Theme 4
4.1.1 Globalisation and its characteristics
Globalisation refers to the increasing international integration of markets for goods, services and the
factors of production.
This results in the LRAS shifting right as companies now have access to
wider markets and also due to more workers being available wages will be
depressed. Furthermore, competing global resources will improve
productivity. Access to the global consumer and an ability to invest anywhere
will also shift AD outwards.
Macro economic objectives on the whole will improve:
● However governments can only partly control inflation through controlling aggregate demand.
However, they cannot manipulate AS and global supply prices.
● There will never be much wage inflation as there is such a large global labour supply.
● A race to the bottom on taxes will occur.
● The environment will be degraded to a certain extent as more production and transport
occurs. However, it also enables technological advances on the environment to spread.
Globalisation causes:
● Goods trade is increasing, with increasing manufactured imports due to developing countries
inquiring more capital and knowledge, also accessing cheap labour and efficient forms of
transport.
● Service trade is increasing.
● Trade liberalisation, with lower barriers to trade and increasing trade growth. This includes
increased treaties and trade blocs such as the WTO and ASEAN. However, trade blocs prevent
other countries from participating in trade.
● MNCs are growing in size and number due to exploiting economies of scale and technology to
make cheap products. Marketing techniques further spread the knowledge on these goods.
They use monopolistic power, influence government decisions and engage in anti-competitive
practices to maintain this.
● International financial flows increase from international capital being owned and increased
interdependence.
● Foreign ownership of firmsis increasing.
● Communications and IT development have shrunk communication time e.g. the internet.
Consumer impact:
● Consumer choice has increased due to more goods and services becoming available.
However, arguably goods have been homogenised.
● Prices are falling as production is switched to low cost locations. However higher world
income means some products increase due to higher demand and inelastic supply.
● Incomes are rising globally as a whole improving well being and consumption, however this is
not true of stagnant incomes in the developed world and those who lose their job to others.
Worker impact:
● Employment has increased in the developing world as they gain more investors. However this
leads to structural unemployment being exacerbated in the developed world. It all depends on
labour mobility.
● Migration has increased as workers move for either economic or physical reasons. This helps
to increase employment and create more jobs. However, this may compete with other workers
and put a strain on services. Market failure and government failure creates barriers to this in
some cases.
● Wages of low skilled jobs are decreasingon average as there is increased competition.
However, high skilled jobs have rising wages as demand increases for these few jobs. This has
widened inequality in developed countries but decreased it globally.
,Producer impact:
● Specialization and economic dependence has increased with agents becoming increasingly
dependent. This also means specialization increases risks when trade links break but reduces
it when you can import things globally. This creates a large dependence on exchange rates
and prices.
● Costs have fallen due to an increase in markets as more countries open up with cheaper
factors of production and arguably less dependence.
● Footloose capitalism means firms operate in multiple countries moving to the best suited area
however, destroying and creating prosperity. This has led to the shift of production to the
developing world increasing living standards. This helps to exploit comparative advantage.
● Tax avoidance has increased due to transfer pricing through overestimating and
underestimating profits, offices in low tax countries where profits are assigned to and
transferring production facilities to low tax countries.
Government impacts:
● It brings prosperity to some countries and takes from others resulting in the adaptation of
government policies. Some governments are prone to bribery and corruption especially in
corrupt countries.
● The government loses control over inflation as monetary policy is hard to use when supply
side policies are out of hand.
● The government could gain through larger taxes from TNCs or lose out from tax avoidance.
The environment:
● Increase in production due to rising demand results in environmental degradation.
● Economic growth may be used to fight environmental depletion.
● Multinationals normally produce in the most profit maximising manner thus over degrading the
environment.
Countries:
● Economic gains may be from more incomes, different jobs, lower prices and more consumer
choice.
● Economic losses occur when industry change, unemployment, cultural erosion, environmental
depletion and lower wages occur.
● Cultural erosion and a multicultural global culture occurs.
● Countries may lose political freedom due to treaties or forces of globalisation.
Positive impacts:
● Firms can exploit economies of scale.
● The factors of production can move to activity thatearns the highest rate of return, thus
improving efficiency from comparative advantage and the rate of global economic growth.
Especially as investment may result in the multiplier effect.
● LEDCs benefit from liberalisation as capital will easily move to exploit the cheap skilled
workforce that they offer also TNCs will bring world class production techniques, helping to
generate economic growth.
Negative impacts:
● Poorer countries cannot exploit the results of globalisatione.g. a limited multiplier effect as
money leaks out in imports. Tax breaks to entice MNCs reduce government investment in
factors such as education. Low wages also hardly raise the living standard.
● Poor countries still have growth obstacles that globalisation does little to remove e.g. debt.
● Globalisation is driven by technology (90% is developed in the West who have the resources to
invest in large R&D programmes and cover the high fixed costs).
● Most FDI goes to MEDCs (Africa receives 2% of FDI).
● Many commodities on which LEDCs rely are being replaced by new technology e.g. copper or
fibre optics. Leading to falling demand and price of LEDC commodities harming their
economies.
, ● Environmental degradation occurs at a larger scale with the rich exploiting poorer countries.
4.1.2 Specialisation and trade
International trade reasons:
● Prices are cheaper in other countries mainly due to production costs. This may be due to
workforce skill, natural resources or quality of physical capital.
● Product differentiation, with some being better quality or a different type to others.
● Difference in resources, resulting in trade to receive certain factor endowments necessary.
● Political reasons with trade deals or embargos affecting trade levels.
● Wealth of countriesinfluences who can afford to buy your goods and thus who you trade with.
Comparative advantage exists when a country is able to produce a good more cheaply relative to other
goods produced domestically than another country. This theory of comparative advantagemeans
countries will be mutually advantaged to trade if the opportunity cost of production of goods differs.
Trade pattern explanations:
● An emerging country with rapid growth will export and import more, with a growing consumer
market.
● Comparative advantage changing resulting in trade between countries changing and
increasing trade as countries specialise more.
● Trade blocs and bilateral trading agreements influence the pattern of trade between
countries.
● Exchange rate changes result in the price of exportsand imports and thus demand.
Absolute advantage exists when a country is able to produce a good more cheaply in absolute terms
than another country.
Comparative advantage assumptions:
● No transport costs, whilst in reality this is added onto the price as trade occurs eliminating or
reducing some comparative advantage gains. (However, this can be spread across the large
amount of goods being transported, economies of scale).
● Costs are constant and there are no economies of scale, however this exists and benefits
international specialisation as goods become cheaper to produce.
● There are only two economies producing two goods, what and how much will be traded
actually depends on consumption patterns.
● All goods are homogenous, which they are actually not resulting in other factors such as
quality not being accounted for, thus they cannot be compared (eliminating the theory?)
● Factors of production are mobileand there is perfect mobility (costless), this is not true and
thus may result in unemployment and capital waste in the loss of business lowering living
standards.
● There are no tariffs or trade barriers and there is free trade which results in no change to the
price of the goods. However, trade partners most likely have good agreements and there are
already large free trade areas.
● The external costs are identical.
● There is perfect knowledge allowing consumers to know where the best price of goods can be
found.
● There is effective demand for the product which a country has comparative advantage.
Through comparative advantage countries are able to consume beyond their PPF.
The UK is moving towards the service sector (comparative advantage) which they thus invest in to
angle their factors of production towards that. This is what's driving its increase in exports, however
not all services can be exported.
The labour theory of valuesuggests by RIcardo that all costs could ultimately be reduced to labour
costs, so prices could be in terms of workers cost per hour of production. Thus comparative costs
, represent labour productivity. This is not true as factors such as legislation on land may change
prices. One's capital endowment in relation to their labour influences the price of capital products and
primary products.
Commodities are homogenous so imports will mainly be dependent on prices, whilst
manufactured/services are heterogeneous based on other factors e.g. quality allowing a country to be
more in control of demand. This means imports may be based on wider choice available. Domestic
competitors have the competitive edge of knowing what their market wants.
LEDCs may be stuck in a development trap due to having a comparative advantage in commodities
that have declining terms of trade.
Comparative advantage may not always lead to larger welfare as economic growth occurs, this may be
due to the fact that happiness is subjective and the production of goods one has a comparative
advantage in may come with large externalities.
4.1.3 Patterns of trade
Benefits of free trade (like a free trade area):
● Specialisation, with comparative advantage showing world output will increase through
specialisation. It also allows you to focus your resources on things that you are more
productive in, further fueling growth.
● Economies of scaleallows economies to maximise and reduce costs through comparative
advantage.
● Different countries have different factors of productionallowing them to make use of
alternative factors and gain different products.
● Choice through trade as you have a larger market consumers can access.
● Innovation as increased competition results in a more saturated market resulting in firms
searching for cut costing methods whilst improving product quality in order to remain
competitive. This helps to result in incentives that drive economic growth.
Costs of free trade:
● Overdependence may occur especially for small countries, resulting in price or demand
swings largely impacting GDP.
● A deficit in the trade balance due to increased imports.
● Dumping into markets, funded by the government causing unemployment unfairly in
developing countries.
● Unbalanced development as countries have to specialise in what they are best at which may
include mainly primary industries.
● Jobs will be lost leading to structural unemployment and output reduction, especially within
markets lacking competitiveness internationally.
● Risk increases as demand side shocks may occur such as supply being cut or credit crises
cutting off finance.
● A decline in infant industries due to them not having a chance to innovate and become
competitive due to cheaper products that have been produced for the long run.
● Global monopolies may occur resulting in consumers and workers being exploited.
● Income distribution will be less equal as trade may disproportionately go to some countries.
Furthermore the trade benefits mainly go to rich elites widening the gap.
● Loss of culturemay occur as foreign products and ideas seep into a country.
● Loss of sovereigntymay occur as trade and international treaties may be decided by other
bodies. Furthermore, private trade gives power to foreign companies and consumers.
● The environment will be depleted more as degradation and unsustainable development occur.
4.1.4 The terms of trade
The terms of tradeis the ratio between average export and import prices. Trade taking place depends
on the terms of trade. This trade is only mutually advantageous if the international selling price is
4.1.1 Globalisation and its characteristics
Globalisation refers to the increasing international integration of markets for goods, services and the
factors of production.
This results in the LRAS shifting right as companies now have access to
wider markets and also due to more workers being available wages will be
depressed. Furthermore, competing global resources will improve
productivity. Access to the global consumer and an ability to invest anywhere
will also shift AD outwards.
Macro economic objectives on the whole will improve:
● However governments can only partly control inflation through controlling aggregate demand.
However, they cannot manipulate AS and global supply prices.
● There will never be much wage inflation as there is such a large global labour supply.
● A race to the bottom on taxes will occur.
● The environment will be degraded to a certain extent as more production and transport
occurs. However, it also enables technological advances on the environment to spread.
Globalisation causes:
● Goods trade is increasing, with increasing manufactured imports due to developing countries
inquiring more capital and knowledge, also accessing cheap labour and efficient forms of
transport.
● Service trade is increasing.
● Trade liberalisation, with lower barriers to trade and increasing trade growth. This includes
increased treaties and trade blocs such as the WTO and ASEAN. However, trade blocs prevent
other countries from participating in trade.
● MNCs are growing in size and number due to exploiting economies of scale and technology to
make cheap products. Marketing techniques further spread the knowledge on these goods.
They use monopolistic power, influence government decisions and engage in anti-competitive
practices to maintain this.
● International financial flows increase from international capital being owned and increased
interdependence.
● Foreign ownership of firmsis increasing.
● Communications and IT development have shrunk communication time e.g. the internet.
Consumer impact:
● Consumer choice has increased due to more goods and services becoming available.
However, arguably goods have been homogenised.
● Prices are falling as production is switched to low cost locations. However higher world
income means some products increase due to higher demand and inelastic supply.
● Incomes are rising globally as a whole improving well being and consumption, however this is
not true of stagnant incomes in the developed world and those who lose their job to others.
Worker impact:
● Employment has increased in the developing world as they gain more investors. However this
leads to structural unemployment being exacerbated in the developed world. It all depends on
labour mobility.
● Migration has increased as workers move for either economic or physical reasons. This helps
to increase employment and create more jobs. However, this may compete with other workers
and put a strain on services. Market failure and government failure creates barriers to this in
some cases.
● Wages of low skilled jobs are decreasingon average as there is increased competition.
However, high skilled jobs have rising wages as demand increases for these few jobs. This has
widened inequality in developed countries but decreased it globally.
,Producer impact:
● Specialization and economic dependence has increased with agents becoming increasingly
dependent. This also means specialization increases risks when trade links break but reduces
it when you can import things globally. This creates a large dependence on exchange rates
and prices.
● Costs have fallen due to an increase in markets as more countries open up with cheaper
factors of production and arguably less dependence.
● Footloose capitalism means firms operate in multiple countries moving to the best suited area
however, destroying and creating prosperity. This has led to the shift of production to the
developing world increasing living standards. This helps to exploit comparative advantage.
● Tax avoidance has increased due to transfer pricing through overestimating and
underestimating profits, offices in low tax countries where profits are assigned to and
transferring production facilities to low tax countries.
Government impacts:
● It brings prosperity to some countries and takes from others resulting in the adaptation of
government policies. Some governments are prone to bribery and corruption especially in
corrupt countries.
● The government loses control over inflation as monetary policy is hard to use when supply
side policies are out of hand.
● The government could gain through larger taxes from TNCs or lose out from tax avoidance.
The environment:
● Increase in production due to rising demand results in environmental degradation.
● Economic growth may be used to fight environmental depletion.
● Multinationals normally produce in the most profit maximising manner thus over degrading the
environment.
Countries:
● Economic gains may be from more incomes, different jobs, lower prices and more consumer
choice.
● Economic losses occur when industry change, unemployment, cultural erosion, environmental
depletion and lower wages occur.
● Cultural erosion and a multicultural global culture occurs.
● Countries may lose political freedom due to treaties or forces of globalisation.
Positive impacts:
● Firms can exploit economies of scale.
● The factors of production can move to activity thatearns the highest rate of return, thus
improving efficiency from comparative advantage and the rate of global economic growth.
Especially as investment may result in the multiplier effect.
● LEDCs benefit from liberalisation as capital will easily move to exploit the cheap skilled
workforce that they offer also TNCs will bring world class production techniques, helping to
generate economic growth.
Negative impacts:
● Poorer countries cannot exploit the results of globalisatione.g. a limited multiplier effect as
money leaks out in imports. Tax breaks to entice MNCs reduce government investment in
factors such as education. Low wages also hardly raise the living standard.
● Poor countries still have growth obstacles that globalisation does little to remove e.g. debt.
● Globalisation is driven by technology (90% is developed in the West who have the resources to
invest in large R&D programmes and cover the high fixed costs).
● Most FDI goes to MEDCs (Africa receives 2% of FDI).
● Many commodities on which LEDCs rely are being replaced by new technology e.g. copper or
fibre optics. Leading to falling demand and price of LEDC commodities harming their
economies.
, ● Environmental degradation occurs at a larger scale with the rich exploiting poorer countries.
4.1.2 Specialisation and trade
International trade reasons:
● Prices are cheaper in other countries mainly due to production costs. This may be due to
workforce skill, natural resources or quality of physical capital.
● Product differentiation, with some being better quality or a different type to others.
● Difference in resources, resulting in trade to receive certain factor endowments necessary.
● Political reasons with trade deals or embargos affecting trade levels.
● Wealth of countriesinfluences who can afford to buy your goods and thus who you trade with.
Comparative advantage exists when a country is able to produce a good more cheaply relative to other
goods produced domestically than another country. This theory of comparative advantagemeans
countries will be mutually advantaged to trade if the opportunity cost of production of goods differs.
Trade pattern explanations:
● An emerging country with rapid growth will export and import more, with a growing consumer
market.
● Comparative advantage changing resulting in trade between countries changing and
increasing trade as countries specialise more.
● Trade blocs and bilateral trading agreements influence the pattern of trade between
countries.
● Exchange rate changes result in the price of exportsand imports and thus demand.
Absolute advantage exists when a country is able to produce a good more cheaply in absolute terms
than another country.
Comparative advantage assumptions:
● No transport costs, whilst in reality this is added onto the price as trade occurs eliminating or
reducing some comparative advantage gains. (However, this can be spread across the large
amount of goods being transported, economies of scale).
● Costs are constant and there are no economies of scale, however this exists and benefits
international specialisation as goods become cheaper to produce.
● There are only two economies producing two goods, what and how much will be traded
actually depends on consumption patterns.
● All goods are homogenous, which they are actually not resulting in other factors such as
quality not being accounted for, thus they cannot be compared (eliminating the theory?)
● Factors of production are mobileand there is perfect mobility (costless), this is not true and
thus may result in unemployment and capital waste in the loss of business lowering living
standards.
● There are no tariffs or trade barriers and there is free trade which results in no change to the
price of the goods. However, trade partners most likely have good agreements and there are
already large free trade areas.
● The external costs are identical.
● There is perfect knowledge allowing consumers to know where the best price of goods can be
found.
● There is effective demand for the product which a country has comparative advantage.
Through comparative advantage countries are able to consume beyond their PPF.
The UK is moving towards the service sector (comparative advantage) which they thus invest in to
angle their factors of production towards that. This is what's driving its increase in exports, however
not all services can be exported.
The labour theory of valuesuggests by RIcardo that all costs could ultimately be reduced to labour
costs, so prices could be in terms of workers cost per hour of production. Thus comparative costs
, represent labour productivity. This is not true as factors such as legislation on land may change
prices. One's capital endowment in relation to their labour influences the price of capital products and
primary products.
Commodities are homogenous so imports will mainly be dependent on prices, whilst
manufactured/services are heterogeneous based on other factors e.g. quality allowing a country to be
more in control of demand. This means imports may be based on wider choice available. Domestic
competitors have the competitive edge of knowing what their market wants.
LEDCs may be stuck in a development trap due to having a comparative advantage in commodities
that have declining terms of trade.
Comparative advantage may not always lead to larger welfare as economic growth occurs, this may be
due to the fact that happiness is subjective and the production of goods one has a comparative
advantage in may come with large externalities.
4.1.3 Patterns of trade
Benefits of free trade (like a free trade area):
● Specialisation, with comparative advantage showing world output will increase through
specialisation. It also allows you to focus your resources on things that you are more
productive in, further fueling growth.
● Economies of scaleallows economies to maximise and reduce costs through comparative
advantage.
● Different countries have different factors of productionallowing them to make use of
alternative factors and gain different products.
● Choice through trade as you have a larger market consumers can access.
● Innovation as increased competition results in a more saturated market resulting in firms
searching for cut costing methods whilst improving product quality in order to remain
competitive. This helps to result in incentives that drive economic growth.
Costs of free trade:
● Overdependence may occur especially for small countries, resulting in price or demand
swings largely impacting GDP.
● A deficit in the trade balance due to increased imports.
● Dumping into markets, funded by the government causing unemployment unfairly in
developing countries.
● Unbalanced development as countries have to specialise in what they are best at which may
include mainly primary industries.
● Jobs will be lost leading to structural unemployment and output reduction, especially within
markets lacking competitiveness internationally.
● Risk increases as demand side shocks may occur such as supply being cut or credit crises
cutting off finance.
● A decline in infant industries due to them not having a chance to innovate and become
competitive due to cheaper products that have been produced for the long run.
● Global monopolies may occur resulting in consumers and workers being exploited.
● Income distribution will be less equal as trade may disproportionately go to some countries.
Furthermore the trade benefits mainly go to rich elites widening the gap.
● Loss of culturemay occur as foreign products and ideas seep into a country.
● Loss of sovereigntymay occur as trade and international treaties may be decided by other
bodies. Furthermore, private trade gives power to foreign companies and consumers.
● The environment will be depleted more as degradation and unsustainable development occur.
4.1.4 The terms of trade
The terms of tradeis the ratio between average export and import prices. Trade taking place depends
on the terms of trade. This trade is only mutually advantageous if the international selling price is
