LS1 + LS2 - Globalisation, Comparative Advantage Flashcards
Globalisation
Process of interaction and integration among people, companies and govt worldwide.
Results in whole world becoming a ‘single’ economy
More interdependence between countries
Causes of globalisation
CAUSES: TGF GT
TRADE LIBERALISATION- barriers to trade such as tariff barriers have decreased as countries have realised the benefits of free trade in promoting growth by exploiting their comparative advantages. Promotes comp – increasing LRAS. Through the work of the WTO who’s main role is to reduce trade barriers between nations. Trade between countries has increased- leading to greater economic integration between countries.
GROWTH OF TRADING BLOCS- this is where trading blocs like the EU and ASEAN have either deepened their integration or have formed promoting more free trade and easier movement of labour between member states. Consequently more trade and labour migration between these members is promoted and FDI is likely to increase leading to the greater integration of these economies
GROWTH OF MULTINATIONAL CORPORATIONS- As technology improves, mobility of capital is easier and access to world markets is easier, MNCs can become very large in terms of production levels and profitability. Consequently to expand further to international markets MNCs will move and operate in various countries leading to the greater interdependence of nations in the form of increased FDI. Supernormal profits. Take advantage OF cheap labour costs. They have used marketing to become global, and by growing, they have been able to take advantage of economies of scale, such as risk-bearing economies of scale. The spread of technological knowledge and economies of scale has resulted in lower costs of production
TECHNOLOGICAL ADVANCEMENTS- occurred in terms of internet improvements, software development and transportation improvements in particular. Thus to trade internationally and operate business = more efficient= quicker- cheaper- opening up markets increasing trade FDI and migration flows
FALL IN TRANSPORT COSTS- occurred due to innovations and greater privatisation of transport. Cheaper and faster= promoting more trade. FDI and migration flows have increased with this improvement in mobility both of labour and capital
How does globalisation cause inequality
SPECIALISATION AND TRADE- Cheaper to source materials from elsewhere, contraction in domestic supply and a fall in employment and real incomes- structural u/e and a decline in SOL. Wages pressure- inequality. Deindustrialisation – higher rates of long-term u/e social depravation
HIGHER PROFITS FROM MNCS- pay-outs to executives increasing dividends. Because of tax avoidance, tax revenues generate- insufficient to pay for public services, welfare systems. UK 2017 MNC avoid paying £6 billion in tax rev
EVAL:
It increases demand for high skilled workers and lowers the expected earnings of people in relatively low skill and low knowledge occupations.- FDI creates more formal employment and income for people employed in those sectors but perhaps at the expense of similar workers in higher income countries whose skills are no longer in demand
Impact of globalisation on countries
Allows countries to be more specialised and more productive in goods and services in which they have a comparative advantage (lower opp cost than other countries), raises living standards, incomes, profits
Strong national firms –> strong global firms - boost profits, employment, living standards
Countries can become overdependent on certain sectors of their economy, vulnerable to changes in comp adv over time - lots of unemployment (structural), reduced living standards
Impact of globalisation on consumers
Allows countries to specialise in industries w with comp adv, reducing costs, as firms become more productive, and experience economies of scale - cheaper prices for consumers
Increased choice for consumers - consumers can buy goods and services form all over the globe
Impact of globalisation on governments
Can limit tax revenue - if country A increases corporation tax, TNC will move to country B, with lower corporation tax, redcucing tax rev for country
Possibility of increased administrative procedures - could introduce trade barriers
Impact of globalisation on producers
Exposed to more competition form all across the world, domestic firms could struggle, go out of business due to increased comp from foreign firms
Develop global supply chains, shift production to most advantageous location
More choice with suppliers - cheaper labour/raw materials
Impact of globalisation on workers
Harder for workers to achieve pay rises - as TNCs could just move production to other country with cheaper labour - Offshoring
High skilled workers with comp adv tend to do well in globalisation - higher wages, better QoL
Low skilled workers suffer, as their industries become more uncompetitive
Impact of globalisation on environment
Increases env destruction, contributes to greenhouse gas emissions - global warming
Increased demand for finite resources and raw mats - increased mining or deforestation/clearing of forests
Increased transportation - increase in greenhouse gas emissions (shipping creates 2/3% of world total gg emissions)
Pros of globalisation
W EOS GCC
INCREASE IN WORLD EFFICIENCY- with greater free trade and specialisation, resources are allocated where countries have their comparative advantage. Consequently, allocative efficiency is attained and with money to act as a means of exchange, the basic economic problem is solves maximising benefit to both consumers and producers
Large Economeis of Scale- larger international market to access, businesses have the potential to grow much larger and sell to many more consumers around the world. With greater benefit from purchasing and technical economies businesses will lower their average costs of production increasing productive efficiency. Lower costs translate into higher profitability and potentially lower prices for the consumer
Increased competition and lower prices- s- fierce competition, producers do what they can to compete- allocative efficiency and great benefit to the consumer through lower prices, higher quantity, quality, and choice. Businesses may be forced to re-invest and be innovative – best quality of a diversified range
Increased choice for consumers and businesses- businesses can source raw materials from all around the world ,find the cheapest prices. Similarly, consumers can access a greater market to buy their goods and services from. Businesses benefit from lower costs of production- lower prices, greater market share, higher profitability, consumers= welfare, material and non- material living standards can improve markedly
Higher rates of GDP growth- greater market size and specialisation – greater export potential and revenue generated from exports for countries with large comparative advantages- AD and thus economic growth will increase. Unemployment will decrease- firms respond by giving more labour- increasing incomes and living standards, prosperity. Tax revenues hypothecated capital investment, public goods and merit goods, retraining programmes- invest into supply side policies. Absolute poverty= reduced= inc social mobility
Cons of globalisation
ISES
GROWING INCOME INEQUALITY- higher growth may not be translated into higher incomes for all. Corrupt governments who don’t redistribute tax revenue effectively, capital intensive sector production or from one dominant sector are all potential causes of this widening gap. Thus key macro objective not met- increasing relative poverty and deteriorating government finances. Developing nations- sig parts of the population may continue to live in absolute poverty holding back economic development
RISE IN STRUCTURAL UNEMPLOYMENT- major industries go into decline- struggle to compete internationally where other countries have the comparative advantage and low cost labour benefit- macroeconomic objective is lost. Occupational immobility of these workers promotes a problem for the gov where re training is necessary. There’s a cost to the gov directly but also indirectly – higher u/e benefits
ENVIRONMENTAL COSTS- with FDI increasing, growth etc, negative externalities increased e.g. very high pollution levels, resource depletion, resource degradation and deforestation. Consequently, wellbeing and quality of life decrease. Not sustainable. UN 200 trillion a year
OVER SPECIALISATION- exploiting comparative advantage, risk of becoming too over reliant on a narrow range of goods and service. If the industry collapses or declines where specialisation has occurred no industry can prosper. In developing nations, dual economy could persist trapping the economy in low levels of development
Absolute advantage
A country has absolute advantage in the production of a good or service if it can produce it using fewer resources and at a lower cost than another country. Produce a good more cheaply relative to other countries
Comparative advantage
occurs when a country can produce a good or service at a lower opportunity cost than another country. This means they have to give up producing less of another good than another country, using the same resources.
A country can change over time e.g. due to greater research and development and innovation in newer and more sophisticated techniques providing a country with lower cost advantages.
Can gain a comparative advantage due to either greater quantities of factors of production or better quality factors of production e.g. greater abundance of natural resources, labour, machinery.
Country with higher skilled labour force- comparative advantage in manufactured goods. Country with a natural resource endowment and good climate- adv. in primary commodity extraction.
Advantages of specialisation and trade
Comparative advantage shows how world output can be increased if countries specialise in what they are best at producing, this will increase global economic growth.
Trading and specialising allows countries to benefit from economies of scale , which reduces costs and therefore decrease prices globally.
Different countries have different factors of production and so trade allows countries to make use of factors of production, or the things produced by these factors, which they otherwise may have been unable to.
Trade enables consumers to have greater choice about the types of goods they buy, and so there is greater consumer welfare.
Trade also means there is greater competition, which provides an incentive to innovate. This creates new goods and services and new production methods, increasing consumer welfare and lowering costs respectively.
Countries which isolate themselves for political reasons, like North Korea, have found that their economies tend to stagnate.
Disadvantages of specialisation and trade
However, trade can lead to over-dependence, where some countries become dependent on particular exports whilst others become dependent on particular imports. This can cause problems if there are large price falls in the exports of if imports are cut for political reasons= economy can collapse
It can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and competitive. The less mobile the workforce, the higher the chance that changes in demand due to trade will reduce output and employment over long periods of time- problem in the UK as some areas such as Manchester suffer from unemployment as their traditional industries declined, for example ship-building.
The environment will suffer due to the problems of transport as well as the increased demand for resources e.g. deforestation.
Countries may suffer from a loss of sovereignty due to signing international treaties and joining trading blocs, for example in the EU.
They may see a loss of culture as trade brings foreign ideas and products to the country.
