4.1

Question 1

What are the characteristics of globalisation?

Answer 1

• the growing interdependence of countries and the rapid rate of change it brings about.
• definition: the increasing integration of the world’s local, regional and national economies into a single international market.
• It involves the free trade of goods and services, the free movement of capital and labour and the free interchange of technology and intellectual capital.

Question 2

What factors have contributed to globalisation in the last 50 years?

Answer 2

• Improvements in transport infrastructure and operations have meant there are quick, reliable and cheap methods to allow production to be seperated around the world.
  -Improvements in IT and communication allow companies to operate across the globe.
• Trade liberalisation and reduced protectionism has made it cheaper and more feasible to trade. The breakdown of the soviet bloc and the opening of China has shown a whole area of the world.
• International financial markets- provided the ability to raise money and move money around the world, necessary for international trade.
• TNCS- have led to globalisation by acting to increase their own profit as they want to take advantage of low labour costs.
• Containerisation- cheaper to ship goods across the world. This causes prices to fall, which helps make the market more competitive.

Question 3

What are the impacts of globalisation on individual countries?

Answer 3

• There could be trade imbalances between countries.
• Within individual countries, there could be income and wealth inequalities if the benefits and costs of globalisation are not evenly spread.
• Inequality between countries can also increase, some countries gain more from globalisation than others.
• spread of culture.
• some may argue this has weakened culture diversity due to global brands.

Question 4

What are the impacts of globalisation on governments?

Answer 4

• some governments might lose their sovereignty due to the increase in international treaties.
• the government may be able to receive higher taxes, since TNCs pay tax and so do the people they employ.
• TNCS also have the power to bribe and lobby governments, which could lead to corruption.

Question 5

What are the impacts of globalisation on consumers?

Answer 5

• Consumers have more choice since there are a wider range of goods and services available from all around the world.
• It can lead to lower prices as firms take advantage of comparative advantage and produce in countries with lower costs.
• Many consumers worry about loss of culture.
• increase in world GDP, means living standards increase and helps lift people out of absolute poverty.

Question 6

What are the impacts of globalisation on producers?

Answer 6

• firms are able to import from more countries and sell them in more countries. This reduces risk since a collapse of the market in one company will have a smaller impact on the business.
• Able to employ low skilled workers much cheaper in developing countries and can exploit comparative advantage and have larger markets, both of which can increase profits.

Question 7

What are the impacts of globalisation on workers?

Answer 7

• There have been large scale job losses in the western world in manufacturing sectors as these jobs have been transferred to countries such as China.
• Increased migration may affect workers by lowering wages but migrants can also improve skills.
• International competition has led to a fall in the growth of wages for low skilled workers in developed countries whilst increased those in developing.
• The wages for high skilled workers appear to be increasing since there is more demand for their work- increasing inequality.
• TNCS tend to provide training for workers and create jobs.

Question 8

What are the impacts of globalisation on the environment?

Answer 8

• The increase in world production has led to increased demand for raw materials.
• Increased trade and production has also led to more emissions.
• However, globalisation means the world can work together to tackle climate change.

Question 9

What is comparative advantage?

Answer 9

When a country can produce a good or service at a lower opportunity cost than another country.
This means they have to give up producing less of another good than another country using the same resources.

Question 10

What is absolute advantage?

Answer 10

If a country can produce a good or service using fewer resources and at a lower cost than another country.

Question 11

NUMERICAL AND DIAGRAMATIC

Question 12

What are the assumptions relating to the theory of comparative advantage?

Answer 12

• assumes that there are no transport costs, and these could lower or prevent comparative advantage.
• It also assumes costs are constant and there are no economies of scale.
• In the model, goods are assumed to be homogenous, which is unlikely in real life. This makes it difficult to conclude that a country has a comparative advantage.
• Also assumes that factors of production are perfectly mobile, there are no tariffs.

Question 13

What are the advantages of specialisation and trade?

Answer 13

• Comparative advantage shows how world output can be increased if countries specialise in what they are best at producing.
• Trading and specialising allows countries to benefit from economies of scale.
• different countries have different factors of production and trade allows countries to make use of factors of production.
• trade enables consumers to have greater choice about the types of goods they buy- increase consumer welfare.
• trade also means there is greater competition, which provides incentive to innovate.

Question 14

What are the disadvantages of specialisation and trade?

Answer 14

• trade can lead to overdependence where some countries become dependent on particular exports or imports. This can cause problems if there are large price falls or if imports are cut off due to political reasons.
• Can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and competitive.
• The environment will suffer due to problems of transport as well as increased demand for resources.
• loss of sovereignty due to signing international treaties and joining trading blocs, for example in EU.
• loss of culture as trade brings foreign ideas and products.
• non-renewable resources can run out.

Question 15

What are the 4 factors influencing the pattern of trade between countries?

Answer 15

• comparative advantage
• impact of emerging countries
• growth of trading blocs and bilateral agreements.
• changes in relative exchange rates

Question 16

How does comparative advantage influence the pattern of trade?

Answer 16

• countries will trade where there is a comparative advantage to trading.
• a change in comparative advantage will affect the trade pattern.
• developing countries have gained a advantage in the production of manufactured goods, due to their lower labour costs, so production shifted abroad.
• the deindustrialisation of countries such as the UK has meant the manufacturing sector has declined. This means that production of manufactured goods has shifted to other countries, such as China.
• China and India now take a much larger proportion of world trade.

Question 17

How do emerging countries influence the pattern of trade?

Answer 17

• countries grow at different rates and when they grow, they are likely to need to import more goods and services than before as well as exporting more to pay for this.
• Emerging economies shift the trade pattern by taking up a larger proportion of a country’s imports and exports that they had previously.
• International trade is more important for developing countries than developed. It contributed towards 20% of LDC economies.
• The collapse of communism has meant that more countries, especially developing countries, are participating in world trade.

Question 18

How do trading blocs and bilateral trading agreements influence patterns of trade?

Answer 18

• These increase the level of trade between certain countries and so influences patterns of trade because trade increases between these countries and decreases between others.
• Joining the EU means that the UK traded a lot more with european countries than previously.
• the policies of developed countries have limited the ability of developing countries to export primary commodities.

Question 19

How do changes in relative exchange rates influence trading patterns?

Answer 19

• The exchange rate affects the relative prices of goods between countries.
• Prices determine whether consumers buy goods and so will affect the pattern of trade.
• A rise in the exchange rate of a country will decrease its exports and shift trade to another country.

Question 20

What is the terms of trade?

Answer 20

Measures the rate of exchange of one product for another when two countries trade. It tells us the quantity of exports that need to be solid in order to purchase a given level of imports.

Question 21

What is an improvement in the terms of trade?

Answer 21

If the terms of trade increases as the country can buy more imports with the same level of exports.

Question 22

What is the calculation of terms of trade?

Answer 22

average export price index/ average import index x 100

Question 23

What factors influence a country’s terms of trade?

Answer 23

• In the short run, exchange rates, inflation and changes in demand/ supply of imports or exports can affect terms of trade since these affect their prices.
• In the long run, an improvement in productivity compared to a country’s main trading partners will decrease the terms of trade since export prices will fall relative to import prices.
• Another factor is changing incomes. This affects demand.
• In general, anything which affects the price of a country’s import or exports will affect its terms of trade.

Question 24

What are the impacts of changes in a country’s terms of trade?

Answer 24

• If PED of exports and imports is inelastic a favourable movement in terms of trade would improve the current account.
• An improvement in the terms of trade mean the economy can import more goods for each unit of exports. This can help reduce cost- push inflation. It could also help improve standards of living.
• Worsening terms of trade will lead to a fall in living standards and because it is more difficult to earn foreign currency, it becomes harder to pay foreign debt.

Question 25

What are the 4 types of trading blocs?

Answer 25

• free trade areas
• customs unions
• common market
• monetary unions

Question 26

What is a free trade area?

Answer 26

This is where countries agree to trade goods with members without protectionist barriers. For example, NAFTA and EFTA.

Question 27

What is a customs union?

Answer 27

Countries in a customs union have established a common trade policy with the rest of the world.
For example, they might use a common external tariff.

Question 28

What is a common market?

Answer 28

This establishes free trade in goods and services, a common external tariff and allows free movement of capital movement of capital and labour across borders.

Question 29

What is a monetary union?

Answer 29

• sometimes called a currency union.
• these are two or more countries with a single currency, with an exchange rate that is monitored and controlled by one central bank or serveral central banks with monetary policy. .
• This is more economically integrated than a customs union and free trade area.

Question 30

The Eurozone as an example of monetary union:

Answer 30

• European central bank distributes notes and coins, sets interest rates, maintains a stable financial situation and manages the foreign currency reserves.

Question 31

Conditions necessary for their success (monetary unions):

Answer 31

• use the same interest rates.
• budget deficits cannot exceed 3% of GDP
• Gross national debt has to be below 60%
• Inflation has to be below 1.5% of the three lowest inflation countries
• The average government bond yield has to be below 2% of the yield of the countries with the lowest interest rates- ensures exchange rate stabilit.

Question 32

What are the advantages of regional trade agreements?

Answer 32

• free trade encourages increased specialisation, and this increases output, according to comparative advantage.
• this specialisation also helps firms to benefit from economic of scale.
• firms may be able to grow much larger by creating a larger customer market, but this may be difficult given different customer markets in different countries.
• It will be easier for some products, such as basic chemicals and cars.
• Firms inside the bloc are protected from cheaper imports from outside, for example- EU protected from Chinese imports.
• removal of barriers means domestic industries face greater competition- encourages innovation and lower prices, leading to improvements in productive and allocative efficiency.
• increased trade may create more jobs.
• increased choice.

Question 33

What are the disadvantages of regional trade agreements?

Answer 33

• countries no longer able to benefit from trade with countries in other blocs and the blocs are likely to distort world trade.
• may be a reduction in competition as inefficient firms are driven out of the business.
• loss of resources- most successful countries will attract capital and labour.
• firms may set up factories in the poorer countries, as labour is cheaper, and this will help them grow but will also mean they lose the most skilled labourers to more successful countries.
• could also be retaliation as the creation of one regional trading bloc will lead to creation of others.
• creating and maintaining trading blocs can distract governments from the gains of signing full free trade agreements.
• Distribute gains from trade unequally, developed countries often gaining most and developing countries being impacted little.

Question 34

What is trade creation?

Answer 34

• when a country moves from buying goods from a high cost to a lower cost country.
• when trade is created by the joining of a trade union.

Question 35

What is trade diversion?

Answer 35

• • when they go from low cost to higher cost.
• consumption shifts from a lower cost producer outside the trading bloc to a higher cost producer within it.
• a trading bloc is more likely to lead to trade diversion than trade creation when it has a very high external tariff as this will push countries to buy from within the bloc or if there is a small cost difference.