2.2 The Global Economy

Question 1

Reasons for globalisation

Answer 1

• Fewer tariffs and quotas
• Reduced cost of transport
• Reduced cost of communication
• Increased significance of MNCs

Question 2

Impacts of globalisation on individual countries

Answer 2

• Increase in GDP
• Increase in current account balance
• Risks due to interdependence

Question 3

Impacts of globalisation on governments

Answer 3

• Increase in tax revenue
• Decrease in unemployment

Question 4

Impacts of globalisation on producers

Answer 4

• Access to huge markets
• Access to labour
• Lower costs
• Lower taxation

Question 5

Impacts of globalisation on consumers

Answer 5

• Lower prices
• More choice

Question 6

Impacts of globalisation on workers

Answer 6

• Employment
• New skills
• Unemployment (due to offshoring)

Question 7

Impacts of globalisation on the environment

Answer 7

• Damage to the environment

Question 8

Impacts of lower corporate taxes

Answer 8

• Provides firms with additional funds to expand factors of production
• Incentive for firms to increase investment and thus increase output, GDP and employment
• Can result in firms setting up in the given country instead of other countries, thus increasing productive capacity and total output
• However: less tax revenue
• No guarantee that firms will reinvest the additional capital into expansion

Question 9

Advantages of MNCs/FDI

Answer 9

• Increase capital investment
• Training of local workforce
• Lower unemployment
• Local businesses may benefit from supplying the MNCs with raw materials
• Increased tax revenue
• Improved current account on the balance of payments if exports increase

Question 10

Disadvantages of MNCs/FDI

Answer 10

• Low wages and poor working conditions
• Many MNCs do not train local workers to a high level, preferring to use their own managers and senior staff
• Can drive out local businesses
• Tax evasion
• Repatriation (host country loses out)
• Damage to the environment, external cost left to the government of the host country
• MNCs may only stay a short time in the host country and often move from one country to the next, taking whatever incentives are on offer

Question 11

Advantages of free trade

Answer 11

• Lower prices (for consumers)
• Increased choice (for consumers)
• Lower input prices (for producers)
• Wider markets for businesses (for producers)
• Provides competition for domestic firms (for the economy)

Question 12

Disadvantages of free trade

Answer 12

• Domestic producers forced out of the market
• Structural unemployment

Question 13

Reasons for protectionism

Answer 13

• Preventing dumping
• Protecting employment
• Protecting infant industries
• To gain tariff revenue
• Preventing entry of harmful goods
• Reduce current account deficit
• Retaliation

Question 14

Benefits of tariffs

Answer 14

• Protects infant industries
• Increase government tax revenue
• Reduces dumping

Question 15

Drawbacks of tariffs

Answer 15

• Higher prices (for consumers)
• Lower quality (for consumers), reduces competition -> inefficiency for domestic firms
• Reduces choice (for consumers)

Question 16

Benefits of subsidies

Answer 16

• Lowers prices (for consumers)
• Lowers costs of production (for domestic firms)
• Increases international competitiveness (for domestic firms)
• Increases employment (for the economy)

Question 17

Drawbacks of subsidies

Answer 17

• Opportunity cost (for governments)
• Reduces choice (for consumers), some imports cannot compete

Question 18

Advantages of trading blocs for member states

Answer 18

• Access to a wider market
• Ability to exploit economies of scale
• Lower prices
• More choice
• Higher efficiency
• Lower risk for domestic firms
• Ability to attract increased FDI

Question 19

Disadvantages of trading blocs for member states

Answer 19

• High costs of administration
• Excessive interdependence
• Greater competition for domestic businesses, resulting in falling sales/firms closing down, which could also cause unemployment
• Chance of monopoly
• Market failure
• Reduced independence

Question 20

Advantages of trading blocs for non-member states

Answer 20

• No extra cost of administration
• Higher independence
• No risk of interdependence

Question 21

Disadvantages of trading blocs for non-member states

Answer 21

• Exports are subject to trade restrictions (domestic firms will earn less profit)

Question 22

Factors affecting the demand for a currency

Answer 22

• Interest rates
• Currency speculators
• Demand for exports
• Level of inward FDI