Globalisation & Trade Flashcards
What is globalisation?
Globalisation is the increasing integration and interdependence of economies worldwide, driven by:
• Free movement of goods and services
• Labour mobility (migration)
• Capital flows (FDI, investment)
• Technological advancements
It leads to greater trade, competition, and economic interdependence between countries.
What factors have contributed to globalisation?
- Technological advancements – Faster communication, internet, and logistics.
- Containerisation – Reduced transport costs, making global trade easier.
- Growth of WTO & free trade blocs – Lowered trade barriers.
- Deregulation – Opened up economies to foreign investment.
- FDI & Multinational Corporations (MNCs) – Increased global economic links.
- Growth of emerging economies (BRICS) – Expanded world trade.
What are the benefits of globalisation for More Developed Countries (MEDCs)?
• Export-led growth (e.g. South Korea’s industrial success).
• More competition and choice – Lower prices, higher quality goods.
• Better labour supply – Migration fills skill shortages.
• Access to global financial markets – Easier investment and borrowing.
What are the drawbacks of globalisation for More Developed Countries (MEDCs)?
• Structural unemployment – Industries move to lower-cost countries (e.g. US Rust Belt).
• Vulnerability to shocks – Economic crises spread faster (e.g. 2008 financial crisis).
• Exchange rate volatility – Unpredictable currency fluctuations impact trade.
How has globalisation affected Less Developed Countries (LDCs)?
✅ Positive Effects:
• Foreign Direct Investment (FDI) → Creates jobs, infrastructure, and skills.
• Technology transfer → Cheaper access to modern innovations.
• Export markets → Expands trade and economic opportunities.
• Access to finance → More investment from international sources.
❌ Negative Effects:
• Dumping – Rich countries sell goods below cost, harming local industries.
• Brain drain – Skilled workers migrate, leaving shortages at home.
• Poor working conditions – MNCs exploit cheap labour.
• Environmental damage – Exploitation of natural resources with fewer regulations.
What is specialisation in trade, and why is it important?
• Specialisation means countries focus on producing goods they are most efficient at.
• It requires trade to obtain goods that are not domestically produced.
• Example: Finland produces paper, Germany produces cars – they trade for mutual benefit.
What is comparative advantage?
A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country.
• Example: Brazil produces sugar cheaply, the US produces wheat efficiently – they trade to maximise output.
• Specialisation based on comparative advantage increases total world output.
What is absolute advantage?
A country has an absolute advantage if it can produce a good using fewer resources than another country.
• Example: Saudi Arabia has an absolute advantage in oil production due to its vast reserves.
Absolute advantage is different from comparative advantage, which considers opportunity cost.
What are the benefits of international trade?
• Higher global output – More efficient resource allocation.
• Greater competition – Lower prices, better quality products.
• More consumer choice – Access to foreign goods (e.g. bananas in the UK).
• Economies of scale – Larger markets lead to lower costs and higher profits.
What are the costs of international trade?
• Negative externalities – Pollution from shipping and transportation.
• Structural unemployment – Workers lose jobs as production moves abroad.
• Economic dependence – Reliance on foreign markets can be risky.
• Exploitation of workers – Low wages in developing countries.
What are trading blocs, and how do they affect trade?
Trading blocs are groups of countries that reduce or eliminate trade barriers between members.
Examples:
• European Union (EU) – Customs union with free movement of goods, people, and money.
• USMCA (formerly NAFTA) – Free trade agreement between the USA, Mexico, and Canada.
• ASEAN – Trade bloc in Southeast Asia.
• Mercosur – South American trade agreement (e.g. Brazil, Argentina).
What is a customs union, and how is it different from a free trade area?
• Customs Union: Countries remove internal trade barriers and impose common external tariffs (e.g. EU).
• Free Trade Area: Countries remove internal trade barriers but set their own tariffs on non-members (e.g. NAFTA).
Customs unions harm trade with non-members due to tariffs but promote trade within the bloc.
What is the World Trade Organisation (WTO), and what does it do?
The WTO promotes free trade by:
• Reducing trade barriers (tariffs, quotas).
• Resolving trade disputes.
• Ensuring non-discriminatory trade (Most Favoured Nation principle).
It started as GATT (1947) and now has 163 members.
What are the terms of trade, and how are they calculated?
Terms of Trade (ToT) measure the price of a country’s exports relative to its imports.
Formula:
ToT = (Average export price ÷ Average import price) × 100
Improved ToT → More imports can be bought for the same amount of exports.
Worsened ToT → Imports become more expensive relative to exports.
What factors affect a country’s terms of trade?
• Technological advances – Improve export quality or volume.
• Tariffs – Import taxes worsen ToT for affected nations.
• Commodity price changes – Higher prices for key exports improve ToT.
• Exchange rates – A stronger currency lowers import costs, improving ToT.
