Section 13 - The Global Economy

Question 1

Developed countries - definition

Answer 1

> Developed countries are richer, industrialised countries such as the UK, Japan and Australia.
They have high GDP/capita figures.

Question 2

Developing countries - definition

Answer 2

> Developing countries, such as Colombia and Angola, largely rely on manufacturing, agriculture and other labour-intensive industries.
They’ll have low GDP per capita figures and lower standards of living than developed countries.

Question 3

Emerging countries - definition

Answer 3

> Some developing countries are called emerging countries because they’re not yet developed, but are further along the development process than other developing countries - e.g. countries such as China, which are growing quickly but aren’t yet developed.

Question 4

Globalisation - definition

Answer 4

> Globalisation is the increasing integration of economies internationally.

Question 5

Main characteristics of globalisation

Answer 5

1. The free movement of capital and labour across international boundaries.
2. Free trade in goods and services between different countries.
3. The availability of technology and intellectual capital (e.g. the knowledge of employees) to be used (and patented) on an international scale.

Question 6

Globalisation - intro

Answer 6

> In the last 50 years, the scale and pace of globalisation has dramatically increased.
Globalisation also involves political and cultural factors:
-E.g. international bodies such as the UK tend to lead to a convergence of political decision - i.e. there are more joint decisions made between countries, and more international competition.
-Examples of cultural globalisation include the spread of things such as McDonald’s and yoga across the world.

Question 7

Globalisation - other characteristics

Answer 7

1. International trade becoming a greater proportion of all trade.
2. An increase in financial capital flows between countries.
3. Increased integration of production - e.g. different parts of a product being produced in different countries.
4. A greater number of countries becoming involved in international trade.
5. An increase in foreign ownership of firms.
6. De-industrialisation of developed countries, and the industrialisation of developing/emerging countries.
7. More international division and movement of labour.

Question 8

Globalisation - other characteristics - what is meant by international division and movement of labour

Answer 8

> I.e. the labour used to produce products is divided between more countries or moves from developed to less developed countries. For example:

• Developing countries, particularly emerging countries, are increasingly obtaining the levels of skills and technology needed to produce goods for more developed countries. Furthermore, labour is also relatively cheap in developing/emerging countries compared to developed countries.
• These factors have led to foreign companies starting to produce goods in developing/emerging countries, especially if there are other appealing factors for foreign companies, such as a good transport network in the developing country.
• For example, India provides software development for many European companies.

Question 9

MNCs

Answer 9

> A key feature of globalisation is the growth of multinational corporations (MNCs).
MNCs are firms which function in at least one other country aside from their country of origin.
A.k.a TNCs.
Factors which attract MNCs to invest in a country are:
-the availability of cheap labour and raw materials.
-good transport links.
-access to different markets.
-pro-foreign investment government policies.
MNCs may choose to divide their operations and locate each part in the country with the lowest costs.
For example, this can be done by offshoring and by outsourcing.

Question 10

Offshoring - definition

Answer 10

> Setting up a company abroad.

Question 11

Outsourcing - definition

Answer 11

> Subcontracting work to another organisation.

Question 12

Causes of globalisation

Answer 12

1. Trade liberalisation - this is the reduction or removal of tariffs and other restrictions on international trade (i.e. reducing protectionism). Countries might negotiate these trade agreements using the WTO.
2. The WTO has brought an increase in global product standards, e.g. through agreements on product standards, which allow consumers to have more confidence in imported goods.
3. A reduction in the real cost and time needed for the transportation of goods means that it’s cheaper to export and import. E.g. development of larger cargo ships.
4. Improvements in communications technology - e.g. the internet is making the communication needed for international trade easier and cheaper.
5. Firms, especially MNCs, wishing to increase profits. For example, this means they might invest in setting up a factory in a developing country where labour is cheaper. So there’s an increase in FDI by MNCs.
6. Firms expanding overseas to exploit economies of scale.
7. An increased number of MNCs and the growth of their significance and influence - e.g. as MNCs have a greater influence, there’s likely to be more international trade of goods and services, and more international investment.
8. Governments wishing to obtain the benefits of increased trade - so, e.g. a gov. might provide incentives for foreign firms to encourage them to invest in their country.
9. The opening of new/or more markets to trade and investment.
10. Growth in international trading blocs, e.g. there’s more trade now between EU countries.
11. Increasing investment by sovereign states - e.g. Norway invests some of its oil revenues in foreign companies.
12. More international specialisation - if countries specialise in making the products they’re best at , this will encourage international trade.

Question 13

Example of ‘the opening of new or more markets to trade and invest

Answer 13

> For example, following the collapse of the Soviet Union after the Cold War, many communist Eastern European countries previously had closed economies.
Also China opening its economy to trade and then joining the WTO in 2001 has had a big impact on globalisation.

Question 14

Globalisation - benefits

Answer 14

1. Trade encourages countries to specialise in the goods and services they’re best as producing/providing which increases output.
2. So globalisation can allow countries to produce the things where they have a comparative advantage, leading to improvements in efficiency and the allocation of resources.
3. Producers can benefit from EoS and lower production costs because markets become bigger when countries trade. Global sourcing has also led to lower raw material costs.
4. Lower production costs are also sometimes passed on to consumers in the form of lower prices.
5. World GDP has risen as a result of globalisation due to many factors. E.g. increased efficiency means firms can increase output. Countries which aren’t open to trade have seen a reduction in their growth rates,
6. Globalisation provides consumers with a greater choice of goods and services to purchase.
7. Improved standards of living and reduced levels of absolute poverty in the world. A key reason for this is because levels of world employment have increase, as increased output has meant the creation of more jobs.
8. Increased growth and employment has helped governments achieve their macroeconomic objectives.
9. Increases in competition brought about by globalisation can lead to lower prices for consumers.
10. There has been an increased awareness of, and quicker response to, foreign disasters and global issues and their consequences.

Question 15

Globalisation - drawbacks

Answer 15

1. Globalisation is causing the price of some goods and services to rise - increasing world incomes lead to increasing demand for goods and services, so when supply is unable to meet demand, prices rise.
2. Globalisation can lead to economic dependency so this can lead to instability in economies - e.g. if the US economy goes into a recession and reduces imports, this may cause European economies to go into a recession too.
3. Increasing world trade has led to global imbalances in balance of payments accounts. These balances are unsustainable leading to calls for increased protectionism.
4. Specialisation can lead to overreliance on a few industries by an economy, which is risky.
5. Individual firms may be outcompeted by foreign firms and go out of business.

Question 16

MNCs - positive effects

Answer 16

> FDI by MNCs creates new jobs, and brings new skills and wealth to an economy. MNCs also buy local goods and services, leading to inflows of foreign currency.
MNCs can benefit from economies of scale, helping them to be more efficient, i.e. they can produce products more cheaply.
Some people believe MNCs raise living standards by providing employment.

Question 17

MNCs - negative effects

Answer 17

> Some people argue MNCs exploit workers in developing countries by paying them lower wages than in developed countries.
MNCs can force local firms out of business - for example, because local firms might be unable to obtain similar economies of scale, they will be less competitive.
MNCs can relocate rapidly and cause mass unemployment.
They can withdraw profits from one country and place them in another with low tax rates - so the former country won’t be able to gain tax revenue from those profits.
They can use their economic power to reduce choice and increase prices.
MNCs can influence gov. policies in other countries to their advantage, which can be unfair to local people or unhelpful to the domestic economy.
Governments may be forced to reduce corporate tax levels to attract or keep MNCs in their country.

Question 18

Globalisation - environment

Answer 18

> Environmental degradation has resulted from globalisation. E.g. international trade leads to an increase in the international transportation of goods - this means more fossil fuels are used, contributing to climate change and causing resource depletion.
Carbon emissions are also increased by, for example, rising production levels of manufactured goods to meet rising global demand.
Other threats to the environment that are linked to globalisation include:
-deforestation and increasing depletion of other non-renewable resources.
Some people argue that international trade isn’t sustainable at current levels if its environmental impact is considerable.

Question 19

Consequences of globalisation

Answer 19

> Globalisation may have contributed to increasing levels of inequality within many countries (both developed and developing).
In some emerging economies such as China and India, the gaps between their wealthiest and poorest citizens have increased significantly in recent years.
MNCs can bring extra tax revenue to both developed and developing countries, but regulation is often needed (e.g. of transfer pricing) to make sure governments don’t lose out on this revenue. Imposing this regulation can be costly.
Consequences differ for developing and developed countries.

Question 20

Transfer pricing

Answer 20

> Transfer pricing is setting prices for goods/services that are transferred between divisions of the same company.
MNCs could try to manipulate these prices in order to save money on tax.

Question 21

Consequences of globalisation for developing/emerging countries

Answer 21

1. Health and safety laws are generally less strict in developing/emerging countries - MNCs may take advantage of this.
2. MNCs may exploit workers by offering very low wages.
3. Skilled workers often leave developing/emerging countries to work in more developed countries.
4. This reduces the developing country’s potential for economic growth.
5. However, globalisation creates jobs, reducing unemployment.
6. MNCs often bring more efficient production methods and technology to developing countries.
7. There’s an increase of investment in developing/emerging economies, e.g. through FDI.

Question 22

Consequences of globalisation for developed countries

Answer 22

> Cheap overseas production of goods has led to a severe reduction in some industries in developed countries, causing structural unemployment. E.g. cheap clothes from countries such as Bangladesh have contributed to the collapse of the textile industry in the UK.
Such collapses lead to de-industrialisation, which has further impacts on economies - such as a fall in exports.
The success of emerging economies, e.g. China and India, impacts on developed countries - for example, emerging economies’ share of global GDP has increased at the expense of more developed nations.
Increased levels of imports result from increased trade and have a negative effect on a country’s BoP.
Globalisation gives countries greater access to raw materials and semi-manufactured goods from other countries, which can be used in the production of domestic goods. These goods can then be exported r sold domestically.
MNCs gain access to cheaper labour, which leads to lower CoPs and lower prices for consumers.

Question 23

International trade - definition

Answer 23

> The exchange of goods and services between countries (i.e. imports and exports).

Question 24

Advantages of international trade

Answer 24

> Countries can’t produce all the things they want and need because resources are unevenly distributed.
International trade can give countries access to these resources and products they otherwise wouldn’t be able to use - countries can export goods in order to import the things they can’t produce themselves.
By trading internationally, not only do a country’s consumers enjoy a larger variety of goods and services, but increased competition resulting from international trade can lead to lower prices and more product innovation - so people’s standards of living are raised by having more choice, and better quality and cheaper products.
Additional markets allow firms to exploit more economies of scale - if the additional market mean there’s an increase in demand for their products.
International trade can also expose firms to new ideas and skills - e.g. an MNC might bring new manufacturing skills to a developing country.

Question 25

What does international trade do?

Answer 25

> Allow countries to specialise

Question 26

International trade - specialisation

Answer 26

> International trade allows countries to specialise in the goods and services they’re best at producing.

Question 27

International trade - specialisation - why?

Answer 27

> Countries specialise because:

• They have the resources to produce the good or service efficiently.
• They’re better than other countries at producing the good or service.

Question 28

International trade - specialisation - advantages

Answer 28

> Specialisation has its advantages:

• Costs are reduced, which can be passed on to consumers in the form of lower prices.
• The world’s resources are used more efficiently.
• Global output is increased and living standards are raised.

Question 29

International trade - specialisation - disadvantages

Answer 29

1. Domestic industries may be forced to shut down because foreign firms are better at producing the goods or services provided by that industry.
2. Specialisation can lead to overreliance on one industry - if something happened to negatively affect that industry, it would have a severe impact on the whole economy.
3. Countries are vulnerable to cuts in the supply of goods that they don’t produce themselves.
4. Specialisation can have negative impacts on a country’s economy. E.g. if a country begins to specialise in a particular industry, other industries may decline, and workers from those industries may struggle to get work (as they might not have the relevant skills).

Question 30

International trade - disadvantages

Answer 30

1. Trading internationally usually involves higher transport costs.
2. Currency exchanges when trading abroad can carry costs, potentially resulting in financial losses.
3. There are other costs to firms that trade internationally, such as complying with other countries’ legal and technical requirements, translating legal documents, and advertising material, and performing market research for overseas markets.
4. International trade increases globalisation, which has its own disadvantages.

Question 31

Absolute advantage

Answer 31

> A country will have an absolute advantage when its output of a product is greater per unit of resource used than any other country.
Through specialisation, more output is produced using the same amount of resources - so the cost per unit is reduced.

Question 32

Comparative advantage

Answer 32

> Comparative advantage uses the concept of opportunity cost - the opportunity cost is the benefit that’s given up in order to do something else.
In this case, it’s the number of units of one good not made in order to produce one unit of the other good.
A country has a comparative advantage is the opportunity cost of it producing a good is lower than the opportunity cost for other countries.
The law of comparative advantage is based on several assumptions, which make it hard to apply to the real world.
For example, it assumes that there are no economies or diseconomies of scale, there are no transport costs or barriers to trade, there’s perfect knowledge, and that factors of production are mobile. Also, externalities are ignored.

Question 33

Complete specialisation

Answer 33

> If countries specialise fully in the goods they have a comparative advantage in, allocating all their resources to one product, total output for one good will increase but for the other good it may fall.
By only reallocating some resources, it’s possible to increase the output of both goods.
Countries can split production then trade.
By using partial specialisation, outputs are both greater than they were before specialisation.
Countries are unlikely to specialise 100% - instead they produce at a level where their combined production of both goods is greater than without specialisation.
For trade to benefit both countries, the terms of trade must be set at the right level.
If the opportunity cost of production is the same in both nations, there would be no benefit from trade.

Question 34

Trade - main condition

Answer 34

> Usually, for trade to occur between 2 countries, both countries must benefit from trading, or at least not be any worse off than if they hadn’t traded. So, neither country will pay more for a good than it would cost them to produce it themselves, and neither will accept less for a good than it costs for them to produce it.
Whether trade is beneficial or not depends on the opportunity cost ratios for each country.

Question 35

Terms of trade - definition

Answer 35

> A measure of the relative price of a country’s exports compared to its imports.

Question 36

Terms of trade

Answer 36

> A country’s terms of trade is the relative price of its exports compared to its imports.
It is often described using an index number and calculated using the formula:
-(index of average price of exports) divided by (index of average price of imports) x 100.
If the price of a country’s exports rises, but the price of its imports stays the same, its terms of trade index will increase.
This increase will mean it’ll effectively become ‘better off’, as it will be able to afford more imports.
And if a country’s terms of trade index falls, it’ll effectively be worse off.
For example, during the recession in 2008-20, the UK’s terms of trade index fell - this was because the price of its imports rose more quickly than the price of its exports.

Question 37

Trade - developed countries

Answer 37

> Imports are crucial to maintaining high standards of living in developed countries.
Products will often be cheaper when bought from abroad - e.g. due to increased competition and cheaper labour in developing countries.

Question 38

Trade - developing countries

Answer 38

> Developing countries can import goods they don’t have the technology to produce themselves, which results in a higher standard of living.
Trade also gives these countries access to new materials, meaning new industries will be created because they can produce new products. This will help to improve the economies of developing countries.

Question 39

Trade - emerging countries

Answer 39

> Emerging economies will experience some of the benefits of both developed and developing countries.
For example, emerging economies will be able to purchase cheaper products from developing countries, and they’ll also benefit from importing products and services they don’t have the technology to produce themselves.