14 - The International Economy: Globalisation and International Trade Flashcards
What is globalisation?
The process of increasing economic integration of the world’s economies
What are causes of globalisation?
- Improvements in information and communication technology (ICT)
- Developments in transport
- Other more traditional forms of technology
What are examples of globalisation?
- Service industries in the UK dealing with customers through call centres in India
- Fashion companies designing their product in Europe, making them in southeast Asia and finally selling point of most of them in North America
What are the main characteristics/factors contributing to globalisation?
- Trade in goods
- Trade in services
- Trade liberalisation
- Multinational Corporations (MNCs)
- International financial flows
- Communications and IT
- Containerisation
How is ‘trade in goods’ a characteristic/factor contributing to globalisation?
- Developing countries have acquired the capital and knowledge to manufacture goods
- The efficient forms of transport make it easier and cheaper to transfer goods across international borders
- MNCs relocate production to developing nations due to cheaper labor costs, prompting trade between developed and developing countries for access to manufactured goods.
How is ‘trade in services’ a characteristic/factor contributing to globalisation?
- E.g., the trade of tourism, call centre services, and software production has increased from developing countries to developed countries
How is ‘trade liberalisation’ a characteristic/factor contributing to globalisation?
The growing strength and influence of organisations e.g. the World Trade Organisation (WTO)
What is the World Trade Organisation (WTO)?
An international body which advocates free trade and has contributed to the decline in trade barriers
How are ‘multinational corporations (MNCs)’ a characteristic/factor contributing to globalisation?
- They have used marketing to become global
- By growing, they have been able to take advantage of economies of scale, such as risk-bearing economies of scale has resulted in lower costs of production
What are multinational corporations (MNCs)?
MNCs are organisations which own or control the production of goods and services in multiple countries
What are the roles of multinational corporations (MNCs)?
-Economic integration and increased trade - led to global production platforms, enabling specialisation and leveraging the global division of labor.
- Investment and technology transfers - occur globally as firms seek optimal business opportunities, with technology flowing from developed to emerging economies.
- Changing employment patterns and global capitalism -involve the creation of millions of jobs, particularly in countries like China and India, coordinated by MNCs. These firms use their leverage to demand favourable business environments.
- The global marketplace and international brands - MNCs compete globally, operating on a large scale to benefit from economies of scale and reduce average production costs.
How are ‘international financial flows’ a characteristic/factor contributing to globalisation?
- For example, the flow of capital and FDI across international borders has increased. China and Malaysia have financed their growth with capital flows
- The foreign ownership of firms has increased. There has been more investment in factories abroad
- The removal of capital controls has facilitated this increase
How is ‘communications and IT’ a characteristic/factor contributing to globalisation?
- The spread of IT has resulted in it becoming easier and cheaper to communicate, which has led to the world being more interconnected
-There’re better transport links and the transfer of information has been made easier
How is ‘containerisation’ a characteristic/factor contributing to globalisation?
- This has resulted in it becoming cheaper to ship goods across the world. This causes prices to fall, which helps make the market more competitive
- Containerisation helps to meet world demand as cargo can be moved 20x as fast as before
- However, it is mainly MNCs which have been able to exploit this, and it could result in some structural unemployment
What is containerisation?
When goods are distributed in standard sized containers, so it is easier to load and cheaper to distribute using rail and seas transport
What’re the consequences of globalisation?
- Individual countries
- Governments
- Producers and consumers
- Workers
- The environment
What are the benefits of globalisation?
- Greater competition
- Increased investment
- Free movement of labour
How is greater competition a benefit of globalisation?
- Domestic monopolies used to be protected by a lack of competition
- However, globalisation means that firms face greater competition from foreign firms
How are workers/free movement of labour a benefit of globalisation?
- Workers can take advantage of job opportunities across the globe, rather than just in their home country
- However, structural unemployment may arise due to shifts in industries, as seen in the UK with the decline of shipbuilding and mining, leading to job losses
- It could be argued that countries would have had the change from agriculture to manufacturing to services anyway, and globalisation simply sped it up
- When production shifts to lower labour cost countries, the creation of jobs could be seen as either beneficial or harmful. On one hand, MNCs could be exploiting their labour and providing poor working conditions in e.g. sweetshops. On the other hand, working in a sweatshop might provide a higher, more stable income than any alternatives, such as agriculture
How is Increased investment a benefit of globalisation?
- Globalisation has enabled increased levels of investment. It has made it easier for countries to attract short-term and long-term investment
- Investment by multinational companies can play a big role in improving the economies of developing countries
How are producers and consumers a consequence of globalisation?
- Specialisation and economies of scale benefit consumers and producers as firms expand.
- Increased competition drives firms to lower average costs and enhance efficiency.
- Globalisation enables producers to lower costs by relocating to areas with cheaper labor and adopting advanced technology.
- While globalisation generally boosts world GDP, its exact contribution to growth is difficult to quantify.
- Rising consumer incomes, driven by increased demand from countries like China, can offset production cost reductions, especially in commodities.
- Globalisation has reduced extreme poverty globally, but not in regions like Sub-Saharan Africa, potentially exacerbating inequality.
- Consumers enjoy a wider range of goods and services due to globalisation, although some services may become standardised, such as hotels.
What’re the costs of globalisation?
- Free trade
- The environment
- Tax competition and tax avoidance
- Labour drain
How is tax competition and tax avoidance a cost of globalisation?
- MNCs like Amazon and Google, can set up offices in countries like Bermuda and etc with very low rates of corporation tax and then funnel their profits through these subsidiaries
- This means they pay very little tax in the countries where they do most of their business. This means governments have to increase taxes on VAT and income tax
- It is also seen as unfair competition for domestic firms who don’t use the same tax avoidance measures.
- The greater mobility of capital means that countries have sought to encourage inward investment by offering the lowest corporation tax. (e.g. Ireland offers very low tax rate)
- This has encouraged lower corporation tax, which leads to higher forms of other tax
How is labour drain a cost of globalisation?
- Globalisation enables workers to move more freely
- Therefore, some countries find it difficult to hold onto their best-skilled workers, who are attracted by higher wages elsewhere.
How are individual countries/free trade a cost of globalisation?
- There could be trade imbalances between countries e.g. the US runs a large current account deficit with China
- There could be imbalances and inequalities in consumers’ and countries’ accesses to health, education and markets
- There could be income and wealth inequalities (within individual countries) if the benefits and costs of globalisation are not evenly spread e.g. China’s rural-urban divide
- Culture could spread across the globe. Some might say this has weakened culture and that there’s been a loss of cultural diversity due to global brands. However, others will argue that the spread of culture has been positive and helped to improve their quality of life
How are governments a cost of globalisation?
- Some governments might lose their sovereignty due to the increase in national treaties
- Individual states would find it hard to resist the force of them, they will have to abide by their rules
How is the environment a cost of globalisation?
- Consumers might show more concern towards the environment as their average income increase
- Negative impacts on the environment could include deforestation, water scarcity and land degradation
What is absolute advantage?
When a countries production of a good or service can produce them using fewer resources and at a lower cost than another country
Who has absolute advantage in this table? (table 14.1 pg501)
- Atlantis has an absolute advantage in producing guns as its 4x better in gun production than Pacifica
- Pacifica has an absolute advantage in butter production as its 3x better in butter production
What does production without specialisation mean and how is it shown in the table (table 14.2)?
- If both countries you’re comparing devote half their total resources to each activity (country have 2 units available and use only 1 unit of resource)
- Without specialisation, Atlantis produces 4 guns and Pacifica produces 1 gun, which means that 5 guns are produced in total
- For butter production, without specialisation, total butter production is 8 tonnes. Atlantis produces 2 tonnes and Pacifica produces 6 tonnes
What does production with complete specialisation mean and how is it shown in the table (table14.3)?
- Each country produces only the good in which it has an absolute advantage
- Table shows that if Atlantis devotes both its resources units to guns, it produces 8 guns
- Table shows if Pacifica completely specialises, the country produces 12 tonnes of butter with its 2 units of resource
What does this diagram show (table 14.4)?
How when each country enjoys an absolute advantage in a different good, complete specialisation results in more of good being produced
Explain what is being shown within the diagram(table 14.4)?
- Specialisation produces net output gain of 3 guns and 4 tonnes of butter. Since more has been produced, more can be consumed, and it is possible to make people better off
- However, for output gains to translate into gains from trade, two further factors have to be taken into account
- First, Administration and transport costs are inherent in trade, reducing the net gains from specialisation and trade ((3 guns + 4 tonnes of butter) - transport and administration costs). Therefore, trade is only beneficial if the gains from specialisation exceed these costs.
- Second, For trade to translate into welfare gains for both countries, the traded goods must be in demand, and each country must export its surplus to satisfy the other country’s demand after meeting its own inhabitants’ needs for the specialised goods.
- The idea that based on circumstances, without suitable demand conditions, the case for specialisation and trade disappears
What is a comparative advantage?
Occurs when a country can produce a good or service at a lower opportunity cost than another country. This means they have to give up producing less of another good rather than another country, using the same resources
Explain how a comparative advantage is present within this table (table 14.5)
- Although Atlantis has an absolute advantage in producing both guns and butter, the country possesses a comparative advantage in the production of guns but has a comparative advantage in the production of butter
- The country that gives up least of the other commodity when increasing output of a particular commodity by 1 unit possesses a comparative advantage in that good
- Atlantis has to give up 2 guns to increase its output of butter by 1 tonne but Pacifica only has to give up 1 gun to produce an extra tonne of butter production even though it has an absolute disadvantage in both products
What is free trade?
The act of trading between nations without protectionist barriers, such as tariffs, quotas or regulations
What quality controls can import controls be divided into?
Import quotas (which put a maximum limit on imports), and tariffs or import/export duties (which raise the price of imports/ reduce the price of exports)
What are quotas?
Physical limits on the quantities of imported goods allowed into a country
What are tariffs?
Taxes imposed on imports from other countries entering a country
What are export subsidies?
Money given to domestic firms by the government to encourage firms to sell their products abroad and to help make their goods cheaper in exports markets
What benefits does free trade provide?
- Countries can exploit their comparative advantage, which leads to a higher output using fewer resources and increases world GDP. This improves living standards
- Free trade increases economic efficiency by establishing a competitive market. This lowers the cost of production and increases output
- By freely trading goods, there is trade creation because there are fewer barriers. This means there is more consumption and large increase in economic welfare
- More exports could lead to higher rates of economic growth
- Specialising means countries can exploit economies of scale, which will lower their average costs
What’re the costs of free trade?
- Free trade has resulted in some job losses as countries with lower labour costs have entered the market
- Free trade might have contributed to some environmental damage, especially from the increase in manufacturing
What’re the reasons for the changes in pattern of trade between the UK and the rest of the world?
- Comparative advantage
- Impact of emerging economies
- Growth of trading blocs and bilateral trading agreements
- Changes in relative exchange rates
How is ‘comparative advantage’ a reason for the changes in pattern of trade between the UK and the rest of the world?
- Developing countries have experienced a surge in manufactured goods exports to developed nations, driven by their competitive advantage in production stemming from lower labor costs, prompting production relocation
- The deindustrialisation of countries such as the UK has meant the manufacturing sector has declined. This means that production of manufactured goods has shifted to other countries, such as China, whilst the UK now focuses more on services, such as finance
- This has led to the industrialisation of China and India. Their share of world trade has and the volume of manufactured goods that they export has increased
- However, since China’s population is now ageing, their wage competitiveness has fallen. This is also due to the rise of the middle class in China, who demand higher wages and consume more
How is ‘Impacts of emerging economies’ a reason for the changes in pattern of trade between the UK and the rest of the world?
- The collapse of communism has meant that more countries, especially developing countries, are participating in world trade
- International trade is arguably more important for developing countries than developed countries
- For example, China and India are important for African infrastructure. They have invested in their infrastructure in exchange for natural resources.
How is ‘growth of trading blocs and bilateral trading agreements’ a reason for the changes in pattern of trade between the UK and the rest of the world?
- With more trading blocs, trade has been created between members, but diverted from elsewhere
- Trade creation occurs when a country consumes more imports from a low cost producer, and fewer from a high cost producer
- Trade diversion occurs when trade shifts to a less efficient producer
- Protectionist barriers are often imposed on countries who are not members, so trade is diverted from producers outside the bloc to producers within the trading bloc.
- The policies of developed countries have limited the ability of developing countries to export primary commodities. E.g. The EU Common Agricultural Policy (CAP)
How is ‘changes in relative exchange rates’ a reason for the changes in pattern of trade between the UK and the rest of the world?
- China has been running a trade surplus with the US and since 2006 the US trade deficit has narrowed with China, and China has reduced their trade surplus, too.
- China has planned this change from export-led growth to growth fuelled by domestic consumption.
- When running the trade surplus, China had kept their currency’s value low, in order to make their exports relatively cheap.
- Could be argued that one of the reasons for the UK’s current account deficit is the strength of the pound compared to the Euro. E.g. In 2015, it reached a seven year high against the Euro
What is protectionism?
The act of guarding a country’s industries from foreign competition
What are the methods of protectionism?
- Tariffs
- Quotas
- Export subsidies
- Embargoes
- Excessive administrative burdens (‘red tape’)
What impact do tariffs have for protectionism?
- It could lead to retaliation, so exports might decrease
- Their impact is that the quantity demanded of domestic goods increases, whilst the quantity demanded of imports decreases
What does this tariff diagram show? (physics and maths)
- It illustrates the effects of imposing a tariff
- The original quantity of imports is Q2 – Q1, and the new quantity of imports is Q4 – Q3
- The purple rectangle shows the revenue the government gains from imposing the tariff. This could help finance government expenditure
- The blue triangles show the area of deadweight loss of welfare, as a result of the tariff
What impact do quotas have for protectionism?
Leads to a rise in the price of the good for domestic consumers, so they become worse off
What impact do export subsidies have for protectionism?
- Helps firms to make their goods cheaper in exports markets
- Government might use direct payments, tax relief, or provide cheap access to credit
What impact do embargoes have for protectionism?
- This is the complete ban on trade with a particular country
- Usually politically motivated
What impact do excessive administrative burdens (‘red tapes’) have for protectionism?
- Increases the cost of trading, and hence discourages imports
- It makes it difficult to trade with countries imposing red tape
- Particularly harmful for developing countries which are unable to access these markets
- (Harder to notice this type of protectionism, which is why it is favoured among some countries)
What’re the potential benefits of countries adopting protectionist policies?
- Infant industries might need protecting. Protectionism is usually short term until the industry develops, at which point the industry can trade freely
- Could be used to correct market failure. It can deal with demerit goods and protect society from them
- Governments might employ protectionist measures to improve the current account deficit
- Governments might want to protect domestic jobs
- If a country employed multiple policies then a trade deficit would reduce as they will be importing less due to tariffs and quotas on imports
What’re the potential costs/consequences of countries adopting protectionist policies?
- Protectionism could distort the market and lead to a loss of allocative efficiency.
- It prevents industries from competing in a competitive market and there is a loss of consumer welfare
- It imposes an extra cost on exporters, which could lower output and damage the economy.
- Tariffs are regressive and are most damaging to those on low and fixed incomes
- There is a risk of retaliation from other countries, so import and consumer prices might increase
- Protectionism could lead to government failure
Draw the diagram you would use to describe how an increase in exports can affect the national economy.
Explain this diagram how an increase in exports can affect the national economy.
How does Exchange Rate influence a country’s current account balance?
Effect the competitiveness of imports and exports, therefore effecting the amount of imports and exports which effect the current account.
How does Inflation influence a country’s current account balance?
Explain using a graph the drawback (evaluation( of using Devaluation as a policy to reduce current account deficit?
Depends upon the price elasticities of demand for exports and imports.
Draw a diagram for a market closed to international trade, including the consumer and producer surplus.
Draw a diagram for a country with free trade.
Explain this free trade economy diagram.
Consumer surplus is are of A+B+C, and producer surplus is area D. The domestic production has been contracted to QS1 and domestic consumption has increased to QD1
What is the diagram for tariff’s on free trade?
Explain this tariffs free trade diagram simply.
- More Domestic Supply and Less Imports
- In this case, the tariff is P1-P2.
- The tariff leads to a decline in imports. - Imports were Q4-Q1. After the tariff, imports fall to Q3-Q2.
- Consumer surplus falls by 1+2+3+4
- Government raises tariff revenue of area 3
- Domestic suppliers gain an increase in producer surplus of area 1
- The net welfare loss is (1+2+3+4) – (1+3) = 2+4
Explain this tarrif diagram.
What is the government revenue of this diagram?
Tariff revenue = tariff × q. of imports (£0.40 × 20 million) = £ 8 million
How much is the consumer surplus reduced by in this diagram?
With no trade = (£3.20 – £1.80 × 40) /2 = (£1.40 ×40)/2 = £28 million
After tariff – (£3.20 – £1.60) × 50)/2 = £40 million
With no tariff (free trade)- £3.20 – £1.20 × 60)/2 = £60 million
Tariffs reduce consumer surplus by £20 million
What is the increase in producer surplus in this diagram from the tariff?
With no trade (£1.80 – £0.5) × 40)/2 = £24 million
With tariff (£1.60-0.50) × 30)/2 = £16.5 million
With free trade and no tariff (£1.20-0.50 × 20)/2 = £6 million.
Tariffs increase producer surplus by £10.5 million
What is the net welfare loss of this tariff in this diagram?
Welfare effect of tariffs = gain in producer surplus (£9 m) + gain in tariff revenue (£8m) – loss of consumer surplus £20m)
Therefore net welfare loss = £3 million
