Globalisation and Trade

Question 1

Define globalisation

Answer 1

The process of growing economic integration of the world’s economies

Question 2

What are the causes of globalisation ?

Answer 2

1.Technology
2.Mulitnational companies
3.Lower tariffs
4.Improved transport
5.Labour mobility
6.Capital mobility

Question 3

What are the characteristics of globalisation ?

Answer 3

1.Growth of international trade - trade liberalisation by WTO
2.Greater international mobility of capital and labour
3.Increase in power of multinational corporations (MNCs)
4.Deindustrilaisation of older industrial regions

Question 4

Define MNCs

Answer 4

enterprise operations in several countries but with their headquarter in one country. ( They have to be actually based in different countries)

Question 5

What are the consequences of globalisation for LDC’s ?

Answer 5

1. Imbalance of power e.g dominance of US corporations culture.

2.McDonaldisation - involves destruction of local cultures - yet glocalisation offsets this as it means that there MNC are more likely to succeed if they adapt to the countries culture.

3. Exploitation of workers - yet they are still being paid higher wages than domestic ones and MEDC’s cant afford negative publicity so they support fair trade.
4. MNCs bring much needed investment into LEDCs. ( Macroeconomic benefits)

Question 6

What are the consequences of globalisation for MDC’s ?

Answer 6

1. Low skill jobs are lost due to cheaper labour in LEDC’s
   2.Allows specialisation which enhances productivity yet MEDC’s become more dependent on other countries
   3.Economies of scale
   4.Cheaper labour and lower prices
   5.Better service due to competition
   6.Fill in labour shortages

Question 7

What are the benefits of MNC’s

Answer 7

1.Transfer skills and expertise to host countries
2.Add to GDP of host countries
3.Competetion encourages productivity
4.Significant tax revenue

Question 8

What are the drawbacks of MNC’s ?

Answer 8

1.Domestic business cant compete
2.Profits may be remitted back to MNC’s rather than spent in host country
3.May act unethical

Question 9

How can MNC’s influence tax and tax revenue ?

Answer 9

1. Race to the bottom where governments deregulate to attract MNC’s
2. Tax avoidance /profit shifting - over reporting of costs and under reporting of profits and revenues. For example transfer pricing (price at which divisions of a company transact with each other)

3.Tax evasion - illegally loopholes where firms reduce amount of tax they pay

Question 10

What is some context of tax avoidance ?

Answer 10

EU is putting legislations that will force companies to disclose their earnings.

Oxfam estimates the annual revenue loss for developing countries at around $50bn

Question 11

What are key economic effects of corporate tax avoidance

Answer 11

1.Distortion of market competition.
2.Fiscal deficits and fewer resources for public sector.
3.Huge expenses given to plan tax loopholes which are better used in the economy.

Question 12

What are the limits to governments ability to control MNC’s ?

Answer 12

1.Capital is increasingly footloose
2.Many countries require MNC’s for their economies
3.Many MNC’s have monopsony power - only buyer in the market
4.WTO agreements that encourage trade liberalisation
5.Coporations have huge lobbying budgets

Question 13

Define absolute advantage

Answer 13

a country has absolute advantage if it can produce more of a good than other countries from the same amount of resources

Question 14

How do you find absolute advantage with and without specialisation ?

Answer 14

1. compare how many times greater is the country with absolute advantage in producing a certain product.

2.Calculate the total output without specialisation by adding.

3.Each country will specialise with what they have absolute advantage in. Then you multiply no. of units of resources by output

Question 15

What are the underlaying assumptions of absolute advantage ?

Answer 15

1. Both countries have interest in both products
   2.Low transport and administrative costs
   3.Only surplus of production is exported to prevent welfare loss

Question 16

Define comparative advantage

Answer 16

The country with the least opportunity cost posses a comparative advantage in that good

Question 17

How is comparative adv calculated ?

Answer 17

1. Find the opportunity cost of each good for each country: OUTPUT method where the other good goes on top of the fraction and good you are interested in, in the bottom.
2. If total output with complete specialisation is less than without then partial specialisation is needed.
   - the country with absolute advantage of both will partially specialise. LOOK AT EXPLANATION IN BOOK pg 308 and worksheet

Question 18

What are underlaying assumption of comparative advantage ?

Answer 18

1.Factors of production are fixed - cannot move to other countries
2.Factors of production can be moved within industries in the country
3.Manufactured goods are traded between countries

Question 19

How does absolute advantage and comparative advantage link to PPF diagrams ?

Answer 19

The country with whose curve is furthest from the origin has absolute advantage.

The gradient shows the opportunity cost according to how the axis are labelled. The shallower the gradient means the country has the comparative advantage.

Question 20

What are the benefits of free trade ?

Answer 20

1.Choice - increasing welfare for some customers
2.Jobs/employment
3.Specialisation
4.Economies of scale
5.Increased competition - increasing efficiency
6.Innovation - both goods and services as well as production methods

Question 21

What are the costs of free trade ?

Answer 21

1. Environmental damage
   2.Loss of sovereignty - loss of ability to make decisions about matters that affect them due to treaties
   3.Overdependence - susceptible to D&S shocks
   4.Loss of culture
   5.Unemployment - structural
   6.Distribution of income - less equal distribution if benefits leave the country

Question 22

Define economic development

Answer 22

An increase in the living standards, reduction in poverty, better diet, better housing, access to education and healthcare and more sustainable production methods

Question 23

Define protectionism

Answer 23

It occurs when countries place restrictions on imports into the economy. This includes: tariffs, quotas, embargos and export subsidies

Question 24

Define tariffs and who is imposed upon ?

Answer 24

Tax imposed on imports from another country which raises its price.

Imposed on buyer not seller i.e has to pay duties in order for their order to be released

Question 25

Define quota

Answer 25

Quantity control - helps regulate the volume of trade between countries

Question 26

Define export subsidy

Answer 26

Money given to domestic firms by the government to encourage them to sell abroad. Through lowering prices so they can compete

Question 27

Define embargo and regulation

Answer 27

1. Embargo - complete ban of imports resulting from unfavourable political or economic circumstances isolating the country
2. Regulation - limiting imports through rules. This pushed up the costs of production increasing the price

Question 28

What are the causes of protectionist policies ?

Answer 28

1. To protect infant industries - as initially they will be unable to compete with big rivals who have comparative advantage and economies of scale. Protection from cheaper imports allow them to grow.
2. To protect sunset industries - on a temporary basis to allow orderly rather than disruptive structural change in the manufacturing base. This minimises social and economic costs as labour is immobile. Therefore reducing structural unemployment.

3.Strategic trade theory - argues that it is wrong to rely on free trade and existing comparative advantage. E.g protection against unfair competition, necessary to retaliate, need support through subsidies to modernise.

4. Antidumping - to prevent dumping where a country has excess supply so it dumps the surplus on foreign markets at a below cost price. This damages domestic firms.
5. Self sufficiency - politically to ensure that a country is self sufficient in vital foodstuff, energy and raw materials in time of war.

6.Eployment - to protect doemstic employment as multinationals will go to the lowest possible labour costs

NOTE:
Choose 3 and develop analysis

Question 29

What are the consequence of protectionist policies ?

Answer 29

1. Retaliation
   2.Hit business confidence
   3.Affects consumer choice
   4.Firms become inefficient as they are too reliant on government
   5.Increased FDI - as multinationals would rather operate in that country rather than pay tariffs.
   6.Employment

Question 30

What are the degrees of international economic integration ?

Answer 30

Preference areas - free trade areas - customs union - common markets - economic unions - political unions

Question 31

Define free trade areas

Answer 31

Member countries abolish tariffs on mutual trade but each partner determines their own tariffs on trade with non member countries

Question 32

Define customs union

Answer 32

A trading bloc in which members enjoy internal free trade with all members protected by a common external tariff barrier.

Question 33

What are examples of free trade areas and custom unions ?

Answer 33

1. Free trade areas - EFTA, NAFTA
   2.Customs union - EU, EAC

Question 34

How does customs union differ from single markets ?

Answer 34

1. Customs union shares the revenue from the common external tariff in a predetermined way e.g the EU budget fund.

The EU receives revenue from custom duties, contributions from member states depending on GNI.

2. Single market is a deeper form of economic integration: free movement of labour, capital and goods and services. Moreover, it involves economic policy harmonisation in health, safety and competition policy.

The EU is both cutomes and single market

Question 35

What are the characteristics of the single European market

Answer 35

1.Free trade between members
2.Common external tariff
3.Free movement of labour, capital
4.Common product regulation
5.Some common laws
6.Some fiscal harmonisation

Question 36

Define trade creation

Answer 36

Occurs when a country enters a free trade
area / agreement or becomes involved in a customs union in which there is free trade between members but also a
common external tariff. Trade creation is the movement from a higher cost source
of output to a lower cost source of supply as a result of
joining a trade agreement

Question 37

Define trade diversion

Answer 37

Trade diversion is a switch from a lower-cost foreign source/supplier outside of a customs union towards a higher-cost supplier located inside the customs union.

Once inside a customs union, the country must now adopt a common external tariff which will then increase the cost of
importing from the 3rd party nation

Question 38

What is the aim of WTO ?

Answer 38

It helps to promote free trade by persuading countries to lower their import tariffs and other barriers to open markets including widespread use of import licenses, export subsidies and other non-tariff barriers

1.Facilitating international trade
2.Resolving trade disputes
3.chnical assistance and capacity building for developing countries

Question 39

What are the key challenges of the WTO ?

Answer 39

Complexity of production: Countries and producers increasingly specialize in certain stages of production depending on their comparative advantage. This
incentivizes countries to pursue bi-lateral trade agreements rather than agree multi-lateral trade deals

Shifting global economic power: A big challenge for the WTO is to help meet the aspirations of emerging nations and overcome strains in trade relationships
with developed nations

Fragmentation of the global trading system: A big risk for the WTO is that regional preferential trade agreements are by passing attempts to secure a new global
trade deal. Half the exports of the top 30 exporting countries in the world now go to preferential trade partners

Manily conflicts bwn countries e.g IRA angered UK and EU