4.1 Flashcards
What is globalisation?
Its 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.
What is the main benefit of globalisation?
It 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, e.g. through lower prices for consumers which increases their real incomes. It also allows consumers to buy a greater range of goods and services, increasing choice.
What are 8 characteristics of globalisation?
Trade to GDP ratios are increasing for many countries.
- Expansion of financial capital flows across international borders
- Increasing foreign direct investment and cross border acquisitions
- More global brands including a number from developing countries
- deeper specialisation of labour e.g. in making specific component parts.
- Global supply chains and investment routes
- higher levels of cross- border labour migration
- Increased connectivity of people and businesses through networks.
What 4 factors have contributed to globalisation in the last 50 years?
- Containerisation- decreases shipping costs by using standardised containers and reaping economies of scale in freight industries. Decreases unit cost of transporting products across the world.
- Technological advances- cuts cost of transmitting and communicating information- key factor behind trade in knowledge- incentive products using the latest digital technology.
- Differences in tax systems- some nations cut corporate tax to attract inflows of foreign direct investment as deliberate strategy to drive growth
- Less protectionism- average import tariffs have fallen- however, there has been a rise in non tariff barriers e.g. import quotas, domestic subsidies and tougher regulations hinting at a phase of de-globalisation.
What are TNC’s?
Transnational corporations base their manufacturing, assembly, research and retail operations in a number of countries. Many TNC’s have become synonymous with globalisation, like nike and facebook.
Why are TNC’s a driver of globalisation?
They have been relocating manufacturing to countries with relatively lower unit labour costs to increase profits and returns for shareholders. E.g. VW, toyota and nissan have plants in mexico, which has helped mexico build a comparative advantage in assembling, manufacturing and then exporting vehicles to other countries including the US and canada.
What is a key recent feature of globalisation?
A surge in the number of transnational businesses from emerging markets. E.g. china mobile is in the top 10 consumer brands in the world and Alibaba has expanded to be one of the biggest online retailers.
What are 7 advantages of globalisation?
- Encourages producers and consumers to use division of labour in global supply chains and using economies of scale- increase in economic welfare
- more competitive markets through trade reduces level of monopoly supernormal profits- increases cost reducing innovations
- Drives faster economic growth leading to higher per capita incomes. Has reduces extent of extreme poverty
- Freer movement of labour, relieving labour shortages and promoting the sharing of ideas from diverse workforces
- Opening up of capital markets such as stock increases opportunities for developing countries to borrow money
- Increased awareness of the systemic challenges from climate change and effects of wealth/ income inequality
- Competitive pressures may prompt improved standards of gov. and better labour protection through improved monitoring by international organisations.
What are 7 disadvantages of globalisation?
- Rising inequality/ relative poverty- gains will be unequal leading to growing political and social tensions if inequality of income and wealth increases.
- Threats of the global commons e.g. irreversible damage to ecosystems
- Greater exploitation of the environment e.g. increased production of raw materials
- Macroeconomic fragility- external shocks can rapidly spread to other centres( systemic risk)
- Trade imbalances- can lead to increase in protectionist tensions, wider use of tariffs and quotas
- Workers may suffer structural unemployment as a direct result of the out-sourcing of manufacturing to lower-cost countries
- Dominant global brands- businesses with dominant brands and superior technologies may squeeze out smaller local producers.
What are the impacts of globalisation on the UK 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 UK gov spending/ tax revenues
- impact of inward investment into UK on employment
- impact of share prices and profits of UK companies
What are external shocks?
Events that come from outside a domestic economic system. Negative external shocks create instability and can lead to persistent periods of weaker economic growth, higher unemployment, falling real incomes and rising poverty.
Positive external shocks can include the emergence of and widespread adoption of technologies used by businesses and households in may countries.
Give 8 examples of external shocks in a globalised world.
- global financial crisis 2007-2009
- Eurozone economic crisis
- volatile world commodity prices
- growth slowdowns in emerging nations
- international and regional trade and investment deals
- currency volatility and policy changes e.g. devaluation
- extreme weather e.g. flooding
- Geo-political uncertainty and risks from terrorism
When does absolute advantage occur?
It occurs when a country 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 absolute advantage.
When does comparative advantage exist?
- the relative opportunity cost of production for a good or service is lower in one nation than another
- a country is relatively more productively efficient than another.
- The basic rule is to specialise your scarce resources in the goods and services than you are relatively best at.
- This opens up gains from specialisation and trade which then leads to a more efficient allocation of resources.
What are the key assumptions behind the theory of comparative advantage and trade?
- constant returns to scale- i.e. no economies of scale.
- Perfect factor mobility between industries.
- 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
