4.1 International Economics Flashcards
Characteristics of globalisation
- increased trade in goods/services (increase in world exports & imports over last 50 yrs)
- improved mobility of labour & capital (eg. free movement of people within EU, so easier for domestic firms to hire empower an workers so increase in access to higher skilled workers)
Factors contributing to globalisation in the last 50 yrs
- increasing number and influence of global companies (large increase in FDI by firms so increase in no. of businesses owned by an entity in another country eg. Apple headquarters in America but make up majority of phone sales in UK)
- improvements in transport infrastructure & operations (so individuals/ small businesses can ship their products int. so firms/individuals gain access to larger markets from range of int. countries)
- improvements in communication technology & IT. (rise of internet so goods/services can be sold online so firms can sell all around the world so reduces costs as no restrictions eg. ASOS fashion retailer that sells around world with no physical store so less costs)
- trade liberalisation & trading blocs (encourage free trade amongst countries so interdependence of countries increased, helped by WTO eg. European Union recessions in one country affects all trading partners (fall in AD so fall in domestic consumers so fall in exports, fluctuations in shared currency eg. Euro in Germany, France, Spain) so countries help others in trading bloc undergoing bas economic conditions (Greece bail out by the EU)
Impact of globalisation & global companies on individual countries
+ increased investment within countries (TNCS investment) injection into economy, larger impact due to multiplier, creates incentive for supply-side improvements to encourage TNCs
+ TNCs bring world class management techniques & tech, spread to all industries
+ trade increases output as exploitation of comparative advantage (offer lower prices)
- power of TNCs causes political instability as may support unpopular regimes or higher regimes that don’t support them
- comparative cost advantages change overtime so companies leave country, causes structural unemployment & reduces growth
- increased interdependence of economies
Impact of globalisation and global companies on consumers
+ more choice as wider range of goods available from around world
+ can lower prices as firms produce (outsource) in countries with lower costs
BUT
- can rise prices as incomes rising so higher demand for goods/services
- worry about loss of culture
Impact of globalisation & global companies on workers
+ wages for high skilled workers increasing, more demand for their work BUT increasing inequality
+ TNCs provide training for workers & create new jobs
- increased migration lowers wages
BUT
+ increased migration provides important skills & increase in AD which increases no. of jobs - int. competition lowered wages / reduced growth for low skilled workers in developed countries
BUT
+ increase wages for low skilled workers in developing countries - large scale job losses in western world in manufacturing sectors (deindustrialisation) as jobs transferred to other countries (China, Poland)
- workers in sweatshops have poor conditions & low wages, BUT better job than other alternatives
Impact of globalisation & global companies on Government
+ gov receives higher taxes (from TNCs & from employees)
BUT
- more tax avoidance?
+ if use correct policies, can maximise gains & minimise losses
- TNCs have power to bribe and lobby govs, leads to corruption
Impact of globalisation & global companies on producers
+ firms can source products from more countries & sell in more counties (reduces risk as collapse of market in one countries has smaller impact)
+ can employ low skilled workers cheaper in developing countries & exploit comparative advantages(can produce at lower costs) & have larger markets, increase profits
- firms unable to compete int. lose out
Impact of globalisation & global companies on environment
- increase in world production so increase in demand for raw materials, bad for environment (kills habitats, deforestation etc.)
- increased trade & pollution (planes) led to more emissions, more pollution (increase in negative externalities)
+ BUT globalisation means world can work together to tackle climate change & share ideas, tech
Absolute & comparative advantage (definitions)
Comparative advantage: theory that country should specialise in goods/services it can produce at lowest opportunity cost (different opportunity costs make specialisation mutually advantageous)
Absolute advantage: country can produce good using fewer factors of production than another country (more cheaply)
Absolute & comparative advantage (numerical approach)
Absolute & comparative advantages (diagrammatic approach)
Effect of trade on country’s PPF
Due to specialisation Countries can trade their specialisation good for more of a good another country specialises in than they could produce, so overall they have more goods than they would if they didn’t trade and produce outside their PPF
Assumptions & limitations of comparative advantage
- assumes no transport costs (country may have lowest opportunity cost but much higher transport costs so may be more expensive than other country)
- assumes there are no economies of scale (country without comparative advantage may be able to exploit economies of scale to much greater extent so can sell good at lower price (price saving) & country with comparative advantage may become major supplier in market & benefit from huge economies of scale so advantage over other countries greater than comparative advantage model states)
- goods assumed to be homogenous (aren’t in real life so products cant be perfectly compared so difficult to conclude if country has comparative advantage)
- assumes consumers have perfect knowledge (abt which goods have lowest prices so will buy from there, but info gaps so may buy from country without comparative advantage)
- terms of trade between countries determine whether trade can take place (tariffs, trade barriers)
- external costs of production ignored (pollution, unsustainable resources, more socially beneficial to produce good in country that doesn’t have comparative advantages but fewer external costs to environment or society)
Advantages of specialisation & trade in an international context
+ lower price & more choice (trade increases world output so more choice for consumers, countries specialise with lowest opportunity cost so lower cost per unit so lower prices)
+ larger markets & economies of scale for firms (firms can access larger markets as countries trade so increased demand so increased output & benefit from economics of scale, so decrease in average costs can make lower consumer prices)
+ higher economic growth rates & living standards (specialisation so overall output level increases so higher economics growth rates so increase in wages (national output = national expenditure = national income) so increase in material standards of living, increase in demand from labour increase as derived from demand for good/service so unemployment levels fall)
+ trade so greater competition, provides incentive to innovate, so new goods, new production methods, increasing consumer welfare & lowering costs
Disadvantages of specialisation & trade in an international context
- trade deficits occur if country’s goods/services uncompetitive (countries without comparative advantage have low export revenue & high import expenditure so experience large trade deficits so reduced aggregate demand & economic growth rates)
- danger of dumping by foreign firms (trading causes risk of foreign firms dumping goods/services domestic markets so large increase in supply so prices fall, if domestic firms less competitive than foreign competitors so make loss at lower prices & forced out of market so increase in unemployment rate)
- increased exposure to external shocks (trade increases interdependence amongst countries so increase in risk of external shocks eg. recession causes demand for imports to fall so country they trade with experience fall in export revenue from goods/services they sell to that country, so knock on effect contributes to trade deficit so decrease in economic growth)
- can cause structural unemployment, jobs lost to foreign firms more efficient & competitive (eg. deindustrialisation in Manchester in UK so suffer from unemployment)
- environment suffers as increased transport between countries (planes, shipping) & increased demand for resources (deforestation)
- loss of culture as trade brings foreign ideas & products, locals unhappy
