Globalisation

Question 1

What is globalisation?

Answer 1

Refers to the increased economic integration between countries
Peter Jay’s definition:
‘the ability to produce any good or service anywhere in the world, using raw materials, components, capital and technology from anywhere, sell the resulting output anywhere and place the profits anywhere’

Question 2

What are the 4 characteristics of globalisation?

Answer 2

1) Increase in trade as proportion of world GDP
2) Increased movements of financial capital (capital flows) between countries
3) Increased international specialisation and division of labour
- increasingly common for parts and components of products to be made in dif countries and assembled in another
4) Growing importance of transnational companies (TNCs) and FDI

Question 3

What are the causes of globalisation?

Answer 3

1) Fall in transport costs
- enables good to be X and M more cheaply
- v.low AC resulting in benefiting from economies of scale
2) Decline in cost of communications
- Internet expanding at rate of 11% py
3) Lowering of trade barriers
- WTO negotiating reductions in tariffs etc
4) Collapse of communism and opening up of China
- result in spectacular rates of E.G
- increase in FDI making China major manufacturing nation
- 1989-91 collapse of Soviet bloc & introduction of various forms of market economy
- countries becoming more closely integrated into world economy
5) Increased importance of transnational (multinational) companies
- taken advantage of reduction in trade barriers and development of internet to organise trade globally
- offshoring (refers to companies transferring manufacturing to a different country)
6) Increased trading blocs

Question 4

What are the benefits of globalisation?

Answer 4

1) Higher living standards
- lower trade barriers, increased trade countries can specialise in producing goods in which they have a comparative advantage
- result: higher world output thus increasing living standards
2) Economies of scale
- firms producing on larger scale benefiting from falling LR AC
3) Lower Ps
- manufacturing moved to countries where cost of production (especially lab our) lowest
- lower Ps for many goods especially clothes and electronic equipment
- increased C surplus
4) Increased C choice
5) Reduction in absolute poverty in developing countries
- developing countries more closely integrated into world economy
- increase in their real GDPs reducing no. people living in absolute poverty
6) Increased tax revenues
- GDP increases, gov receive increased tax revenues from individuals and companies
- use for expenditure on supply side policies
e. g health education infrastructure
7) Technology transfer
- when TNCs I in other countries, likely to bring modern tech with them
- domestic firms may benefit from adopting tech
- result: increased productivity
8) New managerial techniques
- TNCs likely to introduce modern managerial techniques designed to increase productivity

Question 5

What are the costs of globalisation?

Answer 5

1) Promoted exploitation of workers (labour)/ exploitation of resources
- TNCs may pay lower wages for longer working hours to those in developing countries
- some countries have I aggressively in developing countries rich in natural resources to secure future supplies of resources
e. g China I in copper mines in Zambia
2) Increased external costs (negative externalities)
e. g increase road air transport increasing CO2 emissions/ pollution
3) Increased inequality
- D for unskilled labour decreased in developed countries, increasing earnings gap between highest-paid & lowest-paid workers
4) Increased global instability
- evidenced by financial crisis in Asia 1990s and global credit crunch following collapse in confidence of banking system
- increased integration caused this
5) Over-dependence on Ms
- country which don’t have competitive advantage may come to rely increasingly on Ms
- deterioration in c.a of BoPs
6) Tax avoidance
- some TNCs engage in transfer pricing ot minimise tax burden in countries with high corporate taxes

Question 6

What is the law of comparative advantage?

Answer 6

A country has comparative advantage if it can produce a good with a lower opportunity cost than that of another country
- trade between 2 nations can be beneficial for both if each specialises in production of good with lower relative opportunity cost

Question 7

What are the assumptions of the law of comparative advantage?

Answer 7

1) Constant returns to scale
- increase in F.O.P leads to exactly proportionate increase in output
- imply PPFs drawn as straight lines
2) No transport costs
3) No barriers to international trade
4) Perfect mobility of F.O.P between different uses
5) Externalities ignored

Question 8

What is absolute advantage?

Answer 8

Implies a country can produce more of one product than another country

Question 9

What is the ‘terms of trade’?

Answer 9

Measures average P of a country’s X’s relative to average P of its Ms
- index of X Ps / index of M Ps x 100

Question 10

What has to happen in order for trade to be beneficial?

Answer 10

The terms of trade must lie between the opportunity cost ratios
- if opportunity costs were the same then would be no benefit from specialisation and trade

Question 11

What are the costs of the law of comparative advantage?

Answer 11

1) Free trade not necessarily fair trade
i. e rich countries might exert monopsony power to force producers in developing countries to accept v.low Ps
2) Based on unrealistic assumptions

Question 12

What is the role of the World Trade Organisation (WTO)?

Answer 12

1) To liberise trade
- lower trade barriers
2) Settle trade disputes between member countries

Question 13

Why do the goals of the WTO and trade blocs conflict?

Answer 13

Restrict trade with non-member countries and WTO goal is to promote free trade

• WTO found it difficult to secure agreement on reducing trade barriers between members
• no. and size of trading blocs has increased so argued they do actually play important role in promoting free trade

Question 14

What are trading blocs? Give examples.

Answer 14

Intergovernmental associations that manage and promote trade activities for specific regions of the world
For example:
- Europen Union (EU)
- North American Free Trade Agreement (NAFTA)
- Common Market of the South (MERCOSUR): Argentina Brazil, Paraguay, Uraguy & Venezuela
- Central American Common Market (CACM)
- Association of Southeast Asian Nations (AESEAN)

Question 15

What are the 4 different types of trading blocs?

Answer 15

1) Free trade areas
- trade barriers removed between member countries, but individual members can still impose tariffs & quotas on countries outside the area
e. g NAFTA
2) Custom unions
- free trade between member states and a common external tariff on goods M from outside the bloc
e. g EU
3) Common markets
- custom unions but with added dimension that not only goods & services that can be moved freely within the area but also F.O.P especially labour
4) Monetary unions
- custom unions that adopt a common currency
e. g euro zone area of EU is an example

Question 16

What are the benefits of free trade?

Answer 16

1) Higher living standards
2) Lower Ps
3) Increased C choice
4) Economies of Scale

Question 17

What are the costs of free trade? And thus the case for protectionism.

Answer 17

1) Deficit on trade in goods and services balance
- if country’s goods and services uncompetitive then M’s increase relative to X’s and deterioration in its trade in goods and services balance
2) Danger of dumping
- firms in countries with surpluses of goods might dump them on other countries
- undermine local producers causing them to go bankrupt
- in LR country could become dependent on M’s
3) Increased unemployment
4) Increased risk of disruption
e. g financial crisis of 2008 dependent on X’s
5) Unbalanced development
- international specialisation based on free trade means only those industries with where the country has comparative advantage will be developed while others remain undeveloped
- sectoral imbalance
6) Global monopolies
- TNCs gain monopoly power and exploit C restricting output

Question 18

What is dumping?

Answer 18

Refers to goods exported to another country at below AC of production

• form of predatory pricing
• illegal under WTO

Question 19

What are the problems associated with free trade for developing countries?

Answer 19

1) Infant industries may be unable to compete & may go out of business
2) Monopsony power of firms in developed economies might force producers in developing countries to accept low P’s for their products
3) Countries dependent on primary products may face declining terms of trade

Question 20

The existence of trading blocs has 2 significant consequences:
1) Trade creation
2) Trade diversion
Explain them.

Answer 20

1) Trade creation occurs because the removal of trade barriers results in increased specialisation & trade according to the law of comparative advantage
2) Trade diversion occurs because member countries may now buy goods from other member countries (which are not subject to tariffs) rather than from countries outside the bloc (which are subject to tariffs)
- therefore there’s a diversion of trade from lower-cost countries outside the bloc to higher-cost countries inside the union
- inefficient allocation of resources