International A level (IAL)
Edexcel Economics
Unit 4: Developments in the global economy
Red - Applications
Green - Key words/phrases/important
, TOPIC 1 - CHARACTERISTICS OF
GLOBALISATION
Globalisation
● Globalisation refers to the increasing integration of economies through the free flow of
goods, services, capital and labour across borders.
● Characteristics of globalisation:
➔ Increase in trade as a proportion of GDP: Export share of world GDP has risen
over the past 50 years. Both exports and imports as a percentage of GDP have
increased for countries. Developing countries are exporting manufactured goods to
developed countries, whereas developed countries are exporting services to
developing countries.
➔ Increase in importance of transnational companies (TNCs) and foreign direct
investment (FDI): The number of TNCs has increased over the years, as well as the
size of TNCs. Examples include The Coca-Cola Company, McDonald’s, Apple Inc.,
etc. In addition, FDI has increased between countries due to the opening up of
financial markets.
➔ Increase in migration: Migration has increased, mainly to developed countries, for
people to enjoy better standards of living. This has been possible because of lower
transport costs and increased income.
1
, TOPIC 2 - CAUSES OF GLOBALISATION
Factors contributing to increased globalisation in the last 50 years
● Trade liberalisation: Trade liberalisation is the elimination or reduction of barriers to
international trade to increase free trade between countries. As more and more countries
became members of the World Trade Organisation (WTO), trade liberalisation increased.
Countries lowered or removed their protectionist policies and allowed free trade of goods
and services, leading to globalisation. By 2018, 164 members were part of the WTO.
● Increased number and size of trading blocs: The number of trading blocs has increased
significantly over the last 50 years and is still rising. Trading blocs lead to free flow of goods
and services, sometimes labour and capital as well, between the member countries of the
trading blocs which increases world trade and export share of world GDP. E.g. European
Union (EU), the North American Free Trade Agreement (NAFTA).
● Political change:
➔ In the 1980s and 90s, when the Soviet system was breaking down and the USSR
countries moved away from a centrally planned economic system, trade between the
West and Russia (and the USSR countries) was allowed. Exports and imports
among these countries increased and led to international trade.
➔ China opened up to foreign trade and moved towards a more market-based
economy from the 1980s. Due to China’s size, population and cheap labour,
manufacturing jobs and factories moved to China. China started consuming more of
the world’s raw materials while exporting the finished goods to the rest of the world,
leading to an increase in world trade.
● Reduced cost of transportation and communication:
➔ Average transport costs have fallen significantly. Improvements in transport
infrastructure have made it easier and cheaper to distribute goods around the world;
larger planes, ships, and containerisation allow firms to send a large number of
products, so the cost of transport is spread over a large number of units, lowering
average transport costs.
➔ Advanced technology and development in communications reduce the time needed
for economic agents to communicate with each other. This is because of the internet
and social media apps. This makes trade easier and allows workers to work sitting in
other countries, lowering costs.
● Increased significance of TNCs: TNCs spread business operations across multiple
countries, creating a global production and distribution network. This allows them to tap into
new markets and take advantage of lower production costs in certain regions. They
increase world trade as they import raw materials into the country where their products are
manufactured, and then export them to their target country.
2
, Foreign Direct Investment (FDI) by Transnational Companies (TNCs)
Reasons for FDI
● Allows firms to operate close to the source of commodities/ raw materials
● Avoid protectionist measures by operating inside a trading bloc
● Earn higher profits by exploiting lower labour costs, tax rates and regulations
● Become price-competitive from lower costs
● Increase market share by selling products in new markets
● Allows firms to get access to cheap but sufficiently skilled labour
The impact of FDI on recipient countries
● Positive impacts:
➔ FDI is an injection into the circular flow of income → creates jobs → increases
employment → increases the productive potential and long-run aggregate supply
(LRAS) of the economy → potential economic growth → multiplier effect. E.g. Toyota
has two manufacturing plants in the UK, which have created many jobs, trained their
workforce and boosted business in the local economies.
➔ FDI creates jobs → employment increases → higher and more income →
consumption increases → aggregate demand (AD) increases → economic growth →
better living standards. For example, China’s economic growth increased over the
years due to the jobs created by multinationals such as Apple and Nike.
➔ TNCs train employees → production and management skills would be transferred to
the local economy of the country in the long run → increased productivity and
improved quality of human capital → increase potential economic growth/ LRAS.
E.g. Intel has its largest assembly and test facility in Vietnam, investing over $1
billion there. Intel has contributed significantly in Vietnam by creating partnerships
and investing in programs focusing on education, environment, sustainability and
community volunteering.
➔ FDI → creates competition in local markets with TNCs → local firms become more
efficient and productive → low prices and more choices → consumer welfare
improves → living standards improve.
➔ TNCs may help to build up infrastructure in the recipient country, such as bridges,
railways and roads, which would benefit local firms and people. The government
may also spend on infrastructure projects to attract FDI, such as improving power
supplies or road networks, which lowers transport costs for local firms and
commuting time for workers. Either way, efficiency and productivity will improve, and
costs will fall. For example, the launch of the Dhaka Metro Rail and Dhaka Elevated
Expressway in Bangladesh has led to faster transport and commuting times.
➔ FDI can lead to higher tax revenue for the government, reducing their fiscal deficits:
✔ Increased employment → higher income → increased income tax
✔ Higher profits by TNCs → higher corporate tax
✔ Increased consumption from higher income and employment → increased
VAT from goods and services sales
3
Edexcel Economics
Unit 4: Developments in the global economy
Red - Applications
Green - Key words/phrases/important
, TOPIC 1 - CHARACTERISTICS OF
GLOBALISATION
Globalisation
● Globalisation refers to the increasing integration of economies through the free flow of
goods, services, capital and labour across borders.
● Characteristics of globalisation:
➔ Increase in trade as a proportion of GDP: Export share of world GDP has risen
over the past 50 years. Both exports and imports as a percentage of GDP have
increased for countries. Developing countries are exporting manufactured goods to
developed countries, whereas developed countries are exporting services to
developing countries.
➔ Increase in importance of transnational companies (TNCs) and foreign direct
investment (FDI): The number of TNCs has increased over the years, as well as the
size of TNCs. Examples include The Coca-Cola Company, McDonald’s, Apple Inc.,
etc. In addition, FDI has increased between countries due to the opening up of
financial markets.
➔ Increase in migration: Migration has increased, mainly to developed countries, for
people to enjoy better standards of living. This has been possible because of lower
transport costs and increased income.
1
, TOPIC 2 - CAUSES OF GLOBALISATION
Factors contributing to increased globalisation in the last 50 years
● Trade liberalisation: Trade liberalisation is the elimination or reduction of barriers to
international trade to increase free trade between countries. As more and more countries
became members of the World Trade Organisation (WTO), trade liberalisation increased.
Countries lowered or removed their protectionist policies and allowed free trade of goods
and services, leading to globalisation. By 2018, 164 members were part of the WTO.
● Increased number and size of trading blocs: The number of trading blocs has increased
significantly over the last 50 years and is still rising. Trading blocs lead to free flow of goods
and services, sometimes labour and capital as well, between the member countries of the
trading blocs which increases world trade and export share of world GDP. E.g. European
Union (EU), the North American Free Trade Agreement (NAFTA).
● Political change:
➔ In the 1980s and 90s, when the Soviet system was breaking down and the USSR
countries moved away from a centrally planned economic system, trade between the
West and Russia (and the USSR countries) was allowed. Exports and imports
among these countries increased and led to international trade.
➔ China opened up to foreign trade and moved towards a more market-based
economy from the 1980s. Due to China’s size, population and cheap labour,
manufacturing jobs and factories moved to China. China started consuming more of
the world’s raw materials while exporting the finished goods to the rest of the world,
leading to an increase in world trade.
● Reduced cost of transportation and communication:
➔ Average transport costs have fallen significantly. Improvements in transport
infrastructure have made it easier and cheaper to distribute goods around the world;
larger planes, ships, and containerisation allow firms to send a large number of
products, so the cost of transport is spread over a large number of units, lowering
average transport costs.
➔ Advanced technology and development in communications reduce the time needed
for economic agents to communicate with each other. This is because of the internet
and social media apps. This makes trade easier and allows workers to work sitting in
other countries, lowering costs.
● Increased significance of TNCs: TNCs spread business operations across multiple
countries, creating a global production and distribution network. This allows them to tap into
new markets and take advantage of lower production costs in certain regions. They
increase world trade as they import raw materials into the country where their products are
manufactured, and then export them to their target country.
2
, Foreign Direct Investment (FDI) by Transnational Companies (TNCs)
Reasons for FDI
● Allows firms to operate close to the source of commodities/ raw materials
● Avoid protectionist measures by operating inside a trading bloc
● Earn higher profits by exploiting lower labour costs, tax rates and regulations
● Become price-competitive from lower costs
● Increase market share by selling products in new markets
● Allows firms to get access to cheap but sufficiently skilled labour
The impact of FDI on recipient countries
● Positive impacts:
➔ FDI is an injection into the circular flow of income → creates jobs → increases
employment → increases the productive potential and long-run aggregate supply
(LRAS) of the economy → potential economic growth → multiplier effect. E.g. Toyota
has two manufacturing plants in the UK, which have created many jobs, trained their
workforce and boosted business in the local economies.
➔ FDI creates jobs → employment increases → higher and more income →
consumption increases → aggregate demand (AD) increases → economic growth →
better living standards. For example, China’s economic growth increased over the
years due to the jobs created by multinationals such as Apple and Nike.
➔ TNCs train employees → production and management skills would be transferred to
the local economy of the country in the long run → increased productivity and
improved quality of human capital → increase potential economic growth/ LRAS.
E.g. Intel has its largest assembly and test facility in Vietnam, investing over $1
billion there. Intel has contributed significantly in Vietnam by creating partnerships
and investing in programs focusing on education, environment, sustainability and
community volunteering.
➔ FDI → creates competition in local markets with TNCs → local firms become more
efficient and productive → low prices and more choices → consumer welfare
improves → living standards improve.
➔ TNCs may help to build up infrastructure in the recipient country, such as bridges,
railways and roads, which would benefit local firms and people. The government
may also spend on infrastructure projects to attract FDI, such as improving power
supplies or road networks, which lowers transport costs for local firms and
commuting time for workers. Either way, efficiency and productivity will improve, and
costs will fall. For example, the launch of the Dhaka Metro Rail and Dhaka Elevated
Expressway in Bangladesh has led to faster transport and commuting times.
➔ FDI can lead to higher tax revenue for the government, reducing their fiscal deficits:
✔ Increased employment → higher income → increased income tax
✔ Higher profits by TNCs → higher corporate tax
✔ Increased consumption from higher income and employment → increased
VAT from goods and services sales
3
