Mini Test Oct Flashcards
Globalisation
The ever-increasing integration of countries around the world.
The process through which an increasingly free flow of ideas, people, goods, services and capital leads to the integration of economies and societies.
Globalisation arises from growing world markets and increasing international trade and entails increasing interdependence between countries.
Key aspects of globalisation
-Trade to GDP ratios are increasing for most countries
-Expansion of Financial capital flows between countries.
-Foreign Direct Investment and cross border M and A
-Rising number of global brands - including from emerging countries
-Deeper specialisation of labour- components come from many nations
-Global supply chains and new trade and investment routes e.g. south- south trade
-Increasing levels of international labour migration and migration within countries
-Increasing connectivity of people and businesses through mobile and WiFi network
Why has globalisation increased over the past 50 years
-Developments in IT, transport and communications have accelerated the pace of globalisation over the past 40 years. The internet has enabled fast and 24/7 global communication, and the use of containerisation has enabled vast quantities of goods and commodities to be shipped across the world at extremely low cost.
-More recently, the rise of social media means that national boundaries have, in many ways become irrelevant as producers use new forms of communication and marketing, including micro-marketing, to target international consumers. The widespread use of smartphones has also enabled global shoppers to have easy access to ‘virtual’ global markets.
-The rise of new electronic payments systems,, including e-Wallets, pre-pay and mobile pay, e-Invoices and mobile pay apps, also facilitate increased global trade.
-Increasing em>capital mobility has also acted as a stimulus to globalisation. When capital can move freely from country to country, it is relatively straightforward for firms to locate and invest abroad, and repatriate profits.
-The development of complex financial products, such as derivatives, has enabled global credit markets to grow rapidly.
-Increased trade which has become increasingly free, following the collapse of communism, which has opened up many former communist countries to inward investment and global trade. Over the last 30 years, trade openness, which is defined as the ratio of exports and imports to national income, has risen from 25% to around 40% for industrialised economies, and from 15% to 60% for emerging economies.[1].
-The emergence of footloose multinational and transnational companies (MNCs and TNCs) and the rise in the significance of global brands such as Microsoft, Apple, Google, Sony, and McDonalds, has been central to the emergence of globalisation. The drive to reduce tax burdens and avoid regulation has also meant the establishment of complex international business structures.
Impact of Globalisation on countries and government
-Rising incomes from all the new jobs created > rising tax revenue collected
-Economic growth and improved standard of living
-Better quality of jobs as MNCs invest in new factories and training
-Increased migration to where the new jobs are created- ensures skill gaps in countires can be filled
-Potentially improved Balance of Payments
-Technology and skills transfer due to MNCs improves quality of labour and production processes of domestic firms leading to improved productivity
-Reduced poverty/ potentially reducing inequality
BUT
-Lead to decline of traditional industries leading to structural unemployment
-Increased living standards may not be equally felt in an economy or between economies
-Much depends on the quality/quantity and sustainability of jobs.
Globalisation- effect on Individuals/ consumers
-Increased choice and quality of jobs
-Increased choice and quality of goods and services
-Lower prices
-Potentially improved innovation
-May help lift people out of poverty/increase standards of living
BUT
-Income may not be equally distributed accross the population
-May lead to a reduction in locally produced goods/reduced culture
Globalisation- effect on Enviroment
-Increased awareness of issues surrounding the environment- While many of the environmental effects of globalisation have been negative, its rise has led to an increase in environmental awareness around the world.
-Greater connectivity and higher rates of international travel have made it easier than ever for people to see the effects of deforestation, habitat loss, and climate change on the environment. This, in turn, contributes to new laws, rules and procedures that limit negative effects.
-Greater interdependence and cooperation between countries may make globally environmental policies achievable as well as tech and processes.
BUT
-Increased Transport of Goods: Shipping products globally can harm the environment by increasing emissions, destroying habitats, and spreading invasive species.
-Economic Specialization: While specialization fosters trade and cooperation, it can quickly deplete natural resources.
-Decreased Biodiversity: Habitat loss and climate change among other factors—have led to population decline across organisms.
-Resource Depletion- greater production of goods requires the use of finite resources
Globalisation - impact on producers
-Lower costs as producers can access products from a range of countries
-Increased competition means producers need to try and aim for productive efficiency at the MES(lowest unit cost)
-Increased sales may lead to increased scale and economies of scale
-Lower transportationn costs/ better comms have enabled businesses to benefit from production in low cost countries and more complex supply chains
-Tax avoidance- firms can base their central operations in a country that pays low or no tax even though they operate in many countries
BUT
-Greater competition
-Businesses may gain a poor reputation due to ethical/environmental concerns
-Greater interdependence between countries can make businesses vunerable to external shocks ie tsunami/ Ukraine war
Globalisation impact on workers
-Jobs may be more diverse and fulfilling than previous jobs
-Potentially better jobs and pay is likely to be higher as FDI may lead to more complex jobs and multinationals are more able/ likely to afford higher pay rates than local companies
-Easier for labour to migrate to other countries to gain better paid jobs
-Higher economic growth > rising employment > increased wages/improved living standards
-Skills and technology transfer
BUT
-Can cause structural changes/ unemployment. Some industries workers have become unemployed- ie ship building and mining in the UK.
-Exploitation by some MNCs…. Race to the bottom. Due to cost management, jobs may be low skilled and conditions may be poor
-Need to consider the quality of jobs and working conditions and sustainability of jobs (footloose capitalism)
Specialisation
Occurs when an economy focuses on a narrower range of goods and services.
Economies make the most of their resources by concentrating on what they do the best (this is known as comparative advantage)
However this will only be of real benefit if the economy can trade the surplus and buy the goods and services they need but do not produce
The advantage can be enhanced by economies of scale. The increased export revenue can be used to buy cheap imports.
The choice of specialisation is dependent upon the quality and quantity of the factors of production of each country.
Absolute Advantage
When a country can produce a good or service at a lower cost than another or it can produce the same amount with less resources
Comparative Advantage
Helps explain the benefits of specialisation and trade between individuals, firms and countries
It arises when one party can produce a good or service at a relatively lower opportunity cost than another party
In simpler term, its about assessing which activity a party is relatively more efficient at producing compared to other activities.
The concept was introduced by British economist David Ricardo in the early 19th century as part of his theory of international trade.
Comparative advantage- Opportunity Cost
The decision to produce any good or service has an opportunity cost, which is the amount of another good or service that might otherwise have been produced. Given a choice of producing one good or another, it is more efficient to produce the good with the lower opportunity cost, using the increased production of that good to trade for the good with the higher opportunity cost.
The lowest opportunity cost determines which country will specialise in which good (this determines the good that the country is relatively more efficient at). Only trade if the opportunity cost of production differs between countries.
The law of comparative advantage states that the overall output can be increased if individuals specialise in producing the goods in which they have a comparative advantage.
It is an explanation of why trade leads to economic growth,even when a country has an abolsute advantage in the production of several products.
When is it beneficial for 2 countries to trade?
-There needs to be a suitable rate of exchange.
-To exploit Comparative advantage and for each country to benefit, the rate of exchange must lie between the OC ratios of the goods.
Rate of exchange example
In the previous example the opportunity cost ratios were
- For every 1 unit of beef, Australia forego 0.8 of tobacco.
- For every 1 unit of beef, Malawi forego 1.5 units of tobacco.
* Therefore for every 100 units of beef, Australia would forego 80 units of tobacco, for every 100 units of beef, Malawi would forego 150 units of tobacco.
For Aus only worth selling beef to Malawi if they get more than they could’ve made themselves ie 80 units of tobacco.
For Malawi only worth buying from Aus if it is less than 150 units of tobacco otherwise they may as well carry on making it themselves
Advantages of country specialisation/ having a comparative advantage
-Higher exports: Total production of goods and services is raised and quality can be improved.
-Variety- Consumers have access to a greater choice of higher quality products. Prices are likely to be lower which may lead to higher real income.
-A bigger market: Specialisation and global trade increase the size of the market offering opportunities for economies of scale.
-Lower costs may lead to businesses gaining further competitive advantage and consumers benefitting from lower prices.
-Increases productivity and living standards across the world.
-Competition and lower prices: Increased competition acts as an incentive to minimise costs, keep prices down plus also to innovate.
-Deeper specialisation which could lead to economies of scale.
