4.3 Globalisation

Question 1

What does globalisation mean?

Answer 1

Globalisation refers to the ever increasing of the worlds local, regional and national economies into a single international market

Question 2

What are some causes of globalisation ?

Answer 2

-improvement of global transport (i.e container ships/fall in transport costs
- reduction in trade barriers and trade liberalisation
-the rise of the regional trading blocs that allow the free movement of labour and capital
-deregulation and market reforms which allow foreign ownerships of domestic firms and encourage FDI flows
-increased exchange of services such as tourism and financial services across borders
-the rise of multinational and transnational companies and their marketing techniques which has led to the rise of global brands and global supply chains

Question 3

What does Heckscher-Ohlin model say ?

Answer 3

The Heckscher-Ohlin 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 4

What does non price theories of trade mean ?

Answer 4

Non-price theories emphasise that international exchange is driven by factors beyond the price differences
While commodities (agricultural/materials) tend to be fairly homogenous, manufactured goods and services are usually non homogenous. Each product is slightly different, and price is not the only factor that determines demand; tastes and preferences can also matter greatly. Consumers might import a good or service from a specific country even if it is available more cheaply elsewhere

Question 5

What is the formula for the terms of trade index (TOT)?

Answer 5

An improvement in the terms of trade means that export prices rise relative to import prices

Question 6

Why should terms of trade change (short run)?

Answer 6

1.Changes in demand conditions: if the demand for a product falls, its price on the world market falls. This will cause a deterioration of the terms of trade for countries that export that good, and an improvement for countries that import that good. Vise versa
2. Changes in supply conditions: changes in global prices may be driven by changes in supply e.g. weather conditions affecting agriculture
If the price of a product is rising, countries that export it will see an improvement in their TOT
3. Changes in relative inflation rates: if a country has a higher inflation rate relative to other countries, its exports will be more expensive - TOT improves
4. Changes in relative exchange rates: a currency depreicaiton leads to a rise in the price of imports -TOT worsens

Question 7

Why do terms of trade change (long run)?

Answer 7

1. Changes in productivity: a rise in productivity relative to a country’s main trading partners will to a lower relative price of exports -TOT will deteriorate
2. Technological improvements
3. Changes in income levels: a rise in income levels leads to an increase in the demand for the good.
   However depends on the elasticity of YED
   For primary commodities the tends to have a YED <1 income inelasticity
   Manufactured goods - YED>1 income elastic
   Countries exporting goods with high YED will tend to see an improvement in their TOT

Question 8

What effect do changes in demand have on the TOT?

Answer 8

An increase in the demand for a good or service leads to a increase in the price of the g/s on the world market.
if the country export this g/s: the ToT will improve as the export revenue is now greater. The trade balance will also improve
if the country import the g/s: the ToT will worsen as the import expenditure increases. The trade balance will also worsen
terms of trade and trade balance have a positvie relationship

Question 9

What effect do changes in supply have on the TOT?

Answer 9

A shift in supply cure means equilibrium price and quantity move in the opposite direction.
Inelastic demand (PED<1) : exporting countries: TOT deteriorates, export revenue falls;the trade balance worsens
Elastic demand (PED>1)> exporting countries: TOT deteriorates, but export revenue revises and trade balance improves
if PED<1, the terms of trade and the trade balance move in the same direction
If PED>1, the terms of trade and the trade balance move in the opposite direction

Question 10

Why do developing countries often face deteriorating terms of trade?

Answer 10

In the long run, technological advances in agriculture lower the price of primary commodities, worsening the terms of trade for developing countries
As income grows, the demand for primary commodities grows less than proportionately (YED<1) as people spend a larger fraction of their income on manufactured goods and services. Thus countries that export primary commodities are likely to face deteriorating TOT.

Question 11

Consequences of persistently deteriorating terms of trade

Answer 11

-increasing difficulties in importing inputs for production
-growing and persistent balance of trade deficit, and growing indebtedness
-reduced export earning in agriculture, leading to grater poverty in rural areas and greater inequality between rural and urban areas
-lower incomes likely to worsen the government budget balance (lower tax revenue)
-the need to keep exporting primary commodities, which makes it difficult to diversify
-growing inequality between developing and developed nations as the former must give up more of their exports in exchange for the same quantity of imports

Question 12

What is Prebisch-Singer hypothesis?

Answer 12

Economic theory suggest that the price of primary goods (such as raw materials and agricultural products) tend to decline relative to the prices of manufactured goods over time

Question 13

What are the consequences of globalisation on consumers ?

Answer 13

1.Greater consumer choice in terms of the number of goods and services available, but this also means that goods and services are homogenous
2.Relative price of goods and services have fallen due to production moving from high cost to low cost locations. However, this has led to the increase in the price of certain goods. Gloabalisatin has lead to an increase in average global incomes and has increased the demand for commodities (which have a fairly inelastic supply)
3.Benefits of globalisation have accrued unequally to people in different countries or to the different segments of the population within a country, for example outsourcing of labour leading to increase in structural unemployment in the domestic country

Question 14

What are the consequences of globalisation on workers ?

Answer 14

1.Large scale job-losses and structural unemployment in developing countries as labour is outsourced to developing countries which have seen a rise in employment
2. globalisation has lead to the increased migration across borders. This can help raise the productivity on a country but also put strain on public services, such as healthcare, education and housing
3. Globalisation has led to changes in global wage inequality.Low skilled labour are forced to accept lower wage due to the threat of production being sourced overseas, while high skilled workers in developed countries receive higher wages
4.Multinational organisations and firms create jobs wherever they set up operations

Question 15

What are the consequences of globalisation on producers ?

Answer 15

1. Globalisation has come about through specialisation and trade, Which has allowed a wider range of inputs and increase supply networks.
   However, the increased dependency between countries has left producers susceptible and more adversely affected by supply side shocks
   2.cots of production have gone down becasue essential inputs and labour are cheaply available in other countries
2. *footloose capitalism- MNCs are able to more production between different countries in pursuit of profit leading to jobs being created and destroyed in their wake
   4.Tax avoidance**
   5.the present of MNCs can act as an incentive for domestic firms to improve their competitiveness by increasing efficiency.
   However, smaller firms are unable to compete with MNCs economies of scale and are forced to shut down and leave the market

Question 16

What methods do MNCs exploit to avoid taxes?

Answer 16

A) transfer pricing: this is where a MNC subsidiary produced a good or service in a high tax country, transfer it to a different country at an artificially low price, where it is used to produce another good or service. This makes it look like the subsidiary has not made much profit in the high tax country. At the same time a larger profit is made in the low tax country
B)Setting up headquarters in a low-tax country where the ownership of a key production element is registered(technology, intellectual property rights, copyrights).The subsidiary in the low tax country can sell it to subsidiaries in high tax countries at a very high price. Subsidiaries in high tax countries can then show that they have almost no profit due to the very high priced technology/copyright
C)Transfer production to a country with low corporation tax rates

Question 17

How has globalisation affected governments?

Answer 17

1.Increased mobility of firms and high skilled labour may put pressure on governments of developed and developing countries to lower income and corporation taxes
2.job creation as MNCs invest in a country; however there are likely to be economic problems (such as lower export revenue, lower tax revenue as well as fewer jobs)if they leave
3.Tax incentives may have to be given to attract MNCs, such as tax breaks, subsidies and lower production taxes
4.May incentivise govenrment to spend more on education and R&D in order to attract MNCs
5. Opens up scope for bribery and corruption as MNCs try to gain contracts or control resources through bribery of politicians and government officials

Question 18

In what ways are countries becoming more dependant on one another ?

Answer 18

• international trade (free trade) in goods and services
• free movement of labour between countries (economic migration)
  -free movement of capital across countries (FDI, financials outflows)
  -Spread of technology and intellectual property across borders