4.1 Globalisation and trade Flashcards
What is globalization?
The process of economies and cultures becoming more interconnected through trade, capital and technology and media
-Global GDP share accounted by exports has risen from 12% in 1960 to 30% now
What are the features of a globalized world?
Free movement of:
- Goods and services
- Labour free to move wherever wanted
- Investment and capital flow - FDI, mergers, stock and bonds
- Tech and ideas
- Connectivity
- Global brands rising
- Deeper specialization in labour
- Trade and investment routes made
What are the causes of globalisation?
- Transport - containerisation, loading, air transport costs, computerisation
- Communications - internet, low costs, speed, online retail, services provided anywhere
- Remove trade barriers - WTO has 164 countries
- Trade blocs - eliminate etrade barriers
- Collapse of communism - open China to FDI and trade in 1989
- Deregulation of financial markets
- Differences in tax systems - cutting tax to attract FDI
- Less protectionism
What are TNCs?
- Transnational corporations base manufacturing, assembly, research and retail operations in a number of countries, growing with globalisation.
- Biggest 500 TNCs account for 70% of trade value
- Locate to areas with low unit costs for profits and returns
- Gives poorer countries comparative advantages in the industry TNCs set up
What are the benefits of globalisation?
- Firms grow beyond national boundaries - EofS
- Exploit lower costs so greater profits and surplus
- Consumer confidence rises
- Consumer choice rises
- Growth and reduced poverty - gain in economic welfare
- Rising tax revenues from FDI and growth
- Technological advancements
- Spread of best managerial practices
- Greater specialization and division of labour
- Competitive markets - less monopoly profit
- Drives economic growth and per capita incomes
- Adds financial opportunities for developing countries - stock and bond markets
What are the costs of globalisation?
- Rising inequality at national and international scale
- Environmental damage
- Resource shortages
- Import dependence, deficits, failure of domestic markets
- Risk of contagion - shocks affect entire economy
- Exploit labour and resources
- Tax avoidance
- Dominant global brands more powerful
- Structural unemployment as outsourcing out competes
- Trade deficits
Evaluation:
- Loss of domestic economy
- Political pressure e.g. migration
- Recession may spread internationally
- Environmental cost - TNC go to less laws
- Richer countries gain more so increased inequality
What is the benefit of globalisation to the UK.
- Higher surplus and consumer choice
- Retail prices and inflation
- UK firms relocate to low wage economies
- Net migration into UK - spending and tax
- Inward investment into UK
- Share prices and profits of UK companies rise.
What are external shocks?
-Outside domestic systems could be positive or negative e.g. technology may be positive:
Negative:
- GFC
- crisis
- Commodity prices
- Growth slowing down in emerging nations
- Investment deals
- Currency volatility
- Extreme weather
- Conflict
What are the reasons and advantages of FDI?
- Market seeking
- Resource Seeking
- Efficiency seeking
Creates:
- Jobs
- Tax revenues
- Capital
- Infrastructure
- Technology
- Human capital
What are the disadvantages of FDI?
- Tax breaks reduce tax revenue
- Profits repatriated to home country
- Investment decisions made overseas with little domestic influence
- Investors seeking low wage economies move elsewhere as wages rise
- Investors exploit lack of safety and environmental regulations
What does it mean to have absolute advantage?
A country can supply a product using fewer resources than another nation. If a country uses the same factors of production but can produce more of a product, it has absolute advantage and is more efficient.
Example:
Workers A and B work for 10 hours
A lays 80 bricks and bakes 20 cakes
B lays 40 bricks and bakes 50 cakes
A has absolute advantage in brick laying and B in cake baking
If they both specialize fully and trade then the output of bricks and cakes can increase.
What does it mean to have comparative advantage?
If a country is able to produce a good for and the relative opportunity cost of production is lower in that nation than another.
It is more productively efficient, and so a country so specialize resources in the goods and services you are relatively best at to lead to a more efficient allocation of resources
What is an example of comparative advantage?
Consider both countries using half of their available resources to each industry
Australia make 250 in beef and 200 in tobacco
The opportunity cost is therefore 5:4
Malawi makes 100 beef and 150 tobacco
The opportunity cost is therefore 10:15
Malawi has a comparative advantage in producing tobacco and Australia in beef - Australia lose more in tobacco to produce more beef than Malawi does
At current outputs, 350 beef and 350 tobacco is made.
If Australia specializes in beef, it can make 500 in beef and if Malawi specialize in Tobacco it can make 300 and then if they trade this can be split at the same ratio it was at before i.e. 250:100 beef goes to 270:130 beef and so more is made (350:400)
What is some evaluation to comparative advantage theory?
- Assumes constant returns to scale - no EofS
- Perfect factor mobility between industries
- No trade barriers which change prices
- Low transportation costs
- No significant externalities
What are the gains from trade?
- Allows deeper specialisation and benefits from EofS
- Increases market competition and choice - innovation and quality
- Increased market contestability reduces prices for consumers leading to higher real incomoes
- Better use of scarce resources e.g. trade in sustainable technology
- Improve allocative efficiency as lower marginal cost
- Increase productivity efficiency as EofS
- Improve dynamic as innovation
- Reduces X inefficiency as keep unit costs low
