4.1 (1-7) Flashcards
globalisation
Globalisation is a process by which economies and cultures have been drawn deeper together and have become more inter-connected through global networks of trade, capital flows, and the rapid spread of technology and global media.
benefits of globalisation
-moving less skilled labour to low wage countries increases the relative demand for higher skilled, higher productivity labour
-without comp from international trade, product quality would probably not be as good as it is today
-increases in the demand for skilled labour are clear market based incentives to worker to boost their education levels
-the quality of todays computer is due to technological advances caused by competition in the international marketplaces
-people and nations can produce more goods and services when they specialise
costs of globalisation
-low skilled workers may face rising income inequality compared with high skilled workers
-cheif among the losers of globalisation are shareholders in Industries that cannot compete with foreign manufacturers
-faced with unemployment, workers in dealing industries will need temporary assistance and long term assistance
What is the key benefit of globalisation?
Globalisation allows businesses and countries to specialise in producing goods and services where they have a comparative advantage (i.e. able to produce at a lower opportunity cost).
Specialisation and trade enable a gain in economic welfare, for example through lower prices
for consumers which then increases their real incomes. It also allows consumers to buy a greater range of goods/services, increasing choice.
Characteristics of globalisation
-trade to GDP ratios are increased for many countries
-expansion of financial capital flows across international borders
-increasing foreign direct investment and cross border acquisitions
-More global brands – including a rising number from emerging countries
-Deeper specialization of labour e.g. in making specific component parts
-Global supply chains & new trade and investment routes
-Higher levels of cross- border labour migration
-Increasing connectivity of people and businesses through networks
Factors contributing to globalisation in last 50 years
- Containerisation – the real prices & costs of ocean and air shipping have come down due to the widespread use of standardised containers & reaping of economies of scale in freight industries and often huge container ports built to serve them. This reduces the unit cost of transporting products across the world.
- Technological advances – which cuts the cost of transmitting and communicating information – this is a key factor behind trade in knowledge-intensive products using the latest digital technology
- Differences in tax systems - Some nations have cut corporate taxes to attract inflows of foreign direct investment (FDI) as a deliberate strategy to drive growth
- Less protectionism – average import tariffs have fallen – but in recent years we have seen a rise in non-tariff barriers such as import quotas, domestic subsidies and tougher regulations hinting at a phase of de-globalisation.
the causes of globalisation
-improved communication
-improved transport
-free trade agreements
-global banking
-the growth of multinationals
-labour costs and skills
Transnational Corporations (TNCs)
Transnational corporations (TNCs) base their manufacturing, assembly, research and retail operations in a number of countries.
Ad of globalisation
1.Economies of scale – leading to gains in economic welfare
2. More competitive markets through trade reduces the level of monopoly supernormal profits and can also incentivize businesses
3. Trade can help drive faster economic growth which leads to higher per capita incomes. Ergo less poverty
4. freer movement of labour between countries
5. Opening up of capital markets such as bond and stock markets increases the opportunities for developing countries to borrow money to help overcome a domestic savings gap
6. Globalisation has increased awareness among people around the world of the systemic challenges from climate change and the effects of wealth/income inequality
7. Competitive pressures of globalisation may prompt improved standards of government and better labour protection through improved monitoring by international organisations
dis of globalisation
- Rising inequality / relative poverty
- Threats to the global commons e.g. irreversible damage to ecosystems, land degradation
- Globalisation can lead to greater exploitation of the environment,
- Macroeconomic fragility – in an inter-connected world economy, external shocks in one region can rapidly spread to other centres (this is known as systemic risk)
- Trade imbalances: Increasing trade imbalances (both surpluses and deficits) lead to protectionist tensions, wider use of tariffs and quotas and also a move towards managed exchange rates
- Workers in may suffer structural unemployment as a direct result of the out-sourcing of manufacturing to lower-cost countries and a rise in the share of imports in a nation’s GDP
- Dominant global brands – businesses with dominant brands and superior technologies may squeeze out smaller local producers leading to a reduction in choice for consumers and some job losses
Impacts of globalisation in an economy
- Expanded choice and higher consumer surplus
- Effects on retail prices and the rate of inflation
- Impact of UK firms relocating to lower-wage economies
- Impact of net inward migration on real wages and on UK government spending / tax revenues
- Impact of inward investment into UK on employment
- Impact on share prices and profits of UK companies
External shocks
-External shocks are events that come from outside a domestic economic system.
e.g. financial crisis, extreme weather, political uncertainty
* Negative external shocks create instability and can lead to persistent periods of weaker economic growth, higher unemployment, falling real incomes and rising poverty.
* External shocks can also be positive e.g. the emergence of and widespread adoption of technologies used by businesses and households in many countries.
Absolute advantage
Absolute advantage
Absolute advantage occurs when a county can supply a product using fewer resources than another nation. If a country using the same factors of production can produce more of a product, then it has an absolute advantage.
Comparative advantage
Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals.
David Ricardo was one of the founding fathers of classical economics.
How does Comparative ad lead to greater output
-If individuals specialise in certain goods/servies that they can produce at the lowest opportunity cost, then total output will increase. trade will then need to happen to share out this output
-Usually specialise in what natural resources you have
Limitations of Richard’s comparative ad theory
-ignores the cost of transporting goods between countries
-increased specialisation makes countries dependent on a limited range of goods
-countries may prefer to be self sufficient
-comparative ad is dynamic and will change overtime
Comparative advantage exists when:
- The relative opportunity cost of production for a good or service is lower in one nation than another country
- A country is relatively more productively efficient than another
- The basic rule is to specialise your scarce resources in the goods and services that you are relatively best at
- This opens up gains from specialisation and trade which then leads to a more efficient allocation of resources
Assumptions behind the theory of comparative advantage and trade
- Constant returns to scale – i.e. no economies of scale – which might in reality amplify the gains from trade
- Perfect factor mobility between industries (e.g. geographical + occupational of labour)
- No trade barriers such as tariffs and quotas which artificially change the prices at which trade occurs
- Low transportation costs to get products to market – high logistics costs might erode comparative advantage
- No significant externalities from production and/or consumption of the products being traded
Gains from trade
- Free trade allows for deeper specialisation and benefits from economies of scale (increasing returns)
- Free trade increases market competition and choice and also drives up product quality for consumers
- Increased market contestability reduces prices for consumers leading to higher real incomes
- Trade can lead to a better use of scarce resources for example from trade in sustainable technologies
How does the following increase trade:
-comparative ad
-economies of scale
-product differentiation
-comp ad- producing goods that you have the lowest opportunity costs due to ad such as lower wages and more natural resources
-EofS- if a country specialises in manufacturing a product, unit costs will fall as larger factories benefit from the ad off mass production
-Product D- consumers prefer a wide range of choice of different products from different countries. This is due to the demand for higher quality, unique production.
Ad of specialisation
-lower average costs, since the market becomes more competitive
-A greater variety of goods and services could be produced
-There is an outward shift in the PPF curve
Dis of specialisation
-There could be more structural unemployment, since production moves abroad
-countries might become stuck in the production of one good or service, so they cannot develop further
-Countries could become over-dependent on the export of one commodity
-increase in transport costs leading to environmental damage
Reason for changes in patterns of trade
-countries trade more often
-globalisation
-more distribution of wealth
-new industrialised countries
-Deindustrialisation
-less trade blocks more trade agreements
-collapse off communism
What is the geographical pattern of trade?
-This is the countries with whom businesses and people trade
-Intra-regional trade is trade between countries in the same region (European Union, Africa, Asia)
Trade in goods
-Goods exported and imported include tangible manufactured products such as cars, components for aircraft
Trade in services
-Heavily traded services include transportation (goods and passengers), tourism, health and education services,
What are the terms of trade
-Index of export prices / index of import prices X100
-used to measure a countries competitiveness
-If export prices increase then the terms of trade will
-If import prices increase then the terms of trade will
-Increase
-Decreases
reasons for terms of trade change
-change in production costs
-exchange rate
-demand rate
-supply changes
-changes in productivity
-changes in inflation rate
what is a trade bloc
-is a group of countries that join together in some form of agreement in oder to increase trade between themselves and/or to gain economic benefit from cooperating
