Real-world issue 1
Real-world issue 1 - Who are the winners and losers of the integration of the world’s economies?
Conceptual understandings
The increased interdependence of economies has benefits and costs.
Increased economic integration may result in efficiency, welfare gains and improvements in economic well-being but the benefits may not result in equity.
Key concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention.
4.1 Benefits of international trade
Benefits of international trade, including:
increased competition
lower prices
greater choice
acquisition of resources
more foreign exchange earnings
access to larger markets
economies of scale
more efficient resource allocation
more efficient production
Diagram: free trade illustrating exports when world price is above domestic price
Diagram: free trade illustrating imports when world price is below domestic price
Calculation (HL only): from a diagram, the quantity of exports, quantity of imports, import expenditure, export revenue
Absolute and comparative advantage (HL only)
Gains from trade
Sources of comparative advantage
Opportunity costs
Diagram (HL only): linear PPC showing differing opportunity costs and the potential gains from specialization and trade as a result of comparative advantage
Calculation (HL only): opportunity costs from a set of data in order to identify comparative advantage
Limitations of the theory of comparative advantage (HL only)
4.2 Types of trade protection
Tariffs
Effects on markets and stakeholders
Diagram: showing the effect of a tariff on price, production, consumption, expenditures, revenues, welfare
Calculation (HL only): from a diagram, the effects on stakeholders of tariffs
Quota
Effects on markets and stakeholders
Diagram: showing the effect of a quota on price, production, consumption, expenditures, revenues, welfare
Calculation (HL only): from a diagram, the effects on stakeholders of quotas
Subsidy/export subsidy
Effects on markets and stakeholders
Diagram: showing the effect of a subsidy on price, production, consumption, expenditures, revenues, welfare
Calculation (HL only): from a diagram, the effects on stakeholders of subsidies
Administrative barriers
Standards and regulations
4.3 Arguments for and against trade control/protection
Arguments for trade protection/advantages of trade protection, including:
protection of infant (sunrise) industries
national security
health and safety
environmental standards
anti-dumping
unfair competition
balance of payments correction
government revenue
protection of jobs
Economically least developed country (ELDC) diversification
Arguments against trade protection/disadvantages of trade protection, including:
misallocation of resources
retaliation
increased costs
higher prices
less choice
domestic firms lack incentive to become more efficient
reduced export competitiveness
Free trade versus trade protection
4.4 Economic integration
Preferential trade agreements
Bilateral
Regional
Multilateral (the World Trade Organization)
Trading blocs
Free trade areas/agreements
Customs unions
Common markets
Advantages and disadvantages of trading blocs
Advantages, including:
trade creation (HL only)
greater access to markets offer potential for economies of scale
with freedom of labour, there are greater employment opportunities
membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations
greater political stability and cooperation
Disadvantages, including:
trade diversion (HL only)
loss of sovereignty
challenge to multilateral trading negotiations
Monetary union
Advantages and disadvantages of monetary union (HL only)
The World Trade Organization (WTO)
Objectives and functions
Factors affecting the influence of the WTO, including:
difficulties of reaching agreement on services/primary products
unequal bargaining power of members
4.5 Exchange rates
Floating exchange rates
Determination
Depreciation and appreciation of a currency
Diagram: showing the exchange rate determination and changes in equilibrium in a floating exchange rate system
Calculation: using exchange rates, the price of a good in different currencies
Changes in demand and supply for a currency—factors including:
foreign demand for exports
domestic demand for imports
inward/outward foreign direct investment
inward/outward portfolio investment
remittances
speculation
relative inflation rates
relative interest rates
relative growth rates
central bank intervention
Calculation: changes in the value of a currency from a set of data
Consequences of changes in the exchange rate on economic indicators, such as:
the inflation rate
economic growth
unemployment
the current account balance
living standards
Diagram: AD/AS curves to show potential consequences of changes in the exchange rate on the economy
Fixed exchange rate
Devaluation and revaluation of a currency
How fixed exchange rates are maintained
Diagram: showing how a fixed exchange rate is maintained
Managed exchange rates
Overvalued currencies
Undervalued currencies
Diagram: showing the exchange rate determination and changes in equilibrium in a managed exchange rate system
Fixed versus floating exchange rate systems (HL only)
4.6 Balance of payments
Balance of payments
Credit and debit items
Surplus or deficit on an account
Calculation: elements of the balance of payments from a set of data
Components of the balance of payments
Current account
Balance of trade in goods
Balance of trade in services
Income
Current transfers
Capital Account
Capital transfers
Transaction in non-produced, non-financial assets
Financial account
Foreign direct investment (FDI)
Portfolio investment
Reserve assets
Official borrowing
Interdependence between the accounts
Zero balance in the balance of payments
Credits matched by debits
Deficits matched by surpluses
Relationship between the current account and the exchange rate (HL only)
Diagram (HL only): on exchange rate showing the relationship between the current account balance and the exchange rate
Relationship between the financial account and the exchange rate (HL only)
Implications of a persistent current account deficit in terms of: (HL only)
exchange rates
interest rates
foreign ownership of domestic assets
debt
credit ratings
demand management
economic growth
Methods to correct a persistent current account deficit (HL only)
Expenditure switching
Expenditure reducing
Supply-side policies
Effectiveness of measures to correct a persistent current account deficit (HL only).
The Marshall-Lerner condition and the J-curve effect (HL only)
Diagram (HL only): J- curve with reference to the Marshall Lerner condition
Implications of a persistent current account surplus in terms of (HL only):
domestic consumption and investment
exchange rates
inflation
employment
export competitiveness
Inquiry—possible areas to explore (not an exhaustive list)
The impacts of changes in the exchange rate on different stakeholders and the economy, for a chosen country.
Why a government chooses to manage the exchange rate, for a chosen country.
Methods a government uses to manage its exchange rate and why, for a chosen country.
The patterns of current account deficits/current account surpluses for different countries.
Theory of knowledge questions
Free trade is advocated on the grounds that it leads to greater efficiency. Yet it results in both winners and losers. Do economists have a moral responsibility toward the losers when they advocate free trade?
To what extent would increased economic integration ever be considered undesirable?
Is it ethically sound for economically developed countries to demand that less developed countries remove their trade barriers in the interests of free trade when they continue to provide income support to their farmers? Can one country know what is right for another to do?
To what extent does possession of knowledge carry with it an ethical responsibility?
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