Theme 3 - The Global Economy Flashcards
Which two Asian countries have become leading economies thanks to globalisation?
India and China
How has the UK’s economy changed since globalisation?
It has shifted from producing goods to offering services (Secondary Sector - Tertiary Sector)
What is free trade?
When countries trade with no protectionist measures such as tariffs, quotas and embargoes
Why have developing economies gained an advantage in the production of goods?
They have fewer regulations and lower labour costs, meaning it is cheaper to produce there, hence lower prices
Define absolute advantage
This is when country A can produce more units than country B with the same factor inputs
Define comparative advantage
This is when country A can produce the same number of units as country B but with a lower opportunity cost
List a few advantages of specialisation
- Greater world output
- Higher standard of living for developing economies
- Increased supply of goods to choose from
List a few advantages of free trade
- Greater economic growth
- Greater efficiency due to competitive markets
- Exploit economies of scale, which brings lower costs and therefore lower prices
What is Foreign Direct Investment?
This is the flow of capital from one company to another
Why is FDI good for a developing economy?
It creates jobs and encourages investment in technology
What is trade creation?
When a country consumes more imports from a low cost producer
What happens to countries that aren’t part of a specific trading bloc?
They will face tariffs and other protectionist measures when trying to trade with a member of another trading bloc
How do tariffs affect imports?
They reduce imports, because the price of imports become more expensive due to the introduction of a tax
What is a quota?
A limit on the quantity of imports allowed into a country
How do quotas affect consumer surplus?
They reduce consumer surplus, because the price of these imports increase due to the restriction on the quantity of imports
What are voluntary export restraints?
This is an agreement between two countries to limit the amount of goods they export to each other
Why does protectionism usually lead to higher prices?
Protectionist measures distort the market and reduce the competition, so domestic firms have no incentive to cut costs and reduce prices
Why are tariffs regressive?
They impact low-income families the most
What does the G20 comprise of?
The 20 largest economies in the world
What is the role of the World Trade Organisation (WTO)?
To promote free trade
What is the role of the World Bank and the IMF?
To ensure financial and economic stability
What is the difference between the World Bank and the IMF?
The World Bank can loan funds to member countries in order to reduce poverty and promote economic stability, whereas the IMF promotes monetary cooperation between member nations
What is a bilateral trade agreement?
An agreement between 2 countries to favour each other’s goods and services
What is the Eurozone an example of?
A monetary union
What does being a member of a monetary union entail?
All members share the same currency and follow the same monetary policies
List a few advantages of a monetary union
- Currency is less prone to speculative shocks, reducing uncertainty
- Less red tape when travelling between member countries, thus increasing efficiency
What is the major disadvantage of being part of a monetary union?
Members have to follow the same monetary policies, so in times of economic distress they cannot alter them at the expense of other countries
Which year did China become the world’s second largest economy?
2011
What factors contributed to China’s growth in the 1990’s?
Mass privatisation (which increased productivity) and the increase in foreign direct investment
Describe the difference between push and pull factors?
Push factors deter firms from entering new markets, whereas pull factors are those that attract a firm to enter a market
Would a saturated market be a push or a pull factor?
A push factor
Would an emerging economy be a push or pull factor, and why?
A pull factor as emerging economies have a high scope for potential firm growth
Define offshoring?
This is the process of having part/all of a firm’s services shifted abroad
How could a firm benefit from offshoring?
They can take advantage of the low labour costs in other countries
What is outsourcing?
This occurs when firms get their goods from a supplier abroad
How does political stability affect the potential growth of a firm?
If a country faces lots of corruption it will be harder for a firm to set up a long-term plan in that country and be able to make a profit
Would red tape be a push or a pull factor?
A push factor
If a firm is a net importer of raw materials, how would a depreciation in their currency affect the prices of their goods
A depreciation causes imports to be more expensive, thus raising their costs of production which they would pass on to consumers in the form of higher prices
How would government subsidies affect a firm?
It would lower their average cost of production, thus improving their profit margin per unit of output sold
Describe the idea of glocalisation?
This is when firms have the intention of distributing their goods/services on a global scale, but also ensure they meet the demands of their local consumers
What is ethnocentrism?
This is the idea of comparing other cultures with the qualities of the domestic culture
How would ethnocentric consumers be beneficial to domestic firms?
These type of consumers favour their domestic culture over any other, meaning they are less likely to buy from foreign firms, thus reducing competition for domestic firms
What is a polycentric approach to business?
This is when global firms employ people from the host country in order to get a better understanding the wants and needs from consumers in that country
Give one cost benefit of advocating a polycentric approach?
It is cheaper to recruit an employee from the host country, due to low labour costs (especially if the host country is a developing one)
Give one disadvantage of a firm operating in a different country with a different native language?
This increases the chances of inaccurate translation, which can lower the quality of the firm’s products and therefore adversely affect revenue
Describe the difference between mass markets and niche markets?
Mass markets address all consumers, whereas niche markets focus on a small group of consumers and a specific product
Which market is more likely to have a higher profit margin - mass or niche? And why?
Niche markets because these products are specialised to a specific consumer group and so firms will demand a higher price to compensate for this
What are MNC’s?
Multinational corporations are corporations with assets in multiple foreign countries
How would investing in foreign countries help the people of that country?
It would create jobs for these people, which could potentially improve their quality of life
Why would MNC’s choose to shift their production processes abroad?
To take advantage of the low cost of labour
How would local firms benefit from MNC’s in that area?
Local firms may supply the MNC with raw materials or other goods, thus increasing their revenue
Briefly describe corporate social responsibility (CSR)
This is when firms ensure that their actions are beneficial to society
How could the presence of a MNC hinder the growth of local firms?
If local firms cannot benefit from economies of scale and provide their goods at the same price level as the MNC, they may lose revenue which will affect their scope for profit
How would the local economy benefit from MNC’s?
MNC’s would increase employment in the area, and through the multiplier effect would increase spending and lead to stronger economic growth
Would an increase in exports improve or damage the balance of payments?
It would improve the BoP
Who are stakeholders?
These are anyone with an interest in how a particular firm is run
What do cheap products imply about the people making those products?
That those workers are paid very little
Why would some countries fear trying to control MNC’s?
If they impose too much regulation and red tape, the MNC may cease activities in that country, which could lead to unemployment and less economic growth
Why would a firm monitor its own behaviour?
They might have high ethical standards
What are the OECD guidelines for MNC’s?
They encourage firms to adhere to the principles of human rights
How might self-regulation harm a firm’s profit?
They may lose out in a competitive market, thus reducing their profit potential
