4.1 Globalisation

Question 1

Define globalisation

Answer 1

Globalisation is the increased interdependence of economies through trade

Question 2

Give three examples of global companies

Answer 2

Dell, BP and Amazon

Question 3

Identify three characteristics of globalisation

Answer 3

i. Increased trade (as a % of global GDP)
ii. Increased Foreign Direct Investment (FDI)
iii. Increases migration or movement of people

Question 4

Identify three characteristics of de-globalisation

Answer 4

i. Increased trade barriers such as tariffs
ii. Falling trade as a % of global GDP
iii. Less migration

Question 5

Identify three causes of globalisation

Answer 5

i. Lower transport and communications costs
ii. Increased importance of Transnational Corporations (TNCs)
iii. Lower trade barriers or trade liberalisation

Question 6

Explain how trade liberalisation increases globalisation

Answer 6

When trade can take place with no restriction, this reduces the transaction costs of trading. When the cost of trade reduces, more trade will take place. This has been seen within trading blocs such as the EU, where the free movement of goods and services has increased the volume of trade amongst member countries

Question 7

Explain how reduced transport and communications costs causes globalisation

Answer 7

Transport and communications are a cost of production, so if these aspects of trade can be reduced then world supply can increase. This means that it becomes cost effective to import goods from further away rather than produce them domestically, which increases the chances of specialisation. It also means that production can be broken down so that components can be made in various countries and transported to an assembly point. Communications improvements have meant that is it easier to manage a global workforce, as well as market and sell products globally without having to have a physical presence in a country.

Question 8

Explain how the existence of Tans National Corporations (TNCs) causes globalisation

Answer 8

TNCs have found that there are 3 reasons to expand internationally – this is i) in search of resources ii) in search of markets to sell their products and iii) in search of more efficient locations to produce. This means that the profit motive has driven TNCs to look for opportunities to reduce costs, and increase revenues internationally.

Question 9

Identify benefits of globalisation

Answer 9

i. Increased world output, through comparative advantage
ii. Reduction in absolute poverty by giving countries access to inflows of money
iii. Facilitation of the transfer of knowledge and technology
iv. Improved quality and choice for consumers

Question 10

Identify disadvantages of globalisation

Answer 10

i. Externalities from transport and increased production
ii. Inequalities within and between countries
iii. Vulnerability to external shocks
iv. Structural unemployment
v. Exploitation

Question 11

Why might there have been public backlash against globalisation in recent years

Answer 11

i. Concerns about global warming, habitat destruction and resource depletion
ii. Concerns about the distribution of global wealth
iii. Concerns from individuals/firms who have lost their jobs or been disadvantaged by international competition
iv. Concerns about whether trade is taking place on a “level playing field” – in other words, concerns that some countries may be competing unfairly by manipulating their currencies, subsidising local producers or using murky protectionist measures such as government procurement policies that favour domestic suppliers

Question 12

Identify 3 benefits of FDI to the host country

Answer 12

i. Transfer of technology (capital) and knowledge (human capital)
ii. Provides employment and income/boosts AD in the short run, and LRAS through investment in productive potential
iii. Provides tax revenue

Question 13

Identify 5 disadvantages of FDI to the host country

Answer 13

i. Exploitation of workers: low wage, poor working conditions
ii. Bringing in overseas managers rather than employing local people
iii. Environmental damage if government ‘turn a blind’ eye to activities
iv. May have been given tax incentives, so not contributing to tax revenue
v. May be footloose, so able to leave quickly without bestowing any benefits

Question 14

What are global supply chains and give an example?

Answer 14

When sequences in the production process can take place in different counties. For example, the raw materials for a pencil may be found in Canada and Zambia, the design of the pencil takes place in the UK, and the construction of the pencil takes place in China.

Question 15

Define the law of comparative advantage

Answer 15

The law of comparative advantage states that a country should specialise in the production of goods for which they have the lowest opportunity costs

Question 16

Define absolute advantage

Answer 16

Absolute advantage is when one country can produce at a lower cost than another country

Question 17

Advantages of specialisation

Answer 17

i. Can become more efficient/productive as an economy
ii. Can benefit from economies of scale
iii. Can produce more and improve standards of living

Question 18

Disadvantages of specialisation

Answer 18

i. If comparative advantage changes over time you may need to change the structure of your whole economy with significant transition costs e.g. structural unemployment
ii. You may get diseconomies of scale
iii. Costs of transport may make trade too expensive with some countries
iv. Makes you vulnerable if you are not producing strategic products such as food

Question 19

Use comparative advantage to explain the benefits of free trade and globalisation

Answer 19

The benefit of trade is that it allows countries to specialise in the products and services for which they have a comparative advantage. This means that world output can increase as countries specialise in products in which they are relatively efficient at producing. An increase in world output means that populations have more products and services to consume which increases standards of living globally.

Question 20

What assumptions does the theory of comparative advantage make?

Answer 20

i. Assumes no diseconomies or scale, or diminishing returns e.g. constant returns to scale assumed
ii. No transaction costs such as transport costs
iii. No externalities

Question 21

Define what is meant by the pattern of trade

Answer 21

The pattern of trade describes what is being traded and with whom

Question 22

Give three reasons why the pattern of trade has changed in the last 50 years

Answer 22

i. Emerging economies
ii. Trade liberalisation and trade blocs
iii. Ex-communist countries

Question 23

What impact does the rapid growth of economies such as China and India have on the pattern of trade in the global economy?

Answer 23

i. China is now the world’s biggest trader
ii. Both countries have used export led growth as a way to expand, and consequently
this has meant that both countries are trading more with countries all over the globe,
both exporting more, and importing more than previously
iii. This therefore affects the pattern of trade as the question of “who” is trading has
changed – significant amounts of trade in manufactured goods has moved to China, and some services are now being provided by India – this may be because these countries have developed a comparative advantage in different types of goods and services, showing that this theory is not static, and comparative advantage can change over time

Question 24

How might other countries react to the rapid growth economies such as China and India?

Answer 24

i. Other countries might see opportunities to sell raw materials to China e.g. many African countries have sold more metals and minerals to China to help with their industrialisation
ii. Some countries may find their growth threatening, and may apply trade barriers with these countries to try and protect their own domestic industries from competition, or develop their own trade blocs to counter the threat from China

Question 25

Define terms of trade

Answer 25

Terms of trade shows the rate at which a countries exports can be swapped for imports

Question 26

What is the formula for calculating the terms of trade between two countries?

Answer 26

Terms of trade = index of export prices/index of import prices

Question 27

What does the WTO stand for?

Answer 27

World Trade Organisation

Question 28

Identify 3 facts about the WTO

Answer 28

i. 164 members
ii. Formed in 1995 replacing GATT
iii. It has about 600 staff

Question 29

What is the main role of the WTO

Answer 29

i. Aims to reduce trade barriers
ii. Monitor member countries
iii. Teach new member countries how to promote free trade
iv. Resolve trade disputes amongst member countries

Question 30

What is meant by a trading Bloc?

Answer 30

i. A group of countries, usually geographically close, who have removed trade barriers amongst themselves, (Free Trade Areas)
ii. Possibly common external barriers (Customs Union)
iii. Sometimes free movement of all factors of production (A Common Market)
iv. Occasionally the same currency and shared central bank (A Currency Union)

Question 31

Give 3 examples of trading blocs

Answer 31

i. The North American Free Trade Agreement (NAFTA)
ii. Association of South East Asian Nations (ASEAN)
iii. The European Union (EU)

Question 32

Distinguish between a Free Trade Area and a Customs Union

Answer 32

A free trade area does not have a common external tariff, such as NAFTA but a customs union does, such as the EU

Question 33

How has the growth in the number of trading blocs affected the WTO?

Answer 33

i. It means that countries are organising their own bi-lateral and multilateral agreements rather than going through the WTO.
ii. It may also create issues for the WTO if countries who are outside of the trading bloc complain about the trade behaviour of countries within the bloc, e.g. because of trade diversion issues

Question 34

Define trade creation

Answer 34

Trade creation is when the removal of a trade barrier leads to an increase in trade

Question 35

Define trade diversion

Answer 35

Trade diversion is when a country moves from trading with a low cost country to a higher cost country as a result of the removal of a tariff

Question 36

What is meant by bi-lateral trade agreements?

Answer 36

When two counties negotiate a trade agreement amongst themselves, rather than going
through the WTO which would be a multi-lateral trade agreement

Question 37

Why might a country prefer to negotiate its own bi-lateral trade agreement rather than adopt a free trade agreement negotiated through the WTO?

Answer 37

It is quicker and the agreement can be tailored to the needs and objectives of the two countries involved rather than have to consider the needs of multiple parties

Question 38

Define tariff

Answer 38

A tariff is a tax on imports – it is paid by the company wanting to sell goods and services into an economy that is not their own and is received by the government of the host country

Question 39

Define quota

Answer 39

A quota is a maximum number of goods that can be imported – once the maximum has been reached, then it is possible for a firm to sell above that number but they may be penalised with a tariff or other restriction

Question 40

Define non-tariff barrier

Answer 40

A non-tariff barrier (NTB), is something that makes trade costlier or difficult, but which is not a tariff. For example, health and safety regulation on imported goods, domestic subsidies, or government procurement policies that favour domestic firms.

Question 41

Define voluntary export restraint agreements

Answer 41

This is like a quota but it is self-imposed by the exporting country rather than the importing country – they do this in order to avoid worse tariffs or quotas

Question 42

Define protectionism

Answer 42

Protectionism is when a government imposes trade restrictions on other countries

Question 43

Identify and explain 4 reasons why a country uses protectionist policies

Answer 43

i. To protect domestic jobs from structural unemployment, e.g. protecting jobs in the domestic car industry by subsidising domestic producers
ii. To generate government revenue e.g. for developing countries this could be an important source of tax revenue to invest in supply side policies
iii. To protect infant industries, e.g. the computer industry in Brazil was protected whilst this industry grew to a size where economies of scale could be achieved such that this company could withstand international competition
iv. Strategic products such as food are often protected as the country may need to remain self-sufficient in some products in case of conflict

Question 44

Explain 4 disadvantages of protectionism

Answer 44

i. It reduces total consumption in an economy from Qd to Qd2
ii. There is a deadweight loss represented by the shaded triangles which reduces
consumer and social welfare
iii. It could lead to retaliation or tariff wars
iv. It means consumers pay higher prices from Pworld to Pworld + Tariff