Globalization

Question 1

What is specialization?

Answer 1

Whole countries should specialize in producing goods and services where they are most efficient

Question 2

3 reasons for specialization

Answer 2

1. Different resources are needed for different goods
2. Resources are unevenly distributed across the world
3. Resources are internationally immobile => easier to trade e.g pineapples

Question 3

What is Globalization?

Answer 3

It is a process when countries become inter-connected through spread of the flow of technology, information, financial products etc.

Question 4

Name 4 causes of globalization

Answer 4

1. Improvements in transport
2. Improvements in IT
3. Containerisation
4. Trade Liberalisation

Question 5

Name 5 characteristics of globalization

Answer 5

1. Increased movement of Labour
2. Increased movement of financial capital
3. Increased specialisation
4. Increased international trade
5. Increased trade-to-GDP ratio

Question 6

Why is the one of the main ways to move financial capital between the countries?

Answer 6

FDI

Question 7

What is FDI?

Answer 7

An investment made by a firm in one country to gain OWNERSHIP over the foreign firm

Question 8

What is the theory of comparative advantage ?

Answer 8

Global output (living standards) will increase if countries specialise in the production of goods in which they have a comparative advantage (lower OC).

Question 9

3 assumptions & limitations of the theory of comparative advantage?

Answer 9

The benefits of comparative advantage and specialisation are based on unrealistic assumptions

1. Average cost of production is constant — increased specialisation might result in rising AC caused my diseconomies of scale => increase in price
2. No trade barriers — trade barriers might distort comparative advantage
3. No transport costs — transport costs might also distort comparative advantage

Question 10

Advantage and disadvantage of specialisation in the international market

Answer 10

Advantage — specialisation and trade may create a larger market for firms, allowing a country to benefit from economies of scale

Disadvantage — specialisation and trade may lead to overdependence on imports and exports e.g Saudi Arabia’s oil sales account for 50% of Real GDP

Question 11

Advantage and disadvantage of specialisation in terms of the Price level

Answer 11

Advantage — lower prices. When a country specialises, it can reach greater economies of scale, decreasing their costs and price.
Moreover, it can lead to bigger variety of goods

Disadvantage — specialization and trade may lead to diseconomies of scale & decrease in motivation, causing price to increase

Question 12

Impact of globalization on individual countries

Answer 12

+ Increase in living standards. According to the theory of comparative advantage, if countries specialise, the worlds output will increase, also increasing living standards.

— When countries specialise, they become overdependent on exports/imports e.g Saudi Arabia’s oil sector accounts for 50% of real GDP

Question 13

Impact of globalization on Government

Answer 13

+ Increased tax revenue. With more trade, government can raise more money through trade restrictions, such as tariffs, increasing their revenue and potentially increasing government spending

— Tax avoidance. Transfer pricing - transferring profits within TNC to reduce corporation tax paid.
It is estimated by Global Financial Integrity (GFI) research group that several hundred billion dollars of tax are lost each year through transfer pricing

Question 14

Impact of globalization on producers

Answer 14

+ Lower productions costs. Globalization allows companies to relocate their parts of their business to other countries e.g Apple makes the process for their iPhones in Taiwan, reducing their costs for labor and production
+ Innovation. Sharing new ideas and technology might lead to an increase in productivity and innovation

— Higher barriers for small firms. TNC’s can access a larger international market and experience economics of scale, reducing costs and prices. Therefore making more competition for smaller firms as they would not make profit at such prices because they can’t reach such economies of scale

Question 15

Impact of globalization on consumers

Answer 15

+ Wider choice (TNC)v and lower prices (economies of scale)

— Decreased consumer happiness. Diderot effect - the more you consume, the more you want. Some researches show that if consumer are more driven to buy stuff, there would be a decrease in happiness

Question 16

Impact of globalization on workers

Answer 16

+ Improvements in transport => increased mobility of labour thus easier to fins a job
+ Improvements in IT => increase in remittances thus easier to pay

— Structural unemployment - when countries specialise, jobs might shift from one sector to another, causing structural unemployment e.g developing China specialises in steel production, therefore workers in England might be left unemployed as the UK would not be concentrating on steel production anymore

Question 17

Impact of globalization on environment

Answer 17

+ Better international relationships lead to increased global cooperation to fight climate change e.g Kyoto protocol - an international agreement to reduce greenhouse emissions

— Increase in global warming. More international trade causes an increase in the amount of transport, leading to excess CO2 emissions.