Theme 4 - Globalisation and Trade Flashcards
what is globalisation
- the process in which national economies have become increasingly integrated and interdependent
causes of globalisation
- Trade liberalisation: Trade liberalisation lowers tariffs, making it easier for countries to exchange goods and services. With fewer barriers, businesses expand internationally, leading to more global trade. Economies become more connected
- Trading blocs - they remove tariffs and restrictions between member countries, easier to trade within the group. businesses within the block gain access to larger unified market, encouraging trade
- growth of MNCs - they establish operations in multiple operations in multiple countries, boosting cross border investment
- mobility of labour- allows workers to move between countries, filling skill gaps, supporting international economic activities. migrant workers contribute to global business and enhance productivity. they also send remittances back home, creating economic connections
benefits of globalisation
- increased productivity, lower prices, increased international competition
- consumer welfare increases as they have more variety of choice, more innovative products
- greater growth, higher tax revenue
- greater employment, lower prices, higher demand, have to keep up w this demand
- benefits from large economies of scale, increased output and lower costs, high profit
- technological advancements
disadvantages of globalisation
🌍 1. Structural Unemployment in Developed Countries → Offshoring to Lower-Cost Nations → Loss of Domestic Manufacturing Jobs → Regional Decline
Globalisation encourages firms to move production to countries with cheaper labour.
Developed economies may experience deindustrialisation as jobs are lost to emerging markets.
This leads to structural unemployment, especially for low-skilled workers.
Some regions may face long-term decline, poverty, and social unrest (e.g. Detroit in the US).
🏭 2. Environmental Degradation → Race to the Bottom on Regulations → Overexploitation of Resources → Long-Term Ecological Damage
Global firms may choose to operate in countries with weaker environmental regulations.
This can lead to pollution, deforestation, and carbon emissions.
Local resources are often overused to meet global demand.
The long-term result is biodiversity loss and contribution to climate change.
⚖️ 3. Widening Inequality → Profits Accrue to Multinationals and Skilled Workers → Marginalisation of Poorer Communities → Rising Social Divisions
Globalisation rewards capital and skilled labour, benefiting MNCs and educated workers.
Low-skilled workers face wage stagnation or job losses.
In many countries, this has led to growing income and wealth inequality.
Inequality can lead to social tension and political instability (e.g. populism, protests).
🧾 4. Tax Avoidance by MNCs → Base Erosion and Profit Shifting (BEPS) → Lower Government Revenue → Underfunded Public Services
Multinational corporations use transfer pricing and tax havens to reduce tax bills.
This results in base erosion, where taxable profits disappear from high-tax countries.
Governments face falling revenues despite high levels of corporate activity.
This can lead to cuts in health, education, and welfare, worsening inequality.
🧠 5. Cultural Homogenisation → Western Values and Brands Dominate → Erosion of Local Traditions → Loss of National Identity
Globalisation spreads Western culture, language, and consumer products.
Local customs, languages, and cultural industries may be overwhelmed or devalued.
Traditional practices may decline as young people adopt global lifestyles.
This can lead to a loss of cultural diversity and identity over time.
terms of trade equation
weighted index of exports / weighted index of imports x 100
how are exports/imports weighted
- a basket of exports for a given nation is formulated
- the most popular exports sold are featured in the basket
- they are weighted according to the revenues brought in
- an overall price of the exports is generated
what does terms of trade tell us
the quantity level of exports that need to be sold in order to purchase a given level of imports
why is terms of trade important for developing countries
- Many developing countries rely heavily on exporting raw materials. Favorable terms of trade mean they can earn more for their exports, boosting national income.
- Improved terms of trade allow developing countries to buy essential goods, like machinery and technology, at lower costs, supporting economic development
what does an increase/ decrease in the terms of trade mean
- increase : a country can now obtain more imports for each unit of its exports
- decrease : a country can now obtain less imports for each unit of its exports
basic reasons why terms of trade may improve
- price of exports increasing
- import prices decreasing
short run factors that can affect terms of trade
demand -
- If global demand for a country’s exports rises, export prices increase.
This leads to an improvement in the terms of trade as the country earns more for its exports relative to its imports.The country can now afford more imports with the same amount of exports.
supply -
- If the supply of imports increases, prices for those goods fall.
This improves the terms of trade, as the country can buy imports more cheaply while maintaining its export revenue.
The country benefits from cheaper goods, boosting purchasing power.
- relative inflation rates
- If a country’s inflation rate rises faster than its trading partners, its export prices become more expensive.
This can improve the terms of trade as the country earns more for each unit of export. - If inflation is lower abroad, import prices from those countries may decrease.
This improves the terms of trade, as the country can buy imports more cheaply while still selling its exports at relatively higher prices.
The country benefits from cheaper imports, increasing its purchasing power. - exchange rate
- When a country’s currency appreciates, its exports become more expensive for foreign buyers, and imports become cheaper.
This can improve the terms of trade as the country can buy more imports for each unit of export. - If trading partners’ currencies appreciate, their goods become more expensive to import, deteriorating the terms of trade.
Conversely, if trading partners’ currencies depreciate, the country’s imports become cheaper, improving the terms of trade.
how do long term factors affect tot
🔋 1. Commodity Price Trends (e.g. oil, coffee) → Global Oversupply or Low Demand → Deteriorating Export Prices for Developing Countries → Worsened ToT
Many developing nations depend on primary commodities for exports.
Long-term shifts in supply gluts (e.g. better farming techniques) or declining demand (e.g. transition to renewables) reduce prices.
This leads to lower export revenues.
The terms of trade worsen as the price of imports (often manufactured goods) remains high.
🏭 2. Shift from Primary to Manufactured Goods → Developing Countries Export Low-Value Goods, Import High-Value Goods → Declining ToT Over Time → Worsening Balance of Payments
Manufactured goods often rise in price faster due to technological improvements and brand power.
Developing countries often remain trapped exporting low-value primary products.
Their export prices rise slower than import prices.
This causes long-term deterioration in ToT and possible BOP issues.
🚀 3. Technological Progress in Advanced Economies → Productivity Gains in Export Sectors → Falling Export Prices for Them → Improved ToT for Developed Nations
Developed countries advance in capital goods and tech exports.
Higher productivity lowers production costs and prices.
Meanwhile, they import inelastic goods from poorer nations.
This can improve their ToT, worsening global inequality.
🧓 4. Demographic Shifts (e.g. ageing population) → Changing Demand for Imports and Exports → Altered Global Trade Patterns → Structural Shift in ToT
An ageing population might demand more healthcare imports, less tech and clothes.
Export patterns shift towards services or high-tech goods.
This alters trade flows and relative prices.
Terms of trade change depending on whether a country adjusts its export structure in time.
📦 5. Changes in Global Supply Chains → Offshoring to Cheaper Countries → Reduced Costs for Manufactured Imports → ToT Shift Against High-Cost Producers
Firms move production to low-cost nations over time.
This reduces the price of manufactured goods globally.
Importing countries benefit as their import prices fall.
But producers in high-cost countries may suffer from a ToT decline.
what is economic integration
the process whereby countries coordinate to reduce trade barriers
- and to harmonise fiscal and monetary policy
what isa trading bloc
a group of countries that join together and agree to increase trade between themselves by reducing/eliminating protectionist barriers
what is a bilateral/multilateral agreement
an agreement to remove tariffs/quotas between 2/multiple countries
what are preferential trading areas
where tariffs and other trade barriers are reduced on some, but not all goods traded.
what is a free trade area
Countries have a common external tariff but allow free trade among themselves.
what are customs unions
where there is free trade within the trading bloc and a common external tariff on goods coming from outside the bloc
what are common markets
Customs unions with the addition of the free movement of capital and labour
- and where produce standard and laws concerning free movement of goods and services are commonly held
what are economic unions
are where the economies of member countries are as fully integrated as different regions within a country. It implies both fiscal and monetary union
examples of trading blocs
NAFTA - Canada, USA, Mexico
African Continental Free Trade Area (AfCFTA)
EU
what is full economic integration
- No barriers exist for trade or movement between member countries,
- Countries share fiscal, monetary, and regulatory policies, often adopting a unified currency and central bank
- Member countries align their laws and regulations to create a single market with uniform rules,
features of the EU
- free trade between member nations
- common external trade barriers on imports from non member countries
- common policies in things like : agriculture, fishing, competition, regional, environmental
- free movement of labour and capital
- 17/28 members adopting the EURO - monetary union
- coordination of economic policy
pros of being part of the EU
Free trade :
- Free trade within the EU eliminates tariffs and barriers, boosting exports and imports.
This stimulates economic growth and creates jobs, as businesses access a larger market and expand production.
Higher Foreign Direct Investment (FDI):
EU membership attracts FDI, as investors prefer a stable and integrated market.
Increased FDI leads to new businesses, job creation, and technology transfer, strengthening the economy.
Huge Market Size:
Being part of the EU gives businesses access to a vast market of over 450 million consumers.
This larger demand allows firms to achieve economies of scale, increasing efficiency and competitiveness.
Higher Consumer Choice:
Consumers benefit from a greater variety of goods and services from across the EU.
This competition lowers prices and improves product quality, enhancing consumer welfare.
Freedom of Labor and Capital:
Workers can move freely between EU countries, filling skill gaps and reducing unemployment.
Capital flows easily across borders, boosting investment opportunities and business expansion.
cons of being in the EU
Forced to Follow EU Laws and Regulations:
Member states must adopt EU-wide laws and regulations, which may not always align with national interests.
This can limit a country’s policy-making flexibility, particularly in areas like labor and environmental regulations.
Costs of Contributions to the EU Budget:
Countries are required to make financial contributions to the EU budget.
These costs can be significant, reducing the funds available for national spending on public services and infrastructure.
Potential Trade Benefits from FTAs Outside the EU:
Being part of the EU may restrict a country’s ability to negotiate its own free trade agreements (FTAs) with non-EU nations.
Countries might miss out on better trade deals or benefits with emerging markets outside the EU.
High Levels of Immigration:
The free movement of labor within the EU can lead to increased immigration, which some countries find challenging to manage.
This may put pressure on public services and infrastructure and could lead to social or political tensions.
what is trade creation
- a theory that derives from a countrys membership of a customs union
- movement from high cost domestic producer to a low cost producer inside the customs union
advantages of trade creation
- Lower Prices for Consumers → Increased Consumer Welfare → Higher Standard of Living
Trade creation leads to cheaper imports from more efficient producers → This lowers prices for consumers, as they can now purchase goods at a lower cost compared to domestic alternatives → With reduced spending on goods, consumers have more disposable income, which improves consumer welfare and can contribute to a higher standard of living → Over time, these lower prices also make essential goods more affordable, benefiting the general population and improving overall well-being. - Increased Competition → Enhanced Innovation → Higher Quality Products
As trade creation opens up the market to new international suppliers, domestic producers face more competition → To stay competitive, firms must innovate and improve product quality to attract consumers → This encourages dynamic efficiency in the economy, as businesses are forced to cut waste, optimize production processes, and offer better products → Over time, this benefits consumers with a wider variety of higher-quality goods at more competitive prices, spurring economic growth. - Specialization → Enhanced Comparative Advantage → More Efficient Resource Allocation
Trade creation allows countries to specialize in the production of goods in which they have a comparative advantage, i.e., the ability to produce at a lower opportunity cost → As resources are allocated more efficiently, this allows for increased output of goods, making use of each country’s most productive industries → The overall result is higher efficiency in global production, driving global economic growth and improving wealth creation across nations. - Economic Growth → Increased Investment → Job Creation
With greater market access and trade creation, economies experience higher levels of export growth and are often able to attract foreign investment → Investment flows into sectors where countries have competitive advantages, leading to higher productivity and expanding industries → This, in turn, leads to job creation, both directly in the export industries and indirectly in supporting sectors like logistics, finance, and technology → As a result, economies can experience sustained economic growth and reduced unemployment rates. - Strengthened International Relations → Enhanced Political Cooperation → More Opportunities for Collaboration
Trade creation often leads to closer economic ties between nations, facilitating stronger diplomatic and political relations → With a vested interest in mutual economic prosperity, countries are more likely to engage in peaceful negotiations and work together on global challenges like climate change, security, and health crises → Enhanced political cooperation can further lead to more opportunities for collaboration in areas like technology exchange and investment in infrastructure, benefiting all involved parties
Evaluation points for trade creation advantages
The benefits of trade creation depend on several factors:
Degree of Market Integration:
- The extent to which barriers like tariffs and quotas are reduced. More integration leads to greater trade creation and efficiency gains.
Comparative Advantage:
- Whether countries can truly specialize based on their comparative advantage. The larger the difference in efficiencies, the greater the gains from trade.
Market Competitiveness:
- The level of competition in domestic and foreign markets. More competitive markets are likely to pass cost savings to consumers through lower prices.
Elasticity of Demand and Supply:
- If demand for imports and supply of exports are highly elastic, the benefits from trade creation will be more significant, as trade volumes respond strongly to price changes.
Initial Trade Barriers:
- The higher the initial trade barriers (tariffs, quotas), the larger the potential gains when those barriers are removed.
what is trade diversion
movement from a low cost foreign producer to a high cost producer within the customs union
what does the box represent on a trade diversion graph
loss of EU or the unions efficieny
impacts of trade diversion
Loss of Efficiency:
- Trade diversion shifts imports from a more efficient (lower-cost) producer outside a trade bloc to a less efficient (higher-cost) producer within the bloc. This results in a less optimal allocation of resources, reducing overall economic efficiency.
Higher Prices for Consumers:
- Consumers face higher prices as they must purchase goods from less efficient producers within the trade bloc. This leads to reduced consumer welfare and purchasing power.
Reduced Variety of Goods:
- Since imports from outside the trade bloc are discouraged by tariffs or barriers, consumers may have fewer choices in goods and services, limiting product variety and innovation.
Potential Trade Conflicts:
- Trade diversion can strain relationships with non-member countries, especially those that were previously major trading partners. This could lead to retaliatory tariffs or restrictions, disrupting global trade.
Reduced Global Competitiveness:
- By focusing on trading within a bloc, firms might have less incentive to innovate or improve efficiency, which could weaken their competitiveness on the global stage in the long run.
advantages of being part of a monetary union
Non-Fluctuating Exchange Rate:
- With a shared currency, there are no exchange rate fluctuations between member countries. This stability reduces uncertainty for businesses and consumers, promoting trade and investment.
Lower Costs of Currency Conversion:
- Businesses and travelers save on currency conversion costs, which can lead to more efficient cross-border transactions and encourage more economic activity within the union.
Increased Business Confidence:
- The stability of a shared currency boosts business confidence, encouraging investment and expansion across member countries, as firms face lower currency risks.
Easier Price Comparisons:
- A common currency makes it easier to compare prices across member countries, increasing market transparency and fostering competition, which can lead to lower prices and better consumer choices.
Currency More Stable Against Speculation:
- A larger, unified currency, such as the euro, is less prone to speculative attacks than smaller, individual currencies. This enhanced stability protects economies in the union from volatile currency movements and external economic shocks.
disadvantages of being in a monetary union
❌ 1. Loss of Independent Monetary Policy → No Control Over Interest Rates → Inability to Respond to Domestic Shocks → Prolonged Recessions
A country gives up control of its own central bank and shares interest rate policy with other nations.
If it faces a domestic recession, it cannot lower interest rates to stimulate demand.
The ECB (European Central Bank) may set rates based on conditions in stronger economies like Germany.
Weaker members (e.g. Greece, Portugal) may struggle to recover from downturns as a result.
📉 2. No Independent Exchange Rate Policy → Cannot Devalue Currency → Loss of Competitiveness → Worsening Trade Deficits
In a monetary union, members use a common currency, so they cannot devalue to boost exports.
If unit labour costs are high or inflation is greater than the average, exports become expensive.
The country loses price competitiveness in global markets.
This can lead to a persistent current account deficit and rising debt.
💰 3. One-Size-Fits-All Monetary Policy → Misaligned Interest Rates → Asset Bubbles or Credit Crunches → Destabilised National Economies
Interest rates are set centrally, often not reflecting national inflation or growth rates.
For fast-growing economies, interest rates may be too low, encouraging excessive borrowing and inflating asset bubbles.
For struggling economies, rates may be too high, causing credit contraction.
This divergence can lead to economic imbalances and financial instability.
📊 4. Fiscal Constraints (e.g. Maastricht Criteria) → Limits on Government Spending → Reduced Ability to Stimulate Economy → Austerity Measures
Member states must follow rules like keeping debt below 60% of GDP and deficits under 3%.
This limits the ability to use expansionary fiscal policy during downturns.
Countries may be forced into austerity, cutting public spending when the economy needs a boost.
This can worsen unemployment and slow recovery.
🇮🇹 5. Asymmetric Shocks and Structural Imbalances → Some Countries Fall Behind → Rising Tensions and Risk of Political Fragmentation
A monetary union lacks a fiscal union, so there are no large-scale transfers to help struggling regions.
Poorer or less productive nations may fall further behind the core economies.
This fuels resentment and anti-EU sentiment, as seen in countries like Italy and Greece.
It threatens the stability and unity of the monetary union over time.
increased terms of trade EV points
- we assume that an improvement in the terms of trade means a country can buy more imports. this only holds if the improvement in the TOT translates into higher export revenue. only then, the countries purchasing power increases
- if a country has high inflation rates, u less the PED of their exports is inelastic, they will not generate a lot of revenue
- higher domestic prices make exports more expensive, which could reduce international demand, especially if the exports are not demand inelastic. foreign buyers may switch to alternative suppliers with lower costs
- this could offset the gains from better terms of trade, as falling export demand would decrease foreign revenue and might even worsen the trade balance, particularly in competitive global markets
why might a deterioration in the terms of trade not be a bad thing
- Improved international competitiveness
- A lower terms of trade often means a country’s export prices have fallen relative to import prices
- this can make exports more competitively priced, boosting demand for these goods
- increased export volumes could raise overall export revenue - Depends on the quantity of exports and imports
- the impact of TOT is depends on the relative volume of exports and imports
- if the country is exporting a high volume even at lower prices, total export revenue may remain stable or increase
- this would allow the country to maintain or improve its trade balance despite a worsening in terms of trade - PED
- if exports are price elastic, a drop in price could lead to a proportionally larger increase in demand, boosting export revenue
- even with a lower terms of trade, overall trade revenue could rise, benefiting economic stability and supporting employment in export sectors
using comparative advantage, explain how can lower tariffs can increase GDP
- countries can specialise in goods they have a CA in
- they are now consuming/producing more so this means an increase in GDP
What are the factors contributing to globalisation in the last 50 years?
🌐 1. Advances in Communication Technology → Faster Global Information Flow → Lower Transaction Costs for Firms → Easier Global Coordination
Development of the internet, smartphones, and instant messaging reduced barriers to communication.
This allowed real-time information sharing across continents.
Businesses can now manage global supply chains and services efficiently.
This has encouraged multinational expansion and outsourcing.
🚢 2. Containerisation in Shipping → Lower Transport Costs per Unit → Economies of Scale in Trade → Expansion of Global Trade Volumes
Standardised containers allow goods to be transferred easily between ships, trucks, and trains.
This cut down loading times, labour costs, and theft/damage risks.
It became cheaper for firms to trade across borders.
Led to a surge in international trade.
💸 3. Deregulation of Financial Markets → Easier Cross-Border Capital Flows → More FDI and Global Mergers → Greater Economic Integration
Many countries liberalised capital controls and allowed foreign ownership.
This encouraged foreign direct investment (FDI) in developing nations.
Large firms began to merge or acquire international subsidiaries.
Resulted in interlinked financial systems and economies.
🧾 4. Trade Liberalisation by WTO and Trade Blocs → Lower Tariffs and Quotas → Incentivised Export-Oriented Production → Growth in Global Supply Chains
Organisations like the WTO pushed for global trade agreements.
Countries reduced barriers to imports and exports.
Firms now structure operations around where costs are lowest, sourcing parts globally.
This has intensified global economic interdependence.
💻 5. Rise of Global Tech Platforms (e.g. Amazon, Google) → Easier Market Access for Consumers and Firms → Cross-Border E-commerce Boom → Integration of Consumer Markets
Tech firms connect buyers and sellers worldwide via digital platforms.
Even small firms can now access international markets easily.
Consumers have more choice and firms have a broader reach.
This helped create a more unified global marketplace.
What are the general impacts of globalisation on countries, governments, producers, consumers, workers, and the environment?
Countries: Economic growth, but also widening inequality between rich and poor nations.
Governments: Pressure to adopt pro-market policies, but also challenges to sovereignty due to global economic forces.
Producers: Access to larger markets, but increased competition and the need to lower costs.
Consumers: Greater choice and lower prices, but potential for exploitation of workers in low-wage countries.
Workers: Creation of jobs in some sectors, but job losses in others due to outsourcing and automation.
Environment: Environmental degradation due to increased production and transportation, but also potential for global cooperation on environmental issues.
What are the assumptions and limitations of comparative advantage theory?
Assumptions:
No transportation costs.
No trade barriers.
Perfect mobility of factors of production.
Two-country, two-good model.
Limitations:
Real-world economies are more complex than the simplified model.
Changes in exchange rates or trade policies can distort comparative advantage.
Specialisation might lead to dependence on a narrow range of goods.
factors affecting patterns of trade
Comparative advantage: Countries will trade based on their comparative advantage.
Emerging economies: As developing countries grow, their demand for goods and services increases, affecting global trade patterns.
Trading blocs and agreements: The formation of regional trade agreements or blocs (like the EU, NAFTA) can shift trade flows.
Exchange rates: Changes in relative exchange rates affect the cost and demand for imports and exports.
things affecting patterns of trade chains
- Comparative Advantage → Impact on Patterns of Trade
Countries specialize in goods they can produce at a lower opportunity cost.
→ This leads to increased trade between countries, as they export goods they specialize in and import those they are less efficient at producing.
→ The global trade pattern shifts to focus on the exchange of goods where countries have a comparative advantage.
→ Trade flows increase, leading to greater economic interdependence between nations, as countries rely on each other for goods and services.
→ The rise in specialization and trade results in higher global efficiency, as resources are allocated based on comparative advantage. - Emerging Economies → Impact on Patterns of Trade
Emerging economies grow rapidly, boosting their production of manufactured goods.
→ As these economies expand, they start to export more goods like electronics, machinery, and textiles.
→ This leads to a shift in global trade flows, with a larger share of trade being conducted between emerging economies and developed nations.
→ Emerging economies become increasingly important in global supply chains, with their industries integrating more into international markets.
→ The growth of these economies leads to more diversified trade patterns, with more South-South trade emerging between developing nations. - Trading Blocs and Agreements → Impact on Patterns of Trade
Trading blocs (e.g., EU, NAFTA, ASEAN) reduce trade barriers within member countries, making it easier to exchange goods.
→ This encourages intra-bloc trade, where countries within the bloc trade more with each other than with non-member nations.
→ Market access is enhanced, with businesses in the bloc benefiting from larger consumer bases and lower tariffs.
→ The growth of trading blocs leads to reduced trade with non-members, shifting global trade flows in favor of bloc members.
→ As these trade agreements evolve, global supply chains adapt, and economies within the bloc become more integrated. - Exchange Rates → Impact on Patterns of Trade
Currency depreciation makes a country’s exports cheaper for foreign buyers, leading to higher export volumes.
→ This shifts trade patterns, with more exports going to foreign markets, as products from the depreciating currency become more competitive.
→ At the same time, a weaker currency can make imports more expensive, reducing the demand for foreign goods.
→ This can lead to a reduced trade deficit, as the country exports more and imports less, changing its trade balance.
→ Fluctuations in exchange rates also introduce uncertainty into international trade, which can influence companies to adjust their strategies and hedge against risks.
factors influencing a country’s terms of trade?
Changes in export prices: If a country’s exports become more expensive, its terms of trade improve.
Changes in import prices: If the prices of imports rise, a country’s terms of trade worsen.
Inflation: High domestic inflation can worsen the terms of trade by making exports less competitive.
Productivity improvements: Increased productivity in export industries can improve the terms of trade.
