A-Level Economics A: Chains of Reasoning PAPER 2

Question 1

4.1.1 Globalisation

Q. Explain the impacts of globalisation on consumers

Answer 1

1. The benefits include greater competition, lower prices, economies of scale.
2. Globalisation means that domestic monopolies will now face more international competition.
3. This leads to lower prices for consumers since other firms can undercut firms that operate at a higher/uncompetitive price point.

Question 2

4.1.1 Globalisation

Q. Explain the impacts of globalisation on workers

Answer 2

1. In terms of employment, some people have gained whilst others have lost.
2. Developing countries generally provide cheap labor; many companies from developed countries relocate their manufacturing facilities to developing nations.
3. As a result, workers who were previously involved in manufacturing become unemployed.

Question 3

4.1.1 Globalisation

Q. Explain the impacts of globalisation on economic growth

Answer 3

1. Globalisation increases investment within countries.
2. The investment of TNCs represents an injection into the economy, and which will have a larger impact due to the multiplier.
3. This creates an incentive for countries to make supply-side improvements to encourage TNCs to operate in their countries.

Question 4

4.1.1 Globalisation

[POINT: LOW PRICES FOR CONSUMERS]

[DIAGRAM OF TRADE CREATION]

Q. Examine the potential benefits of membership in a trade bloc

Answer 4

1. The benefits include tariff removal which leads to trade creation.
2. Trade creation will occur when there is a reduction in tariff barriers, leading to lower prices.
3. This switch to lower cost producers will lead to an increase in consumer surplus and economic welfare due to lower prices.
4. Removing tariffs reduces the price of imports from P1 to P2. Quantity bought rises from Q3 to Q4.
   Therefore there is an increase in consumer surplus, equal to area 1+2+3+4.

Question 5

4.1.1 Globalisation

[CB: LOW PRICES FOR CONSUMERS]

[DIAGRAM OF TRADE CREATION]

Q. Examine the potential benefits of membership in a trade bloc

Answer 5

1. However, that is not the full story, reducing tariffs has two drawbacks on domestic producers and government tariff revenue.
2. The diagram shows there is a net gain from removing tariff barriers.
3. Domestic producers will sell less as consumers buy cheaper imports (decline in producer surplus is shown by area 1).
4. Governments will lose tax revenue (from import tariffs) (shown by area 3).

Question 6

4.1.1 Globalisation

[POINT: SPECIALISATION]

Q. Examine the potential benefits of membership in a trade bloc

Answer 6

1. The benefits include greater competition, lower prices, economies of scale from specialisation.
2. Free trade encourages increased specialisation, and this increases output, according
   to comparative advantage.
3. This specialisation also helps firms to benefit from
   economies of scale.
4. Economies of scale will lead to lower average costs from increased output causing lower prices and costs, a dynamic advantage.

Question 7

4.1.1 Globalisation

[CB: SPECIALISATION]

[TRADE DIVERSION]

Q. Examine the potential benefits of membership in a trade bloc

Answer 7

1. Countries are no longer able to benefit from trade with countries in other blocs and the blocs are likely to distort world trade.
2. Inefficient producers within the bloc are protected from efficient producers outside the bloc, called trade diversion.
3. Trade diversion occurs when tariff agreements cause imports to shift from low-cost countries to higher-cost countries.