Theme 4 Revision
Define globalisation.
The process in which the world’s economies are becoming increasingly interconnected in terms of flows of
goods/services, labour, capital and information.
Explain five characteristics of globalisation.
● Growth in international trade. The volume of goods and services traded across national borders has
increased significantly over time. Countries are increasingly specialising in what they produce most
efficiently and buy the rest on global trade markets.
● Increased capital flows. Money now moves more freely across borders in the form of foreign direct
investment (FDI), portfolio investment and financial transactions. National financial markets are now
deeply interconnected.
● Migration of labour. People move across borders in search of better employment opportunities,
leading to increasingly interconnected labour markets. Human capital is more likely to flow where it is
needed most.
● Cultural homogenisation. Cultures increasingly influence one another as countries become more
interconnected. Global brands, music, food and media are consumed worldwide, leading to a
homogenisation of consumer tastes and lifestyles across different nations.
● Transmission of economic problems. A recession, financial crisis or supply shock is unlikely to stay
confined in one country, and will often swiftly spread to others. A key example is the 2008 financial
crisis, which spread globally after beginning in the United States.
Explain four factors contributing to globalisation.
● Growth of MNCs. Large firms now operate across multiple countries, positioning stages of production
wherever costs are lowest or markets are largest. They are both a cause and a consequence of
globalisation, driving further integration as they expand.
● Technological change and communication. Advances in technology, particularly the internet, have
dramatically reduced the cost of communication and coordination across borders. This has made it
much easier for firms to manage global supply chains, for consumers to access foreign markets, and for
ideas and information to spread internationally.
● Financial deregulation. The liberalisation of financial markets has allowed capital to move much more
freely across borders.
● Reduction in trade barriers. Greater trade flows have been facilitated by a reduction in tariffs and
quotas as well as a rise in free trade agreements. The World Trade Organisation has played a
significant part in coordinating global trade liberalisation.
Explain the impact of globalisation on consumers, workers, producers, the government and the
environment.
● For consumers
○ Greater access to a wider variety of goods and services from around the world, increasing
choice as well as living standards (potentially, more relevant to developing countries that
import from developed ones).
○ Increased competition from foreign firms drives down prices, improving affordability and
consumer surplus.
○ Domestic industries and small businesses could be undermined by cheap foreign competition,
potentially leading to job losses that reduce household incomes and purchasing power.
● For workers
○ Workers in developing countries may benefit from employment opportunities created by
MNCs as they invest in and set up production facilities, raising wages and living standards.
○ Workers in developed countries may face structural unemployment as firms offshore
production to cheaper locations, particularly in the manufacturing industry.
○ There is a risk of a race to the bottom in labour standards, due to countries competing to
attract MNCs by keeping wages low and worker protections weak.
● For producers
○ Firms gain access to larger global markets, enabling them to increase sales, achieve
economies of scale and earn higher profits.
, ○ Access to cheaper inputs and labour from abroad can reduce the cost of production and
improve profitability and competitiveness.
○ Domestic firms face intensified competition from foreign producers, with small firms being
disproportionately affected since they can’t achieve economies of scale like foreign MNCs
might be able to. The result is that firms that cannot match the efficiency of larger foreign
competitors may be forced out of the market.
● For the government
○ Incoming foreign direct investment (FDI) creates jobs and generates tax revenue (income tax
from new workers and corporation tax from the domestic arm of the MNC), improving public
finance and potentially funding better public services, in turn increasing living standards.
■ However, this depends on the level of corporation tax. To attract and retain MNCs
and their FDI, governments will often set corporation tax at a low rate, which limits
the magnitude of the tax revenue raised.
○ Globalisation might make it harder for governments to manage their domestic economies
independently, since they are increasingly exposed to external shocks beyond their control.
● For the environment
○ Globalisation might spread environmentally friendly technology and practices across borders.
International cooperation on climate change might also solve environmental problems that
couldn’t be solved by any single country.
○ Increased global trade means more transportation of goods across long distances, generating
more carbon emissions and contributing to climate change.
○ Despite effective environmental regulations in many nations, MNCs may simply relocate
production to countries with weaker regulations, leading to pollution not being eradicated but
instead shifted to different areas.
Why do countries trade? Give four reasons.
● Comparative advantages. The principle of comparative advantage states that countries should
specialise in producing goods and services for which they have the lowest opportunity cost, and trade
with other nations for everything else.
● Access to resources. Some nations enjoy natural resource stores that other nations lack. For example,
Ukraine with its fertile farmland and Russia with its vast oil fields. Trade allows countries to share
these resources; both earn export revenue and gain resources they otherwise wouldn’t have had.
● Economies of scale. Domestic firms now serve the global market, not just domestic consumers,
allowing them to expand output, and earning them increased revenue which they can invest to
increase output even more. This drives down average costs through economies of scale. With average
costs lower, domestic firms can enjoy higher profits and the government receives more corporation tax
revenue.
● Consumer choice. Trade allows consumers to access goods and services that either cannot be
produced domestically or would be significantly more expensive if they were. This improves consumer
welfare and living standards. An example would be Saudi Arabia importing grain from countries such
as Russia, which can’t be grown in the arid environment of the Middle East.
Define absolute advantage.
When a country can produce a greater quantity of a good or service than another using the same resources. For
example, with its established and efficient extraction infrastructure, Saudi Arabia can produce more oil than
Australia at a higher efficiency.
Another way of putting it would be that a country has absolute advantage when it can produce a good using
less resources than another.
Define comparative advantage.
A country has comparative advantage when it can produce a good at a lower opportunity cost than another
country, i.e. it gives up less of other goods to produce it. This is often a more useful concept than absolute
advantage, because even if one country is absolutely better than producing everything, trade can still benefit
both countries as long as their opportunity costs differ.
, The formula for comparative advantage is comparative advantage = (loss in other good) / (gain of targeted
good).
Let’s use a table to illustrate this intuitively.
Country (fictional) SuperTuff Tiles Saffron
Zlotia 10,000 2,500
Carsonekh 2,000 2,400
Zlotia has absolute advantage in both SuperTuff Tiles (an advanced material used in rockets) and saffron.
Carsonekh only produces a few SuperTuff Tiles, but has a large saffron industry, growing it in advanced
hydroponic greenhouses.
To produce one SuperTuff Tile in Zlotia, we divide 2,500 by 10,000 to find that 0.25 units of saffron must be
given up to produce one SuperTuff Tile.
To produce one SuperTuff Tile in Carsonekh, we divide 2,400 by 2,000 to find that 1.2 units of saffron must be
given up to produce one SuperTuff Tile.
Evidently, Zlotia has the comparative advantage in producing SuperTuff Tiles, but we can reverse the
calculations to find something interesting:
To produce one unit of saffron in Zlotia, we divide 10,000 by 2,500 to find that 4 SuperTuff Tiles must be given
up to produce one unit of saffron.
To produce one unit of saffron in Carsonekh, we divide 2,000 by 2,400 to find that 0.83 SuperTuff Tiles must be
given up to produce one unit of saffron.
Carsonekh, despite producing a nominally smaller quantity of it, has the comparative advantage in saffron
production.
Currently, the worldwide production of SuperTuff Tiles sits at 12,000, and 4,900 for saffron. Let’s see what
happens if both countries specialise fully in what they have a comparative advantage in.
Zlotia produces 2,500 units of saffron, and must give up 0.25 to produce a new SuperTuff Tile. If all resources
are funneled into SuperTuff Tiles, we find that Zlotia can now produce 10,000 new total SuperTuff Tiles for a
total of 20,000 (using calculation 2,.25 = 10,000). Zlotia now produces no saffron.
Carsonekh produces 2,400 SuperTuff Tiles, and must give up 0.83 to produce a new unit of saffron. If all
resources are funneled into saffron, we find that Carsonekh can now produce approximately 2,892 new total
units of saffron for a total of 5,292 (using calculation 2,.83 = 2,892). Carsonekh now produces no
SuperTuff Tiles.
Now, worldwide production of SuperTuff Tiles is 20,000, and 5,292 for saffron. The world is now producing
more SuperTuff Tiles and saffron since Zlotia and Carsonekh specialised in the goods in which they had a
comparative advantage. Zlotia and Carsonekh can subsequently trade with each other to reap the benefits of
this expanded production.
THE NEXT THREE QUESTIONS ARE BASED ON A DIAGRAM SHOWN IN THE CTG BOOKLET.
Who has the absolute advantage?
Country A has an absolute advantage in both orange and smartphone production.
Who has the comparative advantage in orange production?
, Country A must give up 0.5 smartphones to produce 1 orange. Country B must give up 1 smartphone to
produce 1 orange. Therefore Country A has the comparative advantage in orange production.
Who has the comparative advantage in smartphone production?
Country A must give up 2 oranges to produce 1 smartphone. Country B must give up 1 orange to produce 1
smartphone. Therefore Country B has the comparative advantage in smartphone production.
THE NEXT THREE QUESTIONS ARE BASED ON ANOTHER DIAGRAM SHOWN IN THE CTG BOOKLET.
Who has the absolute advantage in each good?
Country A has the absolute advantage in iPhone production and Country B has the absolute advantage in apple
production.
Who has the comparative advantage in apple production?
Country A must give up 5 iPhones to produce 1 apple. Country A must give up 1.5 iPhones to produce 1 apple.
Therefore Country B has the comparative advantage in apple production.
Who has the comparative advantage in iPhone production?
Country A must give up 0.2 apples to produce 1 iPhone. Country B must give up 0.67 apples to produce 1
iPhone. Therefore Country A has the comparative advantage in iPhone production.
What are the assumptions and limitations associated with the theory of comparative advantage?
● No transport costs. The theory assumes that goods can be traded freely between countries at no cost,
which is obviously unrealistic. In reality, the cost of operating container ships and other logistics costs
can diminish the projected gains from specialisation, particularly for bulky or low-value goods.
● Constant opportunity costs. The theory assumes that opportunity costs remain fixed regardless of
how much a country produces, whereas in reality opportunity costs tend to rise as a country specialises
further, meaning complete specialisation is likely not the best solution.
● Perfect factor mobility. The theory assumes that resources can be freely and instantly moved between
industries as countries specialise. In reality, a worker in the manufacturing industry cannot immediately
become a financial services worker, so structural unemployment and hefty transition costs are likely
going to be a significant issue in a real specialisation scenario.
● Free trade. The theory assumes that no tariffs, quotas or other trade barriers exist between nations. In
reality, this is obviously not always the case as governments frequently intervene in trade for political,
strategic and protectionist reasons. This will be a constraint on the benefits gained from specialisation.
The actual benefits of specialising according to the theory can be contested through evaluation. According to
comparative advantage theory, developing countries should generally specialise in primary commodities (i.e.
raw materials and crops), since, due to their abundance of low-skilled cheap labour, this is often where they
have a comparative advantage. However, primary commodities prices tend to be:
● Volatile. Prices are heavily affected by weather, global demand shocks and speculation.
● Subject to long-run decline. As technology improves, manufactured goods require fewer raw material
inputs, reducing demand for commodities over time. Furthermore, in the case of some commodities
such as oil and gas, supply becomes increasingly scarce over time as resources are depleted.
● Price inelastic in demand. More valid for crops; if a bumper harvest occurs one season, prices will
collapse and demand will not rise significantly in response, leading to plummeting export revenues.
Meanwhile, the manufactured goods and services that developing economies import from developed economies
tend to rise in price over time. This means that the terms of trade (ratio of export prices to import prices) for
commodity-dependent developing countries tends to deteriorate in the long run, as they must export more and
more to afford the same quantity of imports or risk running a damaging trade deficit.
Explain five positive impacts and five negative impacts of specialisation and trade in an international
context.
Define globalisation.
The process in which the world’s economies are becoming increasingly interconnected in terms of flows of
goods/services, labour, capital and information.
Explain five characteristics of globalisation.
● Growth in international trade. The volume of goods and services traded across national borders has
increased significantly over time. Countries are increasingly specialising in what they produce most
efficiently and buy the rest on global trade markets.
● Increased capital flows. Money now moves more freely across borders in the form of foreign direct
investment (FDI), portfolio investment and financial transactions. National financial markets are now
deeply interconnected.
● Migration of labour. People move across borders in search of better employment opportunities,
leading to increasingly interconnected labour markets. Human capital is more likely to flow where it is
needed most.
● Cultural homogenisation. Cultures increasingly influence one another as countries become more
interconnected. Global brands, music, food and media are consumed worldwide, leading to a
homogenisation of consumer tastes and lifestyles across different nations.
● Transmission of economic problems. A recession, financial crisis or supply shock is unlikely to stay
confined in one country, and will often swiftly spread to others. A key example is the 2008 financial
crisis, which spread globally after beginning in the United States.
Explain four factors contributing to globalisation.
● Growth of MNCs. Large firms now operate across multiple countries, positioning stages of production
wherever costs are lowest or markets are largest. They are both a cause and a consequence of
globalisation, driving further integration as they expand.
● Technological change and communication. Advances in technology, particularly the internet, have
dramatically reduced the cost of communication and coordination across borders. This has made it
much easier for firms to manage global supply chains, for consumers to access foreign markets, and for
ideas and information to spread internationally.
● Financial deregulation. The liberalisation of financial markets has allowed capital to move much more
freely across borders.
● Reduction in trade barriers. Greater trade flows have been facilitated by a reduction in tariffs and
quotas as well as a rise in free trade agreements. The World Trade Organisation has played a
significant part in coordinating global trade liberalisation.
Explain the impact of globalisation on consumers, workers, producers, the government and the
environment.
● For consumers
○ Greater access to a wider variety of goods and services from around the world, increasing
choice as well as living standards (potentially, more relevant to developing countries that
import from developed ones).
○ Increased competition from foreign firms drives down prices, improving affordability and
consumer surplus.
○ Domestic industries and small businesses could be undermined by cheap foreign competition,
potentially leading to job losses that reduce household incomes and purchasing power.
● For workers
○ Workers in developing countries may benefit from employment opportunities created by
MNCs as they invest in and set up production facilities, raising wages and living standards.
○ Workers in developed countries may face structural unemployment as firms offshore
production to cheaper locations, particularly in the manufacturing industry.
○ There is a risk of a race to the bottom in labour standards, due to countries competing to
attract MNCs by keeping wages low and worker protections weak.
● For producers
○ Firms gain access to larger global markets, enabling them to increase sales, achieve
economies of scale and earn higher profits.
, ○ Access to cheaper inputs and labour from abroad can reduce the cost of production and
improve profitability and competitiveness.
○ Domestic firms face intensified competition from foreign producers, with small firms being
disproportionately affected since they can’t achieve economies of scale like foreign MNCs
might be able to. The result is that firms that cannot match the efficiency of larger foreign
competitors may be forced out of the market.
● For the government
○ Incoming foreign direct investment (FDI) creates jobs and generates tax revenue (income tax
from new workers and corporation tax from the domestic arm of the MNC), improving public
finance and potentially funding better public services, in turn increasing living standards.
■ However, this depends on the level of corporation tax. To attract and retain MNCs
and their FDI, governments will often set corporation tax at a low rate, which limits
the magnitude of the tax revenue raised.
○ Globalisation might make it harder for governments to manage their domestic economies
independently, since they are increasingly exposed to external shocks beyond their control.
● For the environment
○ Globalisation might spread environmentally friendly technology and practices across borders.
International cooperation on climate change might also solve environmental problems that
couldn’t be solved by any single country.
○ Increased global trade means more transportation of goods across long distances, generating
more carbon emissions and contributing to climate change.
○ Despite effective environmental regulations in many nations, MNCs may simply relocate
production to countries with weaker regulations, leading to pollution not being eradicated but
instead shifted to different areas.
Why do countries trade? Give four reasons.
● Comparative advantages. The principle of comparative advantage states that countries should
specialise in producing goods and services for which they have the lowest opportunity cost, and trade
with other nations for everything else.
● Access to resources. Some nations enjoy natural resource stores that other nations lack. For example,
Ukraine with its fertile farmland and Russia with its vast oil fields. Trade allows countries to share
these resources; both earn export revenue and gain resources they otherwise wouldn’t have had.
● Economies of scale. Domestic firms now serve the global market, not just domestic consumers,
allowing them to expand output, and earning them increased revenue which they can invest to
increase output even more. This drives down average costs through economies of scale. With average
costs lower, domestic firms can enjoy higher profits and the government receives more corporation tax
revenue.
● Consumer choice. Trade allows consumers to access goods and services that either cannot be
produced domestically or would be significantly more expensive if they were. This improves consumer
welfare and living standards. An example would be Saudi Arabia importing grain from countries such
as Russia, which can’t be grown in the arid environment of the Middle East.
Define absolute advantage.
When a country can produce a greater quantity of a good or service than another using the same resources. For
example, with its established and efficient extraction infrastructure, Saudi Arabia can produce more oil than
Australia at a higher efficiency.
Another way of putting it would be that a country has absolute advantage when it can produce a good using
less resources than another.
Define comparative advantage.
A country has comparative advantage when it can produce a good at a lower opportunity cost than another
country, i.e. it gives up less of other goods to produce it. This is often a more useful concept than absolute
advantage, because even if one country is absolutely better than producing everything, trade can still benefit
both countries as long as their opportunity costs differ.
, The formula for comparative advantage is comparative advantage = (loss in other good) / (gain of targeted
good).
Let’s use a table to illustrate this intuitively.
Country (fictional) SuperTuff Tiles Saffron
Zlotia 10,000 2,500
Carsonekh 2,000 2,400
Zlotia has absolute advantage in both SuperTuff Tiles (an advanced material used in rockets) and saffron.
Carsonekh only produces a few SuperTuff Tiles, but has a large saffron industry, growing it in advanced
hydroponic greenhouses.
To produce one SuperTuff Tile in Zlotia, we divide 2,500 by 10,000 to find that 0.25 units of saffron must be
given up to produce one SuperTuff Tile.
To produce one SuperTuff Tile in Carsonekh, we divide 2,400 by 2,000 to find that 1.2 units of saffron must be
given up to produce one SuperTuff Tile.
Evidently, Zlotia has the comparative advantage in producing SuperTuff Tiles, but we can reverse the
calculations to find something interesting:
To produce one unit of saffron in Zlotia, we divide 10,000 by 2,500 to find that 4 SuperTuff Tiles must be given
up to produce one unit of saffron.
To produce one unit of saffron in Carsonekh, we divide 2,000 by 2,400 to find that 0.83 SuperTuff Tiles must be
given up to produce one unit of saffron.
Carsonekh, despite producing a nominally smaller quantity of it, has the comparative advantage in saffron
production.
Currently, the worldwide production of SuperTuff Tiles sits at 12,000, and 4,900 for saffron. Let’s see what
happens if both countries specialise fully in what they have a comparative advantage in.
Zlotia produces 2,500 units of saffron, and must give up 0.25 to produce a new SuperTuff Tile. If all resources
are funneled into SuperTuff Tiles, we find that Zlotia can now produce 10,000 new total SuperTuff Tiles for a
total of 20,000 (using calculation 2,.25 = 10,000). Zlotia now produces no saffron.
Carsonekh produces 2,400 SuperTuff Tiles, and must give up 0.83 to produce a new unit of saffron. If all
resources are funneled into saffron, we find that Carsonekh can now produce approximately 2,892 new total
units of saffron for a total of 5,292 (using calculation 2,.83 = 2,892). Carsonekh now produces no
SuperTuff Tiles.
Now, worldwide production of SuperTuff Tiles is 20,000, and 5,292 for saffron. The world is now producing
more SuperTuff Tiles and saffron since Zlotia and Carsonekh specialised in the goods in which they had a
comparative advantage. Zlotia and Carsonekh can subsequently trade with each other to reap the benefits of
this expanded production.
THE NEXT THREE QUESTIONS ARE BASED ON A DIAGRAM SHOWN IN THE CTG BOOKLET.
Who has the absolute advantage?
Country A has an absolute advantage in both orange and smartphone production.
Who has the comparative advantage in orange production?
, Country A must give up 0.5 smartphones to produce 1 orange. Country B must give up 1 smartphone to
produce 1 orange. Therefore Country A has the comparative advantage in orange production.
Who has the comparative advantage in smartphone production?
Country A must give up 2 oranges to produce 1 smartphone. Country B must give up 1 orange to produce 1
smartphone. Therefore Country B has the comparative advantage in smartphone production.
THE NEXT THREE QUESTIONS ARE BASED ON ANOTHER DIAGRAM SHOWN IN THE CTG BOOKLET.
Who has the absolute advantage in each good?
Country A has the absolute advantage in iPhone production and Country B has the absolute advantage in apple
production.
Who has the comparative advantage in apple production?
Country A must give up 5 iPhones to produce 1 apple. Country A must give up 1.5 iPhones to produce 1 apple.
Therefore Country B has the comparative advantage in apple production.
Who has the comparative advantage in iPhone production?
Country A must give up 0.2 apples to produce 1 iPhone. Country B must give up 0.67 apples to produce 1
iPhone. Therefore Country A has the comparative advantage in iPhone production.
What are the assumptions and limitations associated with the theory of comparative advantage?
● No transport costs. The theory assumes that goods can be traded freely between countries at no cost,
which is obviously unrealistic. In reality, the cost of operating container ships and other logistics costs
can diminish the projected gains from specialisation, particularly for bulky or low-value goods.
● Constant opportunity costs. The theory assumes that opportunity costs remain fixed regardless of
how much a country produces, whereas in reality opportunity costs tend to rise as a country specialises
further, meaning complete specialisation is likely not the best solution.
● Perfect factor mobility. The theory assumes that resources can be freely and instantly moved between
industries as countries specialise. In reality, a worker in the manufacturing industry cannot immediately
become a financial services worker, so structural unemployment and hefty transition costs are likely
going to be a significant issue in a real specialisation scenario.
● Free trade. The theory assumes that no tariffs, quotas or other trade barriers exist between nations. In
reality, this is obviously not always the case as governments frequently intervene in trade for political,
strategic and protectionist reasons. This will be a constraint on the benefits gained from specialisation.
The actual benefits of specialising according to the theory can be contested through evaluation. According to
comparative advantage theory, developing countries should generally specialise in primary commodities (i.e.
raw materials and crops), since, due to their abundance of low-skilled cheap labour, this is often where they
have a comparative advantage. However, primary commodities prices tend to be:
● Volatile. Prices are heavily affected by weather, global demand shocks and speculation.
● Subject to long-run decline. As technology improves, manufactured goods require fewer raw material
inputs, reducing demand for commodities over time. Furthermore, in the case of some commodities
such as oil and gas, supply becomes increasingly scarce over time as resources are depleted.
● Price inelastic in demand. More valid for crops; if a bumper harvest occurs one season, prices will
collapse and demand will not rise significantly in response, leading to plummeting export revenues.
Meanwhile, the manufactured goods and services that developing economies import from developed economies
tend to rise in price over time. This means that the terms of trade (ratio of export prices to import prices) for
commodity-dependent developing countries tends to deteriorate in the long run, as they must export more and
more to afford the same quantity of imports or risk running a damaging trade deficit.
Explain five positive impacts and five negative impacts of specialisation and trade in an international
context.
