4.3 Globalisation

Question 1

What is globalisation?

Answer 1

The ever-increasing integration of the world’s local, regional and national economies into a single international market

Question 2

What are the causes of globalisation?

Answer 2

• Improvements in global transport (containerisation)/fall in transport costs
• Trade liberalisation and the reduction of trade barriers
• The rise of regional trading blocs that allow the free movement of labour and capital
• Deregulation and market reforms which allow foreign ownership of domestic firms and encourage FDI
• Increased exchange of services such as tourism and financial services across borders
• The rise of multinational and transnational companies and their marketing -> rise of global brands and supply chains

Question 3

What is the terms of trade?

Answer 3

The ratio between average exports prices and average import prices

Question 4

What is the terms of trade index?

Answer 4

(Index of average export prices/index of average import prices) x 100

Question 5

Why do the terms of trade change in the short run?

Answer 5

• Changes in demand conditions
• Changes in supply conditions
• Changes in relative inflation rates
• Changes in relative exchange rates

Question 6

Why do the terms of trade change in the long run?

Answer 6

• Changes in productivity
• Technological improvements
• Changes in income levels

Question 7

Why do developing countries often face deteriorating terms of trade?

Answer 7

• In the long run, technological advances in agriculture lower the price of primary commodities, worsening the ToT for developing countries
• As incomes grow, the demand for primary commodities grows less than proportionately

Question 8

What are the consequences of persistently deteriorating terms of trade?

Answer 8

A persistently deteriorating ToT means that a country must keep exporting more in order to maintain the same quantity of imports

Likely to lead to:

• Increasing difficulties in importing essential inputs for production
• Growing and persistent trade deficit, growing indebtedness
• Lower incomes likely to lead to worse the government budget balance
• Reduced export earnings in agriculture, leading to greater poverty in rural areas
• The need to keep exporting primary commodities, which makes it difficult to diversify

Question 9

What is the Prebisch-Singer hypothesis?

Answer 9

Suggests that the prices of primary goods tend to decline relative to the prices of manufactured goods over time (has negative consequences for developing countries)

Question 10

Describe the Heckscher-Ohlin model

Answer 10

The model says that a country will export goods and services that use its abundant factor intensively, and it will import goods that use its scarce factor intensively

Question 11

What are the impacts of globalisation on consumers?

Answer 11

• Greater consumer choice
• Homogenisation of goods and services
• Relative prices of goods and services falling (due to outsourcing)

Question 12

What are the impacts of globalisation on workers?

Answer 12

• Structural unemployment in developed countries as manufacturing moves
• Increased migration across borders
• Changes in global wage inequality
• Multinationals create jobs wherever they set up operations

Question 13

What are the impacts of globalisation on producers?

Answer 13

• Has allowed a wider souring of inputs and wider supply network
• Greater interdependence between countries leaving firms more vulnerable to shocks around the world
• Costs of production have gone down
• Tax avoidance (make costs look bigger in high-tax countries, revenues bigger in low-tax countries):
  - Transfer pricing - MNC subsidiary produces a good in a high-tax country, transfers it to a low-tax country for an artificially low price where it is used to produce a different good.
  - Setting up headquarters in a low-tax country where the ownership of intellectual property rights are registered
  - Transfer production to a country with low corporation tax rates
• Presence of MNCs can act as an incentive to domestic firms in the host country to improve their competitiveness
• Footloose capitalism - MNCs are able to shift production from country to country in search of higher profits, while jobs are created and destroyed

Question 14

What are the impacts of globalisation on governments?

Answer 14

• Increased mobility may put pressure on governments of both developed and developing countries to lower income and corporation tax rates
• Job creation (may cause issues if they leave)
• Tax incentives may have to be given to attract MNCs
• May incentivise governments to spend more on R+D to attract MNCs
• Opens up scope for bribery and corruption

Question 15

What are the impacts of globalisation on developed countries?

Answer 15

• There has been an increase in inequality -> skilled workers will be in demand throughout the world, unskilled workers may experience structural unemployment or lower wages
• Increase in economic migrants
• Changes in production and trade

Question 16

What are the impacts of globalisation on developing countries?

Answer 16

• Brain drain
• MNCs may push local firms out of business
• Profits earned by MNCs may be remitted back to their base country rather than reinvested in the host economy
• Creates jobs and can improve quality of labour
• Increased tax revenues can be used to further improve standard of living