Theme 4 - International Economics Flashcards
(27 cards)
What is globalisation?
The growing cultural, political, and economic integration and interdependence of countries worldwide to create a single international market
What are the characteristics of globalisation?
Increased trade as a proportion of GDP - since 1960 trade as a proportion of GDP has increased from <25% to approx. 57%
Increased foreign direct investment - many manufacturing plants have moved from developed to developing nations, and there has been a huge increase in MNCs
Increased capital flows
Increased movement of labour between countries
What are the causes of globalisation?
Trade liberalisation
Improvements in technology
Reduced cost / improvement of transport and communication
Increased significance of transnational companies
Collapse of communism in Eastern Europe and the opening up of China
Increased international labour mobility
Deregulation of financial markets
How has trade liberalisation caused globalisation?
Trade liberalisation and reduced protectionism has made it cheaper and more feasible to trade; this has been occurring since 1945. The breakdown of the soviet bloc and the opening of China has shown a whole area of the world for business to expand into.
How have improvements in tech caused globalisation?
Improvements in IT and communication allow companies to operate across the globe
How have improvements in transport infrastructure and operations caused globalisation?
Improvements in transport infrastructure and operations have meant there are quick, reliable and cheap methods to allow production to be separated around the world.
How have international financial markets caused globalisation?
International financial markets have provided the ability to raise money and move money around the world, necessary for international trade.
How have TNCs caused globalisation?
TNCs (large companies operating around the world) have led to globalisation by acting to increase their own profit as they want to take advantage of low labour costs. They sell and produce their goods all around the world and have the power to lobby governments.
What are the impacts of globalisation on consumers?
● Consumers have more choice since there are a wider range of goods available from all around the world, not just those produced in the UK.
● It can lead to lower prices as firms take advantage of comparative advantage and produce in countries with lower costs, for example low labour costs.
● In other cases, it is leading to a rise in prices since incomes are rising and so there is higher demand for goods and services.
● Many consumers worry about the loss of culture.
What are the impacts of globalisation on workers?
● In terms of employment, some people have gained whilst others have lost. There have been 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 also provide important skills and an increase in AD which increases the number of jobs.
● International competition has led to a fall in wages (or reduced growth) for low skilled workers in developed countries whilst increased those in developing countries.
● The wages for high skilled workers appear to be increasing, since there is more demand for their work; this is increasing inequality.
● TNCs tend to provide training for workers and create new jobs.
● Those working in sweatshops will see poor conditions and low wages, but this is
better than other alternatives.
What are the impacts of globalisation on producers?
● Firms are able to source products from more countries and sell them in more countries. This reduces risk since a collapse of the market in one country will have a smaller impact on the business.
● They are able to employ low skilled workers much cheaper in developing countries and can exploit comparative advantage and have larger markets, both of which can increase profits.
● Firms who are unable to compete internationally will lose out.
What are the impacts of globalisation on the government?
● The government may be able to receive higher taxes, since TNCs pay tax and so do the people they employ. However, they could lose out through tax avoidance.
● TNCs also have the power to bride and lobby governments, which could lead to corruption.
● If the government uses the correct policies, they can maximise the gains and minimise the losses.
What are the impacts of globalisation on the environment?
● The increase in world production has led to increased demand for raw materials, which of which is bad for the environment.
● Increased trade and production has also led to more emissions.
● However, globalisation means the world can work together to tackle climate change and share ideas and technology.
What are the impacts of globalisation on economic growth?
● Globalisation increases investment within countries; the investment of TNCs represents an injection into the economy, and which will have a larger impact due to the multiplier. It creates an incentive for countries to make supply-side improvements to encourage TNCs to operate in their countries.
● TNCs may bring world class management techniques and technology which can have knock on benefits to all industries as these techniques and technologies are available for them too.
● Trade will increase output since it allows exploitation of comparative advantage.
● However, the power of TNCs can cause political instability as they may support regimes which are unpopular and undemocratic but that benefit them or could hinder
regimes which don’t support them
● Comparative cost advantages will change over time and so companies may leave the country when it no longer offers an advantage which will cause structural unemployment and reduce growth.
What was the impact of covid on deglobalisation?
- World trade fell 16% in April 2020 compared with April 2019
- There was a trend of restoring (increase of 46% in the US in 2021)
- Bringing production back to developed countries due to global trade issues e.g. trade barriers, transport costs, overreliance concerns
- There was an over reliance on Taiwan for electronics and circuits (20% of semi-conductors were from Taiwan)
- There were delays from China / south east Asia due to lockdown policy
- “vaccine nationalism” countries trying to block exports
What are the benefits of globalisation?
Increased competition - results in fall in price and increase in consumer surplus. Also increased choice and quality.
Increase in skilled workers in more economically developed countries - skilled graduates are able to move to countries to work where they can demand higher wages. Impact on productivity and LRAS.
Increased tax revenues - production costs are lower due to cheaper materials/wages thus increasing profit for firms and thus corporation tax revenue.
Poverty reduction - as countries have opened up their markets to FDI/Trade, it has created jobs, increased GDP through increased exports and thus increased GDP per Capita, In China in 1990 60% of people were in absolute poverty, now more like 15%.
Job creation - MNC’s setting up in developing countries will require workers; unemployment may fall.
Increased productivity due to tech transfer / managerial techniques being shared - MNC’s setting up in developing countries bring with them technology and new managerial techniques; this helps to increase productivity as domestic firms become aware of these new methods and can adopt them.
Larger markets - Access to a wider range of consumers enables firms to produce on a larger scale and benefit from economies of scale and thus a reduction in average cost per unit as a result.
What are the drawbacks of globalisation?
Brain Drain in LEDC’s – decrease in skilled workers in LEDC’s as they move to countries where wages are higher.
Negative Externalities – resulting from increased production and trade. Pollution increases as goods are transported greater distances/increase in greenhouse gases.
Exploitation of cheap labour – low wages and long hours associated with MNC’s.
Spread of diseases due to increased migration of workers.
Dumping – country exports a product at a price lower than they would have normally charged in home market or below cost of production; markets become flooded with cheap goods and domestic firms cannot compete.
Increased unemployment as a result of increased competition and domestic firms finding it hard to establish themselves. Unemployment caused by “footloose MNC’s”.
Increased relative poverty/inequality within countries – entrepreneurs gain from increased trade and profits and become richer. Demand for unskilled labour has decreased in developed countries, so earnings gap between highest and lowest paid workers has increased. (unemployment?)
Increased vulnerability/over-dependence on imports – increased integration of countries means that they are more susceptible to global economic crises due to dependence on exports. Countries may also be over-dependent on imports if they do not have a comparative advantage and this negatively affects current account balance.
MNC’s might engage in tax avoidance therefore reducing tax revenues for governments. This could link to the fact that the developing country may not gain from the increased presence of MNC’s within the country as profits transferred back to home country.
Why is globalisation beneficial for some and not others?
Comparative advantage and specialisation - while it boosts efficiency and growth it can lead to job losses and wage suppression on sectors that become uncompetitive
Labour market effects - can lead to deindustrialisation in developed countries, and job displacement in manufacturing, particularly impacting less educated workers. Highly skilled workers and capital owners benefit from access to larger markets and cheaper inputs
Policy trilemma - you can’t simulataneouly have deep economic integration, strong democratic polices and national sovereignty
Weak redistribution mechanisms - benefits of the increase in aggregate wealth are not redistributed effectively
Example of globalisation winners and losers; The china shock in the US
Winners:
Consumers benefitted from cheaper goods
MNCs profited by offshoring production
Investors and skilled professionals gained from increased trade volumes and financial returns
Losers:
Manufacturing workers in the US lost jobs due to factory closures and import competition from China
Local economies in former industrial towns were devastated, leading to long-term unemployment, lower wages and social dislocation and many of these workers did not find comparable jobs
What is deglobalisation?
A decline in economic integration and interdependence characterised by a decline in world trade, capital movements and FDI. Mainly caused by the global financial crisis and resulting recession in many countries. This resulted in increased unemployment, fall in incomes, lower consumer confidence and therefore a fall in demand for world trade. Countries dependent on export let growth realised that they had become over dependent on trade and other countries
How has trade liberalisation led to globalisation?
Trade liberalisation refers to a reduction of trade barriers - this will open up worldwide markets
Trade barriers have fallen since WW2
New organisations were formed to increase integration - GATT (general agreement on tariffs and trade, WTO from 1995
WTO responsible for negotiating reductions in tariffs and other barriers to trade, most recently with the DOHA round:
- DOHA round began in 2001
- Objective was to reduce trade barriers around the world
- Still haven’t been any agreements - disputes over the issue of American agricultural subsidies, which are seen as trade barriers
- Recent push to start negotiations again
Some countries are reluctant to reduce trade barriers still, particularly after the global economic crisis
How have improvements in technology led to globalisation?
Tech improvements have helped speed up improvements in communications and transport
Most important development in recent years - the Internet
- Internet has been growing since the 1960s and was opened up for commercial use by the US government in 1995
- Post 1995 - Internet began to experience a rapid growth as businesses and consumers began to connect to the world wide web
- The internet has contributed to the ‘death of distance’ - much easier for people who are far away from each other to communicate
- Transaction speeds have increased
- Firms’ costs have been reduced - led to the development of online businesses such as amazon and eBay - reduces land and labour costs - means they can operate on a global scale
How has trade reduced cost/improvement of communications and transport led to globalisation?
Fall in the real cost of transporting goods has significantly decreased - allowed for the cheaper importation and exportation of goods
Decline in the cost of communication has also helped this
Improvements in transportation have also allowed firms to split up the production process to cash in on varying cost conditions in different parts of the world
This has helped to facilitate the growth of MNCs
Communications tech has developed rapidly with the growth of the Internet and e-commerce - firms can compete more easily in the global market
How has the increased significant of TNCs led to globalisation?
TNCs are large companies with production based in several different countries
After WW2 more economic power was shifted to corporations - accelerated growth
TNCs have grown even further due to favourable corporation tax rates in many countries, and tax breaks, as TNCs supposedly bring in more jobs
In 2007, the annual revenue of Wal-Mart was greater than the GDP of Sweden
There were about 78000 TNCs in 2006 - TNCs now control most of the world’s investment capital, technology and access to international markets
TNCs partake in FDI which increases the integration of economies
Many TNCs want to gain entry to, for example the EU, due to its single market and China due to its large and growing market
However, the majority of large TNCs are based in developed countries -not all encompassing
