The International Economy: Globalisation and International Trade
The role of multinational corporations in globalisation
• MNC’s business enterprises operating several countries to manage production or deliver goods/services, but HQ in one
country.
• Growth MNCs since 1970’s driven globalisation 4 main ways:
• Economic integration and increased trade: MNC’s built global production platforms, enable specialisation + take advantage
global division labour (Apple products: ‘designed in California, assembled in China’).
➢ Organising global production platforms/supply chains across international boundaries, MNC’s increased economic
integration different countries.
➢ Technological revolution communication/transportation allowed MNC’s coordinate global business activities + open
new markets.
➢ Trade flows increased as MNC’s utilised their global supply chains
• Investment and technology transfers: global mindset, locate operations/invest countries offering best opportunities.
➢ Late 1990’s, oil company British Petroleum changed to BP (reflect global identity).
➢ Since 1990’s Chinese government attracted FDI worth billions dollars from MNCs. Chinese currency remained relatively
weak against US dollar + abundant supply cheap labour meant firms located low/medium-skilled manufacturing in China +
reduce production costs.
➢ Since 1990’s, hundreds millions Chinese workers lifted out of poverty as a result.
➢ Long-term investment flows by MNC’s seen technology transferred from developed economies (UK/USA) to emerging
markets, enabling industrialisation
➢ Shift economic power created tensions (notably US/China). American firms unhappy lack legal protection + cases theft
intellectual property. US businesses forced exchange proprietary technology exchange access Chinese mainland markets.
➢ Has eroded US technological proficiency – cause 2018 US/China trade war: Trump arguing forced tech transfers amounted
to illegal state aid by Chinese gov.
• Changing employment patterns and global capitalism: globalisation seen MNCs transform worldwide employment patterns
➢ Long-term trend manufacturing/industrial production shift from West to East, resulted structural employment + large
pockets poverty in West but millions jobs in East.
➢ MNC’s profit-maximising enterprises, used leverage to demand favourable business environments.
➢ Decades, gov’s across world under pressure cut corporate taxes, reduce social protection workers, resist environmental
protection + ‘light-touch’ regulation.
➢ Globalisation driven by demands MNCs; higher incomes reduced level inequality between developed/emerging markets
(consequences: environmental degradation, pollution, workers’ rights etc).
➢ As a result, no. workers developed economies experienced stagnation living standards and lower real incomes, increasing
inequality.
• The global market and international brands: MNCs all compete globally, seeking operate global scale production, benefit E of S
to reduce costs production.
➢ Standardised products eroded national boundaries, widening consumer choice. Resulted local firms disappearing or
assimilated into MN conglomerates elsewhere.
Trade
• In a closed economy, Iceland’s production possibilities severely limited. Average costs production likely high due to narrow
resource base/small population. Consumption possibilities equally low.
• Within world economy, imports raw material/energy greatly boosts Iceland’s PPF.
• Access world market, Iceland’s firms benefit E of S + long production runs; consumers provided vast array choice, higher living
standards/levels economic welfare.
• Arguments outlined support using trade widen production + consumption possibilities, and the dependency of countries like UK
and Iceland on foreign trade. Reflected by successive UK gov’s supporting unrestricted foreign trade + investment.
The model of absolute and comparative advantage
• American statesman Benjamin Franklin (1706–1790): “No nation was ever ruined by trade.” Many economists’ express
attitudes toward international trade in even more positive manner. Evidence international trade confers overall benefits on
economies strong.
• Absolute advantage: ability produce more of a good than another country with equal resources
• Can be result of a country’s natural endowment e.g., extracting oil in Saudi Arabia much simpler compared other countries
requiring considerable exploration/costly technologies
• Each country has product others need - produced with fewer resources in one country over another, then easy imagine all
parties benefitting from trade.
• However, trade occurs due to comparative advantage.
• Comparative advantage: country with least opportunity cost when producing a good possess comparative advantage in that
good.
• Considering a hypothetical word of two countries, the concept of comparative advantage one justification world trade.
, Adam Smith, David Ricardo and absolute/comparative advantage
• Adam Smith credited introducing concept absolute advantage 18th century in ‘The Wealth of Nations’.
• Early 19th century: distinguished classical economist David Ricardo, developed Smith’s ideas into principle comparative
advantage.
• Neither interested solely abstract economy theory; instead wished change society for better.
• Smith + Ricardo believed in virtues competitive market economy + industrial capitalism.
• Ricardo believed the whole world economy can only reach its full productive potential, maximising output, welfare + living
standards, if market economy truly international.
• Argued each country specialise in activities in which possess comparative advantage; trade surplus in world free
tariffs/protectionism.
The assumptions underlying the principle of comparative advantage
• Case trade + hence case against import controls + other forms protectionism heavily dependent upon assumptions.
• Arguments favour import controls + against free trade depend showing assumption necessary benefits specialisation/trade to
occur simply not met real life:
• Each country’s endowment of factors production fixed + immobile between countries.
➢ In course international trade, finished goods rather than factors production or inputs assumed mobile between countries.
• Constant returns to scale. Real world: increasing/decreasing returns scale.
➢ Specialisation levels adaptive (decreasing returns can erode efficiency + destroy initial comparative advantage – e.g.,
overspecialisation agriculture leading to monoculture – leads soi erosion, vulnerability pests + falling yields).
• Demand + cost conditions stable. Overspecialisation leave country sensitive demand shocks + costs/availability raw materials.
Technological advantages may eliminate initial comparative advantage.
➢ Greater future uncertainty, weaker case specialising narrow range products.
Comparative advantage vs competitive advantage
• Competitive advantage: producing better-quality goods at lower costs + better process than rivals
• Dynamic factors promoting growth firms can create competitive advantage.
• Successful investment, funded + organised R+D combined with education + training stock human capital providing scope
competitive advantage occur.
• Factors can trigger virtuous spiral larger profits, higher investment, better products + greater sales, leads higher profits. Vicious
cycle decline can be unleashed as a consequence for other countries losing competitive advantage.
• Supporters free trade argue increased competition countries with absence import duties/protectionist policies creates exactly
circumstances needed foster growth competitive advantage.
• Strategic trade theory, anti-free trade economists argue protectionism for providing selected industries with competitive
advantage against rest of the world.
The argument for protectionism and import controls
• Quantity controls such as quotas (set limit max no. imports) + tariffs/import duties (raise price imports).
• Supporters free trade believe import controls prevent countries specialising activities which they have comparative advantage
+ from trading surpluses.
• Production takes place inefficiently + economic welfare reduced.
• However, case free trade depends to large extent upon assumptions underlying principle comparative advantage (relax
assumptions + case free trade weakened).
• However, proponents free trade emphasises dynamic benefits opening economy to worldwide competition.
Justifications import controls:
• Infant industries: developing countries justify use import controls to protect infant industries from established rivals in
advanced industries. Argued protectionism needed while newly established industries develop + achieve full E of S.
• Sunset Industries: similar argument infant industries sometimes made advanced industrial economies such as UK to protect
older industries from competition infant industries in developing countries.
➢ Economists advocate selective use import controls as potentially effective supply-side policy instrument prevent
unnecessary deindustrialisation + allow orderly rather than disruptive structural change in manufacturing base economy.
➢ According to view import controls justified temporary basis to minimise social + economic cost painful adjustment process
as structure economy adapts to changing demand or changing technology + comparative and competitive advantage.
• Strategic trade theory: infant and sunset industries arguments closely related to strategic trade theory, argues
comparative/competitive advantage often ‘natural’.
➢ Rather governments try create situations by nurturing strategically selected industries or economic sectors. Justifies
protecting industries while competitive advantage built up, causing spill-over effects other industries
➢ Also argues protectionism prevent exploitation by foreign-based monopolies. Policies such as trade adjustment assistance
+ subsidies exports to protect industries foreign competition. However, export subsidies violate WTO rules.
• Agricultural efficiency: monoculture, result overspecialisation, eroding efficiency + destroying comparative advantage.
Decreasing returns scale weaken case specialisation
The role of multinational corporations in globalisation
• MNC’s business enterprises operating several countries to manage production or deliver goods/services, but HQ in one
country.
• Growth MNCs since 1970’s driven globalisation 4 main ways:
• Economic integration and increased trade: MNC’s built global production platforms, enable specialisation + take advantage
global division labour (Apple products: ‘designed in California, assembled in China’).
➢ Organising global production platforms/supply chains across international boundaries, MNC’s increased economic
integration different countries.
➢ Technological revolution communication/transportation allowed MNC’s coordinate global business activities + open
new markets.
➢ Trade flows increased as MNC’s utilised their global supply chains
• Investment and technology transfers: global mindset, locate operations/invest countries offering best opportunities.
➢ Late 1990’s, oil company British Petroleum changed to BP (reflect global identity).
➢ Since 1990’s Chinese government attracted FDI worth billions dollars from MNCs. Chinese currency remained relatively
weak against US dollar + abundant supply cheap labour meant firms located low/medium-skilled manufacturing in China +
reduce production costs.
➢ Since 1990’s, hundreds millions Chinese workers lifted out of poverty as a result.
➢ Long-term investment flows by MNC’s seen technology transferred from developed economies (UK/USA) to emerging
markets, enabling industrialisation
➢ Shift economic power created tensions (notably US/China). American firms unhappy lack legal protection + cases theft
intellectual property. US businesses forced exchange proprietary technology exchange access Chinese mainland markets.
➢ Has eroded US technological proficiency – cause 2018 US/China trade war: Trump arguing forced tech transfers amounted
to illegal state aid by Chinese gov.
• Changing employment patterns and global capitalism: globalisation seen MNCs transform worldwide employment patterns
➢ Long-term trend manufacturing/industrial production shift from West to East, resulted structural employment + large
pockets poverty in West but millions jobs in East.
➢ MNC’s profit-maximising enterprises, used leverage to demand favourable business environments.
➢ Decades, gov’s across world under pressure cut corporate taxes, reduce social protection workers, resist environmental
protection + ‘light-touch’ regulation.
➢ Globalisation driven by demands MNCs; higher incomes reduced level inequality between developed/emerging markets
(consequences: environmental degradation, pollution, workers’ rights etc).
➢ As a result, no. workers developed economies experienced stagnation living standards and lower real incomes, increasing
inequality.
• The global market and international brands: MNCs all compete globally, seeking operate global scale production, benefit E of S
to reduce costs production.
➢ Standardised products eroded national boundaries, widening consumer choice. Resulted local firms disappearing or
assimilated into MN conglomerates elsewhere.
Trade
• In a closed economy, Iceland’s production possibilities severely limited. Average costs production likely high due to narrow
resource base/small population. Consumption possibilities equally low.
• Within world economy, imports raw material/energy greatly boosts Iceland’s PPF.
• Access world market, Iceland’s firms benefit E of S + long production runs; consumers provided vast array choice, higher living
standards/levels economic welfare.
• Arguments outlined support using trade widen production + consumption possibilities, and the dependency of countries like UK
and Iceland on foreign trade. Reflected by successive UK gov’s supporting unrestricted foreign trade + investment.
The model of absolute and comparative advantage
• American statesman Benjamin Franklin (1706–1790): “No nation was ever ruined by trade.” Many economists’ express
attitudes toward international trade in even more positive manner. Evidence international trade confers overall benefits on
economies strong.
• Absolute advantage: ability produce more of a good than another country with equal resources
• Can be result of a country’s natural endowment e.g., extracting oil in Saudi Arabia much simpler compared other countries
requiring considerable exploration/costly technologies
• Each country has product others need - produced with fewer resources in one country over another, then easy imagine all
parties benefitting from trade.
• However, trade occurs due to comparative advantage.
• Comparative advantage: country with least opportunity cost when producing a good possess comparative advantage in that
good.
• Considering a hypothetical word of two countries, the concept of comparative advantage one justification world trade.
, Adam Smith, David Ricardo and absolute/comparative advantage
• Adam Smith credited introducing concept absolute advantage 18th century in ‘The Wealth of Nations’.
• Early 19th century: distinguished classical economist David Ricardo, developed Smith’s ideas into principle comparative
advantage.
• Neither interested solely abstract economy theory; instead wished change society for better.
• Smith + Ricardo believed in virtues competitive market economy + industrial capitalism.
• Ricardo believed the whole world economy can only reach its full productive potential, maximising output, welfare + living
standards, if market economy truly international.
• Argued each country specialise in activities in which possess comparative advantage; trade surplus in world free
tariffs/protectionism.
The assumptions underlying the principle of comparative advantage
• Case trade + hence case against import controls + other forms protectionism heavily dependent upon assumptions.
• Arguments favour import controls + against free trade depend showing assumption necessary benefits specialisation/trade to
occur simply not met real life:
• Each country’s endowment of factors production fixed + immobile between countries.
➢ In course international trade, finished goods rather than factors production or inputs assumed mobile between countries.
• Constant returns to scale. Real world: increasing/decreasing returns scale.
➢ Specialisation levels adaptive (decreasing returns can erode efficiency + destroy initial comparative advantage – e.g.,
overspecialisation agriculture leading to monoculture – leads soi erosion, vulnerability pests + falling yields).
• Demand + cost conditions stable. Overspecialisation leave country sensitive demand shocks + costs/availability raw materials.
Technological advantages may eliminate initial comparative advantage.
➢ Greater future uncertainty, weaker case specialising narrow range products.
Comparative advantage vs competitive advantage
• Competitive advantage: producing better-quality goods at lower costs + better process than rivals
• Dynamic factors promoting growth firms can create competitive advantage.
• Successful investment, funded + organised R+D combined with education + training stock human capital providing scope
competitive advantage occur.
• Factors can trigger virtuous spiral larger profits, higher investment, better products + greater sales, leads higher profits. Vicious
cycle decline can be unleashed as a consequence for other countries losing competitive advantage.
• Supporters free trade argue increased competition countries with absence import duties/protectionist policies creates exactly
circumstances needed foster growth competitive advantage.
• Strategic trade theory, anti-free trade economists argue protectionism for providing selected industries with competitive
advantage against rest of the world.
The argument for protectionism and import controls
• Quantity controls such as quotas (set limit max no. imports) + tariffs/import duties (raise price imports).
• Supporters free trade believe import controls prevent countries specialising activities which they have comparative advantage
+ from trading surpluses.
• Production takes place inefficiently + economic welfare reduced.
• However, case free trade depends to large extent upon assumptions underlying principle comparative advantage (relax
assumptions + case free trade weakened).
• However, proponents free trade emphasises dynamic benefits opening economy to worldwide competition.
Justifications import controls:
• Infant industries: developing countries justify use import controls to protect infant industries from established rivals in
advanced industries. Argued protectionism needed while newly established industries develop + achieve full E of S.
• Sunset Industries: similar argument infant industries sometimes made advanced industrial economies such as UK to protect
older industries from competition infant industries in developing countries.
➢ Economists advocate selective use import controls as potentially effective supply-side policy instrument prevent
unnecessary deindustrialisation + allow orderly rather than disruptive structural change in manufacturing base economy.
➢ According to view import controls justified temporary basis to minimise social + economic cost painful adjustment process
as structure economy adapts to changing demand or changing technology + comparative and competitive advantage.
• Strategic trade theory: infant and sunset industries arguments closely related to strategic trade theory, argues
comparative/competitive advantage often ‘natural’.
➢ Rather governments try create situations by nurturing strategically selected industries or economic sectors. Justifies
protecting industries while competitive advantage built up, causing spill-over effects other industries
➢ Also argues protectionism prevent exploitation by foreign-based monopolies. Policies such as trade adjustment assistance
+ subsidies exports to protect industries foreign competition. However, export subsidies violate WTO rules.
• Agricultural efficiency: monoculture, result overspecialisation, eroding efficiency + destroying comparative advantage.
Decreasing returns scale weaken case specialisation
