Chap 37

Question 1

Define Globalisation

Answer 1

the process by which the world is becoming increasingly interconnected through trade and other links.

Question 2

Reasons for the greater interconnection between countries

Answer 2

1. Reduced transport costs (larger transports have lowered the cost of moving goods)
2. Advances in communications (online shopping & more in touch with trends)
3. Removal of trade restrictions (tariffs and quotas reduced)

Question 3

Benefits of globalization

Answer 3

1. Increasing competition (greater range at low prices)
2. Encouraging firms to locate some of their production in the most efficient locations.

Question 4

Problems of globalization

Answer 4

1. A recession in one economy can have a significant impact on other economies.
2. Government policy is also, to some extent, constrained
   by globalisation (reluctant to increase the rate of corporation tax for fear that some MNCs will relocate to other countries)
3. The ability of MNCs to shift production from branches in one country to other countries can cause structural unemployment.
4. Some workers may also lose their jobs because of the increased competition that is arising from the breaking down of barriers between national markets. This is increasing the importance of occupational mobility.

Question 5

MNC

Answer 5

A multinational company (MNC) is a business organisation that produces in more than one country

Question 6

Benefits of MNCs producing in countries where products are sold rather than exporting to those countries

Answer 6

1. Reduces transport costs and enables them to keep in close contact with the market.
2. Can get around any restrictions on imports, gain access to cheaper labour and raw materials.
3. Receive grants from the governments of the countries in which they set up their franchises.

Question 7

Advantages of MNCs

Answer 7

1. Increase employment
2. Increase output
3. Increase tax revenue
4. Bring in new technology and management ideas
5. Help in development of infrastructure.

Question 8

Disadvantages of MNCs

Answer 8

1. More prone to pollute
2. More willing to close down plants in foreign countries.
3. Put pressure on the governments to give them tax concessions and not to penalise them for poor safety standards
4. May drive domestic firms out of business.
5. The profits they earn may be paid to shareholders in their home countries rather than being reinvested in the host country.

Question 9

Benefits of free trade

Answer 9

If there is an efficient allocation of resources
- world output, employment, and living standards will be higher

Selling freely to a global market enables firms to
- take greater advantage of economies of scale, raise competitive forces, and give them access to more sources of raw materials and components.

These effects should
- lower prices for consumers, higher quality of products and gain greater choice of products.

Question 10

What is free international trade

Answer 10

• no restrictions on the products bought by firms and consumers from abroad
• no restrictions on products sold by firms to other countries
• no imposition of special taxes.

Question 11

Define protection/ protectionism/ albeit

Answer 11

Protection is the shielding of the country’s industries from the competition posed by other countries’ industries and hence involves restriction of free trade.

Question 12

Methods of protection

Answer 12

• Tariff
• Quota
• Embargo
• Exchange control
• Quality standards
• Expensive paperwork
• Voluntary export restraints (VERs)
• Subsidies

Question 13

Define Quota

Answer 13

a limit placed on imports or exports.

Question 14

Define Embargo

Answer 14

a ban on imports or exports. (eg. demerit goods)

Question 15

Define Exchange control

Answer 15

a limit on the amount of foreign currency that can be obtained.

Question 16

Tariff (what it is, how it helps)

Answer 16

(customs duty or import duty)

• Used to raise government revenue or to discourage the purchase of imports by raising its price
• Likely to be set at a level where the imported products sell at a higher price than domestically produced goods

Question 17

How will ‘quality standards’ help?

Answer 17

Either dissuade other countries from selling to the country

Push up their costs and prices if they do try to sell to the country.

Question 18

Define Voluntary export restraints (VERs)

Answer 18

agreements with other governments to restrict their exports to the country

Question 19

Reasons for protection

Answer 19

1. Protection of infant industries (enables them to grow, take advantage of economies of scale and become internationally competitive)
2. Protection of declining industries (to prevent a significant rise in unemployment-(if labor is immobile and there is a shortage of job vacancies))
3. Protection of strategic industries (to ensure consistency of supplies or promote the economic development of the country)
4. Raising employment and improving the trade position (enable domestic firms to expand)
5. Protection of industries from low wage competition (if both wages and costs are low)

6.Protection of industries from dumping

7. Protecting industries from other forms of unfair foreign competition

Question 20

Define Infant industries

Answer 20

new industries with relatively low output and high cost

Question 21

Define Declining industries

Answer 21

old industries which are going out of business.

Question 22

Define Strategic industries

Answer 22

industries that are considered important for the survival or development of the country.

Question 23

Define Dumping

Answer 23

selling products in a foreign market at a price below the cost of production

Question 24

Why would protection be harmful to raising employment and improving the trade position

Answer 24

Risk of retaliation- If other countries respond by imposing trade restrictions, the country will buy fewer imports but will also sell fewer exports.
So employment, income, and trade position may not improve.

Restricting imports of raw materials may be particularly harmful as it will raise domestic firms’ costs of production.

Question 25

How does dumping affect firms

Answer 25

Sporadic dumping- selling excess supplies in other countries, in order to keep the price high in the domestic market. Predatory dumping- drive domestic firms out of the market, gain a large market share, and then raise prices.

Question 26

Why is predatory dumping harmful

Answer 26

May result in a less efficient allocation of resources and the foreign firms gaining more market power, reducing choice and raising price.

Question 27

Reasons against protection

Answer 27

The key arguments against protection are that it can result in lower choice, higher prices, inefficiency and retaliation.