4.6.1 The international economy Flashcards
Define Globalisation
The process of increased integration and co-operation of different national economies. It involves national economies becoming increasingly inter-related and integrated.
Characteristics of globalisation
- Globalisation is the ever increasing integration of the world’s local, regional and national economies into a single, international market.
- It involves the free trade of goods and services, the free movement of capital and labour and the free interchange of technology and intellectual capital.
- With the spread of globalisation came more trade between nations and more transfers of capital including FDI (foreign direct investment). Moreover, brands developed globally and labour has been divided between several countries. There is more migration and more countries participate in global trade, such as China and India, as well as higher levels of investment. Additionally, countries have become more interdependent, so the performance of their own country depends on the performance of other countries. This could be seen in 2008 and 2009, when the effects of the global credit crunch spread across the globe.
Outline Trade in goods as a factor of globalisation
Developing countries have acquired the capital and knowledge to manufacture goods. The efficient forms of transport make it easier and cheaper to transfer goods across international borders. Some developing countries have the cost advantage of cheaper labour, so MNCs move their production abroad. This causes developed countries to trade with these developing countries, so they can access the same manufactured goods.
Outline Trade in services as a factor of globalisation
For example, the trade of tourism, call centre services, and software production (particularly from India) has increased from developing countries to developed countries.
Outline Trade liberalisation as a factor of globalisation
The growing strength and influence of organisations such as the World Trade Organisation (WTO), which advocates free trade, has contributed to the decline in trade barriers.
Outline Multinational Corporations (MNCs) as a factor of globalisation
MNCs are organisations which own or control the production of goods and services in multiple countries. They have used marketing to become global, and by growing, they have been able to take advantage of economies of scale, such as risk-bearing economies of scale. The spread of technological knowledge and economies of scale has resulted in lower costs of production.
Outline International financial flows as a factor of globalisation
For example, the flow of capital and FDI across international borders has increased. China and Malaysia have financed their growth with capital flows. Also, the foreign ownership of firms has increased. There has been more investment in factories abroad. The removal of capital controls has facilitated this increase.
Outline Communications and It as a factor of globalisation
The spread of IT has resulted in it becoming easier and cheaper to communicate, which has led to the world being more interconnected. There are better transport links and the transfer of information has been made
easier. This is sometimes referred to as the ‘death of distance’.
Outline Containerisation as a factor of globalisation
This has resulted in it becoming cheaper to ship goods across the world. This causes prices to fall, which helps make the market more competitive. Containerisation means that goods are distributed in standard sized
containers, so it is easier to load and cheaper to distribute using rail and sea transport. This helps to meet world demand. Cargo can be moved twenty times as fast as before, economies of scale can be exploited and less labour is required.
However, it is mainly MNCs which have been able to exploit this, and it could result in some structural unemployment
Outline consequences of globalisation for Individual countries
- There could be trade imbalances between countries. For example, the US runs a large current account deficit with China, who has a large current account surplus.
- There could be imbalances and inequalities in consumers’ and countries’ accesses to health, education and markets.
- Within individual countries, there could be income and wealth inequalities if the benefits and costs of globalisation are not evenly spread. This is evident in China, where the population in the rural and urban areas have vastly different levels of income and living standards.
- Culture could spread across the globe. Some might say this has weakened culture and that there has been a loss of cultural diversity due to global brands. However, others will argue that the spread of culture has been positive and helped to improve their quality of life.
Outline consequences of globalisation for Governments
Some governments might lose their sovereignty due to the increase in international treaties. Individual states would find it hard to resist the force of them, and if countries become members of organisations, they will have to abide by their rules.
Outline consequences of globalisation for Producers and consumers
- Consumers and producers can earn the benefits of specialisation and economies of scale as firms become larger.
- Firms operate in a more competitive environment, which encourages them to lower their average costs and become more efficient. Producers can also make their average costs lower by switching production to places with cheaper labour. The spread of technology has resulted in firms being able to employ the most advanced machines and production methods.
- Globalisation leads to a general increase in world GDP, which increases consumer living standards and helps lift people out of absolute poverty. However, it is hard to calculate the proportion of growth which was due to globalisation.
- This rise in average consumer incomes could offset some of the lower costs of production for firms. This is especially due to increased demand from China, which has contributed to the increase in price of commodities, and therefore pushed up the price of raw materials.
- Some consumers gain more from globalisation than others. Globally, there are fewer people in extreme poverty, but this has not been the case in Sub-Saharan Africa.
- There could be increased inequality. Oxfam research in 2015 suggested that 1% of the world own more than the rest of the world
- Consumers could take advantage of a wider range of goods and services because of the increased availability of goods and services. However, some services might
become homogenised, such as hotels.
Outline consequences of globalisation for Workers
- Workers can take advantage of job opportunities across the globe, rather than just in their home country.
- However, there could be structural unemployment. For example, in the UK after the collapse of the ship building and mining industries, there was a lot of structural unemployment. This is because it was more efficient for manufacturing to occur abroad, so production shifted to lower labour cost nations.
- However, it could be argued that countries would have had the change from agriculture to manufacturing to services anyway, and globalisation simply sped it up.
- When production shifts to lower labour cost countries, the creation of jobs could be seen as either beneficial or harmful.
- On one hand, MNCs could be exploiting their labour and providing poor working conditions in, for example, sweatshops. On the other hand, working in a sweatshop might provide a higher, more stable income than any alternatives, such as agriculture.
Outline consequences of globalisation for the environment
Although industrialisation and increased consumer living standards might lead to more pollution through increased production and increased car use, consumers
might show more concern towards the environment as their average incomes increase.
Some of the negative impacts on the environment could include deforestation, water scarcity and land degradation
Define absolute advantage
A country has absolute advantage in the production of a good or service if it can produce it using fewer resources and at a lower cost than another country.
Define comparative advantage
Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country. This means they have to give up producing less of another good than another country, using the same resources.
Countries can specialise where they have comparative advantage. This increases economic welfare.
Define Free trade
Free trade is the act of trading between nations without protectionist barriers, such as tariffs, quotas or regulations.
Free trade provides the following benefits
- Countries can exploit their comparative advantage, which leads to a higher output using fewer resources and increases world GDP. This improves living standards.
- Free trade increases economic efficiency by establishing a competitive market. This lowers the cost of production and increases output.
- By freely trading goods, there is trade creation because there are fewer barriers. This means there is more consumption and large increases in economic welfare.
- More exports could lead to higher rates of economic growth.
- Specialising means countries can exploit economies of scale, which will lower their average costs.
The costs of free trade
- Free trade has resulted in some job losses, since countries with lower labour costs have entered the market.
- Free trade might have contributed to some environmental damage. This is especially from the increase in manufacturing.
Outline the reasons for comparative advantage between the Uk and the rest of the world
- There has been a recent growth in the exports of manufactured goods from developing countries to developed countries. This is because developing countries have gained an advantage in the production of manufactured goods, due to their lower labour costs, so production shifted abroad.
- The deindustrialisation of countries such as the UK has meant the manufacturing sector has declined. This means that production of manufactured goods has shifted to other countries, such as China, whilst the UK now focuses more on services, such as finance.
- This has led to the industrialisation of China and India. Their share of world trade has and the volume of manufactured goods that they export has increased.
- However, since China’s population is now ageing, their wage competitiveness has fallen. This is also due to the rise of the middle class in China, who demand higher wages and consume more.
Outline the Impact of emerging economies between the UK and the rest of the World
The collapse of communism has meant that more countries, especially developing countries, are participating in world trade. International trade is arguably more important for developing countries than
developed countries. It contributes towards 20% of LDC economies compared to 8% of the US economy.
China and India are important for African infrastructure. They have invested in their infrastructure in exchange for natural resources. Both China’s and India’s share in agriculture, mining and fuel has declined. Both countries are important in the Euro area, with trade and financial relations. China is a main import source, whilst both are important for capital.
Outline the Growth of trading blocs and bilateral trading agreements between the UK and other economies
With more trading blocs, trade has been created between members, but diverted from elsewhere. Trade creation occurs when a country consumes more imports from
a low cost producer, and fewer from a high cost producer. Trade diversion occurs when trade shifts to a less efficient producer. Usually, a country might stop
importing from a cheaper producer outside a trading bloc to a more expensive one inside the trading bloc. Moreover, protectionist barriers are often imposed on
countries who are not members, so trade is diverted from producers outside the bloc to producers within the trading bloc.
The policies of developed countries have limited the ability of developing countries to export primary commodities. For example, the EU Common Agricultural Policy (CAP) means domestic farmers receive subsidies to encourage production and lower costs. This increases the incomes of domestic farmers and protects the industry, but farmers in other countries find it hard to compete with them. Therefore, they are not able to access the market in developed countries, which limits their participation In trade.
Outline the Changes in relative exchange rates between the UK and other economies
For a long time, China has been running a trade surplus with the US. Since 2006, the US trade deficit has narrowed with China, and China has reduced their trade surplus, too. China has planned this change from export-led growth to growth fuelled by domestic consumption. When running the trade surplus, China had kept their
currency’s value, the Renminbi, low, in order to make their exports relatively cheap.
It could be argued that one of the reasons for the UK’s current account deficit is the strength of the pound compared to the Euro. In 2015, it reached a seven year high against the Euro
Define protectionism
Protectionism is the act of guarding a country’s industries from foreign competition
Define tariffs as a method of protectionism and there impact
Tariffs are taxes on imports to a country. It could lead to retaliation, so exports might decrease. The impact of tariffs is that the quantity demanded of domestic goods increases, whilst the quantity demanded of imports decreases.
Define Quotas as a method of protectionism and there impact
A quota limits the quantity of a foreign produced good that is sold on the domestic market. It sets a physical limit on a specific good imported in a set amount of time. It leads to a rise in the price of the good for domestic consumers, so they become worse off.
