Theme 4 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
International Trade
The flow of goods and services between countries ie importing and exporting
Import
Is a good or service brought in one country that was produced in another
Export
A good/service sold to another country (money coming into the UK)
Visible and invisible imports and exports
Visible are physical products whereas Invisible are services such as tourism
Top UK Export and Import Countries
(data from 2022)
Imports:
USA
Germany
China
Netherlands
France
Exports:
USA
Germany
Netherlands
Ireland
France
The EU accounted for 41% of UK exports and 52% of Imports in 2023.
UK main exports: Cars, Gold, Crude Petroleum, Gas Turbines
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.
IMF
The International Monetary Fund (IMF) is a specialized agency of the United Nations that works to promote global monetary cooperation and financial stability. It was founded in 1944 as part of the Bretton Woods agreement and is headquartered in Washington, D.C. The IMF provides financial assistance to member countries facing balance of payments difficulties, and works to promote global economic growth and development through policy advice and technical assistance. The IMF has played a central role in addressing economic crises around the world, such as the Asian financial crisis of the late 1990s and the global financial crisis of 2008-2009. The IMF is funded by member countries and managed by a Board of Governors and a Board of Directors.
World Bank
The World Bank is an international financial institution, just like the IMF. It provides loans, grants, and technical assistance to developing countries to support their economic development. The World Bank was created in 1944 as part of the Bretton Woods agreement, along with the IMF. It has a larger scope than the IMF, with a broader focus on poverty reduction and development, rather than just financial stability. The World Bank is also a larger organization, with more than 10,000 employees, compared to around 2,800 at the IMF. The World Bank operates through five institutions.
The World Bank has faced criticism for its governance structure, which is seen as undemocratic and unrepresentative of the interests of developing countries. There have been calls for reform of the governance structure, including greater representation for developing countries and more transparency and accountability in decision-making.
WTD
The World Trade Organisation (WTO) was founded in 1995 but had its origins in the 1947 General Agreement on Trade and Tariffs (GATT). A key principle of the WTO is that of multilateral trade. The WTO describes itself as having 4 roles: conductor, tribunal, monitor and trainer.
Rapid increase in trade
-Bretton Woods international monetary system making payments between countries safer and easier.
-Trade Liberalisation/ work of WTO in reducing trade barriers and opening up markets.
-Falling transport costs- the use of shipping containers (containerisation) has vastly reduced shipping costs and transit times. Air freight prices have fallen dramatically.
-Increased flows of FDI- tax incentives/grants have helped bring foreign direct investment into countries. China/India have made it easier for foreign businesses to set up operations in their countries.
-Technology improvements - not least the internet. Advances in technology have made it easier to organise and co ordinate business operations
-Trade blocs- ie EU- enables free trade between neighbouring countries
-Breakdown of old political orders- particularly China- entry into the global economy.
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)
Greater interdependence and economies
-One of key issues with greater interdependence is how robust the global economy is to shocks:
-oil prices
-pandemic
-Ukraine war
-financial crisis and the credit crunch
-fine in boom but what about recession?
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.
Disadvantages of country specialisation/ having a comparative advantage
-Potentially increased risk as all resources are directed towards one or two areas- over-reliance/ dependence. Economies also rely on other countries producing goods and services that are not specialised.
-Increase in structural unemployment when demand for a good falls/global patterns change.
-May suffer from resource depletion if a country specialises in production.
-Increased carbon emissions due to additional transportation. Other negative externalities.
-It it too risky to become wholly dependent on another country for strategic industries ie food production.
-Inequality. Not every country benefits to the same extent.
Limitations of Comparative advantage - assumptions underlying theory
-Perfect knowledge- consumers may not know where best price is.
-Constant Opporutnity Cost- assumes opportunity cost of producing one good in terms of the other remains constant for both countries.
-No Transport costs- to buy from other countries ie Australia, may have comparative advantage but miles away.
-two countries and two goods- assumes only 2 countries
-No economies of scale- not consistent between countries- which may increase gain from trade.
-Rates of inflation ignored
-No Import controls- Tariffs or quotas on CA countries.
-Non-price competitiveness ignored - other countries may produce better quality, functioning products which dominate over price.
- Exchange rate movement ignored
- Research and Development investment ignored- differences in products because of differences in research into innovation. Countries that don’t have comparative advantage could put loads of money into R&D allowing them to create a new product-> patent it-> gain a monopoly in market.
- Factor mobility between industries ( geographical and occupational mobility) workers are assumed to be equally productive in whatever industry/ job they do and can switch work easily.(FoP are perfectly mobile)
-No externalities from production or consumption
-Labour is homogenous
-Ignores strategic industries
-Assumes both countries have equal/mutual benefit.
Absolute and Comparative advantage using PPFs
If two lines (countries) on PPF country whose line falls further down either axis has a comp advantage in that product as gives up less of other product for more of this one.
Slope represents opportunity cost of producing different goods. Shallower gradient (slope) relative to x- axis means that country has lower opposition cost in producing x axis good. Steeper slope means that country has lower opp cost in producing the good on the y axis.
(example of sheet)
Patterns of Trade
A country’s pattern of trade refers to the mix of goods and services that it imports and exports in international trade.
It also refers to the mix / range of which counties that are most important for a nation in their trade relationships – for example, the UK and the EU.
It reflects the specialisation and comparative advantage that a country has in producing certain products
Some countries have a highly diversified export base with the capability and capacity to export a very wide range of products
Others are heavily reliant on a narrow base of exports or might be highly reliant on trade with just one or a few other countries.
Developed Countries such as the UK will export more high-value services such as Legal consultancy and Health management and import more low-value goods such as clothes and food.
Whereas Developing economies hold a comparative advantage in low value goods and import the high value services
Trade Agreements Affect on Patterns of Trade
A trading bloc could involve the signing of free trade agreements and preferential trade agreements, this will divert trade away from the outside to within the bloc because of the lower cost of production within the bloc.
Intra- Industry Trade
Components bought from all over the world, e.g. UK imports cars whilst also exporting cars made with components all over the world.
China change in patterns of trade
Chinas comparative advantage has shifted to increased value goods and services.
Used to be an assembly country but now comparative advantage shifted to other NEE such as Bangladesh who hold an advantage in clothing.
China now have started buying companies- investing wealth in order to go up the value chain.
Factors Influencing Patterns of Trade
-Comparative Advantage: Countries tend to export goods and services in which they have a comparative advantage and import those in which they have a comparative disadvantage. This principle is a fundamental driver of international trade patterns.
-Impact of Emerging Economies: The rise of emerging economies has had a profound impact on global trade patterns. These countries often become major exporters of manufactured goods and services, altering the dynamics of global trade. They can both compete with and complement established economies.
-Growth of Trading Blocs and Bilateral Trading Agreements: These agreements can significantly impact trade flows. Within trading blocs, member countries often enjoy reduced tariffs and trade barriers, leading to increased trade among them. Bilateral agreements can create preferential trading relationships between specific countries, boosting trade in specific sectors.
-Changes in Relative Exchange Rates: Changes in exchange rates can have a direct impact on trade. A depreciation of a country’s currency can make its exports cheaper and more competitive on the international market, leading to increased exports. Conversely, a stronger currency can reduce exports and increase imports.
These factors do not operate in isolation but interact with each other to shape global trade patterns. For example, changes in exchange rates can affect the competitiveness of emerging economies’ exports, and the growth of trading blocs can influence the ability of countries to leverage their comparative advantages within those blocs.
Reasons for changes in patterns of trade - Comparative advantage
If countries develop a cost advantage in the production of certain goods, the POT would change to reflect these changes (as they would be exporting more of what they specialise in). Advanced countries tend to specialise in hi tech services/products whereas developing economies tend to specialise in land/labour intensive production
The BRICS economies
A group of countries that were identified as experiencing rapid economic growth and closing the gap on the developed economies. These economies have moved into sectors that were previously the province of the advanced economies, while the advanced economies have shifted into service/ quaternary sectors.
Emerging economies
An emerging economy is one in which the country is becoming a developed nation often driven by relatively high economic growth and a rapid expansion of trade and investment flows. An emerging economy is one that can’t yet be classified as ‘developed’ and is investing heavily in its productive capacity.
Reasons for change in patterns in trade - Emerging economies
The rise of emerging economies, such as China, India, Brazil, and others, has had a significant impact on the global pattern of trade in recent decades. These countries have become major players in international trade, both as exporters and importers, and have changed the traditional patterns of trade among developed countries.
One way in which emerging economies have influenced global trade is through their increasing share of world exports and have seen an increase in world merchandise exports. So emerging economies have become more integrated into the global trading system and are increasingly important players in international trade.
Another way in which emerging economies have influenced global trade is through their changing trade patterns. For example, China has become a major exporter of manufactured goods, particularly electronics and machinery, and has displaced other countries in these sectors.
merging economies have also become important importers of goods, particularly in sectors such as energy, minerals, and food as living standards increase.
Suggests that emerging economies are not just important exporters, but also major consumers of goods from other countries.
Reasons for change in patterns of trade - Trading blocs + trading agreements
Trading blocs (areas with free trade) encourage trade between member countries ie the EU currently has 27 members, in 1950 it had 6 members. Trade patterns grow within trade blocs as trade diverts to lower cost producers. There is an increased competitiveness in trading within the bloc and a decrease outside the bloc. EU accounts for 38% of world trade.
Reasons for change in patterns of trade- Changes in relative exchange rates
If the £ strengthens you can buy more foreign goods. But for other countries, our goods become dearer. And Vice Versa. Over time exchange rates adjust to maintain relative international competitiveness. This could affect POT.
UK trade in figures - Exports
Goods- Cars, Mechanical power generators, medicinal + pharmaceutical products, crude oil, aircraft.
Services- Other business services, Financial services, Travel services.
Main countries UK exports to - USA, Germany, Ireland, Netherlands, France.
Exports 2016 vs 2024:
Total: £575.6 billion vs £854.4 billion
Goods: 52% vs 44%
Services: 48% vs 56%
UK trade in figures - Imports
Goods- Cars, refined oil, medical+pharmaceutical, mechanical power generators, crude oil.
Services- Business services (other), travel services, transport services, intellectual property.
Main countries UK imports to - USA, Germany, Netherlands, France, China.
Imports 2016 vs 2024:
Total: £613.4 billion vs £896.3 billion
Goods: 72% vs 64%
Services: 28% vs 36%
The Terms of Trade
The relationship between the prices at which a country sells its exports and the prices paid for its imports. Refers to the average price of a country’s exports in relation to its imports- it measures the amount of imports a country can buy with a unit of export.
Terms of Trade Formula
Index of Export Prices/ Index of import prices x100
Uses same principal as measuring inflation- considering a basket of exported goods and their prices that are weighted based on the most popular (ie by revenue). The same for imports. This is then converted into a index.
How prices affect Terms of Trade
If export prices rise relative to import prices, there has been an improvement in the terms of trade. A unit of export buys relatively more imports. If import prices rise relative to export prices, there has been a deterioration in the terms of trade. A unit of exports can buy less imports than before. Therefore the country has to sell more exports to buy the same level of imports.
Terms of Trade Assumptions
If you have improving terms of trade the price of exports has increased and/or the price of imports has decreased. The opposite for deterioration.
If you are given information for one but not for the other- assume prices are constant.
Deterioration = Fall in living standards and Vice Versa.
The theory assumes levels of exports remain the same, huge assumption. Therefore this MAY lead to a fall or rise in living standards.
Impact - Short Term Factors influencing Terms of Trade
- Demand and supply for Exports and Imports - Increased Demand Due to changes in tastes and fashions is likely to increase prices of exports and therefore TofT have improved and revenues of businesses.
- Exchange rate - a fall in the exchange rate should cause a depreciation in the terms of trade. This is because a decline in the exchange rate will make exports cheaper therefore a unit of exports can buy less imports. An appreciation of the exchange rate should improve the terms of trade because exports will rise in price and imports become cheaper- therefore a unit of export can buy more imports.
-Relative inflation rates in different countries- Higher UK inflation would cause (at least temporarily) an improvement in the terms of trade as UK export prices would be rising faster than import prices. (Though inflation is likely to cause a depreciation in the exchange rate in the long run, which will cause exports to then fall in price) But whether it actually benefits the economy depends on the elasticity of demand.
Impact - Long Term Factors influencing Terms of Trade
-Competitiveness of firms- Export prices will be affected by productivity. If a business improves productivity then it is likely to reduce the costs of production and therefore, selling prices may be reduced, worsening of TofT. Same for Improvements in Technology.
-Changes in incomes could lead to consumers purchasing different types of goods ie if world income rises, demand for tourism increases and therefore countries with strong tourism industries will see an improvement in TofT.
Is improvement in TofT a good or bad thing - Due to Inflation
In reality in the long run if inflation is causing our prices to rise then demand will drop for exports so we will sell less. If imports are dropping in price we will buy more. This will create a large BoP deficit and the net inflow of money will be less than outflows of money so overall loss. Competitiveness of UK and goods sold decrease - lower revenues, limited growth, reduced standards of living depends on how key exports are. Depends on PED. AD will decrease.
Is improvement in TofT a good or bad thing - Appreciation of exchange rate
But competitiveness of UK goods may decrease in global market. Long run loss of demand and loss of revenue.
Is improvement in TofT a good or bad thing - Increased demand for UK goods and services
If have absolute/ comparative advantage then have inelastic demand so good thing. Demand casued by increase in price a positive thing. Revenues have also gone up.
