what is globalisation
the increased trade of goods and services, and flows of capital and labour between countries (interconnectedness –> TLC)
Increased trade flows (exports and imports)
Increased capital flows (FDI, hot money)
Increased labour flows (in terms of foreign labour, both talents and workers)
factors affecting globalisation
- the benefits of free trade and specialisation based on the theory of comparative advantage
- technology improvements in transportation and communication
- government policies that promote economic cooperation
if question asks for factors engendering glob, link these factors to all three aspects of glob (TLC flows)
definition of comparative advantage
refers to a country’s ability to produce a good at a lower opportunity cost than another country, in terms of the amount of production of the other good forgone
how does improvement in transportation and communication tech contribute to glob
major technological improvements in terms of transportation and communication has increased efficiency and lowered cost, increased access to global markets and grow revenue
falling cost + rising revneue –> profit motivated firms will be incentivised which in turn leads to increased trade, investment and labour flows –> globalisation
more detailed answer if question requires; LINK TO TLC FLOWS!
how do government policies that promote economic cooperation contribute to globalisation
international and regional economic cooperation
reduce barriers to trade (both tariffs and ntbs)
1. reduce unit cop, fall in prices of imports, households and firms import more, more exports for exporting countries
2. more stable economic environment (global supply chains are certain for firms to import and export), boost in investor cofidence = greater and freerer flow of capital
3. reduce regulations in foreign labour market, opens borders to more foreign talents and workers
key assumptions for theory of ca (7)
use for evaluation
- only 2 countries
- only 2 goods
- only 2 units of resources for each country
- all resources are fully employed and perfectly mobile within the country (but not internationally)
- there are constant returns to scale in production and constant opportunity cost
- no transport or distribution costs
- there are no barriers to trade
use for evaluation
basis of free trade and specialisation
the benefits of free trade and specialisation are based on the theory of CA which states that free trade between nations is beneficial to all if each specialises and trades according to its CA
a country has a comparative advantage in the production of a good/service if it can produce it at a lower opportunity cost (forgo less of other good in order to produce it)
countries can consume more than its oroginal production possibillity , more variety of g&s, more consumer choices
explanation of theory of ca
1. define the theory of CA and the concept of opportunity cost
-the benefits of free trade and specialisation are based on the theory of CA which states that free trade between nations is beneficial to all if each specialises and trades according to its CA
a country has a comparative advantage in the production of a good/service if it can produce it at a lower opportunity cost (forgo less of other good in order to produce it)
2. explain key reason for CA
- the reasons for ca can be due to the differences in factor endowments in terms of both quantity and quality of resources
- higher quantity of resources results in lower resource prices, while higher quality resources result in greater efficiency
- this is why some countries can produce at a lower unit cost of production, incur a lower opportunity cost in terms of other goods and services forgone, hence having ca in the production of a good/service
3. explain using examples of different countries with different CA, hence different specialisation, exports and imports
- framework: when country x produces good a, they give up less of good b so they have ca in producing good a
4. explain how countries should specialise and trade (export and import)
- so based on the theory of ca, country x should specialise and export good a and import good b
- on the other hand…
5. explain the benefits of free trade and specialisation using PPC graph
- world output is higher
- both countries can consue more than its original production possibility
- more variety of g&s, more consumer choices
limitations of the theory of ca
just assumptions being broken
Factor Immobility within country
Theory of CA assumes perfect factor mobility & countries can specialise based on CA & move resources from 1 industry to another without additional cost
In real world, there is factor immobility, in terms of occupational & geographical immobility, in which additional costs are incurred to solve these factor immobilities, which may reduce CA in production of good
Eg: Workers in agricultural industry producing wheat need to be retrained to work in microchips industry based on CA, if the country wants to specialise in microchips industry based on CA
Rising opportunity cost
Theory of CA assumes constant returns to scale in production & constant opportunity cost when country specialises
In real world, countries are likely to have increasing opportunity costs as production increases = Negate CA country initially have
Increasing specialisation of 1 good = Need to use more resources less suited to its production & more suited to production of other goods = Sacrifice of increasing amounts of other goods
Eg: Country specialises & produces more wheat = Use land less & less suited to growing wheat
Transport costs
Theory of CA assumes no transport & distribution costs
In real world, there are storage, packing, insurance, delivery costs & if they are very high for trade to take place = Country with higher opportunity costs of producing a good may find it cheaper to produce the good in domestic country than import them
Trade Restrictions
Theory of CA assumes free trade with no trade barriers = Countries can get full advantage of international trade
In real world, countries may want to protect domestic industries by restricting trade through imposition of tariffs
Protectionism reduces advantages of trade
ca is dynamic
why may the CA of a country change overtime
free market forces and government intervention that lead to changes in country’s factor endowment in terms of quality and quantity of resources
benefit of glob on goverment macro objectives
look from supply and demand side, then link increased tlc to BUGPEES
AEG, SOL, (since dervied demand for labour increases) lower DDU
- increased trade in terms of a rise in export revenue and hence rise in AD (X,AD) -> lower trade barriers = can export goods at a lower price to one another
- increase capital inflow in terms of a rise of FDI and hene rise in AD (I, AD)
- increased labour inflow in terms of foreign labour can lead to rise in cosumption (C,AD)
QQT, LRAS, PG, Price stab
- TLC –> QQT
- when LRAS rises, productive capacity increases = PG
- Lower GPL also
explanation is the same as previous topics but must contextualise to globalisation (lower trade barriers, labour regulations)
costs of globalisation on governments in terms of macroeconomic policies
note that this then affects policy choice (to address macro problems that arise)
fall in AD = negative EG and DDU
fall in I = LRAS falls
1. for countries with a lack of CA or loss of CA in the production of goods and services, increased trade means greater accessibility to imported goods and services that are cheaper than domestically produced goods (M rise, C fall)
2. lack/loss of CCA = less FDI (go elsewhere, think TNCs)
3. C, I fall = AD fall = RNY, k fall = negative EG
need to grow CA or create new CA leads to rising SU and inequity
- invest in export oriented industries, capital causes structural changes in economy = SU (mismatch of skills)
- SU leads to income inequity
- increased labour inflow exacerbates= locals, especially low-skilled face increasing competition from a large pool of low wage foreign works –> downward pressure on already low wages ; high skilled labour also face greater competition
over-reliance on trade (X) and capital inflow (FDI) so increased vulnerability to external demand shocks
- during recession, fall in foreign income leads to fall in demand for a country’s export assuming YED>0, fall in X
- over-reliance on capital inflow in terms of FDI also leads to fall in I during recession when foreign firms cut investments
- components of AD –> fall in AD –> RNY fall, k + DDU
over-reliance on trade (M) and vulnerability to external supply shocks =CPI
1. over-reliance on imports of factor inputs = vulnerability to supply shocks during global supply chain disruption (war, natural disaster etc.)
2. shortages of imported factor inputs = upward pressure on prices = rise in unit cop = fall in SRAS, rise in GPL
benefits of glob to producers
link to size of markets, degree of competition, cost of production and innovation
- increased access to export markets = size of market is larger, increases demand for gns = increase in revenue and profits (show on firms diagram)
- (same diagram) increased access to export markets and reap ieos in production (increase in scale of production as producers produce more exports) then lower cop (AC falls) and higher profit
- ability to obtain cheaper factors of production; increase in trade and labour flow allows firms to source for cheaper fop (imports and labour) = fall in AC, profit increase
costs to producers
link to size of markets, degree of competition, cost of production and innovation
1. increased competition and smaller domestic market, hence lower revenue and lower profit
- more market competition for local firms from foreign firms as firms inject FDI; domestic firms face falling demand and more price elastic demand curve = lower revenue and profits (represent on diagram AR + MR fall, TR and profit fall), or even subnormal profits for domestic firms which may exit if long-run subnormal
2. increased competition leads to higher cost and lower profit(higher market competition means greater need for local firms to engage in np competition and spend money on marketing etc, and competition for the same resources pushes up prices of fop) = higher unit cop and lower unit profit (AC rise, unit profit fall)
benefits of globalisation on consumers
link to prices + surplus, choice, and variety of goods and services
1. lower prices and higher consumer surplus
- increased trade (X): when firms are able to increase production of exports and enjoy cost savings through IEOS, they pass cost savings to consumers in terms of lower prices
- increase trade (M):consumers can access cheaper imports than what is domestically produced
- FDI lower prices for consuners and higher CS because of higher market competition which causes local firms to engage in price competition = lower prices
- increased labour inflow = lower prices and higher CS as firms have lower unit labour cost with increase supply of low-wage foreign workers = pass on cost savings in terms of lower prices
- increased product quality and variety and more consumer choices
- increase in imported gns and more capital flow (FDI) = higher level of market competition = local firms engage in npc investing in r&d in product innovations = improvement in product quality. other npc like product differentiation = more variety, consumer choice
costs of globalisation to consumers
link to prices + surplus, choice, and variety of goods and services
1. higher prices and lower consumer surplus
- increased trade: higher export demand = DPI when economy has lack of spare capacity = rise in GPL and higher cost of living
- capital inflow (FDI) = more market competiton = local firms that are unable to compete in terms of p and npc might shut down = foreign firms with strong market dominance = monopoly power and ability to set higher prices allows them to exploit consumer = lower CS
2. fall in product quality and variety, less choices
- foreign firm domination = less variety + less incentive to invest in r&d and product innovations (reduce product quality over time)
what are the forms of economic cooperation and trade agreements (international and regional)
- FTA: treaties whichc make trade and investment between 2 or more countries easier
- Free Trade Area: countries eliminate all trade barriers amongst themselves but retain their own trade restrictions against non-member nations
benefits of economic cooperation and trade agreements
remember to use AD/AS analysis!!!
- improvement in BOT position (assuming X increase more than X given that demand for exports increase)
- sustained EG + price stab (higher AD and productive capacity, LRAS due to inflow of FDI)
- lower ddu (increase in demand for exports = firms hire more = derived demand for labour)
- higher productive effiiency (IEOS and EEOS and better infrastructure = average cost of production falls, least cost production methods)
- increase in comsumer welfare due to trade creation (increase in demand for exports during trade liberalisation = trade creation where economic integration results in high-cost domestic producers being replaced by low-cost imports from efficient partner countries = consumers can now buy goods from other countries at a lower price with no tariffs = CS increased
analysis is just adas
cost of economic co-operation and trade agreements
remember to use AD/AS analysis!!!
- demand pull inflation (increase in demand for exports can lead to DPI if not met by increase in productive capacity in export-related industries)
- higher ddu and su (cheaper imports = cosumers switch from domestically produced goods = fall in C,AD,RNY,k= fall in derived demand for labour = DDU + competition from foreign firms = SU)
- fall in consumer surplus due to trade diversion (shifting of trade away from low-cost producers outside the free trade area to high-cost producers within free trade area = higher prices =fall in CS and reducing consumer welfare)
definition of protectionism
refers to any action that the government may take to influence market forces to provide an advantage to domestic industries over foreign producers
types of protectionist measures
1. tariffs
- duties or taxes levied on imports
- raise the price that domestic consumers pay for imported goods
2. non-tariff measures
- import quotas (restrict volume or supply of imports by specifying the maximum amount of foreign-produced good that is permitted into the country over a specific period of time –> supply of M falls = price rises = fall in consumption of M, DD for domesitcally produced import sub rises = domestic production rises)
- subsidies (given to producers to lower COP and increase domestic supply = decrease in domestic prices = increase Qd for domestic = difficult for foreign firms to compete in terms of price, lowering demand for imports assuming XED>0)
- voluntary export restraints (VERs)(importing country ask foreign country to reduce supply, they are forced to comply out of fear of retaliation by tariffs or quotas)
- administrative regulatory conditions (regulations imposed for legitimate health safety or environmental reasons)
need to know diagram for tariffs
benefits of protectionism
- protecting domestic employment and output
- improving BOT position
- protecting infant industry
- counteracting against the threat of cheap foreign labour
- economic diversification
costs of protectionism
- lower productive and allocative efficiency
- worsening BOT position
- trade diversion
explain the economic effects of the imposition of a tariff and the cost and benefit in relation to protecting domestic employment and output
need to know diagram for all cost/benefits. just in this card only
benefit: protecting domestic employment and output
cost: inefficiency and misallocation of resources, reduce demand for exports –> AD fall = DDU
(diagram, assume country that impose tariff is a small country whose actions cannot affect world price of the good)
- when an import tariff is imposed, the price of imported goods in the country will rise REDUCING Qd FOR IMPORTS
- makes domestically produced goods relatively cheaper, Qd FOR DOMESTIC GOOD RISES = RISE IN DOMESTIC PRODUCTION OF GOOD + INCREASE IN DERIVED DEMAND FOR LABOUR (better utilisation of resources, leading to higher productive efficiency and rise in government revenue from tariffs) = protect domestic employment and output
- [cost] loss of consumer surplus, increase in producer surplus + government tax revenue = overall dwl, allocative inefficiency
- [cost] RNY of trading partners fall = lesser pp = demand for exports falls = AD falls = unemployment
[better way]
(better if domestic firms reallocate resources to other industries where they have CA and displaced workers go for upskilling)
aim: protect domestic firms from foreign competition, prevent job loss, allow country to restructure economy more gradually
