Deck 1 Flashcards
Define globalisation
Globalisation is the process by which the world’s economies have developed closer links through trade, investment and production.
Identify 4 characteristics of globalisation
- Global brands
- Global sourcing
- High levels of labour migration
- Increase in transfers of financial capital
Explain 4 factors that explain the promotion of globalisation
- A reduction in protection in the world economy. Reduced tariffs, qoutas and other trade-curbing factors allows for greater volume of goods and services to be traded at lower costs.
- Developments in IT and falling communication costs. The way in which businesses are able to communicate has promoted global economic relations and allowed global supply chains to be managed more effectively.
- A reduction in international capital movement restrictions. This allows for business capital to flow freely within the global economy and increases FDI.
- A fall in real transport costs. This makes it increasingly viable for businesses to source on a global basis and allows greater economies of scale to be achieved.
Define a MNC
A multinational corporation is a firm that operates in more than one country. For example Ford or Nestle.
Define FDI
An investment made by a MNC in a country other than where its operations originate e.g. purchase of foreign firms.
Describe how the WTO promotes free and fair trade
WTO ensures that there is no discrimination in the market by setting up various agreements, it binds its members to promote a stable business environment, as well as encourages countries to lower their trade barriers and assists the development of developing countries by giving them time and flexibility to implement different agreements.
Describe how the IMF promotes economic stability
The IMF promotes economic stability through its three main functions: surveillance, technical assistance and lending. The IMF carries out an annual analysis of hte economic situation in each members country and then helps to design and implement effective economic policies e.g. fiscal or monetary. And if needed, it lends money to countries in order to ease their immediate positions and prevent more serious problems in the future.
Describe how the World Bank promotes economic growth and development
World Bank promotes economic growth and development by providing financial support for internal investment projects e.g. building new roads. It does this through various agencies, for example IBRD or IDA which provide low- or no-interest loans or grants to countries that do not have favourable access to international credit markets and these loans are often linked to conditions that involve changes to the economic policies of the recipient country.
Name 5 benefits of FDI
- An injection into the circular flow of income
- Effects on the balance of payments
- An increase in tax revenue for the government
- Improved productivity
- Technology transfer
Name 5 costs of FDI
- Short-term employment
- Labour-saving technology
- Productivity and technology gains may be limited depending on the FDI
- Environmental costs
- Taxes received may be less than expected
Name 5 effects of globalisation
- . Higher living standards
- Technology transfer
- Enjoyment of global brands
- More dependency
- Furthering the gap between rich and poor
What are the criticisms of the IMF?
- IMF favours military dictatorships that are friendly towards US and EU multinational companies.
- There is a concern about IMF’s attitude towards supporting economies where human rights and labour rights mean little
- Economists are also concerned about IMF’s pro-Keynesian approach to dealing with balance of payments disequilibrium.
- IMF has also been blamed for some economic problems e.g. Argentina 2001 - economists believe that it was the budget restrictions and privatisation of important national resources that lead to an economic catastrophe.
What are the criticisms of the World Bank?
- It has been accused of being US/EU dominated agency for supporting their own economic and political interests.
- Its free market reforms have been criticised as being harmful to the interest of some countries.
5 benefits of globalisation?
- Free Trade Free trade is a way for countries to exchange goods and resources. This means countries can specialise in producing goods where they have a comparative advantage (this means they can produce goods at a lower opportunity cost). When countries specialise there will be several gains from trade:
Lower prices for consumers
Greater choice of goods
Bigger export markets for domestic manufacturers
Economies of scale through being able to specialise in certain goods
Greater competition
- Free Movement of Labour
Increased labour migration gives advantages to both workers and recipient countries. If a country experiences high unemployment, there are increased opportunities to look for work elsewhere. This process of labour migration also helps reduce geographical inequality. This has been quite effective in the EU, with many Eastern European workers migrating west.
Also, it helps countries with labour shortages fill important posts. For example, the UK needed to recruit nurses from the far east to fill shortages.
However, this issue is also quite controversial. Some are concerned that free movement of labour can cause excess pressure on housing and social services in some countries. Countries like the US have responded to this process by actively trying to prevent migrants from other countries. - Increased Economies of Scale.
Production is increasingly specialised. Globalisation enables goods to be produced in different parts of the world. This greater specialisation enables lower average costs and lower prices for consumers. - Greater Competition
Domestic monopolies used to be protected by lack of competition. However, globalisation means that firms face greater competition from foreign firms. - Increased Investment
Globalisation has also enabled increased levels of investment. It has made it easier for countries to attract short term and long term investment. Investment by multinational companies can play a big role in improving the economies of developing countries.
5 costs of globalisation
- Free Trade can Harm Developing Economies.
Developing countries often struggle to compete with developed countries, therefore it is argued free trade benefits developed countries more. There is an infant industry argument which says industries in developing countries need protection from free trade to be able to develop. However, developing countries are often harmed by tariff protection Western economies have on agriculture. Paradox of Free Trade - Environmental Costs
One problem of globalisation is that it has increased the use of non renewable resources. It has also contributed to increased pollution and global warming. Firms can also outsource production to where environmental standards are less strict. However, arguably the problem is not so much globalisation as a failure to set satisfactory environmental standards. - Labour Drain
Globalisation enables workers to move more freely. Therefore, some countries find it difficult to hold onto their best skilled workers, who are attracted by higher wages elsewhere. - Less Cultural Diversity
Globalisation has led to increased economic and cultural hegemony. With globalisation there is arguably less cultural diversity, however it is also led to more options for some people. - Tax Competition and Tax avoidance.
Multinational companies like Amazon and Google, can set up offices in countries like Bermuda and Luxembourg with very low rates of corporation tax and then funnel their profits through these subsidiaries. This means they pay very little tax in the countries where they do most of their business. This means governments have to increase taxes on VAT and income tax. It is also seen as unfair competition for domestic firms who don’t use same tax avoidance measures.
The greater mobility of capital, means that countries have sought to encourage inward investment by offering the lowest corporation tax. (e.g. Ireland offers very low tax rate). This has encouraged lower corporation tax, which leads to higher forms of other tax.
