Globalisation, Comparative & Absolute Advantage

Question 1

What is globalisation?

Answer 1

It is the increasing integration of the international economy. It is the way international trade is increasing, and how economies are becoming more interdependent. The Economist magazine describes it as ‘The Death of Distance’

Question 2

Causes of globalisation?

Answer 2

1. Developments in ICT - cheaper to communicate in various parts of the world
2. Global supply chains
3. Reductions in transport costs
4. Reduction in protectionism - greater trade liberalisation and less barrier to trade. (Role of WTO)
5. Reduction in capital controls - freer movement of capital across borders - allows FDI
6. Economic growth - higher standards of living in emerging economies create opportunities for trade

Question 3

Features of globalisation?

Answer 3

1. Transnational corporations - owns mines, plantations and different factories in different nations. Key feature of globalisation
2. Global brands - Standardised products from companies such as Coca-Cola and McDonald’s in various different countries demonstrate the increasing integration
3. Trading Blocs - most of worlds trade now takes place within regional trading blocs, such as the EU and APEC
4. Global sourcing - this is the way TNCs source on a worldwide basis - e.g Primark manufacturing their clothes in Aisa - cheaper labour costs
5. Greater Trade Liberalisation and Specialisation
6. A Comparative Advantage - (will revisit later)
7. Growing power of USA and China - most powerful economies in the world with most well known TNCs American and China’s manufacturing make them a key feature

Question 4

Advantages of globalisation?

Answer 4

1. Economic growth and improved living standards - development?
2. Consumer choice
3. Technology transfers and sharing of the best practices
4. Lower costs for producers due to economies of scale and lower relative costs
5. Lower prices for consumers

Question 5

Disadvantages of globalisation?

Answer 5

1. Competition - domestic producers suffer
2. Trade imbalances
3. External shocks - sensitivity of world economy
4. Unstable commodity prices - impacts of large fluctuations on LDCs
5. Environmental impact - exploitation of resources and carbon footprints
6. Exploitation of workers in LDCs

Question 6

Why do nations decide to trade?

Answer 6

1. Greater economic growth, income, consumption and standard of living - via access to larger markets
2. Availability - to gain goods they cannot produce themselves
3. Relative costs - more cheaply produced elsewhere - labour costs etc
4. Consumer choice
5. Economies of scale
6. Productive efficiency gains - greater competition abroad encourages domestic producers to become more productively efficient
7. Dynamic efficiency gains - greater competition abroad encourages innovation

Overall international trade benefits consumers - through choice and price.

Question 7

What is the theory of absolute advantage?

Answer 7

Absolute advantage is when a country is able to produce goods more cheaply than another country (ie because is has lower costs of production for that good)

Question 8

What is the theory of comparative advantage?

Answer 8

A comparative advantage exists when one country is able to produce a good at a lower opportunity cost than one country.
(A country is able to produce a good more cheaply relative to other goods produced domestically than another country)

Question 9

What does this law state?

Answer 9

That each country should specialise in the production of the good in which it has a comparative advantage. Through specialisation and subsequent trade, both countries should benefit.

Ricardo’s theory therefore shows that free trade enables countries to specialise in the good they are relatively better at producing.

This therefore increasing consumption in both countries.

(Look back over notes and look at trading possibility curves)