Theme 4.1.1-4.1.6 Flashcards
What is globalisation?
Globalisation is the process of national economies around the world becoming more connected and interdependent socially, economically and politically.
What movements does globalisation tend to bring?
-It can be defined as the increasing integration of the world’s local, regional and national economies into a single international market.
● There is movement towards free trade of goods and services, free movement of labour and capital and free interchange of technology and intellectual capital.
What factors have contributed to increasing globalisation?
● Improvements in transport infrastructure and operations have meant there are quick, reliable and cheap methods to allow production to be separated around the world.
● Improvements in IT and communication allow companies to operate across the globe
● Trade liberalisation and reduced protectionism has made it cheaper and more feasible to trade; this has been occurring since 1945. The breakdown of the soviet bloc and the opening of China has shown a whole area of the world for business to expand into.
● International financial markets have provided the ability to raise money and move money around the world, necessary for international trade.
● TNCs (large companies operating around the world) have led to globalisation by acting to increase their own profit as they want to take advantage of low labour costs. They sell and produce their goods all around the world and have the power to lobby governments.
What is the impact of globalisation on consumers?
● Consumers have more choice since there are a wider range of goods available from all around the world, not just those produced in the UK.
● It can lead to lower prices as firms take advantage of comparative advantage and produce in countries with lower costs, for example low labour costs.
● In other cases, it is leading to a rise in prices since incomes are rising and so there is higher demand for goods and services.
● Many consumers worry about the loss of culture.
What are the impacts of globalisation on workers?
● In terms of employment, some people have gained whilst others have lost. There have been large scale job losses in the western world in manufacturing sectors as these jobs have been transferred to countries such as China and Poland.
● Increased migration may affect workers by lowering wages but migrants can also provide important skills and an increase in AD which increases the number of jobs.
● International competition has led to a fall in wages (or reduced growth) for low skilled workers in developed countries whilst increased those in developing countries.
● The wages for high skilled workers appear to be increasing, since there is more demand for their work; this is increasing inequality.
● TNCs tend to provide training for workers and create new jobs.
● Those working in sweatshops will see poor conditions and low wages, but this is
better than other alternatives.
What are the impacts of globalisation on firms?
● Firms are able to source products from more countries and sell them in more countries. This reduces risk since a collapse of the market in one company will have a smaller impact on the business.
● They are able to employ low skilled workers much cheaper in developing countries and can exploit comparative advantage and have larger markets, both of which can increase profits.
● Firms who are unable to compete internationally will lose out.
What are the impacts of globalisation on the government?
● The government may be able to receive higher taxes, since TNCs pay tax and so do the people they employ. However, they could lose out through tax avoidance.
● TNCs also have the power to bride and lobby governments, which could lead to corruption.
● If the government uses the correct policies, they can maximise the gains and minimise the losses.
What are the impacts of globalisation on the environment?
● The increase in world production has led to increased demand for raw materials, which of which is bad for the environment.
● Increased trade and production has also led to more emissions.
● However, globalisation means the world can work together to tackle climate change and share ideas and technology.
How can globalisation lead to economic growth?
-Increases investment in countries due to investment of TNCs through FDI as well as supply side investment to encourage TNCs.
-TNCs can bring new, more efficient technologies which can be beneficial to all industries.
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How can globalisation lead to economies shrinking?
● However, the power of TNCs can cause political instability as they may support regimes which are unpopular and undemocratic but that benefit them or could hinder
regimes which don’t support them
● Comparative cost advantages will change over time and so companies may leave
the country when it no longer offers an advantage which will cause structural unemployment and reduce growth.
What is sustainable development?
Sustainable development involves meeting the needs of the present without compromising the ability of future generations to meet their own needs.
What is a potential negative of globalisation?
One of the issues concerning globalisation is that economies are becoming too dependent on each other, which means if there are external shocks (such as a financial crisis, pandemic or recession of a major supplier’s economy, or changes in oil prices), many economies around the globe will be put at a significant risk due to not being self sufficient.
What is FDI?
Investment which is undertaken in one country by companies based in another country. This occurs for three main reasons:
-Market seeking: engage in FDI so they can sell in a particular market
-Resource seeking: May invest to take advantage of key resources
-Efficiency seeking: Invest because they have decided that producing in this location would be more efficient than anywhere else around the globe.
What are some examples of market-seeking FDI being important?
-In China, their open door policy since 1979 has proved to be a magnet for TNC’s investing into the nation.
-Japanese firm Nissan has also invested into northern parts of the UK to improve the efficiency of their automotive industry, and allow it to become specialised so that Nissan can have factories there.
What positives can FDI bring to the host nation?
-It is hoped FDI will cause gains in employment, tax revenues as well and capital + technology to allow for economic growth.
-This will be especially important for developing countries who lack the ability to improve capital and technology by themselves, or lack the national income to raise their tax revenue.
What negatives can be caused by FDI?
-If profits which come from the investment find there way into the hands of shareholders elsewhere in the world, the impacts on economic growth may be limited, due to withdrawals affecting the multiplier effect.
-Foreign TNCs may also be able to use their power to lobby against weaker governments in less developed countries, gaining themselves tax breaches which may reduce benefits of FDI.
What is absolute advantage?
This is the ability to produce a good more efficiently than another region/economy (e.g with less labour)
What is a comparative advantage?
This is the ability to produce a good relatively more efficiently (e,g at a lower opportunity cost than another location).
What is the law of comparative advantages?
This is the theory that argues that there may be gains from trade arising when countries (or individuals) specialise in the production of goods or services in which they have a comparative advantage.
This can be true even if the two nations are producing products of similar nature, because they will be able to benefit from intra-industry specialisation, where different countries specialise in different parts of a manufacturing process.
What did David Ricardo say about the importance of specialisation and international trade?
He recognised its importance for economic growth and development. He showed that countries could gain from trade through a process of specialisation.
For example, during the Industrial Revolution Britain could bring in raw materials from its colonies in Africa to supply the manufacturing it specialised in. Today, consumers in the UK are able to both buy and consume goods which simply wouldn’t have been able to be supplied in a domestic economy.
What are the assumptions and limitations of the law of comparative advantage?
● Comparative advantage assumes there are no transport costs, and these could
lower or prevent any comparative advantage.
● It also assumes costs are constants and that there are no economies of scales. Economies of scale help to increase the gains from specialisation.
● In the model, goods are assumed to be homogenous, which is unlikely to hold in real life. The fact products aren’t homogenous makes it difficult to conclude that a country has a comparative advantage as their products can’t be perfectly compared.
● It also assumes that factors of production are perfectly mobile, there are no tariffs or other trade barriers and there is perfect knowledge.
● Whether trade takes place will depend on the terms of trade between the countries.
-In reality, there is more than just two countries involved, and they produce more than just two products.
-The benefits received by the two countries may not be equal.
How can a PPF show if international trade with specialisation is worthwhile?
The PPF of each economy will show the opportunity cost each country has (e,g the gradient) as well as which country has the absolute advantage for each product. If the combined PPF (the PPF if both economies produce at the maximum output in the product where they have a comparative advantage) is more outwards than the individual PPF’s, then theoretically they two nations will gain from international trade.
This combined PPF is known as the trading possibilities curve.
What are the advantages of specialisation and international trade?
● Comparative advantage shows how world output can be increased if countries specialise in what they are best at producing, this will increase global economic growth.
● Trading and specialising allows countries to benefit from economies of scale, which reduces costs and therefore decrease prices globally.
● Different countries have different factors of production and so trade allows countries to make use of factors of production, or the things produced by these factors, which they otherwise may have been unable to.
● Trade enables consumers to have greater choice about the types of goods they buy, and so there is greater consumer welfare.
● Trade also means there is greater competition, which provides an incentive to innovate. This creates new goods and services and new production methods, increasing consumer welfare and lowering costs respectively.
● Countries which isolate themselves for political reasons, like North Korea, have found that their economies tend to stagnate.
What are the disadvantages of specialisation and international trade?
● However, trade can lead to over-dependence, where some countries become dependent on particular exports whilst others become dependent on particular imports. This can cause problems if there are large price falls in the exports of if imports are cut for political reasons.
● It can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and competitive. The less mobile the workforce, the higher the chance that changes in demand due to trade will reduce output and employment over long periods of time. This is a big problem in the UK as some areas such as Manchester suffer from unemployment as their traditional industries declined, for example ship-building.
● The environment will suffer due to the problems of transport as well as the increased demand for resources e.g. deforestation.
● Countries may suffer from a loss of sovereignty due to signing international treaties and joining trading blocs, for example in the EU.
● They may see a loss of culture as trade brings foreign ideas and products to the country.
What is the significance of comparative advantage being dynamic?
This means that just becomes a country has a comparative advantage over another currently, this doesn’t mean that they will also have this advantage. It can change depending on factors such as:
-Demographic changes
-The availability of natural resources
-R&D leading to innovation
-Changes in the import controls (e.g tariffs and quotas)
-Non-price competitiveness of firms can also lead to changes.
What is the terms of trade?
The terms of trade measures the rate of exchange of one product for another when two countries trade. It tells us the quantity of exports that need to be sold in order to purchase a given level of imports.
Movement in the terms of trades is said to be favourable if the terms of trade increase as the country can buy more imports with the same level of exports. This is called an improvement in the terms of trade. It is unfavourable if they decrease, when export prices fall or import prices rise. This is called a deterioration.
How are the terms of trade calculated?
(average export price index/average import price index) x100
What factors will influence terms of trade in the short run?
● An improvement in the terms of trade will be caused by a rise in export prices or a fall in import prices. A deterioration will be caused by a fall in export prices or a rise in import prices.
● In the short run, exchange rates, inflation and changes in demand/supply of imports or exports affect the terms of trade since these affect the relative prices of imports and exports.
What factors will influence terms of trade in the long-run?
● In the long run, an improvement in productivity compared to a country’s main trading partners will decrease the terms of trade since export prices will fall relative to import prices. This can be caused by new technology, more efficient labour etc.
● Another long run factor is changing incomes. This affects the pattern of demand for goods and services. For example, a rise in world income causes a rise in demand for tourism and so a country with a strong tourist industry, such as Spain, may see a rise in prices in that industry and hence an increase in their terms of trade. The Prebisch-Singer hypothesis suggests the long run price of primary goods declines in proportion to manufactured goods, which means those dependent on primary exports will see a fall in their terms of trade.
What are the impacts of changes of terms of trade on the economy?
● If PED of exports and imports is inelastic, a favourable movement in terms of trade would improve the current account on the balance of payments whilst if it is elastic, a favourable movement would worsen the current account.
● An improvement in the terms of trade is likely to lead to a fall in GDP and a rise in unemployment, since if it is caused by a rise in export prices, exports will fall and if it is caused by a fall in import prices, imports will rise. Both of these causes a reduction in production within the country and so a fall in jobs and output. However, a long term decline in the terms of trade suggests a long term decline in living standards as less imports can be bought.
● It is important to look at the cause of the change. If an improvement has occured due to increased demand for exports, then this will be beneficial for the country. If a deterioration is caused by an improvement in international competitiveness, this will also be beneficial. The export and import revenues are more important than the price alone. For an improvement to be beneficial, export revenues must increase.
What is the resource curve in terms of trade?
The term resource curse refers to a paradoxical situation in which a country underperforms economically, despite being home to valuable natural resources. A resource curse is generally caused by too much of the country’s capital and labor force concentrated in just a few resource-dependent industries. By failing to make adequate investments in other sectors, countries can become vulnerable to declines in commodity prices, leading to long-run economic underperformance.
What are the patterns of trade?
Patterns of trade can be spilt into two different patterns. The geological patterns of trade (ie which countries will trade most with which other countries) and commodity patterns (which countries will export and import different goods and services).
What are the factors which will influence patterns of trade?
-Changes in comparative advantage
-Emerging and developing economies (e.g China is now a major exporter of manufactured goods). Developing countries now produce 41% of world exports in 2016.
-Trading blocs and bilateral trading agreements (such as EU. Free trade rules and reduced/removed quotas will heavily influence which countries trade with who)
-Changes in relative exchange rates: a long term change in exchange rates will affect the relative competitiveness of that nation’s goods and services, and therefore impact its patterns of trade.
-Increased influence of WTO – Trade barriers reduced.
-Opening up of Eastern Europe / Former soviet bloc countries to international
trade.
-Increase in FDI in developing nations– Leading to greater productivity and competitiveness in manufacturing
