THEME 4 - MACROECONOMICS Flashcards
Globalisation
is the process of greater integration and inter-connectedness between countries
= the process through which an increasingly free flow of ideas, people, goods, services and capital leads to the integration of economics and societies
Characteristics of Globalisation
= Growth of international trade
= Trade liberalisation
= enhanced mobility of labour
= enhanced mobility of capital
= Increased cultural exchange
= Increased international capitalism
= Increased outsourcing
= Falling transport costs/ the “death of distance”
= Growth of size and influence of multinational corporations(MNCs)
Factors contributing to globalisation in the last 50 years
TRADE AGREEMENTS
The World Trade Organisation has assisted in the reduction or removal of trade barriers and there has been a greater proliferation of trade agreements across the world
REDUCED TARIFFS AND PROTECTIONISM
whilst some protectionist measures remain in place, a large number of countries with significant global economic influence have lowered protectionist measures
EXPANSION OF GLOBAL TRADING BLOCS
the growth of trading blocs such as the EU and NAFTA have reduced national barriers and promoted more trade and integration
IMPROVED TECHNOLOGY
Advances in technology have revolutionised communications, lowered labour costs and enabled businesses to access new foreign markets
MORE GLOBALISED FINANCIAL SYSTEMS
There has been a significant relaxation of the rules and regulations surrounding the movement of capital, which can move either freely, or at very low cost, quickly across the globe.
GREATER LABOUR MOBILITY
Workers are more willing to move across national borders in search of employment
IMPROVEMENTS IN TRANSPORTATION
This has made the movement of people, goods and services across the globe faster and cheaper.
GROWTH OF MULTINATIONAL CORPORATIONS
Many large organisations have taken advantage of lower trade barriers, labour mobility and cheaper transportation to grow rapidly and enter previously untapped markets
GREATER ‘OPENNESS’ OF FORMER ‘CLOSED’ ECONOMIES
Large and rapidly developing countries such as India and China which were previously largely closed to trade have become increasingly integrated into the global economy and play a vital role in the creation of new markets and the provision of low-cost labour
IMPACTS OF GLOBALISATION - POSITIVES
IMPROVED ALLOCATION OF RESOURCES
In a world of scarce resources, greater globalisation should improve the overall allocation of resources if there is a reduction in protectionism and enhancements in efficiency
FREE TRADE
The increased freedom of movement of goods and services increases export opportunities and can therefore have a significant effect on economic welfare
INWARD INVESTMENT
The greater freedom of movement of capital enables firms to invest outside their country of origin. This may lower their own costs of production and improve economic prospects and job opportunities in the invested country
SPECIALISATION
Countries may now benefit from increased specialisation which will lower their production costs and improve efficiency
Greater competition across the globe results in lower prices, greater choice and improved quality for consumers, and the reduction in domestic monopoly power
IMPACTS OF GLOBALISATION - NEGATIVES
INEQUALITY
It is possible that developing countries may not benefit from globalisation to the same extent as developed countries, which will widen the inequality gap across the world. They may struggle to compete, or through specialisation get stuck producing a single primary product
ENVIRONMENTAL IMPACTS
The increased pace of globalisation utilises scarce resources more quickly, increasing commodity prices and increasing pollution and global warming
Different countries will have different views on the seriousness of this problem
STRUCTURAL EMPLOYMENT
As globalisation has accelerated, a large number of primary and secondary sector jobs have been moved to low-wage economies, creating structural unemployment issues in developed countries
MOVEMENT OF LABOUR
Globalisation allows the best talent to move quickly and easily across borders, creating a ‘brain drain’
DAMAGE TO TRADITIONAL CULTURES
Although not always visible, increased globalisation has arguably damaged traditional cultures. The proliferation of multinational companies creates a uniformity of many economies and arguably less cultural diversity
IMPACTS OF GLOBALISATION (MNCs) - BENEFITS
CAPITAL INFLOWS AND INWARD INVESTMENT
MNCs are principally driven by profit motives, and if they can spot opportunities for new markets or the chance to reduce production costs by moving to low-wage economies, they may take advantage of these openings, which drives capital expenditure and investment funds into a country
ECONOMIES OF SCALE
MNCs can seek low production costs and spread their production over greater units of output, which allows them to reduce unit prices
EMPLOYMENT
Create employment opportunities for local workers
INFRASTRUCTURE
MNCs will often invest in training the workforce to improve their skills and also spend money on local roads and transport infrastructure to aid their own trading opportunities and distribution
DIVERSIFICATION
Developing countries may have very few industries to help them generate economic growth and the arrival of MNCs may help to diversify the economy across a wider range of businesses and sectors
STANDARDS
MNCs will often work towards the provision of minimum standards in either production, for example, health and safety considerations or the improved final goods or services
IMPACTS OF GLOBALISATION (MNCs) - NEGATIVES
PROFIT MOTIVE
MNCs will be driven principally by profit, which may come at the expense of consumers and employees
IMPACT ON SMALL FIRMS
It is unlikely that small, local companies will be able to compete with large MNCs, and consequently, they may be unable to survive in the marketplace, so reducing overall competition
ENVIRONMENT IMPACT
MNCs may choose to locate in countries or regions with fewer environmental laws. Whilst this may reduce costs, it may also increase pollution and create negative externalities
EXPLOITATION
MNCs may exploit local resources and the labour force for their own gain, whilst the shareholders of the home nation enjoy the dividends from profits
TAXATION
MNCs will often move their ‘home’ for tax purposes, usually to minimise tax liability. The cases of Starbucks and Amazon demonstrate how this affects both developed and developing nations
International trade
- International trade is the exchange of goods and services between countries
- Imports are goods and services coming into the country
- Exports are goods and services going out of a country
- Free trade exists when there are no restrictions on the flow of goods and services between countries
- There is no government intervention
- The EU is a free trade area
Absolute advantage
is a situation where a country can produce a good or service using fewer resources than that of another country. - It can produce more of that good or service more cheaply.
Comparative advantage
is therefore where a country can produce a good at a lower opportunity cost than that of another
LIMITATIONS OF COMPARATIVE ADVANTAGE
- It is also assumed that opportunity cost ratios remain unchanged, given ongoing changes to efficiency improvements in different
industries, is unlikely to be the case - International trade depends partly upon exchange rates, which are
not factored in
There is no consideration of transport costs, which in some circumstances may be considerable
The theory assumes a model of perfect free trade and takes no account of protectionist measures that might be employed by a
country
Specialisation
occurs when economic units such as individuals, firms, regions or countries
concentrate on specific goods or
services.
Specialisation increases output as economic units become more
effective and efficient in what they produce due to:
- Greater understanding of the requirements of production
- Each economic unit can specialise in what they are best at
- Efficient use of time as there is no switching between tasks
- Technical economies of scale as capital equipment is used to produce
goods and services
The increased output can then be exchanged for other goods and
services that the economic unit is not as good at producing
Specialisation allows for the exchange of goods and services between the economic units
ADVANTAGES OF SPECIALISATION AND TRADE
Increased overall global output
- As a result of comparative advantage
Greater competition
- Trade opens international borders, promoting a greater degree of competition
Employment opportunities
Export industries create employment through the expansion of aggregate demand
Encouragement of specialisation, leading to greater efficiency
- If a country is to trade effectively it needs to specialise in order to compete, which drives down costs and unit prices
Improved quality of goods and services
- Via increased competition and dynamic efficiency, the overall quality of goods and services can be enhanced
allows for trade
improved national income (GDP)
Economics of scale leading to lower costs
a great choice for consumers
Interdependence leading to
better relations between
countries
DISADVANTAGES OF SPECIALISATION
AND TRADE
Over-specialisation
If a country aims to engage in trade, it will need to specialise, however, if world demand falls, this can give an economy significant
problems
Structural unemployment
Over-specialisation may create structural unemployment, which maybe magnified in particular regions in the UK
Infant industries
Some countries are concerned that infant and new industries struggle to compete with MNCs, thus creating local problems and
limited employment opportunities as firms struggle to establish themselves
Dumping
Countries that enjoy significant absolute advantages in the production of certain goods, often agricultural, may sell their
surpluses at very low prices and drive local producers out of the market
Environmental concerns
The process of transporting large quantities of goods around the
world is costly and uses up significant quantities of scarce resources
Over-reliance on a limited number of industries
Reliance on other nations
The threat of external factors e.g. political unrest or natural disasters can cut off
supplies
Less developed countries may be discouraged from moving into new industries or specialising in tertiary
industries
FACTORS INFLUENCING THE PATTERN OF TRADE: COMPARATIVE
ADVANTAGE
Developed countries have utilised developing countries as a source of cheap production in terms of lower costs of raw materials and labour
The improvement in production costs and lower inflationary pressure
generated as a consequence has improved the real incomes of consumers of developed countries and boosted their standard of living
The decline of manufacturing in developed countries has led to reduced
negative externalities in production in those countries
However, many developed countries have experienced structural unemployment as a consequence of businesses relocating production
to low wage economies
FACTORS INFLUENCING THE PATTERN OF TRADE: IMPACT OF EMERGING ECONOMIES
Increased trade has enabled emerging economies to participate more effectively in the global economy. Many have become more integrated into competitive markets and have generated
significant income and wealth for their citizens
This increased income and wealth has led to the creation of job opportunities, which can assist in the reduction of poverty
However, many developing countries may find it hard to access large markets if they are not members of that trading bloc. For example, producers of agricultural products in African nations will have to pay large import duties to sell their products in the EU because of the Common External Tariff
The pace of growth of emerging economies has led to large rises in the prices of primary resources and foodstuffs. This has been
extremely beneficial in terms of revenues for developing
economies, but may not encourage economic diversity which may harm them in future years or in an economic downturn
FACTORS INFLUENCING THE PATTERN OF TRADE: GROWTH OF
TRADING BLOCS
Trading blocs are when the governments of a group of countries agree to trade together freely i.e. normally with no trade barriers
There has been significant growth of trading blocs in the last 50 years
This has led to increased trade between countries that are in the trading blocs as it removes barriers to trade
Bilateral agreements occur when two countries agree to trade at preferential terms
This leads to increased trade between the two countries
After Brexit the UK is looking to increase the number of bilateral agreements it has with other countries, something it was unable to do as part of the EU
FACTORS INFLUENCING THE PATTERN OF TRADE: CHANGES IN RELATIVE EXCHANGE RATES
The exchange rate is the price of one currency in terms of another e.g. $ v £
An appreciation in the exchange rate will lead to a fall in exports as the price of UK goods and services abroad will increase
This will depend upon the elasticity of the product e.g. petrol is price inelastic
Therefore, we will still import petrol but at a higher price
This will increase the cost of imports even though the volume of imports will fall
SPICED - strong pound imports cheaper exports dearer
