Chapter 5

Macroeconomics II – The international

economy

Outcome
By the end of this session you should be able to:

 explain the concept of the balance of payments and its implications for
government policy

 identify the main elements of national policy with respect to trade

 explain the impacts of exchange rate policies on business

 explain the concept of globalisation and the consequences for businesses and
national economies

 explain the role of major institutions promoting global trade and development

 identify the impacts of economic and institutional factors using the PESTEL
framework

and answer questions relating to these areas.

The underpinning detail for this chapter in your Integrated Workbook can
be found in Chapter 5 of your Study Text

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Chapter 5

Overview

International Trade
trade agreements

Balance of THE
INTERNATIONAL Globalisation
payments
ECONOMY

Institutions
encouraging PESTLE
free trade

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 Macroeconomics II – The international economy

Introduction

 Why should we trade with other countries? Do we need to protect domestic

industries? If so, how? What types of trade arrangements exist?

 How should we understand and manage the balance of payments?

 How will globalisation affect businesses and consumers?

 What is the role of different organisations in global trade?

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Chapter 5

International trade

2.1 Benefits of international trade

 Greater choice of goods. e.g. food that cannot be grown

domestically due to climate

 Specialisation Countries can specialise in producing

goods where they have an advantage.

 Greater economies of scale will Access to larger global markets result in

result. lower costs (and lower prices?)

 Extra competition Should result in lower costs and/or

better products

 The extra demand from exports However may get more imports instead.
should reduce unemployment

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 Macroeconomics II – The international economy

2.2 Protectionism

Protectionism

Arguments for Arguments against Methods

 Employment  Inefficiency  Tariffs

 Infant industries  Resource  Quotas

misallocation
 Declining industries  Hidden restrictions
 Cost of living rise
 Unfair competition  Subsidies
 Retaliation
 Protect balance of
payments

 Security

 Raise revenue

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Chapter 5

Trade Agreements

Bi-lateral and multi-lateral Free trade area

 between two or more countries  = multi-lateral free trade
agreement in one
 eliminate quotas and tariffs
geographical area
 e.g. CER Australia/NZ
 e.g. NAFTA

Customs union Single market

 = free trade area + a common  = customs union + common
external tariff. policies on product regulation
+ free movement of
 May use different import
goods/services and labour
quotas.
 e.g. ECOWAS, EU
 e.g. MERCOSUR

Economic Union
 = single market + a common currency.
 e.g. Eurozone

Illustrations and further practice

Now try TYUs 1 to 5 from Chapter 5

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 Macroeconomics II – The international economy

Balance of payments

4.1 Balance of payments

An account showing the financial transactions of one nation with the

rest of the world over a period of time.

 The balance of payments is split into three parts:

– current account (goods and services)

– capital account (e.g. buildings) and

– financial account (e.g. cash flows)

 Current account + capital account + financial account + balancing items = 0

4.2 The current account

This is composed of two parts.

 Visible trade This is trade in goods.

 Invisible trade Services, investment income and transfers of money

between individuals and national bodies.

Current account balance

 A deficit (surplus) on the current account will be balanced by a surplus (deficit),

that is a net inflow (outflow) on the combined capital and financial accounts.

 Generally a surplus balance is good, indicating a growing economy.

 However, a deficit means a decrease in spending power (and a net withdrawal

from the circular flow), which is deflationary.

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Chapter 5

4.3 The capital and financial accounts

 Show transactions in a country’s external assets and liabilities.

 Record capital and financial movements by firms, individuals and governments.

 E.g. foreign direct investment

4.4 Equilibrium

 Concerned about persistent (“fundamental”) disequilibria in key areas.

– persistent deficits on their current accounts (E.g. UK)

– persistent surpluses on their current accounts (E.g. Japan)

 Causes of a structural deficit in the balance of payments current account

Import penetration Poor export performance

 Growth in consumer spending is  Willingness and ability of domestic

often largely supported by imports. producers to supply abroad.

 Imports become more competitive  Price competitiveness of exports.

 Domestic currencies overvalued  Firms in some countries tend to

have more surplus capacity
 Foreign currencies undervalued

 Domestic producers have lacked

competitiveness

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 Macroeconomics II – The international economy

4.5 Policies to deal with a current account deficit

 Do nothing A floating exchange rate system will automatically deal with

the problem

 Devalue the The currency could be deliberately devalued (usually as a

currency one off sudden movement) or depreciated (usually more
slowly) if using a fixed (or dirty floating) exchange rate
system.

 Deflate the Reduce the demand for imports. May result in

economy unemployment.

 Protectionism e.g. import controls

 Supply side Domestic firms could be helped to make them more

policies competitive.

Illustrations and further practice

Now try TYUs 6 to 9 from Chapter 5

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Chapter 5

Globalisation

5.1 Definition

‘the growing economic interdependence of countries worldwide through

increasing volume and variety of cross-border transactions in goods
and services, free international capital flows, and more rapid and
widespread diffusion of technology’.(IMF)

 Make the distinction between

– Internationalisation – increasing spread of economic activities

– Globalisation – involves greater integration and convergence

5.2 Factors driving globalisation

 Improved communications E.G. The internet and mobile telephony.

ICT allows longer supply chains

 Political realignments E.g. Political change in China

 Growth of global industries E.g. McDonalds and Coca Cola

and firms

 Cost differentials E.g. off-shoring to save costs

 Trade liberalisation E.g. removal of trade barriers (WTO)

 Liberalisation of international E.g. developing countries have much

capital markets greater access to capital for funding growth

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 Macroeconomics II – The international economy

5.3 Impacts of globalisation

 Industrial relocation E.G. offshoring to access cheaper

production costs, also Nissan investing in
UK to access EU without trade barriers

 Emergence of growth markets E.g. China opening up to western firms,

tastes widening leading to local product
being in demand more widely

 Access to markets and E.g. selling via the internet. More players
enhanced competition in the market means greater
competitiveness and lower prices.

 Cross-national business E.g. In 2013, Liberty Global Inc.

alliances and mergers (multinational telecoms company) acquired
UK based Virgin Media to expand its reach
into the European cable market.

 Widening economic divisions E.g. "digital divide" – rich vs poor.

between countries

Illustrations and further practice

Now try TYU 10 from Chapter 5

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Chapter 5

Institutions encouraging free trade

6.1 World Trade Organisation (WTO)

 Roles
– to ensure compliance of member countries with previous GATT
agreements
– to negotiate future trade liberalisation agreements
– to resolve trading disputes between nations.

 Opposed to the development of trading blocs and customs unions such as the
EU and NAFTA

6.2 The European Union

 free trade and free movement of labour exists between member states

 common external tariffs apply to imports from non-member states.

6.3 The Group of Seven (G7)

 Canada, France, Germany, Italy, Japan, the United Kingdom and the United
States. Used to be the G8 but Russia were suspended in 2014 and have stated
that they won’t re-join.

 The G7 summit has consistently dealt with:

– Macroeconomic management
– International trade
– Energy issues and climate change
– Development issues and relationships with developing countries
– Issues of international concern such as terrorism and organised crime.

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 Macroeconomics II – The international economy

External analysis of the macro

environment
7.1 PESTEL analysis

 Political

 Economic

 Social

 Technological

 Environmental

 Legal

Democracy and rule of law. The political environment is determined in

most countries by the democratically elected government. Companies
must adhere to the laws of the countries they operate in.

Illustrations and further practice

Now try TYUs 11 to 16 from Chapter 5

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Chapter 5

You should now be able to answers all the questions from chapter 5 of the
Study Text and questions 104 – 125 from the Exam Practice Kit.

For further reading, visit Chapter 5 from the Study Text.

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