CH61 Globalisation

Question 1

what do the characteristics of globalisation include?

Answer 1

increased trade and movements of labour, capital and technology between countries leading to a greater specialisation and interdependence in the world economy

Question 2

what are the driving factors of globalisation?

Answer 2

price competition, improved transport links, liberalisation of trade, multinational companies and international flows of capital

Question 3

what is the definition of globalisation?

Answer 3

the ever-increasing integration of the worlds local, regional and national economies into a single international market

Question 4

what are the four main areas in which economic integration can be broken into?

Answer 4

-free trade across national boundaries of goods and services so that, for example, it becomes easy for a firm in London to sell to a firm in Poland or Vietnam as it is to sell to a firm in Manchester or Belfast
-free movement of labour between countries, in the same way that there is currently free movement of labour within the UK or Within the UK
-free movement of capital between countries, so that a UK pension company might invest in China, or the Chinese central bank use some of its foreign currency reserves to invest in the USA, or a US company buy a UK company
-free interchange of technology and intellectual capital across national boundaries

Question 5

explain the driving factor of globalisation: trade in goods

Answer 5

-for rich, developed countries, goods are increasingly being manufactured abroad, many for the first time in developing countries such as China and India.
-this trade is occurring because developing countries are acquiring the capital equipment and the know-how to produce manufactured goods; there are efficient modes of transport to get goods to markets; and developing countries have a cost advantage in the form of very cheap labour

Question 6

explain the driving factor of globalisation: trade in services

Answer 6

-trade in services is growing
-for instance, growth in tourism is taking large numbers of visitors abroad. Call centres for customers in developed countries are being located in developing countries.
-India has become a world leader in writing software and then selling these skills to companies in developed countries

Question 7

explain the driving factor of globalisation: trade liberalisation

Answer 7

-trade in goods and services is growing partly because of trade liberalisation.
-in the 1930s, international trade collapsed as the world went into the Great Depression and individual countries misguidedly tried to boost domestic demand by adopting fierce protectionist policies. Since, 1945, protectionist barriers have gradually fallen. Lower protectionist barriers have encouraged growth in world trade

Question 8

explain the driving factor of globalisation: multinational companies

Answer 8

• multinational companies have grown in number and size in some industries like car manufacturing or the oil industry, this is because only large multinational companies have the economies of scale and technological knowledge to make products that are both cheap and technologically advanced

Question 9

explain the driving factor of globalisation: international financial flows

Answer 9

-international financial flows are becoming far greater
-countries such as China and Malaysia have financed part of their fast economic growth from inward flows of international capital

Question 10

explain the driving factor of globalisation: foreign ownership of firms

Answer 10

-foreign ownership of firms is increasing
-many large multinational companies, for example, have invested in factories and companies in China
-French firms have bought US firms

Question 11

explain the driving factor of globalisation: communications and IT

Answer 11

-developments in communications and information technologies have shrunk the time needed for economic agents to communicate with each other. In industries such as software production, programmers are effectively just as near to a clients office located in, say, London if they themselves are located in India or Kent

Question 12

what is the impact of globalisation on: consumer choice?

Answer 12

-the availability of goods and services has considerably increased with globalisation leading to greater consumer choice.
-the number of different products available in high streets, shopping centres and supermarkets is larger than it was 20 years ago.
-some argue that goods have become more homogenised. A holiday in Spain is the same as a holiday in Peru apart from the scenery

Question 13

what is the impact of globalisation on: prices

Answer 13

-globalisation is leading to a fall in the price of some goods and services because production is being switched from high-cost locations to low-cost locations.
-however, globalisation is leading to a rise in price in some goods and services. This is because globalisation is raising average world incomes. Higher income means higher demand for individual products. Where supply is not perfectly elastic in the long run, this puts upward pressure on prices

Question 14

what is the impact of globalisation on: incomes?

Answer 14

-overall, globalisation has raised incomes round the world. Consumers are therefore able to buy more goods.
-however, not every consumer has gained. E.g. a worker in Wales who has lost his job because production has moved to China is likely to be worse off.
-equally, some argue that globalisation is a cause of stagnant incomes of below average earning workers in countries like the USA

Question 15

what is the impact of globalisation on: employment and unemployment?

Answer 15

-globalisation has seen both winners and losers in terms of employment and unemployment
-e.g. the transfer of much of manufacturing from western Europe and the USA to countries such as China and Poland has led to large scale losses of jobs in these sectors in the developed world whilst there has been an increase in employment in the developing world
-in western Europe and the USA, many workers made unemployed have found new jobs, particularly in the service sector of the economy but not necessarily at the same rate of pay as before.

Question 16

what is the impact of globalisation on: migration

Answer 16

-increased migration is a characteristic of globalisation
-many migrants are forced to move from their homes because of war and persecution
-however, many are economic migrants, moving because they think they can enjoy a better standard of living for themselves and their families in a new country

Question 17

what is the impact of globalisation on: wages?

Answer 17

-in a perfect labour market where all workers homogeneous, all workers will earn the same wage rate.
-globalisation is shifting workers to different locations round the world. It is also shifting places of work from one country to another
-a multinational electronics company is likely to base their production operations in countries with low wage costs. So workers in the UK have to match the wage levels of workers in other countries if they want to keep their jobs. In practice, what has happened is that a large proportion of manufacturing in the high-cost developed world has shut down and production has moved to low-cost developing countries.
-however, international competition has tended to depress the wages of unskilled and low-skilled workers in developed countries as a result. The impact on high skilled workers has been the reverse. In a global market place, their skills are in high demand because there are relatively few workers with these skills in developing countries

Question 18

what is the impact of globalisation on: multinationals?

Answer 18

-these are sometimes criticised for only creating low level jobs for local employees whilst importing more highly skilled labour from abroad
-however, increasingly multinational companies recognise that creating an international employment base leads to greater productivity
-training local workers to take high-level jobs within the company is an investment which strengthens the company
-training given to employees also spills over into the local economy. it raises the level of human capital. Employees leave multinationals to take jobs elsewhere in the economy and sometimes to set up their own businesses

Question 19

what is the impact of globalisation on producers: specialisation and economic dependency?

Answer 19

-economic agents, including firms, are increasingly dependent upon each other.
-a fault at a manufacturing plant in Thailand can impact on a firm in the UK buying its products, for example.
-increased specialisation inevitably increases some risk when trade links break down. Equally, it reduces risks because firms are able to source products from a wider variety of countries and sell into more countries

Question 20

what is the impact of globalisation on producers: costs and markets ?

Answer 20

-globalisation allows firms to source products from a wider variety of countries and firms
-the wider the supplier network, the lower is likely to be the price at which a firm can buy. Key to lower costs is being able to use lower-paid workers, often in the developing world
-equally, globalisation opens markets. firms in the UK, for example, can sell to countries which previously were closed to trade or had insufficient incomes to buy their goods

Question 21

what is the impact of globalisation on producers: footloose capitalism

Answer 21

-firms which operate in several countries have the power to move production from one country, creating and destroying jobs and prosperity in their wake. they do this to maximise their profits
-globalisation is inevitably leading to a shifting of production from the developed world to the developing world. this is one key way in which the poor developing countries of the world can increase their living standards
-however, multinationals are not the prime cause of this shift in production. Rather, they are responding to market forces in exactly the same way that national companies are so doing.
-multinationals are part of this trend which is exploiting comparative advantage

Question 22

what is the impact of globalisation on producers: tax avoidance

Answer 22

-firms which operate in several countries have the possibility to engage in tax avoidance. there are three main ways in which they do this:
1) one is based on genuine production and transfer pricing. a firm produces good X in a country A and then transports to country B to make into good Y which it then sells. country A has high taxes on profits and country B has low taxes of profits. the multinational can reduce its total profits tax by putting a very high artificial notional price on the product made in country A before sending in to country B. profits are then reduced in country A and increased in country B. Overall the multinational makes a tax saving
2) a second way is to set up an office in a low tax country. Ownership of a key production element like a patent, copyright or sales is then assigned to that country. A significant proportion of costs is then assigned to that key production element which at best eliminates all profit made in other countries. The revenues are then taxed in the tax haven at virtually zero percent.
3) a third way is to transfer production facilities to a low tax country.

Question 23

what is transfer pricing?

Answer 23

an account technique used by multinational companies for reducing taxes on profits by selling goods at a low price internally from a high-tax country to another part of the company in a low-tax country

Question 24

what is the impact of globalisation on governments?

Answer 24

-a multinational moving a car plant from the UK to China is an opportunity for China but leaves the UK with fewer jobs, fewer exports and less tax revenues. Governments therefore have to adopt policies which will capture as large a share as possible of the benefits globalisation and minimise the losses. This might mean lowering taxes on profit for companies or giving subsidies to multinationals setting up manufacturing facilities in the country. It could also mean increasing spending on education and research and development in order to give the country a competitive edge in a global market place
-govs have become increasingly aware of the ability of multinationals to avoid paying taxes on their activities in a country. Some have responded by lowering taxes in order to encourage multinationals to relocate to their tax jurisdiction. However, this issue remains a major problem for most govs
-govs are also prone to bribery and corruption. Multinational companies have a long history of gaining contracts or control of resources through bribing government officials or politicians. This is likely to lead to distort development and leads to lower income for countries

Question 25

what is the impact of globalisation on the environment?

Answer 25

-if world production of wooden furniture rises, then there must be an increase in logging of trees
-extra demand for raw materials and increased emissions and waste have, so far, had an overall negative impact on the world environment.
-however, economic growth can be environmentally sustainable

Question 26

what is the impact of globalisation on individual countries?

Answer 26

-countries benefit economically if globalisation leads to rising incomes, more and better quality jobs, lower prices and more consumer choices. They lose out if globalisation leads to loss of industries, higher unemployment and lower wages

Question 27

what are non-economic impacts of globalisation?

Answer 27

-one is the impact on culture.
-politics too is affected. Nation states have lost sovereignty. Partly, this is because they have singed international treatise which limit their sovereignty. Partly, it is because the forces of globalisation have become so strong that nation states cannot resist them