6.2 - Globalisation

Question 1

What is Globalisation?

Answer 1

Process by which world has become increasingly more interconnected through trade and other links

Question 2

What is Containerisation?

Answer 2

A system of standardised transport that uses a common size of steel containers to transport goods

Question 3

What are Multinational company?

Answer 3

A firm that produces operates in more than one country

Question 4

What are the 4 main characteristics of Globalisation?

Answer 4

1) Increasing foreign ownership of companies
2) Increasing movement of labour and technology across borders
3) Free trade in goods and services
4) Easy flows of capital across borders

Question 5

What are the advantages of MNC’s

Answer 5

Economies of scale: as they operate globally they are able to increase their output & benefit from lowered costs created by economies of scale

Increased profit: much of their profit is sent back to their home country.

Create employment: new jobs are created in host countries each time a new facility is setup & this raises income which helps to improve the standard of living in that country

Risk management: By selling in many national markets, the risk of failure is reducedt.

Question 6

What problems do MNC’s create?

Answer 6

Worker exploitation - Many MNC’s provide poor working conditions and pay very low (sweatshop) due to wielding immense political power over countries

Negative externalities - These are harmful effects to third parties that are not directly involved in the market transaction. Many MNCs extract large quantities of host nation natural resources providing very little payment or compensation

Reduced competition - MNCs are so large that they can out compete domestic firms in the host country. This put many first out of buisness and reduces competition in that country.

Diseconomies of scale - Increase when an increase in the scale of output results in higher cost per unit. Challenges of operating a buisness over a different time zones and cultures create a significant costs

Question 7

What is free trade?

Answer 7

International trade refers to the exchange of goods & services between countries
International trade involves the exchange of goods/service through exports & imports
International trade is ‘free’ when there is no government intervention

Question 8

What are the advantages of free trade?

Answer 8

Consumers
Lower prices due to greater competition driving down the prices/cost.
Greater availably and variety of product, as products can be purchased that are not made in the domestic economy.

Firms:
Enables producers to specialise and expand due to selling to a larger market
May be able to purchase raw materials more cheaply from foreign suppliers, lowering cost of production.

Economy:
Encourages more exports, increasing aggregate demand an export led economic growth more compeition from imports improves qualitiy

Question 9

What are the disadvantages of free trade?

Answer 9

Consumers:
Unsafe or low-quality products may be imported
If one firm dominates and becomes a monopoly this might increase the prices for consumers

Firms:
Increase in competition from other producers and infant industries cannot compete without protection
If there is inflation in the countryside they import from, it will raise their cost of production.

Economy:
Increase in imports will increase the current account deficit May become dependant on other countries who may gain and exploit their monopoly power

Question 10

What are the benefits of free trade?

Answer 10

Greater choice: with access to a wider variety of goods/services, the standard of living improves
Lower prices: with international competition prices fall giving households the ability to buy more
International cooperation: required for trade helps countries to build better relationships which leads to lower levels of hostilities
Flow of new ideas: innovative ideas & technology can be shared between countries
Access to resources: output can increase & costs of production can fall with increased access to raw materials
Increased efficiency: international competition allows the most efficient firms to emerge & this improves the use of global resources

Question 11

How can free trade reduce firms cost of production?

Answer 11

Free trade allows a country to specialise in what it is best at by using resources more efficiently
There are no tariffs charged on imports which will lower COP
Free trade increases competition which incentivises firms to increase their productivity to lower their cost.

Free trade results in a larger market which means firms will be able to take advantage of economies of scale
Free trade results in more sources of raw materials or capital to import and sell at a high price

Question 12

What is protectionism?

Answer 12

Government policies that restrict international trade in order to protect domestic industries.

Question 13

What are Tariffs why do the government implement them and what effect do they have?

Answer 13

Question 14

What are Quotas why do the government implement them and what effect do they have?

Answer 14

Domestic producers , Foreign producers , consumers , Government

Question 15

What are Subsidy why do the government implement them and what effect do they have?

Answer 15

Domestic producers , Foreign producers , consumers , Government

Question 16

What are Embargo’s why do the government implement them and what effect do they have?

Answer 16

Domestic producers , Foreign producers , consumers , Government

Question 17

What are the reasons for protectionism and their explanation?

Answer 17

Infant industries - To protect new firms that would be unlikely to succeed at start up due to the level of global compeition. Once established support is removed.

Sunset industries - To support firms at the end of their life cycle and so government chose to support them to limit the economic damage that would occour if they were to close abruptly.

Strategic industries - Industries such as energy defence and agriculture are essential to the self sufficiency and security of a country. Being reliant on others for these creates vulnerabilities for a nation

Dumping - To protect from foreign firms selling products at unfairly low prices in foreign markets and usually below their normal cost of production.

Current account deficit - Imports greater than exports. Amount of money leaving the country to support foreign firms is greater than that entering to support domestic firms. Protectionism aims to correct this balance

Question 18

Why is protectionism not a good method for Infant industries, Sunset industries and Current account deficit?

Answer 18

Infant industries:
It can be difficult to identify the new industries which have potential
There is a risk that the industries won’t become efficent but rather they become dependent
Use it inefficiently

Sunset industries:
If the other industries in that economy are becoming efficent and expanding, and labour is mobile the protection won’t be needed
There is also an oppotunity cost for the government to be subsidising an inefficient industry

Current account deficit:
There us a rusk of retaliation if other countries respond by imposing trade restrictions, the country will buy fewer imports and sell fewer exports
Imports as a cost o production will also raise in price.

Question 19

How does protectionism support growth of domestic firms?

Answer 19

Protectionism may increase the price of imports therefore contracting demand for imports. This will mean that the quantity of domestic goods demand increases, providing revenue for domestic firms to use to fund their growth

Protectionism can allow infant industries to grow and prevent sunset industries from declining, via subsidies to lower costs and make them more intentionally competitive with lower prices.

Question 20

How does protectionism not support growth of domestic firms?

Answer 20

Protectionism might lead to retaliation from other countries, who will put protectionist policies on their own economy. This will increase the price of exports and decreasing the quality demanded for exports made by domestic firms, damaging their potential for growth

Trade protectionism may make domestic firms complacent and less efficent if they become reliant on protection, which reduces their incentive to grow