Define globalisation.
Growing independence of countries and the rapid rate of change it brings about.
- increasing integration of the world’s local, regional and national economies into a single intergrational market
- movement towards free trade of goods and services, free movement of labour and capital, free interchange of technology and intellectual capital
What are the factors contributing to globalisation?
- improvements in transport infrastructure and operations - quick and reliable methods to allow production to be separated around the world
- improvements in communication
- trade liberalisation and reduced protectionism - cheaper
- international financial markets
- TNCs have led to globalisation by acting to increase their own profit as they want to take advantage of low labour costs. Have power to lobby governments
What are the impacts of globalisation on consumers?
- moe choice
- lower prices due to comparative advantage
- in other cases, it is leading to a rise in in prices since incomes are rising so there is higher demand for goods and services
- worry about loss of culture
What are the impacts of globalisation on workers?
- some people lose while others gain employment (large scale job losses in the western world in manufacturing sectors as these jobs have been transferred to countries such as China and Poland)
- increased migration - may affect workers by lowering wages but migrants can provide skills and increase AD
- international competition
- inequality as wages for high skilled workers increase
- TNCs provide training and create new jobs
What are the impacts of globalisation on government?
- receive higher tax revenue, since TNCs pay tax and so do the people they employ
- TNC bribe and lobby the government - could lead to courruption
- correct policies ca maximise gain and minimise losses
What are the impacts of globalisation on producers?
- firms are able to source products from more countries and sell them in more countries - reduces risk since a collapse of market in one country will have a smaller impact
- able to employ low skilled workers much cheaper in developing countries and can exploit comparative advantage and have larger markets
- firms who are unable to compete internationally will lose out
What are the impacts of globalisation on enviroment?
- increased demand for raw materials
- increased trade and production leads to more emissions
- world can work together to tackle the global warming and climate change and share new technologies
What are the impacts of globalisation on economic growth?
- increases investment within countries; TNC inject in the economy - multiplier - supply side improvement encouragement so TNCs operate in their countries
- world class management techniques and technology from TNCs which can benefit all industries
- trade will increase output since it allows exploitation of comp advantage
- TNCs can cause political instability as they may support undemocratic regimes
- comparative cost advantages change over time and so companies may leave the country when it no longer offers an advantage - struc unemp - growth reduction
What is absolute advantage?
- exists when a country can produce a good more cheaply in absolute terms than another country
E.g. Spain can produce 140 umbrellas while UK can produce 70 at the same time, the Uk can produce 140 cars when Spain can produce 80 at the same time = have to specialise in order to maximise output
What is the theory of comparative advantage?
- countries find specialisation mutually advantageous if the opportunity costs of production are different. Comparative advantage occurs when a country is able to produce a good more cheaply relative to other goods produced.
What are the limitations of comparative advantage theory?
- assumes there is o transport costs, could lower or prevent CA
- assumes that costs are constant, and no ecoomies of scales
- goods are assumed to be homogenous (products cant be perfectly compared)
- assumes that factors of production are perfectly mobile(no tariffs)
What are the advantages of specialisation and trade?
+ CA shows how world output can be increased if countries specialise in what they best at producing, this will increase global economic growth
+ allows countries to benefit from economies of scale, reduction of costs globally
+ greater choice for consumers
+ greater competition, which provides incentive to innovate
+ countries that isolate themselves for political reasons tend to stagnate
What are disadvantages of specialisation and trade?
- can lead to overdependance, where some countries become dependent on particular exports - causes problems if there are large price falls in exports or if imports are cut for political reasons
- can cause structural unemployment as jobs are lost to foreign firms who are more efficient and competitive
- environment will suffer due to problems of transport as well as increased demand for resources e.g. deforestation
- loss of sovereignty due to signing international treaties and joining trading blocks
How does comparative influence patterns of trade?
Countries will trade where there is a comparative advantage. There has been a recent growth in the exports of manufactures gods from developing countries to developed countries, because developing countries have gained an advantage in manufactuting. This leads to deindustrialisation of countries such as UK because the production shifts abroad.
How do emerging economies influence the patterns of trade?
Countries grow at different rates, when they grow they need to import more goods and services than before as well as exporting more to pay for this. It shifts the patterns of trade by taking up a higher proportion of a country’s imports and exports than they had previously.
How do trading blocs and bilateral trading agreements influence the patterns of trade?
These increase the level of trade between certain counrties and so influence the patterns of trade because trade increases between these countries and decreases between others. Joining the EU meant that the UK traded a lot more with European countries than previously, and less with countries outside the UK.
How do relative exchange rates influence the patterns of trade?
The exchange rate affects the relative price of goods between countries. Prices are an important factor in determining whether consumers buy goods and so a change in price will affect the pattern of trade.
What are the terms of trade?
The terms of trade measures the rate of exchange of ones product for another when two countries trade. It tells us the quantity of exports that need to be sold in order to purchase a given level of imports.
What does it mean for movement in terms of trade to be favourable?
The movement is said to be favourable if the terms of trade increase as the country can buy more imports with the same level of exports. This is called an improvement in the terms of trade. = improvement
It is unfavourable if they decrease when export prices fall or import prices rise = deterioration.
What is the formula for terms of trade?
(Average export price index / average import price index) x 100
What are the factors influencing country’s terms of trade?
- in short run: exchange rates, inflation and changes in demand/supply of imports and exports
- in long run: improvement in productivity compares to a country’s main trading partners will decrease the terms of trade since export prices will fall relative to import prices
- changing economies - a rise in world income causes a rise in demand for tourism - increase in terms of trade for spain
What is Prebisch-Singer hypothesis?
The long run price of primary goods declines in proportion to manufactured goods, which means those dependent on primary exports will see a fall in their terms of trade.
What are the impacts of changes in terms of trade?
- If PED of exports/imports is inelastic, a favourable movement would improve the current account on the BoP. When elastic, would worsen
- An improvement in terms of trade is likely to lead to a fall in GDP and a rise in unemployment, since if it caused by a rise in export prices, exports will fall and if it caused by a fall in import prices, imports will rise - both cause a reduction in production within the country and so a fall in jobs and output - long term decline in terms of trade = long term decline in living standards
- however, if an improvement occurred due to increased demand for exports it will be beneficial for the country. If a deterioration is caused by an improvement in international competitiveness, this will also be beneficial. - export revenues are more important than price alone
What are trading blocs?
A group of countries within a geographical region that protect themselves from imports from non-members. They sign an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers among themselves.
