Globalisation Flashcards
Explain the benefits of globalisation on consumers (ie theory of comparative advantage—5m)
Trade occurs because nations have differences in resources endowment and technological capabilities. Because of these differences, there arises
- differences in opportunity cost between different countries in the production of diff types of goods
- a range of TOT for which trade can bring about benefits to both countries
A country can benefit by specialising in the production of a good which it produces at lower opportunity cost, and use the good to trade for other goods, which it can produce on its own only at higher opp cost (but which other countries can produce at lower opp cost). International trade thus allows countries to increase the productivity of their resources via specialisation based on their comparative advantage. This can lead to the expansion of the country’s consumption possibilities beyond their PPC, (increasing the utility derived from the consumption of G+S), resulting in a higher material standard of living
How can globalisation lead to an increase in productive efficiency?
Since globalisation results in more trade, firms usually produce more to be exported to overseas markets, and are able to reap IEOS. For example, productivity gains from using large scale production methods can lower average costs, with total cost increasing less than proportionately to the increase in output. —> enables firms’ unit cost to move down the LRAC, firm produces closer to MES, reducing productive inefficiency from society’s POV.
Explain how SSPs focused on enhancing long run growth potential (ie Increase Factor QQT) can reduce both demand pull and cost push inflation
Reduce DD pull inflation
As PC of economy expands, supply bottlenecks are relieved, allowing AD to grow without high inflation.
[graphical analysis—> increase in AD and AS]
referring to figure, expansion of the country’s PC is shown by the rightward shift of AS from AS0 to AS1. As long as AD continues to increase, firms will be incentivised to put to use the newly created capacity to produce more output. Newly created capacity mean that firms are able to increase output without intensifying competition for factor inputs, achieving non-inflationary sustained growth. As seen from figure, real national income increased from Yo to Y1 with increase in AD from Ad0 to AD1, and further to Y2 following an expansion of the productive capacity, with only a moderate increase in GPL of PoP2
Reduce cost push inflation(lower uCOP)
Productivity gains due to improvements in factor quality —> higher output per unit input
increase in factor quantity —> holding factor demand constant, prices fall
Explain how increased trade through globalisation can lead to a reduction in allocative inefficiency, productive inefficiency and an increase in dynamic efficiency (think: firms’ behaviour)
Globalisation leads to a fall in barriers to trade and investment, increasing contestability of market
Allocative inefficiency reduces: as foreign firms enter domestic markets, the demand for each incumbent falls, becomes more px elastic, ability to charge a markup of P> MC decreases.
Productive inefficiency decreases:
Increase in contestability results in each firm earning lower revenue, firms have greater incentive to check complacency, and reduce X inefficiency
Increase in dynamic efficiency: in order to compete effectively and protect their market share, firms engage in R and D to
-process innovate, increasing productivity and lowering uCOP
-product innovate, by developing better quality/newer products
What are the limitations of the argument that globalisation can bring about efficiency gains?
With increase in contestability, the opposite may happen. Firms may compromise on quality of product in order to match the prices of competitors, using cheaper raw materials of inferior quality, or producing goods that do not meet safety regulations
How does globalisation benefit firms? (Think: revenue and cost)
Globalisation provides new sources for revenue growth, by allowing firms to access a larger consumer base than before —> increase in demand
- able to also leverage on markets which are fast expanding. In these markets, the rapidly rising real national incomes of economies that are experiencing strong growth can fuel strong growth in demand for the firm’s goods.
Ability to diversify risks of failures across different markets in different countries, enabling firms to tide through economic downturns better
Reduce firms’ uCOP. Globalisation involves the removal of trade barriers —> lower or no import tariffs, firms import factor inputs at a lower cost —> lowers uCOP
How does globalisation benefit the macroeconomy via AD?
Raises X and I
Free trade enables countries to overcome domestic demand constraints and gain access to a larger market via the export of goods and services. This will result in an increase in net export revenue (X-M) as domestic firms enjoy an increase in demand for exports.
Free trade also tends to attract foreign direct investment as it provides a platform to tap on larger markets, which could lead to higher profits. Firms revise their expected rate of return on investment upwards relative to the cost of borrowing, and are incentivised to take on more investment projects, increasing I.
Together, this will result in an increase in AD (insert AD song)
Additionally foreign direct investment adds to the quantity of capital in the economy. Foreign direct investment also enables the country to gain access to foreign production methods, allowing for technological transfers. This leads to an increase in productivity. Together, the above developments can lead to an expansion of the economy’s productive capacity and a lowering of the unit cost of production, causing AS to increase. This is represented by a rightward and downward shift of AS from AS0 to AS1. The increase in AS enables real national income to increase past the original Yf, while moderating inflation (talk abt GPL shifts), thus achieving non inflationary, sustained growth (OR potential growth)
I (FDI): govt policies aimed at investment liberalisation can help attract inward FDI
Effect on AD and AS
Especially AS: FDI brings about considerable tech transfers which can improve productivity, as each unit of input is able to produce more output. This results in the lowering of uCOp as well as expansion of productive capacity —> AS shifts right and down
Benefits and costs of globalisation to SME such as Singapore (in your own words)
Benefits: increase X and I (especially foreign investment)
[X] Sg’s domestic market is small and external demand dwarfs the size of the domestic market. External demand is thus a strong driver of AD growth.
[I] sg particularly reliant on FDIs which fuels economic growth by bringing in capital and tech transfers. Small economies like sg may not have sufficient domestic resources to drive the continual expansion of the economy’s productive capacity (ie sustained growth) FDIs provide necessary funds for large scale infrastructure projects, tech and industrial development.
[costs of globalisation] Explain the effects of increased pace of structural change from a firm’s perspective
The removal of trade barriers exposes firms to competition from abroad, permitting existing consumers to switch to foreign suppliers that can offer lower prices and better product quality. With such intense competition from foreign firms, firms that operate at higher unit cost than the competition will find themselves unable to match the prices offered by their competitors. As demand for their goods decline, firms may even have to eventually shut down when their revenue is unable to cover the cost in the long run
[costs of globalisation] Explain how globalisation has led to structural un+
The influx of cheap imports of low end manufactured goods has caused manufacturing industries in advanced economies to be unable to compete with that of developing economies such as China and Vietnam, due to erosion in CA in labour intensive manufacturing. Inefficient industries will shut down, with some even relocating to developing economies. As displaced workers do not have relevant skills that are sought for in new growth industries, they lack the occupational mobility to move into these new growth industries, which are mostly knowledge or capital intensive, such as finance and biotech. Hence, structural unemployment develops.
In your own words, explain how globalisation increases vulnerability to ext supply shocks —> imported inflation
Import dependent economies may be especially prone to imported inflation. When foreign suppliers experience inflation in their countries, Domestic firms who import raw materials from these countries will have to incur higher costs of production.
if they are (a) heavily dependent on these suppliers for raw materials (b) lack alternative substitutes to turn to during such periods (eg, suppliers from other countries experiencing lower or no inflation), and (c) is unable to increase productivity in the short run, unit cost of production willl increase, fuelling cost push inflation.
What are the costs of globalisation relating to MNCs? (Adverse impacts of their activity)
- MNCS known to be fickle and footloose with no commitment to countries that they are based in or those to which they invest in. MNCs can move jobs from country to country purely based on the cold calculation of profits, pulling out of countries during global recessions or when other countries can offer better investment conditions
- Lead to crowding out of domestic firms. MNCs are large in size and able to reap extensive economies of scale which domestic firms cannot compete with. As they exit the industry, economic structure of developing economies become increasingly dominated by MNCs
In your own words, explain as much as you can about how globalisation leads to the widening of income inequality in advanced economies
Due to advanced economies’ comparative advantage in high value added industries such as product design, software development, there is a strong demand for high skilled workers. On top of that, supply for high skilled workers is inelastic (takes long time to develop specialised skills w lengthy periods of training)
On the other hand, low-skill workers face a fall in demand as labour intensive manufacturing industries relocate to developing economies (due to the development of the global value chain). This is however buffered by changes in lifestyle due to rising income, which create demand for low-skill workers via services such as laundry washing, housekeeping, etc
At best, low-skill workers experience a slow increase in demand
Supply is elastic as special training not really required for low skill workers, Qs can be increased easily w increase in wages. On top of that, influx of low-skill workers from developing economies increase supply of low skill workers
Overall effect: sharply rising wages of high skill workers, stagnation of low skill workers wages
Explain how a country’s CA can change over time due to changes in factor endowments
Changes in factor endowment (the China example)
Endowments may change over time
Slowdown in China’s population growth has led to a reduction in the abundance of labour, increasing the opportunity cost of labour intensive industries
on the other hand, capital is getting increasingly abundant in china as the country draws in investments from all over the world, and its high savings rate provides the country with necessary funds for investment
[effect on max poss output]. With supply of capital increasing more rapidly than supply of labour, the max possible output of FSTV (capital intensive) increases more than the max poss output of garments (labour intensive) —> compare shifts on both axes
PPC shifts from PPCo to PPC1
[if FSTV on x axis, garments on y axis) The slope of PPC becomes gentler suggesting that CHina now needs to give up fewer units of garments to produce an additional unit of FSTV—> the opp cost of producing FSTVs has declined over time.
At the same time, the opp cost of producing labour intensive goods have increased
Name the POSITIVE effects of protectionism on the macroeconomy (AD and BOT)
- Resolve a BOT deficit
Protectionism measures such as tariffs raise import prices, inducing consumers to switch to domestically produced goods.
TEm is reduced (can show on tariff diagram), reducing the size of the BOT deficit
Used to increase RNY and employment during periods of recession
Protectionism is seen as an emergency measure against general depression to avoid unemployment. Tariffs on imported goods raise the price of imports, diverting demand towards domestic production (thus creating jobs)
C increases, M decreases
Using tariff diagram to explain:
Imports reduce from AD to BC, spending redirected towards domestic goods, raising domestic producers’ outlook from OA to OB. AD rises, reinforced by multiplier, RNY increases, unemployment decreases
