

What is meant by inflation? How is it measured?

Question 38

What are the different types of unemployment?

Question 39

How do governments manage the economy by controlling aggregate demand and aggregate supply? What are the policy tools used by the central bank of a country?

Question 40

How does inflation targeting affect firms and consumers in an economy?

Question 41

What are the different growth strategies that can be adopted by a firm?

Question 42

How can a firm grow horizontally? What are the benefits of integrating horizontally?

Question 43

What are transaction costs? When are transaction costs likely to be high?

Question 44

What is the hold-up problem? How does the hold-up problem explain vertical integration?

Question 45

What are economies of scope? How is control related to economies of scope?

Question 46

Write a short note on organic growth.

Question 47

Explain the profit-maximizing level of output and profit with respect to the total revenue and total cost curves.

Question 48

Explain the concept of the learning curve.

Question 49

Explain why firms grow vertically.

Question 50

Diversification can reduce a company’s exposure to risk. Explain.

Question 51

1. Explain what is meant by the term horizontal integration.
2.  Evaluate the benefits of mergers in the beer industry?

Sample Answer

Question 1: Economic, Political and Cultural Drivers of Globalisation

Globalisation is shaped by economic, political, and cultural forces. Economically, the search for larger markets, lower production costs, and global supply chains drives firms to expand beyond borders. Political drivers include trade agreements, regional blocs like the EU, and policies that promote foreign investment. Cultural drivers stem from increased communication, migration, and global media, which spread ideas and lifestyles across societies. Together, these drivers encourage greater integration of economies and the flow of goods, services, capital, and people worldwide.

Question 2: The Law of Comparative Advantage

The law of comparative advantage explains that countries should specialise in producing goods and services where they have a lower opportunity cost compared to others. Even if one country is less efficient in producing all products, it still benefits from focusing on what it does best relative to others. Through trade, both countries can consume more than they could in isolation. This principle is the foundation of international trade and supports specialisation and efficiency.

Question 3: Tariffs and Non-Tariff Barriers

Tariffs are taxes imposed on imported goods, making them more expensive and less competitive compared to domestic products. They are used to protect local industries or raise government revenue. Non-tariff barriers, on the other hand, include quotas, import licences, product standards, and other regulations that restrict trade indirectly. While tariffs are more visible, non-tariff barriers are often harder to identify but can be equally restrictive to free trade.

Question 4: Trade Diversion and Trade Creation

Trade creation occurs when a trade agreement allows consumers to buy goods at lower prices from more efficient producers within the bloc. Trade diversion happens when imports shift from a cheaper producer outside the bloc to a more expensive one inside it, simply due to preferential treatment. While trade creation benefits economic welfare, trade diversion may reduce overall efficiency. Both are common outcomes of regional integration agreements.

Question 5: The Common Agricultural Policy (CAP) and EU Trade

The Common Agricultural Policy (CAP) provides subsidies and price supports to farmers in the European Union. While it protects farmers’ incomes and stabilises food supply, it has trade-distorting effects. By subsidising EU farmers, CAP makes their products cheaper on global markets, often disadvantaging producers in developing countries. It also encourages overproduction, which may lead to surplus exports. Critics argue it reduces global efficiency, although reforms have reduced some of its negative impacts.

Question 6: Economic Rationale Behind Trade

The main rationale for trade is that it allows countries to specialise according to comparative advantage, leading to more efficient allocation of resources. For example, New Zealand exports dairy products because it has favourable conditions for farming, while it imports electronics from East Asia where production is more efficient. This exchange benefits both countries by expanding consumer choice and lowering prices, while also supporting growth and innovation.

Continued...