Macroeconomics: Globalisation and trade Flashcards
What is globalisation?
The interconnectedness and interdependence between countries.
What are the key characteristics of globalisation?
Increasing overseas trade.
More money flowing between economies e.g. UK investing more in the EU.
Increase foreign direct investment (infrastructure).
Deeper specialisation of labour (make products at a cheaper price).
Creation of global supply chains (interconnected) and new trade and investment routes.
More global brands.
Increased labour migration (opportunity cost).
Transnational brands.
What is a hub economy?
A country/city that serves as a central point for business, trade, finance, communication, and transportation. e.g. Dubai
Japan has a lower trade openness than Singapore as the economy is larger.
What are the key factors driving globalisation?
Containerisation-( how big the containers are- more products getting exported- purchasing economies of scale).
Technological advances- lowers cost of transmitting as economies can communicate easier.
Differences in tax systems- countries e.g. Ireland have lower corporation tax so businesses are set up there.
Tariffs have fallen- rise in non-tariff barriers e.g. import tariffs.
What are transnational businesses?
TNCs base their manufacturing, assembly, research and retail operations in several countries. e.g. Nike, Apple, Netflix.
Set up in emerging countries.
Why are TNCs a key driver of globalisation?
Relocating manufacturing to countries with relatively lower unit labour costs in order to increase their supernormal profits and equity returns for shareholders.
Labour costs are rising in emerging countries so some TNCs are reshoring manufacturing e.g. TikTok.
Countries are becoming more interconnected.
What are the economic benefits of globalisation?
Cheaper goods and services for consumers.
More competition in consumer markets (more competitive, monopolistic markets).
Reduction in absolute poverty rates (TNCs reduce unemployment due to lower labour costs in those countries).
Gains from specialisation of factors of production.
Rapid transfer of ideas stimulates innovation.
Gains from labour mobility.
Trade can help drive economic growth.
Encourages both producers and consumers to reap benefits from division of labour and harnessing economies of scale.
What are the economic and social costs of globalisation?
Countries are losing educated people - lose opportunity to innovate - brain drain.
Increases inequality- gains are unequal.
Threats to the global commons (irreversible damage to ecosystems, land degradation, deforestation).
Macroeconomic fragility- external shocks in one region can spread to others.
Trade imbalances- leads to more import tariffs and quotas and a move towards managed exchange rates- de-globalisation.
Structural unemployment from out-sourcing of manufacturing to lower-cost countries and a rise in imports.
Corporation tax avoidance.
What is de-globalisation?
A process in which countries/regions become less integrated with the global economy. e.g. UK exiting the EU reduces the flow of goods and services.
What are the causes of de-globalisation?
Protectionism e.g. tariffs, quotas and trade barriers to shield domestic industries from foreign competition. e.g. UK introduced a temporary import tariff on agricultural products.
Economic shocks e.g. Pandemic reduced reliance on global trade and investment.
Changing trade agreements.
Environmental concerns- policies that prioritise local production and reduce carbon footprint.
Health crises e.g. pandemics disrupts travel, trade, and supply chains.
Economic nationalism- policies to protect domestic industries and jobs.
What is corporation tax in Ireland?
12.5% which is half compared to other countries.
What is are MNCs?
Multi-national corporations- a company that has business operations in at least one country other than its home country and generates revenue outside of its home country.
e.g. McDonald’s, Coco-cola.
Host country suffers because they are missing out on tax revenue.
What are the reasons for the growth of MNCs?
Operate closer to target international markets.
Gaining access to lower costs of products.
Avoids protectionism.
What are the impacts of de-globalisation?
More support for local economies
Less negative impacts on domestic environments due to less trade so the domestic economy can align social responsibility.
Local suppliers are more responsive to local demand, development o local economy.
What is comparative advantage?
The relative opportunity cost of production for a good/service is lower than in another country.
How can a country be relatively more productively efficient than another?
Specialise in the goods and services that you are relatively best at.
This opens up important potential gains from specialisation and trade leading to a more efficient allocation of scarce resources.
What is absolute advantage?
This occurs when a country can produce a product using fewer resources (AC is lower) than another nation.
If a country using the same factors of production can produce more, then it has an absolute advantage.
How does comparative advantage affect economic welfare?
If each country specialises, total output can be increased leading to better allocative efficiency and economic welfare.
Providing that a good price can be found from buyers, then specialisation should focus on those goods and services that provide the best value.
In many countries, comparative advantage is shifting towards specialising in and exporting high-technology manufactured goods and high-knowledge services, which command higher prices.
As a country develops more capabilities, then it can produce a wider range of closely-linked goods and services e.g. South Korea, Japan, Germany (highly diversified pattern of exports).
Nations at a lower stage of development tend to have fewer capabilities and thus export a narrower range of products.
What are the assumptions behind the theory of comparative advantage?
Constant returns of scale - no economies of scale - which might amplify the gains from trade.
Factor mobility (switch resources from 1 area to another) between industries- geographically and occupational.
Assuming no import controls such as import tariffs and quotas (no trade barriers so countries want to specialise).
Low transportation costs to get products to overseas markets - high logistics might erode comparative advantage.
Ignores possible externalities of production/consumption.
Mutually beneficial terms of trade is not necessarily one that benefits both countries equally - the benefits may be skewed!
What are the key factors determining comparative advantage?
Quantity and quality of natural resources available.
Demographics - an ageing population, net outward/inward migration, educational improvements, and women’s participation in the labour force will all affect the quantity and quality of the labour force available.
Rates of capital investment including infrastructure.
Investment in research and development which can drive innovation.
Fluctuations in the exchange rate affect the relative prices of exports and imports.
Import controls such as tariffs, export subsidies and quotas (de-globalisation - may not benefit from comparative advantage)
Non-price competition of producers - covering product design and innovation, product reliability, and quality of after-sales support.
Institutions including banking and legal systems.
What are the gains from trade?
Free trade encourages deeper specialisation and benefits from economies of scale.
Free trade increases competition and choice and drives up product quality.
Increased market contestability reduces prices for consumers leading to higher real incomes.
Better use of scarce resources e.g. trade in new sustainable technologies.
