The international economy - Globalisation and trade Flashcards
Variables to consider when measuring globalisation
Difference between GNP and GDP of a country.
Remittances as a % of GDP.
Number of multinational corporations (MNCs) in foreign countries.
Technology advancements (e.g. number of Internet users).
Level of protectionism (e.g. tariffs / quotas).
Membership of free trade agreements (e.g. WTO) / trading blocs (e.g. NAFTA).
Level of FDI flows as a % of GDP.
Amount of X+M (exports + imports) as a % of GDP.
Migration/immigration flows.
Tourism as a % of GDP.
Foreign aid as a % of GDP.
Globalisation
Globalisation is defined in terms of the free movement of goods and services, factors of production (capital, labour), financial flows (FDI, hot money) and economies becoming increasingly interdependent.
Causes of Globalisation
- Containerisation
- Technological advancements
- Growth in WTO membership
- Growth of BRICS: Brazil, Russia, China and South Africa.
- Growth of sovereign wealth funds
- Deregulation
- Growth of free trade blocs
WTO
The role of the World Trade Organisation (WTO) is to liberalise free trade, to provide a forum to resolve trade disputes, and to lower tariff barriers.
The GATT (General Agreement for Tariffs and Trade) was formed in 1948.
As a result of the Uruguay Round in 1995, the WTO was formed.
The Most Favoured Nation Principle (MFN) says that any tariff reduction offered to one country must be offered to all (against trade discrimination).
The WTO began with 23 members, and now has 163 members.
Direct foreign investment
an ownership stake in a foreign company or project made by an investor, company, or government from another country.
Multi national corporations
A multinational corporation has facilities and other assets in at least one country other than its home country.
Dumping
Dumping is a term used in the context of international trade. It’s when a country or company exports a product at a price that is lower in the foreign importing market than the price in the exporter’s domestic market. Because dumping typically involves substantial export volumes of a product, it often endangers the financial viability of the product’s manufacturer or producer in the importing nation.
Positives of globalisation for MDC’s.
- More contestability
- More access to foreign goods and services
- More competition
- Lowering prices further
- Increased choice for consumers
- Export-led growth + export-led multiplier
- Better supply of labour
Negatives of globalisation more MDC’s
- Structural/regional unemployment
- Vulnerability to shocks
- Exchange rate volatility. Volatile speculative flows. Can make it harder for MNC’s to plan.
Comparative advantage
An economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners.
Absolute advantage
Absolute advantage allows an entity to produce a greater quantity of the same good or service with the same constraints than another entity.
Negatives of international trade
- Negative externalities such as pollution from freight.
- Risk of structural/regional unemployment because employers relocate.
- While international trade may benefit skilled workers, it can be bad for low-skilled workers.
- Low-skilled workers in developed countries compete against extremely low wage workers worldwide, which is unsustainable.
Benefits of international trade
- Improved allocative efficiency
- Higher global output
- Greater competition and choice
- Economies of scale
Customs union
A customs union is a group of countries who agree to remove barriers to trade between the union and enforce common trade barriers to those outside of the union. E.g. The European Single Market is a customs union where all internal borders and between country restrictions have been removed.
Protectionism
Protectionism involves protecting a country’s domestic industries, companies and jobs from foreign competition. Protectionism could take the form of tariffs, quotas or other barriers to trade.
Arguments for protectionism
- Anti-dumping laws
- Protect infant industries
- Protect domestic jobs
- Environmental concerns
- Reduced dependence on imports
- Raises tax revenues
- Reduces trade deficit
Arguments against protectionism
- Risk of retaliation
- Higher prices and less choice
- Higher input costs
- X-inefficiency
Infant firm
new industries require protection from international competitors until they become mature, stable, and are able to be competitive. The infant industry argument is commonly used to justify domestic trade protectionism.
Strategies to attract inward investment
- attractive rates of corporation tax
- soft loans and tax relief/ other subsidies
- trade and investment agreements
- flexible labour markets and upskilling of workers
- creation of special economic zones (SEZ)
- investment in high quality critical infrastructure such as ports and telecoms.
- open capital markets to allow remitted profits from the FDI of multinational businesses.
- attraction of relatively low unit labour costs
Advantages of FDI
- infrastructure improvement
- capital deepening
- better training for local workers = improved human capital
- help grow a countries export capacity and develop new areas of comparative advantage.
- technological improvements.
- more competition in markets
Risks of FDI
- inequality
- land grabs/extractive FDI
- ethical standards from TNCs may be poor.
- volatile/ footloose FDI flows.
- Monopsony power of TNC’s.
Portfolio investment
Portfolio investment happens when people / businesses from one country buy shares or other securities such as bonds in other nations.
International trade
Trade is the exchange of products between countries. When conditions are right, trade brings benefits to all countries involved and can be a powerful driver for sustained GDP growth and rising living standards
Mergers and acquisitions
A merger occurs when two separate entities combine forces to create a new, joint organization. Meanwhile, an acquisition refers to the takeover of one entity by another.
Global investment
The allocation of capital across international boarders with the purpose of generating revenue or gaining ownership stakes in foreign assets.
