The Global Economy Real-Life Examples

On Paper 1s, you are expected to use real-life examples in your arguments. This is a list of case studies, related to each part of the syllabus, you could keep in mind whilst answering a question. 

However, just stating a real example is not enough; You are expected to embed it in your evaluation. Get to know the content first!

This is not meant to be a list of examples you have to strictly memorize, but simply a list of cases you can keep in mind when evaluating an economic concept. The best way to learn real-life examples is to start reading economic news articles.

4.1 Benefits of International Trade

• Comparative Advantage (and limitations):

• Taiwan has a comparative advantage in semiconductor (microchip) production

  • • + This means they can make faster and cheaper processors than anywhere else, increasing worldwide IT efficiency

    • - The country is so specialized in this industry that no other country can catch up in the next decades, giving Taiwan great leverage and power others deem unfair

• France has a comparative advantage in the production of wine and cheese, both due to more favorable climate conditions as well as more expertise in doing so. 

  • • + This means they can produce more of this and less of products that are less efficient

    • - Since factors such as transportation costs are ignored in the theory of comparative advantage, it may still be more economical to produce elsewhere

• Australia has a comparative advantage in agricultural products such as beef, due to the vast amount of land they have

  • • + This means countries like China, who has specialized in rice, does not have to give up rice production for cows

    • - However, Australia is far away from most countries and transportation of raw meat is costly
      
      

4.2 Types of Trade Protection + 4.3 Arguments for Trade Protection

• Tariff:

  • • The US imposed tariffs on imported steel in 2018

      • • + This helped protect the old and inefficient domestic steel industry

        • + The US is such a big economy that other countries did not dare to retaliate with tariffs

        • + This generated additional government revenue

        • - This increased prices for consumers, such as car manufacturers or construction firms

        • - Foreign firms earned less from their exports

• Quota:

  • • The US imposed a quota on Japanese car imports in the 80s (Source)

      • • + This helped protect the struggling domestic car industry

        • + This brought in more investment into the American car firms, leading to 8 new factories and 100,000 new jobs

        • - This made cars more expensive (~8%) to consumers, who spent a total of ~$5B more money

        • - Japanese car firms moved production to the US, which created jobs and investment, but challenged the US car firms who now had more competition

• Subsidy:

  • • The EU has a system called "Common Agricultural Policy", providing subsidies to farmers, with the aim of exporting more

      • • + The subsidies help keep prices of important food low, benefiting consumers

        • + The subsidies encourage domestic production of important food

        • - Other countries, such as the US, have protested and retaliate with tariffs

        • - It costs the EU quite a lot of money

• Administrative Barriers:

  • • China banned the imports of goods destined for landfills or recycling a few years ago

      • • + This reduced the amount of waste in China, improving environmental standards

        • - Western countries who shipped trash to China now had to find other destinations
          
          

4.4 Economic Integration

• Free Trade Area:

  • • The North American Free Trade Agreement (NAFTA) is a free trade area between Canada, the US, and Mexico

      • • + It increases trade flows between the nations

        • + It allows for many goods to be produced in Mexico at a cheaper cost than in the US, such as electronics and cars. This increases consumer surplus

        • - It means Mexican businesses outcompete American ones, potentially increasing unemployment and current account deficits in the US

• Customs Union:

  • • The South African Customs Union (SACU) is a customs union with 5 south African members: Botswana, Eswatini, Lesotho, Namibia, and South Africa

      • • + This increases trade flows between the member nations

        • + Common import policies means there is less outside competition for all member states

        • - Member states sometimes have different desires, making new policies difficult to create

        • - The tariffs on non-members make imported goods more expensive, reducing consumer surplus

• Common Market:

  • • The European Economic Area (EEA) is a market with all EU member states, Norway, Iceland, and Liechtenstein

      • • + This has standardized many regulations, improving well-being of consumers and confidence in markets

        • + This added confidence ans stability has increased foreign investment

        • - EEA members lose autonomy over their own markets

        • - EEA members become heavily reliant on other EEA economies for trade

• Monetary Union:

  • • The Eurozone is the group of nations that use the Euro (€) as its currency

      • • + This has further improved stability

        • + Trade is made significantly easier between Eurozone members, as Greek olive farmers can be paid in the same currency as German olive packaging firms

        • - The currency is controlled by one central bank, who will have to make decisions on every country's behalf

        • - Not every country is in the same situation, so when Greece experienced a financial crisis, the central bank could not just print money to bail them out as this could have caused inflation in other Eurozone member countries

4.5 Exchange Rates

• Currency Appreciation:

  • • Japan experienced rapid currency appreciation in the late 1980s and early 1990s, tripling the value of the Yen (¥) between 1985 and 1995 (Source)

      • • + This improved living standards and real incomes of many Japanese citizens, as their money got them much further when buying US goods

        • - Imports increased as exports decreased, slowing Japan's GDP growth from over 6% to causing a recession

        • - Japanese export-oriented firms (Toyota, Sony, etc.) lost out on lots of sales abroad

        • - However, the yen kept on appreciating, as investors speculated its price would go up (the exchange rate was not corrected by the current account deficit)

• Currency Depreciation:

  • • Argentina experienced rapid currency depreciation in the late 1990s (Source)

      • • + While this should in theory increase exports and cause growth...

        • - It caused severe imported inflation (as imports were now more expensive)

        • - It made it difficult to pay off loans from other countries, causing chaos

• Currency Devaluation:

  • • The US attempted to devalue its own currency in 1985, by getting its own, as well as other countries', central banks to sell their dollar reserves (named the Plaza Accord) (Source)

      • • + This should have in theory helped exports and turn the US current account deficit into a surplus, which it did compared to Western countries

        • - However, the US still had a trade deficit with Japan, as they had administrative barriers on imports, and the plan was reversed just 2 years later (named the Louvre Accord)

        • - It also led to Japan's currency appreciation, which led to detrimental effects for Japan's economy - they are in many ways still in recovery(!)

• Fixed Exchange Rate:

  • • Thailand's central bank had imposed a fixed exchange rate with the dollar in the years leading up to 1997

      • • + This increased stability in the economy, and thanks to increased investment, they had economic growth of over 9% a year in the decade prior

        • - However, speculators wanted to see how much dollar reserves the Thai central bank really had, and therefore sold lots and lots of Thai Baht (in an attempt to break the fixed rate). This meant the central bank had to sell USD to buy the Baht again. But speculators kept on doing so, until the Thai bank stopped propping the value up because they had run out of funds. The Thai economy collapsed, and caused the 1997 Asian financial crisis (Source)

• Managed vs. Floating Exchange Rate:

  • • Denmark has its own currency (the DKK), but the Danish central bank tries to manage it so it doesn't gain or lose any significant value compared to the Euro.

      • • + This is very beneficial for the Danish economy, which, as part of the European Union, has enormous trade amounts with countries who use the Euro, such as its neighbor Germany.

        • + In recent years, due to economic uncertainty, the Euro has gained significant value compared to other smaller currencies, such as the Norwegian Krone, which has lost 30% of its value the last 10 years (with respect to the Euro). 

        • + However, since Denmark has this managed, they have avoided the severe currency depreciation that its neighbors Norway and Sweden have experienced.

        • + In Norway and Sweden, since a lot of their imports come from Euro-countries, they are currently experiencing extra inflation, that Denmark is nicely avoiding.

        • + Denmark is a strong and stable economy, and they have the resources to keep this exchange rate, and avoid the speculation that affected Thailand in the 90s.

        • - Should the Euro lose its value compared to others, the DKK will do so too, so Denmark has lost significant currency autonomy.

        • - The Euro has for example lost its value against the US dollar, and so therefore the DKK has done so, too. 

4.6 Exchange Rates

• Current Account Deficit Examples:

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