Globalisation and Trade Theories

Question 1

What is the definition of international trade?

Answer 1

Occurs when a firm exports goods or services to consumers in another country

Question 2

What is the definition of FDI?

Answer 2

Occurs when a firm invests resources in business activities outside its home country e.g through acquisitions, by setting up Greenfield sites

Question 3

What is free trade?

Answer 3

A situation where a government does not attempt to influence through trade/FDI barriers what its citizens can buy from another country or what they can produce and sell to another country

Question 4

What was the important driver of trade between 1800-1913?

Answer 4

Colonial expansion of major powers such as France and UK

• Mostly goods traded historically
• Trade within Europe as well as between colonial powers

Question 5

When was the first wave of globalisation?

Answer 5

1918-1939: sharp increase

Question 6

When was second wave globalisation?

Answer 6

Post WW2, explosion after 1980, FDI grew faster than trade

Question 7

What were the key drivers of second wave globalisation?

Answer 7

• Cheaper communication and transport: shipping, phone call cost dropped 99%
• Global political issues necessitate global response: G20, UN, EU
• Homogenisation of culture
• Companies searching for new opportunities of lower cost

Question 8

How has politics influenced globalisation?

Answer 8

• Climate change
• Terrorism
• Financial Crisis
• NGO corp, influence politics

Question 9

How has culture influenced globalisation?

Answer 9

• Global distribution of western music, language and news
• Return to local/regional customs
• Competitive advantage due to low labour cost in new industrialised countries
• Sub-Saharan African local production facilities destroyed due to globalisation

Question 10

How did the 2008 financial crisis impact globalisation?

Answer 10

• Globalisation has stagnated and, in some countries, reversed
• Glowing backlash against globalisation
  E.g Trump imposing trade barrier on China, rise in protectionism

Question 11

What backlash emerged against globalisation?

Answer 11

• Anti-globalisation protests
• Consumers’ rejection of global projects
• Political movements calling for a retreat towards nationalism
• Rise of xenophobia - behaviour towards immigrants and Brexit
• Election of Trump in the US
• Environmental degradation
• Terrorism

Question 12

Where did the trade theory mercantilism come from?

Answer 12

• Main economic theory in Europe 1500s-1700s
• Links to wars caused as a result of trade e.g French vs Dutch wanting maximum control of land and share of limited world resources

Question 13

What does mercantilism assume?

Answer 13

Maximising exports and minimising imports: subsidies to increase exports and tariffs to reduce imports

Important to maintain a trade surplus

Question 14

How does mercantilism assume that trade is zero sum game?

Answer 14

The country that exports gains at the expense of the importer

Question 15

What is absolute advantage (Adam Smith, 1776)?

Answer 15

A country has an absolute advantage in the production of a product when it is more efficient that any other country in producing it

Question 16

How does absolute advantage suggest export/import ratio should be?

Answer 16

Countries should export the goods for which they have an absolute advantage and import goods that are relatively costly to produce

Question 17

How is free trade beneficial?

Answer 17

Firms will be driven by profits and will create a wider range of profits. Consumers will demand more and cause prices to lower.
Government intervention should be minimal to release economic energy and innovation.

Question 18

How does a country have absolute advantage?

Answer 18

• One country can produce a product much more efficient than another country
• Countries are differently endowed so are better at producing different products

Question 19

What is the theory of comparative advantage

(Ricardo)?

Answer 19

• Must be able to produce the good at a lower opportunity cost relative to another country to achieve C A
• Even if it is more efficient at producing all goods

Question 20

What is opportunity cost?

Answer 20

Foregone opportunity to produce some other goods

Question 21

How does import/export ratio work under comparative advantage?

Answer 21

Countries should specialize in the production of goods they produce most cost efficiently (export) and
(import) buy goods that they produce less efficiently from other countries

Question 22

What is the theory of factor of endowments (Hecksher & Ohlin)?

Answer 22

• The more abundant a resource (capital/labour) the lower its cost
• Countries differently endowed in terms of capital and labour

Question 23

How does import/export ratio work under the theory of factor of endowments?

Answer 23

• Export goods that make intensive use of locally abundant factors
• Import goods that make intensive use of factors that are locally scarce

Question 24

Why do industrialised nation’s trade with each other when they are similarly endowed?

Answer 24

• Specialisation
• Access to information of other countries products so there is differentiation
• Minor differences in the goods creates demand increasing choice of consumers

Question 25

What is New Trade Theory?

Answer 25

Economies of scale: cost advantages due to size, cost per unit of output decreases with increased scale, better than comparative advantage as EOS allows you to specialise and get network benefits

Question 26

How does first mover advantage relate to new trade theory?

Answer 26

Can establish a dominant position in the market and gain Eos before other firms enter creating barriers to entry as they can’t compete

Question 27

How does monopolistic competition relate to NTT?

Answer 27

It suggests that firms are often competing on branding, quality and not just simple price. It explains why countries can both export and import designer clothes.

Question 28

How did gold relate to mercantilism in the 16th century?

Answer 28

Colonial powers such as Britain, France and the Netherlands wanted to keep their gold and wealth high so wanted to sell more than they bought

Question 29

How does absolute advantage relate to specialisation?

Answer 29

If a country is better/faster at producing a product, they should produce it, in turn their labour will become even better and more specialised at producing it in the long run

Question 30

How did Adam Smith have different views on wealth to mercantilists?

Answer 30

Mercantilists believe that gold and silver governs wealth whereas Smith believes that the living standards of people reflects wealth

Question 31

How does comparative advantage differ to absolute advantage?

Answer 31

CA refers to being more efficient at producing a good than another country as well as than OTHER goods

Arose from countries being good at producing both goods in Smith’s hypothetical scenario, and countries being worse at both

Being able to produce goods better and more efficiently than other goods

Question 32

What is an example of early colonial globalisation?

Answer 32

Portuguese establishing trading posts from Africa to Asia and Brazil and trade local products like like slaves, gold, spices and timber (1500s)