4.1 Globalisation

Question 1

Globalisation

Answer 1

Globalisation is the process by which the world is
becoming increasingly interconnected as a result of
massively increased trade

Question 2

Importance of Globalisation

Answer 2

An expansion of trade in goods and services between countries
Shifts in economic and political strength
Development of global brands
Increased levels of labour migration

Question 3

Causes of Globalisation

Answer 3

Improved
Communication
Global Banking
The Growth of
Multinationals
Free Trade Agreements

Question 4

Static gains from trade

Answer 4

Measured by the
increase in output and
lower costs due to
countries specialising and trading in those goods that they have a
comparative advantage in
e.g. Clothing manufacturing in
Bangladesh

Question 5

Dynamic gains from trade

Answer 5

Due to the increased
competition faced by
businesses leading to
better quality products, more investment and
greater efficiency
e.g. Car Manufacturing in Germany

Question 6

Absolute Advantage

Answer 6

When a country (or person) can produce more of a certain good/service than another in the
same amount of time or using the least amount of resources.
This means that the good can be produced
cheaper than elsewhere

Question 7

Comparative Advantage

Answer 7

Comparative advantage exists when a country ( or person) can produce goods at a lower opportunity costs than another. This means a country can produce a good relatively cheaper than other countries

Question 8

Reasons why countries trade

Answer 8

To buy necessary goods
Generate Employment
More variety globally and quickly
Increased competition

Question 9

Economies of Scale

Answer 9

If a country specialises in manufacturing a product, unit costs will fall as larger factories benefit from the advantages of mass production

Question 10

Product Differentiation

Answer 10

Consumers prefer a wide range of choice of different products from different countries. This is due to the
demand for higher quality, unique products.

Question 11

Changes in Trade: Newly industrialised countries

Answer 11

India and China have
dramatically increased their share of world trade and their
share of manufacturing exports.

Question 12

Changes in Trade: deindustrialisation

Answer 12

Many countries experience deindustrialisation with less national output generated by
their manufacturing sectors

Question 13

Changes in Trade: Regional trading blocs

Answer 13

Members freely trade with each other, but erect barriers to trade with non-members.

Question 14

Changes in Trade: collapse of communism

Answer 14

Opening-up of many
former-communist countries. These countries have increased their share of world trade by taking advantage of their low production costs, especially their low wage levels.

Question 15

Terms of Trade

Answer 15

The terms of trade depend upon changes in
the price of imports and exports. It shows how
many imports can be bought for each unit of
exports sold
When the terms of trade rise above 100 they
are said to be improving and when they fall
below 100 they are said to be worsening.

Question 16

Why does the Terms of Trade Change?

Answer 16

Changes in demand for commodities- oil, copper, gold etc.
Changes in income levels in different countries
Changes in productivity
Changes in inflation rates
Changes in Exchange Rates

Question 17

Trading Blocs

Answer 17

A trading bloc is a group of countries that join
together in some form of agreement in order to
increase trade between themselves and/or to
gain economic benefits from cooperation.

Question 18

Trade Blocs: Trade Creation

Answer 18

Increased trade that
occurs between member
countries of trading blocs
following the formation or
expansion of the trading
bloc. The removal of trade
barriers allows greater
specialisation meaning
that prices can fall and
trade can thus expand.

Question 19

Trade Blocs: Trade diversion

Answer 19

Trade diversion is the
decrease in trade
following the formation of
a trading bloc as trade
with low cost non-trading
bloc members is replaced
by trade with relatively
high cost trading bloc
members.

Question 20

Arguments for Trade Blocs

Answer 20

Access to larger markets
Economies of Scale
Trade Creation
Protection against non-members

Question 21

Problems with trade blocs

Answer 21

Inefficient industries in the bloc can be protected from outside competition
Reduce trade with other countries
Disputes with trade blocs

Question 22

Main reasons for protectionism

Answer 22

Protect infant industries
Slow decline of old industries and limit structural unemployment
Diversify the economy, make less dependent on one product
Raise tax revenues
Improve trade balance
Preserve jobs in key industries
Prevent import dumping

Question 23

Types of Trade restriction

Answer 23

Import tariffs
Import Quotas
Subsidies
Migration Controls
Managed Currencies

Question 24

Tariffs

Answer 24

Tax placed on imports to raise revenue and restrict imports
Raise the final price of product to consumer- fall in demand

Question 25

Import Quotas

Answer 25

Physical limit on the quantity of good imported

Question 26

Subsidies

Answer 26

Money is given to local
producers to make their
goods cheaper on the
domestic market and so it reduces
the price of the product to
make it more competitive
against imported goods.

Question 27

Gov action

Answer 27

Legislation: on product quality requirements to restricting certain products that don’t meet the standards
Preferential state procurement policies – this is where a government favour local/domestic producers

Question 28

Balance of Payments

Answer 28

records all financial
transactions made between consumers, businesses and the
government in one country with other nations

Question 29

Long term factors for current account surpluses

Answer 29

Surplus of savings over investment
Significant long run competitive advantage
Long run rise in global prices of main exports
Structural increase in net investment income
Trend rise in factor productivity

Question 30

Short term factors for current account surpluses

Answer 30

Depreciation of the exchange rate
Strong consumer demand in export markets
Cyclical improvement in terms of trade
Fall in costs of essential imports
Rise in net inflows of remittances / profits

Question 31

Long term factors of current account deficits

Answer 31

Under-investment
Relatively low productivity
Persistently high relative inflation
Inadequate R&D, innovation
Emergence of lower cost competition

Question 32

Short term factors of current account deficits

Answer 32

Over-valued exchange rate
Boom in domestic demand
Recession in key export markets
Slump in global prices of exports
Increased demand for imported technology

Question 33

Consequences of Current account surplus

Answer 33

Appreciation of currency
Increased ownership of foreign assets
Reduced levels of domestic investment as its seen that there’s insufficient domestic demand
Possible job creation due to export demands
Better tax revenues for gov

Question 34

Consequences of Current account deficit

Answer 34

Depreciation of currency
Increased foreign ownership of assets
High interest rates
Lowers AD due to GDP= C+I+G+ (X-M)