4.1

Question 1

Globalisation

Answer 1

Process in which national economies have become increasingly integrated and interdependent

Question 2

Characteristics of globalisation

Answer 2

Increase in trade as a proportion of GDP
Increased movements of financial capital and people between countries
Increased international specialisation and division of labour
Growing importance of global or transnational companies
Increase is FDI

Question 3

What effect does world GDP increasing have

Answer 3

Demand for exports goes up, as more countries are trading + technology is improving cost of exporting decreases

Question 4

Factors contributing to globalisation

Answer 4

Fall in transport costs - goods can be imported and exported more cheaply
Decline in cost of communications - internet availability has increased
Lowering of trade barriers
Collapse of communism and opening up of China
Transnational global companies have taken advantage of this to organise trade on a global scale
Growth in number and size of trading blocs

Question 5

Impacts of globalisation for countries

Answer 5

Application of the law of comparative advantage, goods can be produced at a lower opportunity cost, world output increases
Global financial crisis led to a period of deglobalisation as countries wanted to protect themselves and not be so interdependent
Globalisation has also been associated with increased inequality within countries but decreased inequality within countries

Question 6

Impacts of globalisation on governments

Answer 6

Globalisation should result in economic growth and, therefore increased incomes, government should receive greater tax revenues allowing them to spend more on public services
Transfer pricing negates this as countries show that their profits lie in the country with the lowest cooperation tax

Question 7

Impacts of globalisation on producers and consumers

Answer 7

Producers - lower costs of production as a result of offshoring and economies of scale
Consumers - globalisation may mean wider choice of goods at lower prices increasing consumer surplus

Question 8

Impacts of globalisation on workers

Answer 8

Globalisation has been criticised as it has promotes the exploitation of workers, including child labour
Driven down wages, especially those of unskilled workers.
Health and safety regulation are less in developing countries which will have a detrimental effect on the workforce

Question 9

Impacts of globalisation on the environment

Answer 9

External costs associated with increasing globalisation are becoming increasingly apparent
With more trade and travel comes more pollution

Question 10

Comparative and absolute advantage

Answer 10

Even if a country has absolute advantage in production of all goods they can still benefit by specialising in the production of goods in which it has comparative advantage

Question 11

Assumption underlying the theory of comparative advantage

Answer 11

No transport costs
No trade barriers
Average costs of production is constant ( constant returns to scale)
Perfect mobility of resources between different uses
Buyers/ consumers have prefect knowledge

Question 12

Limitations on the theory of comparative advantage

Answer 12

Transport costs might outweigh the benefits of comparative advantage
Similarly, trade barriers might distort comparative advantage
Increasing specialisation and production might result in rising average costs caused by diseconomies of scale

Question 13

Advantage of specialisation and trade

Answer 13

Efficient allocation of resources - based on comparative advantage
Higher world output = greater living standards
Lower prices and more choice for consumers
Incentive for domestic producers to become more efficient
Larger market for firms allowing them to benefit from economics of scale

Question 14

Disadvantage of specialisation and trade

Answer 14

Law of comparative advantage is based on unrealistic assumptions
For developing economies specialisation in the production of primary products might prevent diversification into more productive manufacturing industries
Danger of over dependence on imports ( if country we are importing from fails e,g Russia)
A country’s goods and services may be uncompetitive, resulting in a persistent trade deficit

Question 15

Reasons for the restriction of free trade

Answer 15

To protect infant industries - relevant to developing countries that in are the process of industrialisation. Without protectionism infant industries may not be able to compete as they are yet to establish themselves
Protect geriatric industries - industries that demand protection so they have time to restructure and rationalise production, occur in developed countries that are losing their comparative advantage
Ensure employment protection - cheap imports might threaten jobs in the domestic economy
To prevent dumping - refers to goods being exported lower than the cost of production into markets in order to distort comparative advantage
Restrict imports from countries whose health and safety regulations / environmental regulations are less stringent
Strategic reasons - in times of war they are not reliant on imports
Raise tax revenue - tariffs act as a source of tax revenue for developing countries
In retaliation
Correct the balance of payments deficit - restriction on imports will help reduce the imbalance of (x-m) however in a system of floating exchange rates it is possible that this correction will automatically happen

Question 16

Types of restriction on trade

Answer 16

Tariffs
Quotas - physical restriction on how much can be imported
Subsidies to domestic producers
Non tariff barriers - health and safety regulations increasing production costs for foreign producers

Question 17

Impact of protectionist policies on different parties in the economy

Answer 17

Consumers - higher prices + less choice
Producers - less incentive for domestic producers to become more efficient
Government - would receive tax revenue of tariffs bus subsidises to domestic producers would incur a cost to taxpayers
Living standards - protectionism results in a less efficient allocation of resources because trade barriers distort comparative advantage
On equality - trade barriers imposed by developed countries on goods from developing economies could increase inequality between the 2 sets of countries

Question 18

Types of exchange rate system

Answer 18

Floating - market forces of supply and demand determine the value of the currency
Fixed - fixed by central bank to the value of gold or another currency
Managed - market forces determine the currency but intervention by the central bank in influences the exchange rate

Question 19

Factors effecting the exchange rate

Answer 19

Relative inflation rates 
Relative interest rates 
State of the economy 
Balance of payments on the current account 
Political instability 
Speculation

Question 20

Effect of depreciation on inflation

Answer 20

Increase in AD due to (x-m) exports become cheaper

Imported inflation due to rise of import prices and costs of raw materials push supply curve inwards

Question 21

Comparative advantage definition

Answer 21

Comparative advantage refers to the relative advantage that one country or producer has over another. Countries can benefit from specialising in and exporting the products for which it has the lowest opportunity cost of supply