2.4.1 Life in the global economy

Question 1

Globalisation

Answer 1

the process through which an increasingly free flow of ideas, people, goods, services and capital leads to the integrations of economies and societies

Question 2

Foreign direct investment

Answer 2

When businesses or governments invest in other countries

Question 3

International Monetary Fund

Answer 3

Co-ordinates the international monetary policy system, maintains stability, provide adequate finance for world trade and continue without interruption

Question 4

World bank

Answer 4

Lends to developing countries in order to fund projects which will help them raise incomes and make their ecnomies more efficient

Question 5

World trade organisation

Answer 5

Supervises world trading arrangements and trade negotiations and helps resolve disputes between governments

Question 6

MNC

Answer 6

Businesses which are active in more than one country → distribution outlets, factories abroad, selling services abroad aswell

Question 7

Outsourcing

Answer 7

Buying inputs from foreign suppliers, or locating the whole production process abroad → objective is to exploit cost savings, most often lower wage rates

Question 8

globalisation effect on global economy

Answer 8

Increases exports and imports
- Generate income
- New tech can be imported
- Jobs are created
- Incomes rise

• Increases foreign investment
• Workers move to find job opportunities
• Governments collaborate and agree new rules

Question 9

factors contributing to globalisation

Answer 9

• Tech
• Offshoring
• Increased liberalisation
• Increased harmonisation of laws

Question 10

trade liberalisation as a factor of globalisation

Answer 10

• Becomes easier to trade when trade barriers dismantled → more firms attracted to doing business internationally
• After WWII, general feeling of the need to bind nations together and prevent further catastrophe
• links with capital market utilisation

Question 11

capital market utilisation

fdi = a substantial investment of a firm into a foreign country

Answer 11

• Means of stimulating economic growth in developing countries
• FDI helps big businesses and governments to expand productive capacity → can get closer to market, or extend to a place with lower rage rates
• FDI usually comes from one rich developed country from another, but also helps other emerging economies (china)
• However, interdependence means economic instability can spread from one economy to another

Question 12

political change as a factor of globalisation

Answer 12

• Reduced cost of transportation and communications → made it easier and cheaper to communicate with other countries and to travel to them, so amount of trade increases
• Revolutions in transport systems reducing transport costs; air freight has become cheap for high value bulk products
• Forging international relationships has become easier → ongoing improvements in digital platforms also make trade and communications much easier

Question 13

consequences of globalisation

diversification, FDI, outsourcing, trade liberalisation, migration

Answer 13

• Diversification: selling more than one product or the same product in more than one market → means of spreading risk
• FDI (foreign direct investment : businesses set up production or distribution facilities in other countries, often to benefit from low wage labour market overseas, or to expand to new markets
• Outsourcing: shifting prod process overseas to reduce input costs
  exploitative , takes skilled workers from local businesses
• Trade liberalisation: process of limiting and reducing barriers to trade so that economies involved move closer to free trade
• Seen with the collapse of trade, democratisation of trade to create free trade economies
  International capital flows: sums of money that move from one economy to another
• Increased migration: people move to where there are job opportunities, made easier by breakdown of authoritarian regimes and the creation of trading blocs with reduced trade barriers between countries

Question 14

arguments for globalisation

Answer 14

• Brings wealth and development
• Billions of people have a better standard of living
• Binds countries together increasing stability
  greater/faster economic growth
• Trade liberalisation → more opportunity due to communication
• Allows for specialisation: country can specialise in market/product and excel → products have added value to aid the economy

Question 15

arguments against globalisation

Answer 15

• Cultural imperialism: dominance of US and Western culture
• Developed countries exploit less well developed nations (western)
• Workers in developing nations
• Structural change can lead to period of unemployment as resources are allocated

Question 16

benefits of globalisation (free trade)

choice, market, specialisation, competition, FDI

Answer 16

• Consumers have a wider choirce of goods with lower prices. Important factor in falling prices of manufactured goods
• Allows domestic firms to export a wider market: export lef growth has been important in increasing economic welfare in asian countries
• Enables increased specialisation of production; firms can benefit from economies of scale, leading to lower average costs and increased efficiency
• Causes increased competition between different firms and countries: puts pressure on firms to be increasingly efficient and offer better products for consumers
• Increased foreign direct investment: glob encourages firms to invest in other countries (relocation to indian call centres with lower wage costs) → creates jobs in developing C as well as growth and foreign exchange; have higher wages than native companies even though their wages are low

Question 17

problems with globalisation

Answer 17

• Developing countries struggle to compete → start up in manufacturing may face higher costs than advanced western industries, who will benefit from years of experience and economies of scale
• Keeps developing countries producing primary products → they have comparative advantage in prim products but leaves little room for economic growth
• Primary products have low income elasticity of demand → economic growth means demand for these products will increase slowly (inelastic)
• Primary products have volatile prices so the economy can become subject to income
• Mutlinational companies may be able to force out local retailers, leading to less consumer choice and cultural diversity
• Movement of labour: enables workers to move easily around, however this may cause the highest skilled workers of developing countries to leave for better paid jobs in developed countries

Question 18

increased significance of MNC

saturated domestic markets

Answer 18

• MNC operate or have assets in more than one economy
• Described as transnational corporations or multinational enterprises
• Grew due to trade liberalisation, trade blocs, trade agreements and the fall of communism in europe, as well as development in tech and travel
• For most businesses: domestic markets saturated → further growth and profits must come from expansion overseas where rising incomes can be tempting
• Access to new markets in emerging economies creates huge potential for increased sales and profits
• Allows for outsourcing: buying cheaper raw materials abroad, or setting up production facilities where there are lower costs of production
• Low cost labour, materials, tax breaks