Assess the view that, for the UK, the economic benefits of globalization outweigh the costs

Question 1

Intro

Answer 1

• Globalization is defined as the increased interconnectedness between global economies, resulting in increased trade, increased capital flows, increased migration, increased role of multinational corporations and globally distributed supply chains.
• Globalization has affected the UK by reducing costs via outsourcing parts of the production process and by migrants working at cheaper wage rates.
• On the other hand, globalization has increased the volatility of the UK business cycle, due to increased dependence upon the global business cycle.
• Globalization can also lead to specialization, which can lead to increased possibilities for economies of scale and potentially structural unemployment.

Question 2

P1 - Reduced production costs

Answer 2

• Migrant workers often work for less, reducing wage costs
• Production processes can be outsourced to other countries where due to wage and geographical reasons, total costs are lower
• This can increase profits and efficiency, leading to an outward shift in SRAS and LRAS
• If an economy is operating at full employment, then LRA1 and AS1 refer to without globalization, and LRAS 2 and AS2 refer to with globalization
• Price has dropped from P1 to P2, and output has increased by Y2-Y1
• However, if migrant workers occupy jobs within the UK, then there will be greater unemployment, and there is the same effect if production is outsourced elsewhere, particularly for low-skilled occupations such as in the construction and low-skilled manufacturing industry

Question 3

P2 - Volatility of the UK business cycle

Answer 3

• The integration of the UK economy with the global business cycle has made the UK business cycle more volatile, as its performance is now dependent on global economic conditions
• Negative external shocks, such as global recessions, natural disasters, or political turmoil, can have significant impacts on the UK economy
• These shocks can result in prolonged periods of weaker economic growth, higher unemployment, falling real incomes, and rising poverty
• However, being part of a single market, such as the EU, can help to mitigate the risks posed by external shocks by sharing the burden across member countries
• For example, the 2008 financial crisis had a profound impact on the global economy, and the EU’s shared market helped to cushion the negative effects on its member countries, including the UK

Question 4

Draw economies of scale diagram

P3 - Specialization

Answer 4

• Comparative advantage can lead to specialization, which is when a firm/region focuses on producing a limited scope of goods
• Specialization in a good can lead to increased likelihood of being able to benefit from economies of scale, where production increases whilst average cost decreases
• Specialization in the UK has been most beneficial for high-skilled industries and most detrimental to low-skilled industries
• Specialization can lead to the closure of many industries, resulting in structural unemployment, particularly in lower-skilled industries like factory work and construction
• This can also result in increased inequality in the labor market
• On a global scale, specialization can increase total world output, leading to a more efficient use of the factors of production

Question 5

Conclusion

Answer 5

• Overall, it is very difficult to measure the impact of globalization on the UK economy as a whole, but if split into industry by skill, it is clear to see that high skilled industries are beneficiaries and low skilled industries are losing the most
• This will likely cause both total output and inequality to increase.