LS1 - Globalisation

Question 1

What is globalisation?

Answer 1

• Globalisation is the process of interaction and integration among people, companies, and governments worldwide - includes economic, cultural, and political
• results in the world economy becoming more like a single economy as it increases the interdependence of economies around the globe, changes in economic conditions in one country have a larger impact on other economies in a highly globalised world
• but isn’t an inevitable process - it can move backwards as well as forwards e.g. global financial crisis (2007/08) - downturn in America’s country’s housing market, in this case America’s, lead to same in world

Question 2

Global financial crisis 2007/2008

Answer 2

• US mortgages were used to create financial products that were then sold off to investors around the world
• US and European banks such as Citigroup and UBS bought billions of these financial products.
• The downturn in the US housing market revealed that these products were far riskier, and worth a lot less, than was originally thought.
• Consequently, the global banking system froze up (credit crunch’).
• Governments around the world spent billions to bail out financial institutions at risk of bankruptcy.
• The panic in the financial markets caused a devastating global recession.
• Millions of people lost their jobs and homes as a result.

Question 3

Globalisation definition

Answer 3

‘The ability to produce any goods (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’

‘The ability to produce any goods (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 4

Factors contributing to globalisation over the past 50 years

Answer 4

• trade liberalisation
• transport
• communications technology
• economic & political transitions

Question 5

Definition of bilateral, consensus, multilateral, orthodoxy, trade liberalisation

Answer 5

Bilateral: involving two parties, especially countries
Consensus: a general agreement
Multilateral: involving several parties, especially countries
Orthodoxy: authorized or generally accepted theory, doctrine, or practice
Trade liberalisation: removal (or reduction) of restrictions on the free exchange goods and services between nations

Question 6

Trade liberalisation

Answer 6

• Trade becomes easier through trade liberalisation
• The EU single market is an example of trade liberalisation - Firms can sell products anywhere within the EU single market without any restrictions on trade (other than transport costs)
• After WW2, under the direction of the USA, there was a movement towards trade liberalisation.
• The World Trade Organisation (WTO) is responsible for negotiating reductions in tariffs and other barriers to trade.
• Trade liberalisation has also occurred on a bilateral or multilateral basis e.g. the Chile-United States Free Trade Agreement or the European Single Market.
• Until recent years, political consensus strongly supported further trade liberalisation

Question 7

Aviation

Answer 7

The flying or operating of aircraft

Question 8

Transport

Answer 8

• The cost of transport has declined over the past 50 years due to technological advancements in aerospace and shipping.
• Firms can more easily sell goods and services on a global basis as a result.
• Furthermore, with the rise of commercial aviation, workers can now crisscross the globe making business deals, working in foreign locations
• one of the most important developments was containerisation - making shipping containers

Question 9

Trans-national corporation

Answer 9

TNCs
Known as multi-national corporations
A business that is based/registered in 1 country but has outlets/affiliates or does business in other countries

Question 10

TNC’S

Answer 10

• (TNCs) rely on communications technology developed within the last 50 years or so e.g. GPS.
• Operating on a global scale is only possible due to advancements in communications technology
• The quality of communications has improved immensely e.g. affordable, portable technology

Question 11

Economic & Political Transitions

Answer 11

• In December 1978, the People’s Republic of China, under Deng Xiaoping, began a period of economic reform (referred to as the ‘Opening of China’ in the West).
• included the opening of the country to FDI & permission for entrepreneurs to start businesses.
• From 1978 until 2013, due to China’s ongoing adoption of authoritarian capitalism, the Chinese economy grew by a huge amount ($155 to $7081 per capita).
• On 26 December 1991, the Soviet Union ended and 15 new states including Russia, Ukraine, and Lithuania were born.
• All of these new states began transitions to market economies.
• Economies in the Baltic states have performed the best. Countries such as Russia and Ukraine have failed to fulfil their potential.

Question 12

Global (Transnational) companies

Answer 12

• number and size of global companies has increased significantly over the last 50 years.
• Trade liberalisation and modern day communications enable companies like McDonalds and Apple to operate throughout the globe.
• This extends beyond merely selling products and services.
• These firms use global supply chains
• TNC base their manufacturing, assembly, research and retail operations in a number of countries
• The biggest 500 TNCs together account for nearly 70% of world trade.

Question 13

Definitions of comparative advantage, high-end, industrialisation

Answer 13

Comparative advantage: when a country produces a good or service for a lower opportunity cost than other countries.
High-end: of superior quality or sophistication and usually high in price.
Industrialisation: the development of industries in a country or region on a wide scale.

Question 14

Impact of globalisation on individual countries

Answer 14

• Globalisation allows countries to specialise and become more productive in the goods and services which they have a comparative advantage, helps to raise living standards as profitability and wages rise.
• strong national firms can develop into successful global ones e.g. Zara
• Such firms boost employment and raise living standards.
• But can lead them to become overdependent on certain sectors of the economy. This leaves countries vulnerable to changes in comparative advantage over time.
• Globalisation has made countries increasingly interdependent because countries now trade more with one another than in the past
• Macroeconomic conditions in one economy can therefore have a large impact on other economies. For example, if China entered a recession, demand for imports to China would fall.
• This would thereby have a major impact on aggregate demand in its major trading partners such as Japan and Taiwan.

Question 15

Example of being vulnerable to comparative advantage changing

Answer 15

For example, Sunderland specialised in shipbuilding from the 19th century onwards. Starting in the 1950s, Japan and South Korea developed their own shipbuilding industries that began to outcompete their UK rivals.
Eventually, shipyards closed down in Sunderland which led to high levels of unemployment and reduced living standards.

Question 16

Impact of globalisation on consumers

Answer 16

• Globalisation allows countries to specialise in the goods and services which they have a comparative advantage.
• This will tend to reduce costs because firms will become more productive and experience economies of scale.
• Some of these cost savings will be passed on to consumers through lower prices.
• Choice increases for consumers through globalisation.
• It is difficult for consumers to find out how goods imported from around the world are produced.
• Labour in other countries may be subject to unsafe working conditions e.g. clothing factories in Bangladesh.
• Imports could have been produced in an environmentally unstable way. For example, crops grown on land cleared for farming in the Amazon rainforest.

Question 17

Structural & cyclical unemployment

Answer 17

• Structural unemployment refers to a mismatch between the jobs available and the skill levels of the unemployed.
• Unlike cyclical unemployment, it’s caused by forces other than the business cycle, It occurs when an underlying shift in the economy makes it difficult for some groups to find jobs.
• It is harder to correct than other types of unemployment

Question 18

Deindustrialisation definition

Answer 18

• Deindustrialisation is a process of social and economic change caused by the removal or reduction of industrial capacity or activity in a country or region, especially of heavy industry or manufacturing industry.
• It is the opposite of industrialisation.

Question 19

Impact of globalisation on governments

Answer 19

• can limit ability to raise taxes as companies move to place with lowest corporation tax, countries then may start to undercut their taxes
• causes transfer pricing
• also causes some countries to grow larger then others e.g. China, influences politics

Question 20

Transfer pricing

Answer 20

Offices in different parts of the world allocate sales, profits & purchases to countries with lowest tax bands

Question 21

Deindustrialisation

Answer 21

• Deindustrialisation can arise due to the loss of a comparative advantage.
• The loss of industry causes an increase in unemployment in the regions affected e.g. the closure of the Teesside Steelworks in 2015.
• Skills used in declining industries often have limited transferability to other industries, especially in developed economies.
  E.g. an unemployed coalminer would have few skills needed in high tech manufacturing or service industries (which represent the bulk of employment opportunities in developed economies).
• Long-term structural unemployment can therefore be a major problem for countries in a globalised world.

Question 22

Impacts of globalisation on producers

Answer 22

• allows firms to expand far beyond what is possible in one country
• allows firms to develop global supply chains and shift production to the most advantageous location - sometimes called ‘footloose companies’
• Globalisation increases the number of such companies.
• Producers are exposed to more competition in a globalised world.
• Firms which would have thrived/survived, in a protected domestic market can end up going out of business
• Firms have more choice when it comes to suppliers allowing them to obtain cheaper and/or higher quality raw materials and components.

Question 23

Offshoring & bargaining definition

Answer 23

Offshoring: the relocation of a business process from one country to another-typically an operational process, such as manufacturing, or supporting processes, such as accounting.
Bargaining power: in negotiating, capacity of one party to dominate the other due to its influence, power, size, or status.

Question 24

Affects of globalisation on workers

Answer 24

• workers demand improvements in wages or working conditions, TNCs can threaten to move production abroad - offshoring - harder for workers to gain pay rises and working conditions.
• So workers have less bargaining power when dealing with multinational rather than national firms.
• In developed economies, workers in industries with a comparative advantage tend to do well from globalisation i.e. they receive higher wages. - low skilled workers lose out as the industries they work in tend to become uncompetitive e.g. low-end manufacturing such as basic home appliances.
  -without Chinese imports increases there would be 560,000 extra manufacturing jobs in the US today.
• In the past few decades, many developed countries lost comparative advantages in low-skilled manufacturing industries such as textiles to emerging economies.
• led to a decline in demand in those industries which resulted in falling wages and employment. - developed countries have tended to maintain comparative advantages in high-skilled manufacturing and service industries

Question 25

Affects of globalisation on environment

Answer 25

• Globalisation has increased environmental destruction and contributes to global warming through raising greenhouse gas emissions.
• Rising industrial activity, brought about through globalisation, has increased demand for raw materials such as copper and aluminium.
• Mining raw materials causes environmental destruction.
• Another example is the clearing of rainforests forfarming or industrial activity.
• The increased transportation of goods associated with international trade has led to a rise in greenhouse gas emissions.