4.1 A global perspective

Question 1

Define globalisation

Answer 1

Process in which national economies have become increasingly intergrated and inter- dependent

Question 2

Causes of globalisation

Answer 2

• Growth of MNCs (multinational corporations)- Undertaken FDI, which frequently involves moving manufacturing to a country where production costs are lower (offshoring)
• Trade liberalisation (WTO)
• Trading blocs- free trade in G/S
• Technological advancements- low transportation costs e.g. containerisation= E.O.S + falling LRAC
• Mobility of labour and capital

Question 3

Why is the internet a significant cause of globalisation

Answer 3

• Decrease in cost of communication
• Firms can access world markets more easily by advertising on the internet
• Easier for conumers to buy goods from other countries

Question 4

Why is a decrease in the cost of transport a cause of globalisation

Answer 4

• Transport / volume economies of scale – larger planes and ships reduce average transport cost
  o Technical efficiencies are demonstrated through “containerisation” in freight ships and lorries
  o Increase in fuel efficiency in the use of airplanes, ships and trains which reduce transport fuel cost
  o Better transport infrastructure across the world

Question 5

Why is trade liberalisation a significant cause of globalisation

Answer 5

Trade agreements that remove barriers to trade increase volume of world trade and globalisation because prices of imported and exported G/S has fallen = increased benefits of global trade.

Question 6

How can trade liberalisation reduce globalisation

Answer 6

Trade agreements can lead to an increase in globalisation as a result of the trade creation. However, they can also lead to reduction in trade and globalisation due to the trade diversion away from previous trade partners, who may be more competitive and are not included in the new agreement.

Question 7

Why is the development of sophisticated international financial markets a significant cause of globalisation

Answer 7

The development of quick, secure and sophisticated trans- national payment systems has led to an increase in globalisation. This is because such developments remove one aspect of the risks and uncertainties associated with undertaking international transactions, thus making international trade and globalisation more likely.

Question 8

How can the development of sophisticated international financial markets reduce globalisation

Answer 8

Firms operating in global markets must be aware that not all regions of the world operate their financial systems with the same sophisticated legal and regulatory framework. This can provide inertia in the process of globalisation, when trading with nations where there are risks and uncertainty over the security of financial transactions

Question 9

What are the drawbacks of TNCs

Answer 9

• GPNs may make TNCs more vulnerable to shocks in different parts of the world that halt production, e.g 2011 Japanese tsunami halted supplies in Nissan factory UK.
• Exploitation of workers, such as Rana Plaza textile factory.
• Can be extremely damaging to the environment.
• Cultural erosion.
• Job losses in the home country.

Question 10

Pros of globalisation

Answer 10

• Free movement of labaour and capital (FDI)- increase in migration, attracts FDI
• Technological transfer and innovations
• Benefits of trade -trade blocs & WTO- greater tax revenue, provides economic development
• Lower prices
• Benefit from large E.O.S
• Greater employment

Question 11

How does globalisation lead to greater employment

Answer 11

• Market size gets bigger
• More countries become integrated
• Sharing resources and accessing each other’s markets freely
• Firms grow in size so hire more workers to supply output
• Increase in incomes= increased S.O.L = greater luxury

Question 12

How does globalisation lead to lower prices

Answer 12

• Due to increased int. competitivness
• Increases efficiency + lower costs
• Greater choice, greater quality of G/S, more innovative products being developed= increased consumer surplus
• Firms can access raw materials at lower prices = lower costs
• Firms benefits from large E.O.S & higher profits (increased ouput at lower costs)- more innovation and investment

Question 13

Cons of globalisation

Answer 13

• Trade imbalances- relying on X-led growth leads to CA deficits/surplurses= trade wars, protectionism
• Greater risk of external shocks (risk of contagion) such as Great Depression, Financial Crisis
• Loss of cultural diversity- succumbing to same demand for evergy single person in economy/ tastes and fashion
• Some TNCs/MNCs engage in a form of tax avoidance called transfer pricing
• Environmental costs
• Higher structural unemployment
• Growing inequality

Question 14

How does globalisation lead to tax avoidance

Answer 14

Some TNCs/MNCs engage in a form of tax avoidance called transfer pricing
The use of legal mechanisms (e.g. transfer pricing) & corruption by transnational corporations is stripping developing countries of their assets & has been called ‘new colonialism’
This means less tax revenues for govt, which couldve been used on public services such as NHS, infrastructure education

Question 15

How does globalisation lead to greater inequality

Answer 15

• Demand for unskilled labour has decreased in developed countries, so increasing the earnings gap between the highest-paid and lowest-paid workers
• Top 1% of top earners in the economy own 55% of the total global wealth
• TNCs/MNCs might expoit workers in developing countries by paying lower wages for long working hours
• In a competitive global environment, some countries may lower labor and environmental standards to attract foreign investment and remain competitive= worse working conditions and environmental degradation.

Question 16

How does globalisation lead to environmental costs

Answer 16

• Increased trade= increase road and air transport and associated noise and air pollution
• FDI by countires in search of raw materials may result in exploitation and depletion of resources
• Lack of sustainability and increased external costs
• Future generations cannot acrrue same benefits we currently benefit from

Question 17

4 marks

Explain the likely impact on the standard of living of consumers as a result of globalisation.

Answer 17

• Globalisation is the process in which national economies become increasingly economically integrated and interdependent
• The standard of living is the degree of wealth and material comfort available to consumers in an economy, often measured by GDP per capita (1).
• Globalisation leads to specialisation and trade, which increases consumer choice (1).
• Globalisation leads to specialisation and trade, which results in lower prices for consumers (1).

Question 18

Define absolute advantage

Answer 18

Occurs when a country can produce a product using fewer FoP than another nation

Question 19

Define comparative advantage

Answer 19

A country could specialise in the G/S it can produce at the lowest possibe opportunity cost and then trade with another country

Question 20

The assumptions of comparative advantage

Answer 20

• Transport costs are zero
• There is perfect knowledge
• Factor substitution is easily achieved
• Constant costs of production

Question 21

Advantages of specialisation and trade

Answer 21

• Specialisation and trade allow firms to access global markets where the number of possible customers is far in excess of the domestic potential. This is an advantage because the greater the size of the market the greater the profit potential.
• Specialisation and trade allows firms to produce on a larger scale than previously. This will give them access to increasing economies of scale, which will reduce average costs of production and therefore generate greater profit potential.
• Efficiency and Productivity: Specialization allows countries to focus on producing what they are most efficient at, leading to increased productivity and economic growth.
• Increase in consumer choice: more variety of G/S at competitive prices due to allocative efficiency
• Resource Allocation: It enables efficient resource allocation as countries can allocate resources to industries where they have a comparative advantage, reducing wastage.
• International Cooperation: Trade fosters peaceful international relations and cooperation as countries become interdependent

Question 22

Disadvantages of specialisation and trade

Answer 22

• Risk of structural unemployment: as a country moves towards specialisation, workers in sunset (declining) industries may face occupational immobility of labour
• Dependency: Over-reliance on imports for critical goods can make a country vulnerable to supply disruptions or price fluctuations.
• Income Inequality: While trade can benefit a nation as a whole, it may exacerbate income inequality if the gains are not equitably distributed.
• Environmental Concerns: Specialization in resource-intensive industries may lead to environmental degradation if not regulated properly.
• Trade Imbalances: Persistent trade deficits can lead to indebtedness and economic instability for some countries.
• Loss of Domestic Control: Relying on imports for essential goods can compromise a nation’s control over its own economy and security.
• Increased vulnerability to external shocks e.g. changes in global P’s of commodities, suppressed global demand
• Hidalgo: can leas to a lack of complexity and growth
• Globabal monopolies emerge

Question 23

Formula for terms of trade

Answer 23

(Index of X P’s/ Index of M P’s) x 100

Question 24

What happens if there is a decrease in the terms of trade

Answer 24

ToT has detoriated. This means that a larger volume of exports must be sold in September 2016 in order to finance the same amount of imported G/S
This detoriation in the ToT means that there is likely to be a fall in the S.O.L because imports of essential food, raw materials and technologies are more expensive.

Question 25

Define economic integration

Answer 25

Process whereby countries coordinate so reduce trade barriers and to harmonise monetary and fiscal policy

Question 26

Define trading blocs

Answer 26

A group of countries that join together and agree to increase trade between themselves

Question 27

Define trade creation

Answer 27

Movement from a high cost domestic producer to a low cost producer in the trading bloc

Question 28

Define trade diversion

Answer 28

When an economy joins a trading bloc and now sources from a more expensive supplier in the bloc

Question 29

Define bilateral/ multilateral trade agreements

Answer 29

An agreement to reduce tariffs and quotas between 2/multiple countries

Question 30

Advantages of trading blocs

Answer 30

• Reduction in trade barriers= increase trade between member countries
• (X-M) increase–> AD increases = economic growth
• Export industries employ more to increase ouput
• Fall in demand- deficient unemployment —> increase in yD
• Increase in variety of G/S available for consumers –> increase S.O.L +CS
• More competition from foreign firms –> forces domestic country to become more allocatively and productively efficient
• Achieve E.O.S –> falll in LRAC as firms can access larger markets
• Fall in P of imports= increase in consumer purchasing power + firms who import raw materials production costs fall –> SRAS shifts right = fall in cost push inflation
• Growth leads to an improvement in govt finances, which could be spent on population
• X-led growth can allow countries to earn foreign currency to buy foreign capital goods
• Increase in specialisation and trade according to comparative advantage model
• May see rise in FDI

Question 31

Affect of trading blocs on trade creation using diagram

Answer 31

• Countries may import more of domestic firms G/S
• CS increases due to increase in real Y
• PS decreases as reduced tariffs reduces P
• Loss in tax revenue (tariff revenue from imports is gone)
• Net welfare gain

Question 32

Disadvantages of trading blocs

Answer 32

• Lost tariff revenues
• Financing costs for necessary infrastructure
• Regulatory reforms for common product standards
• Local SME’s (small and medium- sized enterprises) may suffer loss of profit/ jobs when facing stronger competition

Question 33

Benefits of increased economic integration

Answer 33

• Trade creation as a result of joining trade bloc
• ↑ specialisation & trade for countries & their firms, following theory of CA so total output of the economy can ↑
• ↑ Y for workers in the countries due to ↑ D for the country’s X pushing up wages
• ↑ in jobs as domestic firms now have much larger market to sell their products to, improving standard of living for citizens of the countries

Question 34

Drawbacks of increased economic integration

Answer 34

• Trade diversion resulting in loss of efficiciency as trade switches to less efficient producers within the trading bloc
• More integration means financial crises will spread more quickly across trading bloc
• Loss of output due to cheaper competition from lower wage cost countries

Question 35

Explain the role of the World Trade Organisation (WTO)

Answer 35

WTO is primarily concerned with the promotion of free trade by organising negotiations to reduce trade barriers such as tariffs and quotas. Also concerned with enforcing trade rules and settling disputes.

Question 36

Explain one reason why there is conflict between regional trade agreements and the World Trade Organisation.

Answer 36

• Regional trade agreements create trade with the member- nations, but this is at the expense of free trade with non-member countries
• This results in trade barriers and trade diversion, which are against the primary objective of the WTO of promoting global free trade

Question 37

Define mercantilism

Answer 37

The notion that the wealth of a nation was based on how much it could export in excess of its imports