6.2 - Globalisation, Free Trade & Protection Flashcards
Globalisation
The economic integration of different countries through increasing freedoms in the cross-border movement of people, goods/services, technology & finance
What has globalisation lead to/impacted?
- impacted national cultures
- spread ideas
- speeded up industrialisation in developing nations
- led to de-industrialisation in developed nations
De-industrialisation
The process by which manifacturing declines in a society/region as a proportion of total economic activity. Usually accompanied by a rise in the proportion of those working in the tertiary sector.
Four main characteristics of globalisation
- Increasing foreign ownership of companies
- Increasing movement of labour and technology across borders
- Free trade in goods/services
- Easy flow of capital (finance) across borders
Multinational corporation
A business that has production facilities in two or more countries e.g. Apple
Advantages of MNCs (name 4)
- Economies of scale
- Increased profit
- Create employment
- New markets
- Reduced transportation costs
- Good risk management
- Tax incentives
- Avoidance of protectionism
Economies of scale (advantage of MNCs)
Global operation -› increase their output -› benefit in lowered costs from economies of scale
Create employment (advantage of MNCs)
New jobs in host country -› rease income for workers -› improve standard of living of locals
Increased profit (advantage of MNCs)
Much of profit is sent back to home country -› benefitting society (though debatable whether they have offshore bank accounts and do not send money back)
New markets (advantage of MNCs)
Identify potentional markets -› begin to sell there -› increase product diversity
Reduced transportation costs (advantage of MNCs)
MNCs set up facilities close to their customers -› lowers transportation cost which would occur as customers travel to the company
Risk management (advantage of MNCs)
Selling in many national markets globally -› reduced risk of failure
Tax incentives (advantage of MNCs)
MNCs able to increase profits by setting up in countries with low corporation tax
Avoidance of protectionism (advantage of MNCs)
MNCs established bases in countries that are operating protectionsim measures -› thus avoid measures (such as import tariffs)
Disadvantages of MNCs
- Worker exploitation
- Resource plundering
- Political power
- Reduce competition
- Lack of local knowledge/culture
- Over-reliance on MNCs for jobs
- Diseconomies of scale
- Exchaneg rate fluctuations
- Negative externalities
Worker exploitation (disadvantage of MNCs)
Many provide poor working conditions and pay very low wages -› sweathsops, depreciating standard of living
Resource plundering (disadvantage of MNCs)
Many extract large quantities of host nation natural resources and provide very little compensation
Political power (disadvantage of MNCs)
Many enjoy revenue that is higher than the GDP of the host country -› gives immense political power which can be used to their benefit
Reduce competition (disadvantage of MNCs)
So large that they out-compete domestic firms in host country -› puts many firms out of business -› reduces competition -› increase unemployment
Lack of local knowledge/culture (disadvantage of MNCs)
May result in problematic local relationships or flawed advertising campaigns/product offerings
Over-relaince on MNCs for jobs (disadvantage of MNCs)
Developing nations place too many workers into MNCs -› if they leave it creates significant unemployment
Diseconomies of scale (disadvantage of MNCs)
Challenges of operating a business over different time zones and cultures can create diseconomies
Exchangerate fluctuations (disadvantage of MNCs)
Unexpected exchange rate fluctuations can have severe impacts on cost and profits for they operate transnationally
Ngegative externalities (disadvantages of MNCs)
MNCs may disregard local environment for it is not theirs -› pollution and distruction of wildlife
International trade
The exchange of goods & services between countries
Free international trade
When there is no government intervention (quotas, taces, tarriffs etc.) to reduce or limit trade
Benefits of free trade (name and explain 4)
- Greater choice: standard of living improves
- Lower prices: international competition lowers prices giving way to higher spending
- International cooperation: trade helps countries build better relationships -› lower levels of hostility
- Flow of new ideas: innovative ideas/technology can be shared internationally
- Access to resources: increase access to raw materials through imports -› increase in output and decrease in costs
- Increased efficiency: inernational competition -› most efficent firm emerges -› improves use of global resources
- Economic growth: exports are key component of GDP -› increase can lead to econ. growth
- Economic development: increased output -› lower levels of unemployment -› higher incomes and standard of living
Protectionism
Government policies that restrict international trade in order to protect domestic industries
Reasons for protectionism (name and explain 3)
- to protect infant industries that would be unlikely to succeed at start-up due to global competition
- to support sunset industries (declining industries) and help limit the economic damage which would occur if they closed
- to maintain strategic industries (energy, defence, agriculture etc.) where being reliant on exports would create vulnerabilities
- to escape dumping: MNCs sell products at an unfairly low price in foreign markets
- to protect employment from being over-reliant on MNCs
- to correct a current account deficit, an impalance where imports ‹ exports
Methods of protectionism (5)
- tariffs
- subsidies
- quotas
- embargoes
- administrative barriers
Tariff (meaning)
A tariff is a tax on imported goods/services (customs duty)
* usually reduces the global demand for that product
Tariff affect on domestic producers targeted by the government action
- Before: less competitive and produce less
- After: increase their outpur
- May need workers to produce more -› unemployment falls
Tariff affect on domestic producers who are connected to the targeted industry
- Bafore: able to purchase raw materials at cheaper proce
- After: cost of production increases resulting in a fall in output
- May need less workers -› unemployment in related industries may rise
Tariff affect on foreign producers
- Descrease demand for their products -› output falls
- Less supply from efficient foreign producers -› global allocation of resources is more inefficient
Tariff affect on domestic consumers
- Before: consumed more products at lower prices
- After: consumed less products at higher prices
- Standard of living worsened as the value of their income is eroded with higher prices
Tariff affect on the government
- After: government recieves tax revenue from each unit imported
Quota (meaning)
A government-imposed trade restriction limiting the number or value of goods a nation imports or exports
Quota affect on domestic producers
- increases their output
- raises the selling price
- increases their revenue
Quota affect on foreign producers
- decrease their ouput
- those firms who manage to export in quota recieve a higher pice for their sales
Quota affect on consumers
- higher prices and less choice
Quota affect on the government
- they do not recieve any tariff revenue
- may receive higher tax revenue at the end of the financial year when domestic firms pay corporation tax
Quota affect on standard of living
- reduced for consumer: higher prices erode purchasing power of income
Quota affect on equality between firms
- domestic firms can compete more equally
Subsidy (meaning)
An amount of money paid to a firm by the government per unit of output, as a form of support
* lowers the cost of production
Subsidy affect on domestic producers
- decreases cost of production
- increases output
- increases inernational competitiveness
Subsidy affect on foreign producers
- makes it harder for them to compete with domestic firms
Subsidy affect on consumers
- lowers prices - greater purchasing power
Subsidy affect on the government
- costs the government the amount of the subsidy
- there is an oppirtunity cost associated with every subsidy provided
Embargo (meaning)
An embargo is a complete ban on trade with a certain country usually as the result of political fall out
Embargo affect on domestic producers
- increases output due to less competition
Embargo affect on foreign producers
- unable to legally trade with the country
- lose sales and profit
- may go out of business or have to reduce workers
Embargo affect on consumers
- prices will rise
- in some cases the product may no longer be available at all
Embargo affect on the government
- has to spend money enforcing the embargo
Administrative barriers (meaning)
Strategies used to create barriers to trade using less obvious methods
Examples of administrative barriers (4)
- health and safety reguations - restrict imports of certain products
- product specification - size, style etc.
- environmental regulations
- product labelling - can be expensive for firms to apply and may limit desire to sell into certain markets
