4.1 international economics

Question 1

Globalisation

Answer 1

‘increasing integration of the world’s local, regional, and national economies into a single international market’

Question 2

Characteristics of globalisation

Answer 2

• Free trade of goods and services
• Free movement of labour
• Free movement of capital
• Free interchange of technology and intellectual capital

Question 3

Factors contributing to globalisation in the last 50 years

Answer 3

• Trade in goods/services
• Trade liberalisation
• Multinational companies
• International financial flows
• Foreign ownership of firms
• Communications and IT

Question 4

Causes of globalisation - Trade in goods

Answer 4

• For developed countries, googs are increasingly being manufactured abroad in developing countries like China and India.
• Trade is occurring because developing countries are acquiring the capital and know-how to produce manufactured goods, transport is improving, and developing countries have the advantage of low wage rates.

Question 5

Causes of globalisation - Trade in services

Answer 5

• Trade in services is also growing.
• For instance, tourism is increasing due to more disposable income, call centres for customers in developed countries are being located in developing countries, and India has become a world leader in software engineering.

Question 6

Causes of globalisation - Trade liberalisation

Answer 6

• Trade in goods and services is growing because of trade liberalisation.
• In the 30s, the depression caused international trade to collapse and individual countries misguidedly tried to boost domestic demand by enacting fiercely protectionist policies.
• Since the end of WWII, these barriers have gradually fallen, encouraging growth in global trade.

Question 7

Causes of globalisation - Multinational companies

Answer 7

• Multinational companies have grown in number and size.
• In industries like oil and car manufacturing, this is because only multinational companies have the economies of scale to be competitive and technologically advanced.
• In other industries, successful marketing has created global brands such as Coca-Cola, McDonald’s, and Magnum.
• Many of these companies also have political and economic power, as they have vast monopoly power.
• They can also engage in anti-competitive practices, and have strong lobbying power with governments, especially by threats of disinvestment and promises of investment.

Question 8

Causes of globalisation - International financial flows

Answer 8

• Financial flows are becoming far greater between countries.
• For instance, China and Malaysia have financed some of their vast growth via inward flows of international capital.

Question 9

Causes of globalisation - Foreign ownership of firms

Answer 9

• Foreign ownership of firms is increasing.
• For instance, many MNCs have investments in factories in China, French firms have bought US firms, and a company founded in India is now the biggest steel producer in the world after buying several steel producers in the developed world.
• Some oil rich states like Qatar and Norway have state investment funds which buy stakes in foreign companies.

Question 10

Causes of globalisation - Communications and IT

Answer 10

• Developments in communications and it have shrunk the time needed for economic agents to communicate with each other.
• In industries such as software production, programmers are effectively just as near to a client’s office located in, say, London if they themselves are located in India or Kent.

Question 11

Impact of globalisation on consumers - Consumer choice

Answer 11

Wider variety of goods and services generally available as they can be transported around the world, with globalisation leading to greater consumer choice

Question 12

Impact of globalisation on consumers - Homogeneity

Answer 12

Absolute variety potentially decreasing as goods become increasingly homogenised.

Question 13

Impact of globalisation on consumers - Prices

Answer 13

Prices are generally driven down by increased supply, but consumers whose incomes are hurt by globalisation may still be worse off

Question 14

Impact of globalisation on consumers - Tourism

Answer 14

Holiday to Peru is the same as a holiday to Spain apart from scenery

Question 15

Impact of globalisation on consumers - Goods

Answer 15

Clothes made in China may be bought in UK, USA, Japan, etc

Question 16

Impact of globalisation on workers - Employment and unemployment

Answer 16

The transfer of much of the manufacturing of products from Western Europe and the USA to countries like China and Poland has led to a large scale loss of jobs in this sector in the developed world whilst the opposite has been happening in the developing world.

Question 16

Impact of globalisation on consumers - Incomes

Answer 16

• Incomes have generally increased incomes round the world, allowing consumers to buy more goods.
• However, not every consumer has gained, e.g. a worker in south Wales whose job has moved to China is likely to be worse off.

Question 16

Impact of globalisation on workers - Wages

Answer 16

• In a perfect labour market where all workers are homogeneous, all workers will earn the same wages. Globalisation is shifting workers and placing workers. This makes workers compete more.
• This has tended to depress the wages of unskilled workers. There is also upward pressure on wages of high-skilled workers in developed countries, leading to an increase in inequality.

Question 16

Impact of globalisation on workers - Migration

Answer 16

• Majority of migrants are economic migrants who believe that by moving they can achieve a better standard of living for themselves and their families in other countries.
• First-generation economic immigrants tend to be successful in gaining jobs and increasing their incomes furthermore they can fill skill gaps in the economy and so raise the productivity of existing workers.
• By forming businesses, some immigrants even create jobs.
• However, economic immigrants are competing in the job market with workers from the host country. - Immigrants are sometimes perceived by native workers as ‘taking their jobs’ or lowering wage rates because of competition in the labour market.

Question 17

Impact of globalisation on workers - Multinationals

Answer 17

• Multinationals create jobs wherever they set up operations. They are sometimes criticised for creating only low-skilled jobs while using high-skilled workers from overseas.
• However, increasingly multinational companies are training up new workers in countries they invest in, in order to make an investment in that country that will reap later results.
• Training given to employees also spills into the local economy, raising human capital. This happens when workers leave the multinationals for local industry.

Question 18

Impact of globalisation on producers - Specialisation and economic dependency

Answer 18

Economic agents are increasingly specialised so they become more dependant on each other. This means that some operations are far riskier because they rely so heavily on business in other countries. Equally globalisation helps reduce risk as firms can source their production elsewhere if a problem should arise.

Question 19

Impact of globalisation on producers - Costs and markets

Answer 19

Globalisation gives firms a wider variety of businesses to buy goods and services from, along with for firms to buy precursors to their products from.

Question 20

Impact of globalisation on producers - Footloose capitalism and tax avoidance

Answer 20

Firms which operate in multiple countries have more power to move their entire production facilities from one to a country depending on, say, economic conditions or tax rates. This can also exploit comparative advantage. They can also engage in transfer pricing.

Question 21

Impact of globalisation on government

Answer 21

• Moves jobs away from countries with higher taxes to those with lower taxes.
• MNCs may bribe and corrupt governments, leading to inefficiency, and working against the interest of the populace.

Question 22

Impact of globalisation on individual countries

Answer 22

• Depending on the country, benefits and detriments can change.
• For instance, China has clearly benefited greatly from globalisation, while some countries’ central industries have moved away completely.

Question 23

Non-economic impact of globalisaiton

Answer 23

• Local culture is sometimes harmed because of cultural appropriation and cultural homogenisation (e.g. American culture becoming global culture)
• Nations no longer have any self-determination, as they must bend to the will of giant MNCs (e.g. cannot censor people because internet).
• There are significant impacts on the environment and sustainability

Question 24

What is international trade?

Answer 24

The exchange of goods and services between countries

Question 25

What are imports?

Answer 25

Goods and services coming into the country

Question 26

What are exports?

Answer 26

Exports are goods and services going out of a country

Question 27

What is free trade?

Answer 27

No restrictions on the flow of goods and services between countries

Question 28

What is absolute advantage?

Answer 28

Where a country can produce a good or service using fewer resources than that of another country

Question 29

What is comparative advantage

Answer 29

Where a country can produce a good at a lower opportunity cost than that of another

Question 30

What does comparative advantage assume?

Answer 30

• Comparative advantage assumes there are no transport costs, and these could lower or prevent any comparative advantage.
• It also assumes costs are constants and that there are no economies of scales. Economies of scale help to increase the gains from specialisation.
• In the model, goods are assumed to be homogenous, which is unlikely to hold in real life. The fact products aren’t homogenous makes it difficult to conclude that a country has a comparative advantage as their products can’t be perfectly compared.
• It also assumes that factors of production are perfectly mobile, there are no tariffs or other trade barriers and there is perfect knowledge.
• Whether trade takes place will depend on the terms of trade between the countries.

Question 31

Why is it a problem that opportunity cost ratios remain unchanged in comparative advantage theory?

Answer 31

Opportunity cost constantly changes due to changes in efficiency improvements

Question 32

What should a country do if they have a comparative/absolute advantage over the rest of the world in an industry

Answer 32

Specialist in it, allocate more resources to it

Question 33

What causes the rise in efficiency in specialisation

Answer 33

• Greater understanding of requirements of production
• Each economic unit can specialise in what they are best at
• No time wasted switching between tasks
• Technical economies of scale as capital equipment is used to produce goods and services

Question 34

What are the advantages to specialisation due to comparative/absolute advantage?

Answer 34

• Comparative advantage shows how world output can be increased if countries specialise in what they are best at producing, this will increase global economic growth.
• Trading and specialising allows countries to benefit from economies of scale , which reduces costs and therefore decrease prices globally.
• Different countries have different factors of production and so trade allows countries to make use of factors of production, or the things produced by these factors, which they otherwise may have been unable to.
• Trade enables consumers to have greater choice about the types of goods they buy, and so there is greater consumer welfare.
• Trade also means there is greater competition, which provides an incentive to innovate. This creates new goods and services and new production methods, increasing consumer welfare and lowering costs respectively.
• Countries which isolate themselves for political reasons, like North Korea, have found that their economies tend to stagnate.

Question 35

What are the disadvantages to specialisation due to comparative/absolute advantage?

Answer 35

• However, trade can lead to over-dependence, where some countries become dependent on particular exports whilst others become dependent on particular imports. This can cause problems if there are large price falls in the exports of if imports are cut for political reasons.
• It can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and competitive. The less mobile the workforce, the higher the chance that changes in demand due to trade will reduce output and employment over long periods of time. This is a big problem in the UK as some areas such as Manchester suffer from unemployment as their traditional industries declined, for example ship-building.
• The environment will suffer due to the problems of transport as well as the increased demand for resources e.g. deforestation.
• Countries may suffer from a loss of sovereignty due to signing international treaties and joining trading blocs, for example in the EU.
• They may see a loss of culture as trade brings foreign ideas and products to the country.