8 Globalisation

Question 1

Q1: What is globalisation?

Answer 1

A1: Globalisation refers to the process by which economies have become increasingly integrated and interdependent. It is characterized by the increased flow of goods, services, capital, and information across national borders. This integration is facilitated by factors such as trade liberalization, advancements in technology, the growth of multinational corporations, increased mobility of labor and capital, and the formation of trading blocs.

Question 2

Q2: How has trade liberalization contributed to globalisation?

Answer 2

A2: Trade liberalization has played a significant role in promoting globalisation. It involves reducing or eliminating barriers to trade, such as tariffs and quotas. As these barriers have decreased, countries have been able to engage in more extensive trade with one another. This has led to an increase in international trade and the integration of economies. Trade liberalization has also facilitated the transfer of technology, knowledge, and expertise between nations. The World Trade Organization (WTO) has played a crucial role in promoting free trade and resolving trade disputes among member countries. Overall, trade liberalization has been a driving force behind the expansion of globalisation.

Question 3

Q3: How have trading blocs contributed to globalisation?

Answer 3

A3: Trading blocs, such as the European Union (EU) and the Association of Southeast Asian Nations (ASEAN), have contributed to globalisation in two ways. Firstly, these blocs have deepened their integration, allowing for more free trade and easier movement of goods, services, and capital among member states. This has led to increased economic cooperation and integration within these regions. Secondly, trading blocs have attracted foreign direct investment (FDI) as the removal of trade barriers and harmonization of regulations make the blocs more attractive for multinational corporations (MNCs). The presence of trading blocs has resulted in increased trade, labor migration, and FDI, promoting greater global interdependence.

Question 4

Q4: How has the growth of multinational corporations (MNCs) contributed to globalisation?

Answer 4

A4: The growth of multinational corporations (MNCs) has significantly contributed to globalisation. Technological advancements and improved access to world markets have allowed MNCs to expand their operations across multiple countries. As a result, MNCs have become larger in terms of production levels and profitability. To tap into international markets and maximize their profits, MNCs establish and operate in various countries, creating interdependence between nations through increased foreign direct investment (FDI). MNCs bring capital, technology, and employment opportunities to host countries, further driving economic integration and globalization.

Question 5

Q5: How has technological advancement influenced globalisation?

Answer 5

A5: Technological advancements, such as improvements in the internet, software development, and transportation, have played a significant role in promoting globalisation. These advancements have made international trade and business operations more efficient, quicker, and cheaper. Businesses can now trade internationally with ease, communicate and transfer information instantaneously, and reach customers worldwide. This has led to increased trade flows, foreign direct investment (FDI), and migration as businesses and individuals can tap into global markets more easily. Technological advancements have facilitated the integration of economies and the interdependence of nations in the global economy.

Question 6

Q6: How has the increased mobility of labor and capital contributed to globalisation?

Answer 6

A6: The increased mobility of labor and capital has been a key driver of globalisation. Factors such as the growth of trading blocs, tax incentives for businesses and workers, advancements in technology, and labor market deregulation have made it easier, quicker, and cheaper for labor and capital to move across borders. As a result, foreign direct investment (FDI) has dramatically increased, with businesses setting up operations in multiple countries. Similarly, workers seek employment opportunities that maximize their earning potential, leading to migration flows. The increased mobility of labor and capital has fostered economic integration and interdependence among nations, shaping the global economy.

Question 7

Q7: How has the fall in transport costs influenced globalisation?

Answer 7

A7: The fall in transport costs, driven by innovations and greater privatization of transport systems, has had a significant impact on globalisation. It has made trade, foreign direct investment (FDI), and migration more accessible and affordable. The reduced costs of shipping, air freight, and road transportation have facilitated the movement of goods, services, and people across borders. This has promoted more extensive trade relationships, enabled businesses to expand their operations globally, and allowed individuals to seek employment opportunities in different countries. The fall in transport costs has contributed to the integration of economies and the deepening interdependence of nations in the global economy.

Question 8

Q1: What are the pros of globalisation related to world efficiency?

Answer 8

A1: Globalisation brings an increase in world efficiency through greater free trade and specialization. With free trade, countries can allocate their resources to industries where they have a comparative advantage, achieving allocative efficiency. The use of money as a means of exchange helps solve the basic economic problem, maximizing net benefits for both consumers and producers. By focusing on their strengths, countries can enhance productivity and efficiency, leading to overall economic improvement.

Question 9

Q2: How does globalisation contribute to larger economies of scale for businesses?

Answer 9

A2: Globalisation provides businesses with access to a larger international market, allowing them to grow larger and reach more consumers worldwide. This increased market size leads to various economies of scale, such as purchasing and technical economies. Businesses can lower their average costs of production, improving productive efficiency. Lower costs translate into higher profitability and potentially lower prices for consumers. The ability to tap into a larger market enhances a business’s growth potential and competitiveness in the global economy.

Question 10

Q3: How does globalisation foster increased competition and lower prices?

Answer 10

A3: Globalisation creates a global market, leading to increased competition for businesses. In order to stay ahead of rivals, businesses strive to innovate and improve their products and services. This competition results in allocative efficiency and benefits consumers through lower prices, higher quantity, higher quality, and greater choice. Businesses are incentivized to invest and be innovative, while consumers can access the latest technology and a diversified range of high-quality products. The presence of competition drives businesses to continuously improve and provide value to consumers.

Question 11

Q4: What benefits do consumers and businesses gain from increased choice in globalisation?

Answer 11

A4: Globalisation expands the options for businesses and consumers. Businesses can source raw materials from around the world, finding the most cost-effective prices. Similarly, consumers have access to a broader market to purchase goods and services. Businesses benefit from lower production costs, which can lead to lower prices, greater market shares, and higher profitability. For consumers, increased choice means improved welfare, both in terms of material living standards and non-material benefits. Consumers can enjoy a diverse range of products and services, enhancing their overall quality of life.

Question 12

Q5: How does globalisation contribute to higher rates of GDP growth?

Answer 12

A5: Globalisation’s larger market size and specialization contribute to higher rates of GDP growth. Countries with comparative advantages can exploit global markets and generate revenue from exports. As exports (X) increase relative to imports (M), aggregate demand (AD) rises, leading to economic growth. With economic growth, unemployment tends to decrease as firms hire more labor to meet the demand for goods and services. This growth reduces poverty, increases incomes, and raises living standards, contributing to overall prosperity and well-being.

Question 13

Q6: How does globalisation facilitate faster rates of technology transfers?

Answer 13

A6: Globalisation enables faster rates of technology transfers compared to closed economies. The access to new technologies and products is significantly improved. Technological advancements occur more rapidly, enhancing business efficiency and profitability. Consumers benefit from lower prices and have the opportunity to purchase innovative goods and services. The spread of technology is accelerated through global networks and collaborations, leading to overall economic progress and improved living standards.

Question 14

Q7: How does globalisation allow firms to benefit from producing offshore?

Answer 14

A7: Globalisation has made it easier for firms to produce offshore by leveraging advancements in technology and transportation. Businesses can take advantage of lower production costs by moving part or all of their production processes overseas to countries where costs are lower. This offshoring allows businesses to become more profitable, leading to increased innovation and technology advancement through research and development (R&D). Consumers benefit from accessing goods at lower prices, while offshoring also creates job opportunities and incomes for workers in developing countries, contributing to their economic growth and development.

Question 15

Q8: What are the benefits of inward migration associated with globalisation?

Answer 15

A8: Inward migration, driven by globalisation, brings several benefits to countries that attract migrant labor. Migrants possess unique skill sets that can fill job vacancies, boosting productivity and tax revenues in the economy. With a diverse workforce, businesses can maintain continuous production even during nights and weekends, enhancing their competitiveness. Migrants often send remittance income back to their home countries, which increases the incomes and living standards of their family members. Inward migration contributes to economic growth, social integration, and global interconnectedness.

Question 16

Q1: What are the potential negative consequences of globalisation on income distribution?

Answer 16

A1: Globalisation can lead to growing income inequality, particularly in developed nations. This is because the cost of production may not be passed on to higher incomes for all, resulting in widening income gaps and a potential increase in relative poverty. The objectives of reducing poverty and improving government finances may not be met in developed countries, leading to deteriorating living conditions for certain segments of the population. In developing nations, significant parts of the population may experience absolute poverty, hindering economic development. The unequal distribution of income can hinder overall economic progress and social well-being.

Question 17

evaluation: Q2: How does globalisation contribute to a rise in structural unemployment?

Answer 17

A2: Globalisation can result in a rise in structural unemployment. As major industries struggle to compete internationally against countries with a comparative advantage and low-cost labor, they may go into decline. Businesses may engage in offshoring to seek competitive advantages, which can contribute to domestic structural unemployment. This loss of major industries undermines a crucial macroeconomic objective. Moreover, workers in declining industries may face occupational immobility, posing a challenge for the government in terms of retraining and reskilling efforts. The government incurs direct costs for retraining workers and indirect costs in the form of higher unemployment benefits and lower tax revenue. For individuals, both relative and absolute poverty become likely consequences of structural unemployment.

Question 18

Q3: How does globalisation lead to trade imbalances and potential economic crises?

Answer 18

A3: Globalisation, with trade dominated by a few exporting nations, has increased the frequency of trade imbalances. Some countries have large current account surpluses, while others have large deficits. To fund these deficits, levels of international debt have risen dramatically. As countries become more integrated and reliant on one another, a shock affecting one country can have an impact on others, increasing the likelihood of economic crises. Economic crises can spread quickly and bring down the global economy, reducing incomes and prosperity for all. The interconnectedness of economies through globalisation has amplified the risks associated with trade imbalances and economic shocks.

Question 19

Q4: What are the environmental costs associated with globalisation?

Answer 19

A4: Globalisation, with increasing foreign direct investment (FDI) and a focus on growth, has brought about negative externalities and environmental costs. These include high pollution levels, resource depletion, resource degradation, and deforestation. The pursuit of economic development and growth has often come at the expense of well-being and quality of life. Unsustainable production practices imply that future generations bear the brunt of these costs. The environmental costs associated with globalisation pose challenges to long-term sustainability and hinder economic development that prioritizes the preservation of natural resources and the well-being of present and future generations.

Question 20

Q5: What risks arise from over-specialisation in the context of globalisation?

Answer 20

A5: Over-specialisation, where countries focus on exploiting their comparative advantage and neglect the production of goods and services in which other countries are more efficient, carries risks. There is a potential risk of becoming overly reliant on a narrow range of industries. If these industries collapse or decline, there may be no alternative industry available to sustain growth and development. In developing nations, this can result in a dual economy, trapping the economy in a cycle of low-level development. Over-specialisation limits diversification and poses risks to long-term economic stability and resilience.

Question 21

Q6: How can multinational corporations (MNCs) exert too much power and influence through globalisation?

Answer 21

A6: Multinational corporations (MNCs) can gain significant power through globalisation, primarily due to their size, potential tax revenue contribution, and their ability to stimulate growth and employment. This power allows them to influence policies in their favor, such as pushing for environmental policy loosening, deregulating hiring and firing practices, and advocating for lower business taxation rates. These policy changes may not align with the best interests of the countries they enter. MNCs’ influence can lead to a shift in policy priorities that may not consider long-term sustainability or the broader welfare of the host country’s population. The concentration of power in the hands of MNCs raises concerns about democratic governance and equitable decision-making processes.

Question 22

Q7: What are the costs associated with migration in the context of globalisation?

Answer 22

A7: Globalisation can result in costs associated with migration, particularly for developing economies. The phenomenon of brain drain occurs when the lure of higher incomes abroad incentivizes skilled workers to move away from their home countries. This brain drain effect can reduce the long-run growth rates and prosperity of developing nations as they lose their most talented individuals. Additionally, countries receiving migrant labor may experience downward pressure on wages in certain professions, and job opportunities may be taken away from locals. The costs of migration can have significant economic and social implications for both sending and receiving countries, affecting human capital development, income distribution, and local labor markets.

Question 23

Q1: What are the challenges and limitations of fully functioning free trade?

Answer 23

A1: While tariff barriers and quotas have been reduced, the spread of subsidies and non-tariff barriers, particularly in agriculture, has negatively impacted developing countries. The World Trade Organization (WTO) has been successful in promoting free trade in the manufacturing and services sectors, where developed countries have dominance. However, poorer countries that rely on the primary sector for their exports and growth face a more uneven playing field. More work is needed to level the playing field and address the disparities that hinder the full benefits of free trade for developing countries.

Question 24

evaluation: Q2: What role does the government play in mitigating the negative effects of globalisation?

Answer 24

A2: The role of government is crucial in mitigating the negative effects of globalisation and ensuring that its benefits are distributed equitably. While globalisation can increase growth rates and prosperity, it does not automatically lead to poverty reduction and income growth in all countries. Governments must play a pivotal role in effectively taxing higher incomes, particularly benefiting capital owners who are argued to be the greatest beneficiaries of globalisation. This tax revenue can then be redistributed to reduce income inequalities that globalisation may promote. Governments must also implement efficient environmental policies, invest in education schemes to enhance human capital, provide re-training programs for workers affected by competition, and develop necessary infrastructure to fully benefit from trade. Effective government intervention is essential in addressing the challenges and maximizing the positive outcomes of globalisation.

Question 25

Q3: Why is diversification important for developing countries in the context of globalisation?

Answer 25

A3: It is tempting for developing countries to rely heavily on the revenue generated from the primary sector in a resource-rich economy. However, this can trap them in the resource curse, making them vulnerable to slumps in primary commodity markets, resource depletion, and recessions abroad. Governments have a role to play in encouraging diversification by providing incentives for companies or entrepreneurs to enter the manufacturing sector, where value-added production takes place and incomes are higher. Diversification breaks the resource curse and poverty cycles, leading to sustained growth, improved living standards, and increased income levels. Countries that have successfully diversified into manufacturing sectors have demonstrated better economic performance and higher levels of development.

Question 26

Q4: What are the benefits of managed globalisation and selective openness to different aspects of globalisation?

Answer 26

A4: Countries can adopt different approaches to globalisation, selectively opening themselves to various aspects such as trade, foreign direct investment (FDI), migration, and short-term financial flows. Countries that have managed globalisation well have shown better outcomes. For example, China and India opened their economies to trade and FDI while being cautious about short-term speculative financial flows that can create unsustainable bubbles and economic volatility. Opening up financial markets prematurely without adequate preparations can expose countries to both internal and external shocks, leading to economic crises, as seen in South American countries like Argentina, various African countries, and the Caribbean Islands. Managed globalisation allows countries to benefit from the positive aspects while mitigating the risks and vulnerabilities associated with uncontrolled openness.