Topic 7 - A Global Perspective Flashcards
What is globalisation ?
Globalisation is defined in terms of the free movement of goods and services, factors of production (capital, labour), financial flows (FDI, hot money) and economies becoming increasingly interdependent
What are the variables that measure globalisation ?
Difference between GNP and GDP of a country.
Remittances as a % of GDP.
Number of multinational corporations (MNCs) in foreign countries.
Technology advancements (e.g. number of Internet users).
Level of protectionism (e.g. tariffs / quotas).
Membership of free trade agreements (e.g. WTO) / trading blocs (e.g. NAFTA).
Level of FDI flows as a % of GDP.
Amount of X+M (exports + imports) as a % of GDP.
Migration/immigration flows.
Tourism as a % of GDP.
Foreign aid a % of GDP.
What are causes of globalisation?
Technological improvements
Growth in WTO membership
Containerisation
Growth of sovereign wealth funds
Deregulation
Growth of BRICS
Growth of free trade blocs
How do technological advancements cause globalisation?
Mobile phones and the Internet have promoted globalisation.
The Internet has removed physical barriers to trade.
This has had two different effects:
It has allowed firms in a country to access a much larger market - leading to economies of scale advantages, price falls and consumer surplus rises.
It has also allowed consumers to have more choice. Now, consumers can buy from more firms in more countries. So there is more competition and prices have fallen.
Travel between countries is also now easier thanks to technological advancements.
How does growth in the world trade organisation cause globalisation?
The role of the World Trade Organisation (WTO) is to liberalise free trade, to provide a forum to resolve trade disputes, and to lower tariff barriers.
The GATT (General Agreement for Tariffs and Trade) was formed in 1948.
As a result of the Uruguay Round in 1995, the WTO was formed.
The Most Favoured Nation Principle (MFN) says that any tariff reduction offered to one country must be offered to all (against trade discrimination).
The WTO began with 23 members, and now has 163 members.
How does containerisation cause globalisation?
Containerisation and huge tanker ships has seen firms exploit volume economies of scale.
This has promoted the international trade of goods by making shipping cheaper.
How does growth of sovereign wealth funds cause globalisation?
A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds and other such property which invest huge sums globally.
SWFs are typically created when governments have budgetary surpluses.
SWFs are driven (though not exclusively) by commodity-rich countries such as Qatar, which ‘owns’ Canary Wharf, The Shard and Harrods!
How does deregulation cause globalisation?
Financial markets de-regulated in the 1980s/90s.
Former communist economies liberalised in late 1980s/90s.
Deregulation allows huge flows of hot money and foreign direct investment (FDI) internationally.
Growth of cross-border FDI (vertical, horizontal, conglomerate integrations/mergers).
How does the growth of BRICs cause globalisation?
The ‘BRICs’ economies are Brazil, Russia, India, China and South Africa.
These emerging economies have, for the most part, become increasingly integrated into the world economy.
China, in particular, has opened up to trade.
How does the growth of free trade blocs cause globalisation ?
Free trade blocs are typically groups of countries that do not have any trade restrictions (e.g. tariffs, quotas) between them.
The European Union is a Customs Union – this means it has a Common External Tariff (CET). There are no tariffs between countries, but a CET for countries outside the union.
What are the benefits of globalisation for LEDCs ?
Foreign direct investment (FDI)
More export markets
Access to finance
Technology transfers
How is Foreign direct investment (FDI) an example of a benefit of globalisation for a LEDC ?
Globalisation leads to higher FDI flows; which increases aggregate demand (AD) and this leads to higher real GDP (positive multiplier, creates employment, income, tax receipts).
The flow FDI and multinational corporation (MNC) operations can also lead to the transfer of skills and technology, shifting the LRAS curve and PPF for that country outwards.
The impact of obtaining cheap technology that has been built from other countries, rather than using scarce resources domestically, could be significant for LDCs.
What’s an example of how Foreign direct investment (FDI) is a benefit of globalisation for LEDC ?
In 2017, China became the largest FDI investor in Africa.
China has purchased mineral mines in Congo, Ethiopia has received investment in its dams and roads.
In 2017, Kenya launched its own $3.8 billion China-funded train line linking Nairobi to Mombasa. The Chinese built a dam in Zambia.
This kind of FDI is vital for LDCs to boost their infrastructure, improve geographic mobility (in the case of trains) and efficiency.
How is more export markets an example of a benefit of globalisation for LEDC ?
Globalisation has allowed for countries with a small domestic market to export their products abroad and so benefit from foreign demand.
Globalisation allows for export-led growth and an export-led positive multiplier.
How is access to finance an example of a benefit of globalisation for LEDC ?
According to the Harrod-Domar model, one of the main constraints on economic growth and development is a lack of investment.
A key reason for a lack of investment is a lack of access to finance.
Globalisation has allowed financial markets to become more global which now means LEDCs have access to a much wider choice of finance from investors from abroad.
E.g. LEDC firms and governments can issue international bonds to raise money.
Kenya’s $3.8bn train line was funded largely by Chinese funds.
How is technology transfers an example of a benefit of globalisation for LEDC ?
LDCs benefit particularly from technology transfers (and goods such as medical drugs) because these can be bought from abroad much more cheaply than they can be produced domestically.
What are the negative effects of globalisation for LEDCs ?
Dumping
Brain drain
Poor conditions for workers
Environmental concerns
How is dumping a negative effect of globalisation for LEDCs ?
Some LDCs may fall victim to dumping. This is where developed countries sell products at below cost onto LDC markets.
Over half of the anti-dumping cases brought to World Trade Organisation (WTO) are from LDCs complaining about more-developed countries (MDCs).
How is brain drain a negative effect of globalisation for LEDCs ?
Brain drain describes the phenomenon of skilled workers moving abroad in search of higher wages - it is a particular problem for LDCs.
Brain drain in the short term could be costly to LDCs who may be losing their key workers in healthcare or education, which could have disastrous consequences for future long term economic growth; although, in the long-term remittances could add to GDP.
How are poor conditions for workers a negative effect of globalisation for LEDCs ?
In a bid to attract the big MNCs, who will create jobs in their economy, governments may compete.
Having lower health and safety standards for workers, lower corporate tax rates, easier labour laws can bring jobs to a country, but increase hazards for workers in the workplace.
E.g. Primark paid over $10m to victims of a factory collapse in Bangladesh; over 100 people died.
However, MNCs may create jobs for workers who would earn less or be unemployed otherwise.
How are environmental concerns a negative effect of globalisation for LEDCs ?
MNCs often extract natural resources in less developed nations.
These countries may have less regulations or lower environmental standards.
This can result in environmental degradation and negative externalities in the country.
What are the benefits of globalisation for more-developed countries (MDCs) ?
Better supply of labour
Increased competition and choice
Export-led growth
How is a better supply of labour a benefit of globalisation for more-developed countries (MDCs) ?
Free flows of labour mean that labour shortages can be filled and wage inflation can be suppressed by creating a greater pool of labour for firms to choose from.
MDCs are usually the beneficiaries of ‘brain drain’ from LDCs.
How is increased competition and choice a benefit of globalisation for more-developed countries (MDCs) ?
More contestability (lowering barriers to entry and exit) such as deregulation allows for:
More access to foreign goods and services.
More competition.
Lowering price further.
Globalisation means increased choice for consumers (e.g. plasma TV from Japan and BMW from Germany).
How is export-led growth a benefit of globalisation for more-developed countries (MDCs) ?
Globalisation allows countries to develop further through export-led growth and an export-led positive multiplier.
For example, South Korea developed over many years via an export-led growth model.
What are the negatives of Globalisation for More Developed Countries(MDCs) ?
Vulnerability to shocks
Structural/regional unemployment
Exchange rate volatility
How are vulnerabilities to shocks a negatives of Globalisation for More Developed Countries(MDCs) ?
By becoming more interdependent, the risk of contagion (an external event somewhere else in the world coming back to affect you) rises.
Contagion makes a country more vulnerable to economic problems elsewhere.
E.g. economic problems spreading through the Eurozone countries after the events of the financial crisis in 2008.
How are structural/regional unemployment a negative of Globalisation for More Developed Countries(MDCs) ?
Domestic firms could be out-competed by competitors in LDCs with lower costs and close down. Because labour is a derived demand, this could lead to regional unemployment.
E.g. the ‘Rust Belt’ in the USA suffered from losing its main industry of car manufacturing.
How are is exchange rate volatility a negative of Globalisation for More Developed Countries(MDCs) ?
Volatile speculative flows of hot money are a feature of globalisation. Changes in interest rates can cause investors to take their money out of a currency in seconds.
Frequent changes in exchange rates are hard to manage as an importer and an exporter.
In 2011, the Swiss Franc changed in value vs the Euro by 30% in one day.
Between 2014 and 2016, the Brazilian Real fell 50% vs Sterling.
Exchange rate volatility can make it difficult for MNCs to plan.
Why do specialised economies need trade ?
Specialisation means countries often stop making products they need, to focus on producing the products they are better at.
As a result, trade must happen with other countries, and an efficient exchange system is needed.
Money is often used as this medium of exchange because everyone values money.
What is comparative advantage?
Free trade can allow countries to specialise in the goods they are most efficient at producing. Trade means that they can buy some goods from other countries, rather than producing them themselves.
E.g. Finland with paper and Germany with cars
What is opportunity cost of production?
If a country produces sugar, it has an opportunity cost of production.
The labour and capital used to make sugar cannot be used to make wheat at the same time.
E.g. if Brazil can produce a lot of sugar cane per acre but not much wheat, and the US can produce a lot of wheat but not sugar cane, then the US has a lower opportunity cost of producing wheat than Brazil.
This can be shown using production possibility frontiers (PPFs).
How do the US use comparative advantage and how do Brazil use comparative advantage?
The US has a comparative advantage in producing wheat.
Brazil has a comparative advantage in producing sugar cane.
If both countries could specialise in producing the goods they had a comparative advantage in, then:
The total world output of goods will rise.
Brazil and the US can trade wheat for sugar cane, and they both benefit.
Think of comparative advantage as what a country is least bad at - they all have to produce something!
What is absolute advantage ?
A country has an absolute advantage in producing a good over another country if it uses fewer resources to produce that good.
E.g. if Saudi Arabia can produce corn and oil more efficiently than the US, but can only produce 100 barrels of oil or 25 bushels of corn, the opportunity cost for Saudi of producing one barrel of oil is the loss of 0.25 bushels of corn.
If the US lost a bushel of corn by producing one barrel of oil, then the US has a comparative, but not absolute advantage in corn.
What are the costs of international trade ?
Negative externalities such as pollution from freight.
Risk of structural/regional unemployment because employers relocate.
While international trade may benefit skilled workers, it can be bad for low-skilled workers.
Low-skilled workers in developed countries compete against extremely low wage workers worldwide, which is unsustainable.
What is free trade ?
the free movement of goods and services cross-border between countries with no attempt from government to unfairly restrict imports from, or exports to, other countries
What are the benefits of international trade ?
Improved allocative efficiency
Higher global output
Greater competition and choice
Economies of scale
How is improved allocative efficiency a benefit of international trade ?
Free trade improves the efficiency of resource allocation because countries produce in sectors they are better suited to, rather than all goods and services.
The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services.
How is higher global output a benefit of international trade ?
Comparative advantage theory states that, if countries specialise in goods and services, have a lower opportunity cost of producing than other countries, and engage in free trade, they have the possibility of achieving an allocation of resources outside their initial PPF.
How is greater competition and choice a benefit of international trade ?
Free trade causes increased competition, which will lead to cheaper prices and higher consumer surplus.
The reduction in prices increases real incomes, increases purchasing power and allows more goods and services to be bought. So this increases standard of living.
Free trade brings down cost-push inflationary pressure.
Free trade increases choice. Free trade allows countries to consume bananas even if they don’t have the climate for it.
How is economies of scale a benefit of international trade ?
Firms and countries can specialise in the production of a small range of good and services, and trade them with other countries.
Because firms can focus on producing a few goods and services, there is scope for more economies of scale, lower LRAC, lower prices, higher consumer surplus and increased demand for goods.
What were the uk exports values at in 2016 ?
In 2016, UK exports were valued at around £300bn.
The main exports in the UK were financial services, cars, wholesale medicines, gas turbines, petroleum and gold.
The leading recipients of UK exports are the USA, Germany, the Netherlands and France.
What were the uk imports values at in 2016m?
In 2016, UK imports were valued at around £500bn.
The main imports were cars, vehicle parts, aircraft, gold, petroleum and wholesale medicines.
The leading suppliers of imports to the UK are Germany, China, the USA and the Netherlands.
How did the UKs exports change in the 2000s ?
Since 2000 the UK has decreased its share of exports to the EU from 55% to 45%, taking advantage of the rapid economic growth of countries such as Brazil, China, Russia and India.
As London grew as a financial hub from 2000-2008, there was an increase in financial services exported to the rest of the world. This slowed after the global financial crisis of 2008, but is still a major contributor to UK exports.
How have the UKs imports changed since the 2000s ?
Since 2000, over 50% of UK imports have come from the EU.
The rapid growth of China as an exporter has meant that lots of UK imports now come from China.
The decline of the UK manufacturing industry has meant that we import lots more manufactured goods, including computers.
Between 1986 and 1998 what was the Uks current account like ?
And then how did it change in 2002 ?
Between 1986 and 1998, the UK averaged a small trade deficit of around £5bn.
This then grew until 2002 where it reached £30bn and has stayed roughly stable ever since
What factors affect the pattern of trade and trade flows ?
Emerging economies
Changes in relative exchange rates
Comparative advantage
The growth of trade blocs
How do emerging economies affect the pattern of trade and trade flows ?
Emerging economies like China started producing lots of manufactured goods.
They had far lower labour costs than developed markets like the UK and USA.
This led to deindustrialisation in the developed world because jobs relocated from developed countries to developing countries.
Emerging economies like China export a lot of manufactured goods to countries all over the world.
How do changes in exchange rates affect the pattern of trade and trade flows ?
Changes in relative exchange rates can adjust trading patterns.
Nations like Greece, who joined the Euro, saw their relative exchange rate appreciate because they were part of a larger, more successful economy and currency. This would have discouraged the purchase of Greek exports internationally.
When Brazil had a political crisis in 2015, its nominal and real exchange rate declined by over 30%. Holidays to Brazil became more affordable and popular because the Brazilian Real became so cheap
How does comparative advantage affect the pattern of trade and trade flows ?
David Ricardo’s theory of comparative advantage explains why nations specialise in producing different products.
Many developing nations have comparative advantage (and specialise in) producing primary products (commodities) like Brazil.
They export these primary products to nations that have specialised in manufacturing products (the secondary sector) like China.
These exports are bought internationally. Nations like the USA have specialised in tertiary services, however, these are consumed more in the USA. This is one reason for the USA and UK’s current account deficits.
How trading blocs affect the pattern of trade and trade flows ?
Trading blocs and bilateral trading agreements like the EU (or European Economic Area) and NAFTA reduce tariffs and barriers to trade within trade blocs.
The EU encourages tariff-free trade between members but imposes a common external tariff on goods from outside the EU. This encourages the consumption of EU goods and discourages trade with nations outside of these agreements because they are at a relative pricing disadvantage.
Who theorised comparative advantage?
David ricardo
What country is a leading recipient of UK exports?
Netherlands
What is a country that is a major importer to the UK?
Germany
What happened to the exchange rate of nations like Greece when they joined the Euro?
Appreciated
What do terms of trade describe ?
the price of a nation’s exports relative to the price of a nation’s imports
What is the equation for a nations terms of trade ?
A nation’s Terms of Trade = (Average export price index ÷ Average import price) X 100
How do you know if a nations terms of trade have improved ?
A nation’s terms of trade have improved if they can buy more imports for a given amount of exports.
Brazil exports oil. When the oil price is very high, Brazil can buy more consumer goods and machinery (capital goods) with a given amount of oil exported because the value of their export index rises.
How do you know of a nations terms of trade has worsened ?
If an increase in import prices is larger than an increase in export prices, then a nation’s terms of trade have worsened.
How factors affect terms of trade ?
Anything affecting exports and imports will affect terms of trade.
A technological advance in the nation will allow it to export either higher quality goods (worth more money) or export higher volumes of goods.
A tariff imposed by another nation will automatically worsen a nation’s terms of trade.
A commodity price boom could improve a commodity exporter’s terms of trade and worsen a commodity importer’s terms of trade.
High inflation without a change in exchange rate will likely improve a nation’s terms of trade. But often, a country’s exchange rate worsens if there is high inflation.
An increase in the value of a nation’s currency will lower the price of imports in the country, improving terms of trade.
What is the impact of a worsening terms of trade ?
Worsening terms of trade will mean that a nation can afford to import a lower value of goods from abroad.
If the nation continues to import as they did before, their current account deficit will get worse.
A nation’s domestic industry may become more price competitive relative to imported goods and this may increase tax revenues for the government.
Worsening terms of trade may cause cost-push inflation as either more expensive domestic goods have to be purchased or more expensive imports still have to be bought.
What happens to a nation’s terms of trade if an increase in import prices is larger than an increase in export prices?
Worsens
What are regional trade blocs ?
Regional trade blocs are intergovernmental groups that reduce the barriers to trade in their region
What is COMESA (as a regional trade bloc) ?
COMESA is a grouping of 19 countries in east and southern Africa.
Its members include Kenya, Libya, Egypt, Madagascar, Mauritius and Zambia.
What is NAFTA (as a regional trade bloc) ?
The North American Free Trade Agreement (NAFTA) is a trade bloc made up of the USA, Canada and Mexico.
NAFTA supports free trade between its three members. Removing internal quotas and tariffs is the aim of the organisation.
NAFTA does not have common external tariffs on nations outside the ‘customs union’ or ‘trade bloc’.
What is Mercosur (as a regional trade bloc) ?
Mercosur is an economic grouping of Argentina, Brazil, Paraguay and Uruguay.
It was established by the Treaty of Asuncion in 1991.
Mercosur does have an external tariff on goods from outside the trade bloc.
What is the European Union (as a regional trade bloc) ?
The European Union is a trade bloc made up of 28 European nations (as of 2018).
The European Union is the most tightly integrated trade bloc, because it combines common external tariffs, with the free movement of labour and for many nations, a common currency in the Euro.
What is ASEAN (as a regional trade bloc) ?
The Association of Southeast Asian Nations is a trade bloc of 10 Asian countries, including Indonesia, Malaysia, Singapore, the Philippines, Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam.
What are some regional trade blocs ?
European Union (EU)
The North American Free Trade Agreement (NAFTA)
The Association of Southeast Asian Nations (ASEAN)
COMESA (19 countries in east and southern Africa)
Mercosur (Argentina, Brazil, Paraguay and Uruguay)
What is a customs union ?
A customs union is a group of countries who agree to remove barriers to trade between the union and enforce common trade barriers to those outside of the union.
What’s the difference between a customs union and a free trade area ?
A customs union is a step up on a free trade area, the key difference being that in a free trade area there are no common external tariffs.
What do customs unions do ?
There are usually no tariffs or quotas between members of a custom union.
There is usually a common tariff on goods coming from countries outside of the customs union.
Quality regulations are usually standardised within a customs union and people outside the union have to meet these regulations
What is the most famous modern customs union ?
a modern customs union
Southern African Customs Union (which includes Namibia, Botswana and South Africa).
