Theme 4 – Economics
4.1.1 GLOBALISATION:
The increased integration of economies around the world, allows countries to produce goods
and services in which they have a comparative advantage in.
Characteristics of globalisation:
- Increased international movement of labour
- Increased international movement in financial capital
- Increase in specialisation
- Increased international trade
- Increased Trade-To-GDP ratios
Increased international movement of labour:
- When people move countries, they move their labour as well. Due to globalisation
1million people from the UK live outside of the UK.
Increased international movement in financial capital:
- (the movement of money) when a company purchased a company that is unrelated it
is Conglomerate integration is where two firms merge, when they are in a different
industry and are completely unrelated. An increase in globalisation had also
increased FDI – foreign direct investment: FDI is an investment made by a firm in
one country into a firm in another country, to gain control over the foreign firm.
Increase in specialisation:
- When a country can produce more of a good than another country, it has an absolute
advantage in the production of that good. When a country can produce a good at
a lower opportunity cost than another country, it has a comparative advantage in
the production of that good. The theory of comparative advantage states that that
country should specialise in producing that good. Saudi Arabia specialised in oil
production.
Increased international trade:
- For example, souvenir sales would be an export – when selling to foreign tourists.
However, a transnational corporation (a company that operates in +2 countries) could
be an import. 80% of trade is driven by transnational corporations
Increased Trade-To-GDP ratios:
- shows how high the value of international trade is in comparison to the value of
GDP. Total value of international trade/GDP x100. Trade to GDP rations have
increased over the past years due to increased globalisation. All over the world,
countries are more dependent on international trade. GDP is on the bottom of the
trade-to-GDP formula. If GDP decreases, you would be dividing by a smaller number,
which would give a larger answer. So, a decrease in GDP will increase the trade-to-
GDP ratio. If trade stays the same and GDP increases, then trade is taking up a
smaller percentage of GDP.
Causes of globalisation:
- Improvement in transport
,Theme 4 – Economics
- Improvement in IT
- Containerisation
- Trade liberalisation
Improvement in transport:
- there have been developments in transport links which make labour mobilisation
much easier
Improvement in IT:
- has improved the communication network (Google, email, online banking) have
caused an increase in the movement of financial capital
Containerisation:
- Malcom Mclean invented the strong container; shipping costs fell dramatically
causing supply to shift right. The price would fall, and the demand would increase –
there will be an increase in international trade. Has led to a 790% increase in trade.
An efficient and relatively low-cost system of transport that uses a common size of
steel container to transport goods.
Trade liberalisation:
- A trade barrier is a restraint placed by a country on the import of a foreign good. The
most common example of a trade barrier is a tariff which is a tax you must pay when
you import a good. When tariffs fall, the cost of imports fall so the demand for
imports increases so there is an increase in international trade. The average tariff rate
in developed countries is 2%.
Impacts of globalisation:
- Impact on individual countries
- Impact on governments
- Impact on producers
- Impact on consumers
- Impact on workers
- Impact on the environment
- The impact of globalisation will be different in different countries depending on how
integrated they are into the world economy, and whether they have the factor
resources that allow them to gain form globalisation. Some nations are more open to
trade than others.
Impact on individual countries:
- there will be an increase in living standards. The theory of comparative advantage
states that global output will increase if countries specialise in the production of goods
in which they have a comparative advantage. World real GDP measures the amount of
goods and services produced in the world in a year. So, an increase in world output
,Theme 4 – Economics
will increase world real GDP. Today less than 10% of the population are experiencing
extreme poverty. The oil and gas sector in Saudi Arabia now accounts for around 50%
of their real GDP. HOWEVER: it has also led to overdependence because of
specialisation.
Impact on governments:
- as the trade to GDP ratios increase, there is an increase in tax revenue due to tariffs
(tax on imported goods) large transnational companies have different levels of
corporation tax – transfer pricing. Pushing profits to a “daughter company”. The
global financial integrity group states that billions of $ are lost each year due to
transfer pricing.
Impact on producers:
- production could be relocated to where there are lower production costs. TNC’s
benefit because there are larger economies of scale, which will reduce the LRAC.
There is global division of labour. HOWEVER, this will reduce competition of other
firms as they can compete with their pricing. Reduced costs for relocation will benefit
the TNC’s which barriers smaller companies from entering the market.
Impact on consumers:
- consumers have a wider choice of goods. Will lower production costs which will
cause an increase in supply and a reduction of price level. Globalisation has caused
lower price levels and wider choice. Diderot effect: the more consumption will cause
us to want more which is likely to decrease in happiness.
Impact on workers:
- Improvements in transport has increased labour mobility. Workers can move to a
country with a higher unemployment rate, and they are more likely to get a job there.
They are also able to send A remittance is a transfer of money by a foreign
worker to an individual in their home country. HOWEVER, structural
unemployment can be caused due to countries having a comparative advantage of
producing a type of good. Structural unemployment occurs when the structure of
the economy changes. People working in one sector may lose their jobs while another
sector expands. Remittances expected to be $600 million.
Impact on the environment:
- better relationships between economies/countries forces countries to sign treaties to
improve climate change. Will increase global co-operation. HOWEVER, increased
globalisation and transporting goods will increase global warming due to the CO2
emissions and global temperatures could rise by 6 degrees by 2100.
External shocks in a globalised world:
- Global financial crisis 2007-9
- Covid 19
- Volatile commodity prices
, Theme 4 – Economics
- Growth slowdowns in emerging nations
- International and regional trade and investment deals
- Geo-political uncertainty
Transnational corporations:
- Companies that base their R&D, manufacturing, assembly in different countries.
- The biggest 500 TNC’s account for 70% of the value of world trade.
- TNC’s re-locate production to areas with lower unit costs per output, including labour
costs, to increase profit.
4.1.1 GLOBALISATION:
The increased integration of economies around the world, allows countries to produce goods
and services in which they have a comparative advantage in.
Characteristics of globalisation:
- Increased international movement of labour
- Increased international movement in financial capital
- Increase in specialisation
- Increased international trade
- Increased Trade-To-GDP ratios
Increased international movement of labour:
- When people move countries, they move their labour as well. Due to globalisation
1million people from the UK live outside of the UK.
Increased international movement in financial capital:
- (the movement of money) when a company purchased a company that is unrelated it
is Conglomerate integration is where two firms merge, when they are in a different
industry and are completely unrelated. An increase in globalisation had also
increased FDI – foreign direct investment: FDI is an investment made by a firm in
one country into a firm in another country, to gain control over the foreign firm.
Increase in specialisation:
- When a country can produce more of a good than another country, it has an absolute
advantage in the production of that good. When a country can produce a good at
a lower opportunity cost than another country, it has a comparative advantage in
the production of that good. The theory of comparative advantage states that that
country should specialise in producing that good. Saudi Arabia specialised in oil
production.
Increased international trade:
- For example, souvenir sales would be an export – when selling to foreign tourists.
However, a transnational corporation (a company that operates in +2 countries) could
be an import. 80% of trade is driven by transnational corporations
Increased Trade-To-GDP ratios:
- shows how high the value of international trade is in comparison to the value of
GDP. Total value of international trade/GDP x100. Trade to GDP rations have
increased over the past years due to increased globalisation. All over the world,
countries are more dependent on international trade. GDP is on the bottom of the
trade-to-GDP formula. If GDP decreases, you would be dividing by a smaller number,
which would give a larger answer. So, a decrease in GDP will increase the trade-to-
GDP ratio. If trade stays the same and GDP increases, then trade is taking up a
smaller percentage of GDP.
Causes of globalisation:
- Improvement in transport
,Theme 4 – Economics
- Improvement in IT
- Containerisation
- Trade liberalisation
Improvement in transport:
- there have been developments in transport links which make labour mobilisation
much easier
Improvement in IT:
- has improved the communication network (Google, email, online banking) have
caused an increase in the movement of financial capital
Containerisation:
- Malcom Mclean invented the strong container; shipping costs fell dramatically
causing supply to shift right. The price would fall, and the demand would increase –
there will be an increase in international trade. Has led to a 790% increase in trade.
An efficient and relatively low-cost system of transport that uses a common size of
steel container to transport goods.
Trade liberalisation:
- A trade barrier is a restraint placed by a country on the import of a foreign good. The
most common example of a trade barrier is a tariff which is a tax you must pay when
you import a good. When tariffs fall, the cost of imports fall so the demand for
imports increases so there is an increase in international trade. The average tariff rate
in developed countries is 2%.
Impacts of globalisation:
- Impact on individual countries
- Impact on governments
- Impact on producers
- Impact on consumers
- Impact on workers
- Impact on the environment
- The impact of globalisation will be different in different countries depending on how
integrated they are into the world economy, and whether they have the factor
resources that allow them to gain form globalisation. Some nations are more open to
trade than others.
Impact on individual countries:
- there will be an increase in living standards. The theory of comparative advantage
states that global output will increase if countries specialise in the production of goods
in which they have a comparative advantage. World real GDP measures the amount of
goods and services produced in the world in a year. So, an increase in world output
,Theme 4 – Economics
will increase world real GDP. Today less than 10% of the population are experiencing
extreme poverty. The oil and gas sector in Saudi Arabia now accounts for around 50%
of their real GDP. HOWEVER: it has also led to overdependence because of
specialisation.
Impact on governments:
- as the trade to GDP ratios increase, there is an increase in tax revenue due to tariffs
(tax on imported goods) large transnational companies have different levels of
corporation tax – transfer pricing. Pushing profits to a “daughter company”. The
global financial integrity group states that billions of $ are lost each year due to
transfer pricing.
Impact on producers:
- production could be relocated to where there are lower production costs. TNC’s
benefit because there are larger economies of scale, which will reduce the LRAC.
There is global division of labour. HOWEVER, this will reduce competition of other
firms as they can compete with their pricing. Reduced costs for relocation will benefit
the TNC’s which barriers smaller companies from entering the market.
Impact on consumers:
- consumers have a wider choice of goods. Will lower production costs which will
cause an increase in supply and a reduction of price level. Globalisation has caused
lower price levels and wider choice. Diderot effect: the more consumption will cause
us to want more which is likely to decrease in happiness.
Impact on workers:
- Improvements in transport has increased labour mobility. Workers can move to a
country with a higher unemployment rate, and they are more likely to get a job there.
They are also able to send A remittance is a transfer of money by a foreign
worker to an individual in their home country. HOWEVER, structural
unemployment can be caused due to countries having a comparative advantage of
producing a type of good. Structural unemployment occurs when the structure of
the economy changes. People working in one sector may lose their jobs while another
sector expands. Remittances expected to be $600 million.
Impact on the environment:
- better relationships between economies/countries forces countries to sign treaties to
improve climate change. Will increase global co-operation. HOWEVER, increased
globalisation and transporting goods will increase global warming due to the CO2
emissions and global temperatures could rise by 6 degrees by 2100.
External shocks in a globalised world:
- Global financial crisis 2007-9
- Covid 19
- Volatile commodity prices
, Theme 4 – Economics
- Growth slowdowns in emerging nations
- International and regional trade and investment deals
- Geo-political uncertainty
Transnational corporations:
- Companies that base their R&D, manufacturing, assembly in different countries.
- The biggest 500 TNC’s account for 70% of the value of world trade.
- TNC’s re-locate production to areas with lower unit costs per output, including labour
costs, to increase profit.
