International Economics (4.1)
Globalisation
Characteristics of Globalisation
• Globalisation is the integration of the world’s local, regional and national economies
into a single international market
Economic integration can be broken down into 4 areas;
1. Free trade across national boundaries of goods & services
o Firms in London can sell as easily to firms in Birmingham/Poland
2. Free movement of labour between countries
o E.g. – Free movement of labour in UK or in the EU
3. Free movement of capital
o UK firms can invest in Chinese firms
4. Free interchange of technology across national boundaries
o UK company can use its own patented technology in a factory in Brazil as well
as it could in a UK factory
Extent of Globalisation
• A world with no boundaries to trade in G&S and perfectly free movement of capital,
labour & technology
• A world with no trade of movement will be highly localised
• The world currently is between the 2 extremes
Causes of Globalisation
• Trade in goods – Rich developed countries are able to have goods manufactured
abroad in developing countries (China/India) – cheap labour = cheaper cost
• Trade liberalisation – removal/ reduction of barriers to trade, e.g. tariffs and quotas
o International trade collapsed in 1930s and went into the Great Depression.
Protectionist barriers have decreased since 1945
o Caused the increase of MNCs and TNCs due to free movement of g&s
§ They look to locate in countries where tariff imports are low
• Multinational Companies (TNCs) – a company with significant product operations in
at least 2 countries
o They base their HQ in MDCs but invest in LDCs due to them being rich in
natural resources, having cheap labour and land
o The freeing up of capital enabled TNCs to exploit low cost labour and resulted
in a wave of offshoring (setting up production in another country) and
outsourcing (segment of production elsewhere)
• Increase in Communication – less time needed for agents to communicate
o Fall in interest cost and increased availability enable greater international
communication
o Increased availability of IT had increased online communication between
clients in different countries – making communication easier
• Increase in Transport and mobility – Imports and exports become cheaper
o Reduced costs encourages firms to relocate abroad and ship back
o Containerisation – steel containers to transport goods
, § Can be easily transferred between ships to lorries to trains
§ Improved global transport of goods and services
Impact of Globalisation on;
Consumers
• Consumer Choice –
ü availability of g&s increased due to globalisation
• Prices –
ü Lower Relative price falling due to production being switched from high cost
to low cost locations
× Sometimes Higher prices – raised wages = more demand
• Incomes -
ü Raised incomes for some – consumers can buy more products
× Impact negative – production moved to China causing locals to lose out
Workers
• Employment and unemployment-
× Structural unemployment due to workers being shifted from Europe and USA
to China and India – they regain jobs but not at same pay
ü Employment increases in developing countries
• Migration -
ü Enjoy better Standard of Living in another country
ü Increase incomes and fill skill gaps – increasing productivity
ü Some set up businesses – creating jobs
× However, can be perceived as taking host country citizen’s jobs
× Lowers wages due to extra supply
• Wages - shifts places of work globally and shifts workers globally
× Lower wages due to higher competition for work
• Production moved to developing countries
ü In developing countries, wages of workers increase due to increased demand
ü Wage inequality falls globally
× Wage inequality increases within the UK
• Multinationals
ü Create low level jobs for locals
ü Import high skilled work from abroad
ü Training for local workers increases
§ Increased human capital
Producers
• Specialisation – firms become dependant on eachother
× A fault in Thailand can impact UK firms
× When trade links break down, problems arise
ü Reduces risks because firs can source their products from various sources
• Costs and Markets
ü Lower price as a variety of sources to buy from
ü Opens up markets that were previously closed
• Footloose Capitalism
o Multinationals can move production– creating and destroying jobs along the way
× Exploits comparative advantage
, × Loss of capital in homeland
ü Cheaper prices
Government
• Multinational moving abroad causes
× Less exports, less tax revenue and fewer jobs
• Government have to intervene
× Lower tax rates/ granting subsidies
Environment
• Negative impact on environment
× Extra demand for raw materials, increased emissions and waste = negative
impact on environment
× Greenhouse gases increase
× Multinationals dominate gold industry – negative impact
ü Multinationals have financial resources to limit impact on environment
Individual Countries
× High unemployment, loss of industries and lower wages in developed
countries due to transferring production abroad
ü In developing countries, more choice of g&s, better quality jobs and rising
incomes
Specialisation and Trade
Absolute Advantage
• Absolute advantage is the ability to
produce a good at the lowest direct
cost, using the fewest resources
and factor inputs
,Comparative Advantage
• Comparative advantage is the ability to produce a good at the lowest opportunity
cost
•
Think of
Opportunity Cost
as Ratios when
calculating
Assumptions of the theory of comparative advantage
• There are no transport costs – in reality there are always transport costs and
eliminate comparative advantage
• Costs are constant and there are no economies of scale (Lower average cost as
production increases)
o Benefits can be better than firstly assumed
• Only 2 economies producing goods
• Traded goods are identical
o However, production of cars – a Toyota is different to a Ford so difficult to
conclude of a comparative advantage in the production of cars
• Perfect factor mobility
• No tariffs/quotas
• Perfect knowledge between buyers and sellers
,Why comparative advantage exists?
• Labour costs differ around the globe
• Supply of skilled labour varies – a developing country may lack skilled labour so
specialise in production of low technology goods which don’t require much skill
• Natural resources – some countries are rich in natural resources such as Saudi Arabia
Benefits of Trade
• Specialisation
o Specialise in comparative advantage and trade between eachother
• Economies of Scale
o Lowers unit costs, increases profits and lowers price – profits for investment
• Consumer welfare
o Greater choice of g&s as foreign goods are available
Costs of Trade
• Over-dependency on exports & imports -
o Demand falls = large fall in GDP
o Imports can lead to balance of payment deficits & imported inflation if
exchange rate weakens
• Structural unemployment
o Production moved to LDCs due to removal of trade barriers and outsourcing
Patterns of Trade – what influences pattern of trade?
Comparative advantage
• Differences in cost of production affect patterns of trade, UK trade services such as
Finance - China has become industrialised – causing differences to pattern of trade
Impact of emerging economies
• Countries rarely stay the same size – some grow quicker than others
• When growth occurs, it imports more g&s – then exports more too
o Existing patterns of trade are being disrupted by emerging economies with
high growth rates
Growth of trading blocs and bilateral trading agreements
• Designed to increase trade between participating countries at other countries
expense – changes pattern of trade
Changes in relative exchange rates
• Changes in currency = fluctuating prices of exports and imports
o Changes pattern of trade because if more expensive – go elsewhere to source
goods from
Terms of Trade
• Terms of trade is defined as the ratio between
𝑰𝒏𝒅𝒆𝒙 𝒐𝒇 𝒆𝒙𝒑𝒐𝒓𝒕 𝒑𝒓𝒊𝒄𝒆𝒔
average export prices and average import prices × 𝟏𝟎𝟎
𝑰𝒏𝒅𝒆𝒙 𝒐𝒇 𝑰𝒎𝒑𝒐𝒓𝒕 𝒑𝒓𝒊𝒄𝒆𝒔
, Year 1 2 3 4 5 6
Index of 105 99 95 97 100 110
Exports prices
Index of 110 107 105 102 100 105
Imports prices
Index of Terms 95.4 92.5 90.5 95 100 104.7
of Trade
Factors influencing terms of trade
In the short run:
• Change in exchange rate will change import and export prices
o Rise = fall in price of imports = terms of trade improve
• Inflation rise above trading partners inflation rate = improvement
• Demand for exports or imports change price which change terms of trade
In the long term:
• Rise in productivity lowers relative export prices = deterioration of terms
• Changing incomes = change in pattern of demand – increased demand = prices rise=
better terms of trade
Impact of changes in a country’s terms of trade on balance of payments
• Changes in terms of trade can have an effect on balance of payments depending on
price elasticity of demand for imports and exports
Elasticity Price Change Terms of Trade Current Account
balance
Exports Elastic Rise Improve Deteriorate
Fall Deteriorate Improve
Inelastic Rise Improve Improve
Fall Deteriorate Deteriorate
Imports Elastic Rise Deteriorate Improve
Fall Improve Deteriorate
Inelastic Rise Deteriorate Deteriorate
Fall Improve Improve
Impact of changes on the domestic economy
• Improving terms of trade mean the economy can import more goods for each unit of
export.
• Cost-push inflation is reduced, since import prices are falling relative to export
prices. It could also help improve standards of living for consumers in the country.
o However, it can mean that the balance of payments worsens, since there are
fewer exports and more imports.
• Worsening terms of trade means that for every import, the country has to export
more. It could make the price of new technology more expensive, which might limit
productivity.
• It could lead to a fall in living standards, and because it is more difficult to earn
foreign currency, it becomes harder to pay foreign debt.
, Trading Blocs and the World Trade Organisation
Types of Trade Blocs
• A Trade Bloc is a group of countries that have signed an agreement to
reduce/eliminate tariffs, quotas and other protectionist barriers between
themselves
• The agreement is called a regional trade agreement
5 main types of trading bloc
• Preferential trade areas –
o tariff and other barriers are reduced on some but not all goods that are
traded
• Free trade areas-
o All tariffs and quotas removed but allowed to impose tariffs on imports from
countries outside trading bloc
• Customs unions-
o Free trade inside union but common external tariff on goods outside bloc
• Common Markets-
o Customs unions where labour and capital have freedom of movement of
goods and services
• Economic Unions-
o Economies are integrated as different regions within a country
o Some degree of fiscal union – central body has power over tax and spending
o Monetary Union - all share a common currency
Most regional trade agreements are in the form of bilateral agreements. These are
agreements between countries or blocs (EU) and countries
Advantages and disadvantages of Trading Blocs
• Static benefits – gains from specialisation
o Net welfare gain from trade creation exceeds net welfare loss from trade
diversion
• Dynamic benefits – increased competition and transfer of resources
o Gained if competition is large between firms in member countries to bring
increased efficiencies
× Distracts government from making larger gains – through the WTO, Bilateral
agreements take up significant resources
× Distributes gains from trade unequally
ü Reduced transaction costs
ü Economies of scale – can exploit comparative advantage and gain efficiency. EU has
500 million people to sell to
ü Migration – supply of labour increases which fills shortages
Globalisation
Characteristics of Globalisation
• Globalisation is the integration of the world’s local, regional and national economies
into a single international market
Economic integration can be broken down into 4 areas;
1. Free trade across national boundaries of goods & services
o Firms in London can sell as easily to firms in Birmingham/Poland
2. Free movement of labour between countries
o E.g. – Free movement of labour in UK or in the EU
3. Free movement of capital
o UK firms can invest in Chinese firms
4. Free interchange of technology across national boundaries
o UK company can use its own patented technology in a factory in Brazil as well
as it could in a UK factory
Extent of Globalisation
• A world with no boundaries to trade in G&S and perfectly free movement of capital,
labour & technology
• A world with no trade of movement will be highly localised
• The world currently is between the 2 extremes
Causes of Globalisation
• Trade in goods – Rich developed countries are able to have goods manufactured
abroad in developing countries (China/India) – cheap labour = cheaper cost
• Trade liberalisation – removal/ reduction of barriers to trade, e.g. tariffs and quotas
o International trade collapsed in 1930s and went into the Great Depression.
Protectionist barriers have decreased since 1945
o Caused the increase of MNCs and TNCs due to free movement of g&s
§ They look to locate in countries where tariff imports are low
• Multinational Companies (TNCs) – a company with significant product operations in
at least 2 countries
o They base their HQ in MDCs but invest in LDCs due to them being rich in
natural resources, having cheap labour and land
o The freeing up of capital enabled TNCs to exploit low cost labour and resulted
in a wave of offshoring (setting up production in another country) and
outsourcing (segment of production elsewhere)
• Increase in Communication – less time needed for agents to communicate
o Fall in interest cost and increased availability enable greater international
communication
o Increased availability of IT had increased online communication between
clients in different countries – making communication easier
• Increase in Transport and mobility – Imports and exports become cheaper
o Reduced costs encourages firms to relocate abroad and ship back
o Containerisation – steel containers to transport goods
, § Can be easily transferred between ships to lorries to trains
§ Improved global transport of goods and services
Impact of Globalisation on;
Consumers
• Consumer Choice –
ü availability of g&s increased due to globalisation
• Prices –
ü Lower Relative price falling due to production being switched from high cost
to low cost locations
× Sometimes Higher prices – raised wages = more demand
• Incomes -
ü Raised incomes for some – consumers can buy more products
× Impact negative – production moved to China causing locals to lose out
Workers
• Employment and unemployment-
× Structural unemployment due to workers being shifted from Europe and USA
to China and India – they regain jobs but not at same pay
ü Employment increases in developing countries
• Migration -
ü Enjoy better Standard of Living in another country
ü Increase incomes and fill skill gaps – increasing productivity
ü Some set up businesses – creating jobs
× However, can be perceived as taking host country citizen’s jobs
× Lowers wages due to extra supply
• Wages - shifts places of work globally and shifts workers globally
× Lower wages due to higher competition for work
• Production moved to developing countries
ü In developing countries, wages of workers increase due to increased demand
ü Wage inequality falls globally
× Wage inequality increases within the UK
• Multinationals
ü Create low level jobs for locals
ü Import high skilled work from abroad
ü Training for local workers increases
§ Increased human capital
Producers
• Specialisation – firms become dependant on eachother
× A fault in Thailand can impact UK firms
× When trade links break down, problems arise
ü Reduces risks because firs can source their products from various sources
• Costs and Markets
ü Lower price as a variety of sources to buy from
ü Opens up markets that were previously closed
• Footloose Capitalism
o Multinationals can move production– creating and destroying jobs along the way
× Exploits comparative advantage
, × Loss of capital in homeland
ü Cheaper prices
Government
• Multinational moving abroad causes
× Less exports, less tax revenue and fewer jobs
• Government have to intervene
× Lower tax rates/ granting subsidies
Environment
• Negative impact on environment
× Extra demand for raw materials, increased emissions and waste = negative
impact on environment
× Greenhouse gases increase
× Multinationals dominate gold industry – negative impact
ü Multinationals have financial resources to limit impact on environment
Individual Countries
× High unemployment, loss of industries and lower wages in developed
countries due to transferring production abroad
ü In developing countries, more choice of g&s, better quality jobs and rising
incomes
Specialisation and Trade
Absolute Advantage
• Absolute advantage is the ability to
produce a good at the lowest direct
cost, using the fewest resources
and factor inputs
,Comparative Advantage
• Comparative advantage is the ability to produce a good at the lowest opportunity
cost
•
Think of
Opportunity Cost
as Ratios when
calculating
Assumptions of the theory of comparative advantage
• There are no transport costs – in reality there are always transport costs and
eliminate comparative advantage
• Costs are constant and there are no economies of scale (Lower average cost as
production increases)
o Benefits can be better than firstly assumed
• Only 2 economies producing goods
• Traded goods are identical
o However, production of cars – a Toyota is different to a Ford so difficult to
conclude of a comparative advantage in the production of cars
• Perfect factor mobility
• No tariffs/quotas
• Perfect knowledge between buyers and sellers
,Why comparative advantage exists?
• Labour costs differ around the globe
• Supply of skilled labour varies – a developing country may lack skilled labour so
specialise in production of low technology goods which don’t require much skill
• Natural resources – some countries are rich in natural resources such as Saudi Arabia
Benefits of Trade
• Specialisation
o Specialise in comparative advantage and trade between eachother
• Economies of Scale
o Lowers unit costs, increases profits and lowers price – profits for investment
• Consumer welfare
o Greater choice of g&s as foreign goods are available
Costs of Trade
• Over-dependency on exports & imports -
o Demand falls = large fall in GDP
o Imports can lead to balance of payment deficits & imported inflation if
exchange rate weakens
• Structural unemployment
o Production moved to LDCs due to removal of trade barriers and outsourcing
Patterns of Trade – what influences pattern of trade?
Comparative advantage
• Differences in cost of production affect patterns of trade, UK trade services such as
Finance - China has become industrialised – causing differences to pattern of trade
Impact of emerging economies
• Countries rarely stay the same size – some grow quicker than others
• When growth occurs, it imports more g&s – then exports more too
o Existing patterns of trade are being disrupted by emerging economies with
high growth rates
Growth of trading blocs and bilateral trading agreements
• Designed to increase trade between participating countries at other countries
expense – changes pattern of trade
Changes in relative exchange rates
• Changes in currency = fluctuating prices of exports and imports
o Changes pattern of trade because if more expensive – go elsewhere to source
goods from
Terms of Trade
• Terms of trade is defined as the ratio between
𝑰𝒏𝒅𝒆𝒙 𝒐𝒇 𝒆𝒙𝒑𝒐𝒓𝒕 𝒑𝒓𝒊𝒄𝒆𝒔
average export prices and average import prices × 𝟏𝟎𝟎
𝑰𝒏𝒅𝒆𝒙 𝒐𝒇 𝑰𝒎𝒑𝒐𝒓𝒕 𝒑𝒓𝒊𝒄𝒆𝒔
, Year 1 2 3 4 5 6
Index of 105 99 95 97 100 110
Exports prices
Index of 110 107 105 102 100 105
Imports prices
Index of Terms 95.4 92.5 90.5 95 100 104.7
of Trade
Factors influencing terms of trade
In the short run:
• Change in exchange rate will change import and export prices
o Rise = fall in price of imports = terms of trade improve
• Inflation rise above trading partners inflation rate = improvement
• Demand for exports or imports change price which change terms of trade
In the long term:
• Rise in productivity lowers relative export prices = deterioration of terms
• Changing incomes = change in pattern of demand – increased demand = prices rise=
better terms of trade
Impact of changes in a country’s terms of trade on balance of payments
• Changes in terms of trade can have an effect on balance of payments depending on
price elasticity of demand for imports and exports
Elasticity Price Change Terms of Trade Current Account
balance
Exports Elastic Rise Improve Deteriorate
Fall Deteriorate Improve
Inelastic Rise Improve Improve
Fall Deteriorate Deteriorate
Imports Elastic Rise Deteriorate Improve
Fall Improve Deteriorate
Inelastic Rise Deteriorate Deteriorate
Fall Improve Improve
Impact of changes on the domestic economy
• Improving terms of trade mean the economy can import more goods for each unit of
export.
• Cost-push inflation is reduced, since import prices are falling relative to export
prices. It could also help improve standards of living for consumers in the country.
o However, it can mean that the balance of payments worsens, since there are
fewer exports and more imports.
• Worsening terms of trade means that for every import, the country has to export
more. It could make the price of new technology more expensive, which might limit
productivity.
• It could lead to a fall in living standards, and because it is more difficult to earn
foreign currency, it becomes harder to pay foreign debt.
, Trading Blocs and the World Trade Organisation
Types of Trade Blocs
• A Trade Bloc is a group of countries that have signed an agreement to
reduce/eliminate tariffs, quotas and other protectionist barriers between
themselves
• The agreement is called a regional trade agreement
5 main types of trading bloc
• Preferential trade areas –
o tariff and other barriers are reduced on some but not all goods that are
traded
• Free trade areas-
o All tariffs and quotas removed but allowed to impose tariffs on imports from
countries outside trading bloc
• Customs unions-
o Free trade inside union but common external tariff on goods outside bloc
• Common Markets-
o Customs unions where labour and capital have freedom of movement of
goods and services
• Economic Unions-
o Economies are integrated as different regions within a country
o Some degree of fiscal union – central body has power over tax and spending
o Monetary Union - all share a common currency
Most regional trade agreements are in the form of bilateral agreements. These are
agreements between countries or blocs (EU) and countries
Advantages and disadvantages of Trading Blocs
• Static benefits – gains from specialisation
o Net welfare gain from trade creation exceeds net welfare loss from trade
diversion
• Dynamic benefits – increased competition and transfer of resources
o Gained if competition is large between firms in member countries to bring
increased efficiencies
× Distracts government from making larger gains – through the WTO, Bilateral
agreements take up significant resources
× Distributes gains from trade unequally
ü Reduced transaction costs
ü Economies of scale – can exploit comparative advantage and gain efficiency. EU has
500 million people to sell to
ü Migration – supply of labour increases which fills shortages
