Topic 6 Flashcards
What is globalisation?
refers to the increasing interconnectedness of countries, where events in one country impact others, and activities such as travel, trade, and communication span across borders
How has travel contributed to globalisation?
A: Travel between countries has become quicker, easier, and cheap, facilitating the movement of people and goods around the world
How has communication technology (ICT) affected globalisation?
A: ICT has made communication faster and more efficient, allowing instant contact between people and financial markets worldwide.
How do businesses benefit from globalisation in terms of trade?
A: Businesses can easily trade across borders by sourcing raw materials from one country and exporting goods to another. Internet shopping also allows consumers to buy products globally
How does migration influence globalisation?
A: Migration brings cultural diversity as people take their cultural preferences to new countries, influencing demand for various goods and services like food and fashion
What is an example of a business sector that has expanded through globalisation?
A: Financial services providers have expanded activities across national borders, establishing offices worldwide and forming multinational organisations through takeovers and mergers.
How does HSBC exemplify globalisation?
A: HSBC has expanded into over 65 countries by acquiring local financial services providers and rebranding them under the HSBC name
What role does internet shopping play in globalisation?
A: allows individuals to purchase goods from different countries, with air transport enabling fast delivery
How do multinational corporations contribute to globalisation?
A: they operate in multiple countries, increasing economic interconnectedness and enabling goods, services, and capital to flow across borders efficiently
What is the general definition of globalisation
refers to the international integration of business, industry, and society through advancements in technology, communication, and migration. It is commonly described as:
• The trend towards a single global economy and society.
• A process of increasing international networking, linking previously isolated communities and economies
What is the IMF, and what does it aim to achieve
The International Monetary Fund (IMF) is an international body comprising 190 countries. Its aim is to:
• Promote international cooperation on exchange rates and other economic matters.
• Ensure the stability of the international monetary system, including exchange rates and international payments, enabling countries and their citizens to transact with one another.
(IMF, 2019)
How does the IMF define globalisation, and what are its key driving factors
The IMF defines globalisation as:
• “The process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies” (IMF, 2002).
Key factors driving globalisation:
• Increased trade liberalisation.
• Advances in information and communication technology (ICT)
What are the positive aspects of globalisation
Supporters view globalisation as beneficial because:
• It improves the standard and range of products.
• It leads to consistency in services across different countries.
What are the criticisms of globalisation
Critics argue that globalisation:
• Undermines local culture in countries where multinational corporations operate.
• Leads to depersonalisation, as people feel the “one size fits all” approach ignores local preferences and traditions
How do financial service providers adapt to criticisms of globalisation
Many financial providers strive to balance being global with being local:
• They aim to keep customers loyal by adapting to local needs.
• Example: HSBC marketed itself as “The world’s local bank,” emphasising its global reach while understanding local markets.
However, after the 2007–2008 global financial crisis, HSBC dropped this tagline (Quinn, 2011)
What is another criticism of globalisation related to offshoring
Globalisation is criticized for increasing offshoring, where jobs and production are moved to countries with lower costs, impacting local employment in the home countries
How does globalisation in financial services illustrate its interconnectedness
means that strategic decisions made by providers in one country (e.g., UK) can significantly impact global operations. Events in one part of the world, such as the 2007–08 financial crisis, affect economies worldwide due to interconnected markets
What triggered the 2007–08 financial crisis in the US
The crisis was triggered by the sub-prime mortgage market in the US:
• Banks provided mortgages to high-risk borrowers who could not afford them.
• Rising interest rates made it difficult for borrowers to repay loans, leading to defaults and home repossessions.
• Falling house prices meant banks could not recover their loans through repossessed home sales.
How did the repackaging of mortgage debts contribute to the financial crisis
Banks repackaged mortgage debts into securities sold to investors and other banks.
• As defaults increased, these securities lost value, becoming “toxic debt.”
• Financial institutions holding toxic debt faced huge losses, spreading the crisis globally
What is the “credit crunch,” and how did it arise during the financial crisis
The credit crunch occurred when:
• Uncertainty over the value of toxic debt made banks stop lending to each other.
• This lack of lending caused a freeze in the global financial system.
• The first UK bank affected was Northern Rock, heavily reliant on global money markets to fund its mortgages
What measures were taken to prevent the collapse of the UK banking system during the crisis
The UK government injected funds to support failing banks (bailouts) to avoid systemic collapse. This action was necessary due to the unethical lending practices in the US, which had infected banks globally through interconnected financial systems
What does the 2007–08 financial crisis reveal about the risks of globalisation in financial services
The crisis demonstrated that failures in financial services in one country could threaten the stability of the entire global financial system due to integrated markets and daily cross-border banking transactions
What is a criticism of globalisation related to large multinational corporations?
Globalisation has led to the emergence of powerful multinational corporations that:
• Dominate markets, making it difficult for small local businesses to compete and survive.
• Integrate extensively in sectors like financial services, taking customers from smaller rivals.
How do mergers and acquisitions relate to globalisation
They are common in globalisation, where large corporations:
• Buy smaller rivals, increasing their size and power.
• Often result in redundancies due to overlapping operations.
• Can bring increased employment opportunities when entering new markets.
Authorities encourage limits on mergers to maintain competition and consumer choice
Provide an example of a successful acquisition during globalisation
• In 2004, Abbey was purchased by the Santander Group (a Spanish bank).
• Despite job losses, Santander was better protected during the 2007–08 financial crisis, ensuring Abbey’s stability and improved resilience
Provide an example of an ill-advised acquisition during globalisation
Ill-advised acquisition:
• Royal Bank of Scotland (RBS) participated in acquiring Dutch bank ABN Amro.
• ABN was less valuable than RBS had estimated, leading to substantial losses in 2009.
• RBS required government funding to remain afloat.
How does globalisation affect competition in financial services
• UK providers face increased competition from overseas providers, who can operate locally or through the internet at lower costs.
• Local providers must adapt to deliver better services and lower prices to remain competitive
What strategic decisions do UK providers face due to globalisation
- Expanding Overseas:
• Providers may allocate resources to foreign markets, balancing UK commitments with global opportunities.- Customer Impact:
• Expansion may lead to reduced product standards or service levels in the UK.
• Losses during the 2007–08 crisis forced providers like RBS to sell international assets (e.g., stakes in the Bank of China)
- Customer Impact:
What is outsourcing, and what functions are typically outsourced
is the process of hiring another provider to perform functions previously handled in-house.
Examples of outsourced functions:
• Payroll
• Call centre operations
• Data processing
• Book-keeping (basic accounting)
• Computer programming
What are the benefits of outsourcing to a provider
- Enables the provider to focus on core functions (e.g., investment fund management, insurance underwriting).
- Cost savings due to economies of scale achieved by the outsourced company, which specializes in specific processes
What is offshoring, and why do companies choose to offshore tasks
Offshoring involves moving company functions to overseas locations to reduce operational costs.
Reasons for offshoring:
• Access to skilled labour in lower-cost countries (e.g., India, Indonesia, South Africa, Philippines).
• Lower wage costs due to lower cost of living in those countries
What activities do UK providers commonly offshore
Call centre work.
IT and data-processing tasks
How does technology make offshoring easier
Technology allows overseas employees to:
• Receive data electronically.
• Process it quickly and securely.
• Provide access to results as efficiently as if they were local
What is the main difference between outsourcing and offshoring
Outsourcing: Shifts tasks to another company, which can be local or international.
Offshoring: Specifically moves tasks to overseas locations to benefit from lower costs.
What are the customer benefits and challenges of outsourcing and offshoring
Benefits:
• Lower-priced products and services.
Challenges:
• Customers may feel disconnected, especially with overseas call centres.
• Interaction can feel impersonal
What are the potential risks of outsourcing and offshoring for a company’s reputation
Loss of jobs among the provider’s employees.
Damage to reputation with stakeholders, including customers and employees.
What has been discussed in the post-crisis period to prevent future financial crises?
Discussions focus on how financial regulations can be tightened to prevent another crisis.
Key concerns include:
1. Toxic debt as a significant factor.
2. Irresponsible borrowing on international markets.
How did banks contribute to the financial crisis through borrowing
• Leading up to the crisis, banks borrowed trillions of pounds on international markets.
• This borrowing was used to fund lending but not based on the deposits of customers in current and savings accounts
What measures were introduced to discourage global borrowing by UK banks
• In 2010, the UK government imposed a bank levy of 0.088% on the value of bank debts (excluding savings deposits).
• This levy was increased to 0.21% in 2015.
• The levy excluded overseas activities of UK banks
What criticisms were raised about banks’ behavior during and after the crisis
- Payment of large annual bonuses to investment bankers and senior staff.
• Encouraged excessive risk-taking.- Reluctance of banks to lend money to businesses for expansion
What was “Project Merlin,” and what did it achieve
• Project Merlin was an agreement between the UK government and major banks (RBS, Lloyds, HSBC, Barclays).
• Outcomes:
• Banks paid lower bonuses to employees.
• Banks made more money available for business loans
What arguments exist against putting too much pressure on the financial sector
• Critics argue that financial pressure could harm the UK economy, given its reliance on the sector.
• If overregulated, banks might move operations to other financial centers like Mumbai, Shanghai, or Dubai, where regulations are less strict
What are the differing views on the measures taken to date to regulate the financial sector
• Some believe the measures do not go far enough to address systemic risks.
• Opponents argue that overregulation could harm the financial sector’s role in the UK economy
What is the global economy, and how does it relate to the UK economy
• The global economy refers to the aggregate activity of all national/regional economies.
• The UK economy is a part of the global economy, interconnected through trade, financial services, and global events
How do local and global economies affect financial providers
• Locally: Changes in interest rates or job market setbacks can impact them.
• Globally: Events in other countries influence imports, exports, companies, employees, and consumers.
Why is trade between countries important for the global economy
• Countries trade for essential supplies (e.g., oil, rice, microchips).
• Many UK jobs depend on demand abroad for goods and services (e.g., agriculture, pharmaceuticals, London taxis).
• Financial services are a major UK export industry.
How does globalisation affect UK financial providers
- They face competition from businesses based in overseas economies.
- Providers may be part of groups based overseas or have international offices.
- Strategic decisions must consider both local and global conditions
What are exchange rates, and why are they important in global trade
Exchange rates determine the value of one currency relative to another.
• Changes in exchange rates impact the price and competitiveness of goods in international markets
How do changes in exchange rates affect UK goods in European markets
• If sterling strengthens against the euro:
• UK goods become more expensive for European buyers.
• UK manufacturers may need to cut prices (lower profit margins) or risk losing sales.
• If sterling weakens against the euro:
• UK goods become cheaper for European buyers
How are exchange rates influenced by financial markets
• A strong US economy can lead to:
• Higher US interest rates.
• Rising US stock markets.
• Increased demand for US bonds and shares.
• Increased demand for dollars strengthens the dollar’s exchange rate.
What are the knock-on effects of fluctuations in exchange rates
Fluctuations affect trade relationships between countries, altering competitiveness, profit margins, and sales volumes.
What is the primary responsibility of the Bank of England’s Monetary Policy Committee (MPC)
The MPC is responsible for setting the Bank rate in the UK, which influences the demand for and supply of the pound sterling, aiming for a stable inflation rate
How does an increase in UK interest rates affect consumer spending and demand for UK goods
An increase in interest rates makes borrowing more expensive, reducing consumer spending. This leads to a decrease in the demand for UK goods and services
How do higher UK interest rates affect foreign trade
Higher interest rates increase the value of sterling in international markets, making UK goods more expensive for foreign consumers and reducing demand for UK exports
What happens to the exchange rate of the pound sterling when UK interest rates increase
The demand for sterling strengthens, increasing its value against foreign currencies, which makes UK goods more expensive internationally
What is the effect of a reduction in interest rates on the UK economy
A reduction in interest rates makes borrowing cheaper, potentially increasing consumer spending and demand for UK goods and services. It also weakens the value of sterling, making UK exports more competitive internationally
Why did the pound rise in value against the euro after the financial crisis
The pound’s rise was not due to improvements in the UK economy or interest rates but because the euro’s value fell. This was caused by severe financial and economic problems in some eurozone countries, which threatened the euro’s existence as a currency
How have changes in sterling’s purchasing power affected UK imports and exports since 2009
Sterling’s increased purchasing power made imports cheaper and exports more expensive. However, the goods and services the UK exported were still in demand because they were cheaper than in previous years. This helped sustain export demand and limit unemployment in the post-crisis years
What is the purpose of international trade organizations
These organizations aim to coordinate economic policies among countries to prevent harmful actions and achieve optimal outcomes for the global economy. However, differing national interests often make it challenging to reach a consensus
What were the economic effects of the 2007–08 global financial crisis on employment
The crisis led to job losses, pay cuts, and a shift to part-time work for many people
What are protectionist policies, and why are they controversial
Protectionist policies prioritize a country’s economy and labor force by measures like subsidies to industries or import taxes. They are controversial because they prioritize domestic interests over global trade, which can harm other countries
How has free trade influenced economic development since World War II
The end of protectionism and the growth of free trade have significantly accelerated worldwide economic development
What role do international trade organizations play in global trade
They promote free trade and economic cooperation to sustain the advantages of globalization and economic growth
What is the role of the WTO World Trade Organization
The WTO promotes cooperation and trade among over 160 member countries. Its primary function is to ensure that trade flows smoothly, predictably, and freely, while also providing a forum for negotiating trade agreements, settling disputes, and maintaining a system of trade rules
What are some examples of regional economic unions, and how many members do they have
• European Union (EU): 27 member states.
• Association of Southeast Asian Nations (ASEAN): 10 members.
• Caribbean Community (CARICOM): 15 full members and 5 associate members
What is Gross Domestic Product (GDP), and why is it important
GDP measures a country’s economic activity based on its total output of goods and services at market prices. Rising GDP indicates economic growth, higher living standards, increased employment, and greater production, showing the economy is performing well
What does GDP per capita measure, and what are its limitations
GDP per capita is the total GDP divided by the number of people in the country, indicating the average economic output per person. However, it can mask income inequalities, as some individuals may earn far more than the average, while the majority earn much less
What is the ideal type of economic growth, and what happens if growth is too rapid
The ideal economic growth is steady and sustainable. Rapid growth can lead to an “overheated” economy, where businesses cannot meet demand, leading to price increases and inflation
Why must GDP figures be adjusted for inflation
Inflation can cause apparent increases in GDP due to rising prices rather than increased production. Adjusting for inflation provides a “real” GDP figure that accurately reflects economic performance
What is the ‘boom and bust cycle’
It is a cycle of rapid economic growth followed by falling output, a return to growth, and then a recession
How did the ‘boom and bust cycle’ affect the UK in the 1990s and 2000s
The economic boom led to belief in unending growth. However, financial institutions failed to prepare for the end of this period, leading to a deep recession after 2007
What environmental impacts can excessive economic growth cause
A: - Increased burning of fossil fuels
• Shrinkage of green areas
• Increased congestion in urban areas
Define ‘sustainable growth.’
Growth controlled enough to continue into the medium and long term, balancing economic, environmental, and social factors
Growth controlled enough to continue into the medium and long term, balancing economic, environmental, and social factors
Higher productivity—producing more goods and services with the same resources
What is vital for achieving sustainable growth apart from efficient equipment and technology
Investing in education to ensure the labor force has the necessary knowledge, skills, and abilities
What are the limitations of traditional economic measures like GDP and productivity
They focus only on financial output and ignore non-financial aspects like quality of life, equality of healthcare, leisure time, and stress levels.
What did the UK government do in 2011 to address limitations of monetary-based measures?
A: The Office for National Statistics (ONS) launched a ‘happiness survey’ to assess life satisfaction and well-being.
Q: What findings were reported by the ONS from the happiness survey between 2011/12 and 2012/13?
A: - Improved personal well-being
• Increased life satisfaction
• Greater sense of life’s worth
• Reduced anxiety levels
Q: What were some criticisms of the UK’s happiness survey?
A: Critics argued it was a distraction from the economic recession and a way to deflect attention from its effects
Q: What is the Human Development Index (HDI)?
A: A measure that goes beyond economics, using life expectancy, education, and income to assess a country’s development
Q: What happens to share prices and investor appetite during a fall in economic growth?
A: Share prices typically fall, and there is a reduced appetite for shares
How do providers of savings and investment products respond to falling markets?
A: They offer products encouraging riskier investments, such as collective investment funds, unit trusts, investment trusts, and open-ended investment companies (OEICs)
Q: What are OEICs?
A: Open-Ended Investment Companies (OEICs) specialize in investing in smaller companies, newly established firms, and global investments.
Q: How do individuals typically behave in times of economic uncertainty?
A: They tend to prioritize safety by moving their money into safer assets like gilt-edged securities or corporate bonds and reducing their exposure to risk
Q: What is the ‘credit crunch,’ and when did it become evident?
A: The credit crunch refers to reduced lending by banks and stricter borrowing terms, which became prominent during the 2007–2008 financial crisis
Q: How did the UK government respond to the credit crunch?
A: It introduced policies encouraging banks to lend more to creditworthy individuals and businesses
Q: What was the behavior of banks and other lenders following the financial crisis?
A: They became cautious, accepting low profits or even losses, as they recognized that excessive lending was a cause of the crisis
Q: How did individuals react to low interest rates and government encouragement to ‘shop for Britain’?
A: Many focused on paying off debt due to fear of unemployment, leading to reduced borrowing and spending despite lower interest rates
Q: How did falling interest rates affect holders of variable-rate mortgages?
A: Their monthly payments decreased, allowing them to overpay their mortgages to reduce debt faster, rather than spending the extra cash.
Q: Why did the government’s hope for increased spending due to lower interest rates fail?
A: Existing mortgage holders used their savings to reduce debt rather than increasing consumer spending
Why might investment companies find it difficult to identify good opportunities during a global economic downturn?
A: They may struggle to find countries or markets performing well when the world economy is performing poorly, as most investors are losing money
Q: What skills are essential for stockbrokers and fund managers during a recession?
A: The ability to identify companies worth investing in despite a falling market. Successful stock pickers maintain or increase the value of investment portfolios
Q: How do consumer spending habits change during a recession?
A: Consumers still purchase essential goods (food, drink, household items, transport) but focus on finding cheaper alternatives, increasing demand for low-priced products
Q: What type of businesses tend to thrive during a recession?
A: Businesses specializing in low-cost products and services see increases in sales and profits during economic downturns
Q: What is the ‘Aldi effect’?
A: The success of no-frills, low-cost supermarkets like Aldi during recessions, as shoppers switch to reduce their expenses
Q: When did Aldi and Lidl begin operating in the UK, and what is their significance?
A: Aldi started in 1989, and Lidl in 1994. Both are German-owned and exemplify globalization, growing significantly during recessions
Why do low-cost operators like Aldi thrive during economic downturns?
A: They attract shoppers from established supermarkets by offering significantly lower prices on essential goods.
Question: How do successful stock pickers capitalize on recessions, and what challenges did Tesco face during the financial crisis
Answer:
• Stock Picker Strategies: During recessions, successful stock pickers invest in low-cost international companies, like supermarket chains (e.g., Tesco, Asda, Sainsbury’s, Morrisons), which can prosper by appealing to cost-conscious consumers.
• Tesco’s Challenges:
• Continued profit declines throughout 2013 due to losing customers to UK discounters.
• Financial difficulties in global expansion efforts.
• Forced to sell its US stores and merge its Chinese stores with a local rival
Question: Why is it essential for investors to stay updated on companies’ market strategies
Investors must remain aware of major global economic changes and trends to anticipate how companies may be affected (positively or negatively). This allows them to make informed decisions and adapt their investment strategies accordingly.
How does a recession affect employment and earnings
• Employment: Recessions typically cause rising unemployment rates.
• Earnings:
• Workers retaining jobs face reduced hours or pay, resulting in lower real wages.
• Real wages decline further when inflation outpaces nominal earnings growth
What financial challenges do individuals face when they lose their job, and what solutions might they consider
• Challenges:
• Loss of income to finance debt repayments, risking defaults on mortgages and other loans.
• Potentially leads to bad credit or even bankruptcy.
• Solutions:
• Insurance policies that cover mortgage and monthly repayments if made redundant.
• Financial providers may promote these products during periods of uncertainty
How did emerging markets perform during the economic downturn, and what are the “BRICS” and “MINT” countries
• Performance: While developed countries experienced downturns, emerging markets experienced high economic growth, creating challenges for established economies.
• Groups:
• BRICS: Brazil, Russia, India, China, South Africa.
• MINT: Mexico, Indonesia, Nigeria, Turkey
How has demand for commodities from emerging markets impacted global economies
• High demand for resources like oil, metals, and foodstuffs from emerging markets pushed global commodity prices higher.
• This led to inflation in countries dependent on imports of these commodities, such as the UK
How did the UK experience inflation following the financial crisis, and what was its impact on households
• Inflation: The UK did not experience “runaway” inflation but had a Consumer Prices Index (CPI) above the government’s 2% target for several years post-crisis. CPI only fell below the target in February 2014.
• Impact:
• British families faced reduced earnings and higher prices for essential goods and services.
• This significantly affected their financial planning
Why is the wider European economy significant for the UK’s financial services consumers and providers
• The UK’s economy is intertwined with the European Union (EU) due to high levels of trade.
• The financial crisis impacted European countries, particularly those in the Eurozone (countries using the euro), which were hit hardest
What economic conditions must a country meet to adopt the euro
- Fiscal Stability: Maintain policies for raising taxes and spending on public services responsibly.
- Independent Central Banks: Free from political influence.
- Low Inflation and Interest Rates: Ensure economic stability.
- Stable Currency: Over a sustained period.
How did the financial crisis affect the euro and its member countries
• Struggling Countries: Greece, Ireland, Portugal, Spain, and Italy struggled to pay debts.
• Bailouts: Wealthier eurozone countries provided financial aid to stabilize the euro and prevent collapse.
• Euro’s Survival: Some predicted the euro’s failure, while others believed strong institutions would help weather the crisis
Which countries joined the eurozone post-crisis, and when
• Estonia: Joined in January 2011.
• Latvia: Joined in January 2014.
• Lithuania: Joined in January 2015
How did unemployment in the EU change following the financial crisis
• November 2014: EU-wide unemployment was at 11.6%.
• Some EU member states faced even higher unemployment rates.
• Although unemployment improved after this period, it rose again in 2020 due to the effects of COVID-19
How do governments fund public spending aside from taxation?
A: Governments fund public spending by selling government bonds on the world financial markets.
Why must governments offer an interest rate on their bonds?
A: Governments must offer an interest rate high enough to attract investors, who require compensation for the risk of potential default and the assurance they will get their money back when the bond matures
What happens to bond interest rates when a country’s economic problems increase?
A: When economic problems increase, the perceived risk of default rises, and the government must offer higher interest payments to attract investors and sell enough bonds to fund public spending
What challenges did countries like Greece, Ireland, Portugal, Spain, and Italy face in the global bond market?
A: These countries struggled to sell a sufficient volume of bonds at interest rates they could afford to pay
What was the consequence for countries unable to sell bonds at affordable interest rates?
A: Countries such as Greece, Ireland, Portugal, Spain, and Italy were forced to seek financial assistance from the International Monetary Fund (IMF) and the European Union.
