Aled Bennett
STUDENT
ECONOMICS THEME 4
REVISION NOTES
,Chapter 61: Globalisation:
Globalisation: Ever increasing integration of the world’s local, regional and national economies into
a single international market
Economic integration:
1. Free movement of labour: E.g free movement of labour between the UK and EU (before
Brexit)
2. Free movement of capital: E.g Chinese central bank may invest in the USA
3. Free trade of goods and services: It becomes as easy as a London based firm to sell to China
as it is to sell in Manchester
4. Free interchange of technology and intellectual capital: UK firm can use its patented
technology in a factory in Brazil the same as it can in the UK
The Causes of Globalisation:
Trade in goods: For many HIC goods are manufactured abroad – developing countries have acquired
the capital, are efficient and have cost advantage in the form of very cheap labour
Trade in services: Call centres for customers in developed countries are being located in developing
countries – India
Trade Liberalisation: Trade in goods and services is growing because of trade liberalisation – lower
protectionist barriers have encouraged growth in world trade – protectionist policies have gradually
fallen since 1945
Multinational and transnational companies growing in numbers and size: In some industries
(manufacturing/oil) economies of scale allow for products to be made that are cheap and
technologically advanced
- In other industries advanced marketing techniques have created global brands such as Coke
and MacDonald’s – both available in five continents
International financial flows: International financial flows are becoming greater – China have
financed their economic growth from inwards flows of international capital
Foreign Ownership of firms: This is ever increasing – large TNC’s have invested in China (companies
and factories)
- Oil rich states (Dubai and Qatar) have state investment funds which buy stakes in foreign
companies or purchase them
Communications and IT: Developments in communications and information technologies have
decreased the time taken for communication
Impact on Consumers:
Consumer Choice: The availability of goods and services has considerably increased with
globalisation leading to greater choice
- But some argue goods have become homogenised – a holiday in Spain has become the same
as one in Peru apart from the culture – same hotels with the same facilities and rooms with
“international food”
Prices: The relative price of goods and services is changing – leading to a fall in the prices as
production is switched from high cost to low cost locations
, - But it is also rising prices due to rising global incomes – higher incomes means higher
demand for individual products – when supply is not perfectly elastic in the long run this
puts upwards pressure on prices
Incomes: Overall globalisation has raised incomes worldwide consumers can therefore buy more –
but a worker who has lost his job due to outsourcing to China is worse off
Impact on Workers:
Employment and Unemployment: Winners and losers – transfer of manufacturing from Western
Europe and the USA to China and the Middle East has led to higher unemployment in the developed
world but reduction in the developing world
- Caused structural unemployment in traditional manufacturing areas
Migration: Many migrants are forced away due to war and conflict but economic migrants move to
enjoy a better standard of living/income for themselves and family
- They can fill skill gaps and raise the productivity of existing workers – creating jobs and
businesses due to higher demand of goods etc
- Immigration can cause strain on housing, education and healthcare – they can also lower
wage rates due to a surplus of labour supply
Wages: Globalisation is shifting workers to different locations and shifting places of work from one
place to another – a multinational manufacturing company will base in countries with low wage
rates – international competition has depressed the wages of unskilled workers in developed
countries
- Demand for these workers has increased in developing countries therefore pushing their
wages up
- In developed countries inequality has increased as there has been downward wage pressure
on low skilled workers and upwards pressure on high skilled workers
Multinationals: They create jobs wherever they set up – sometimes criticised for only creating low
skilled jobs for locals and recruiting high skilled labour from abroad
- Training workers is now recognised to benefit the firm as well as the worker – it also
influences the local economy raising the level of human capital
Impact on producers:
Specialisation and Economic Dependency: Globalisation comes through increased specialisation and
trade – firms and economic agents are increasingly interdependent
- A fault at a Chinese factory can impact a UK – e.g Russian trade sanctions on the UK can
destroy a market for a UK firm selling into Russia
Costs and Markets: Globalisation allows for firms to source products from a wider variety of
countries/firms – therefore lowering production costs
- It also allows for firms to sell to previously closed markets
Footloose capitalism: Firms which operate in several countries have the power to move production
from country to country – doing so to maximise profits
- Globalisation is inevitably leading to the shifting of production to developing countries –
helping to raise living standards
- Multinationals are part of a trend which is exploiting comparative advantage
Tax Avoidance: Firms which operate in multiple countries can engage in tax avoidance
, 1. Based on genuine and transfer pricing – firm produces good X in country A then transports
to country B to turn X into Y – country A has high taxes on profits and country B has low
ones – therefore the TNC places a very high artificial notional price on product X – profits
are then reduced in country A and increased in B
2. Set up an office in a low tax country such as Ireland, Luxembourg etc – ownership of a key
production element is assigned to the country (patent, copyright or sales) – significant
proportion of costs is assigned to that key element – revenue then taxed at virtually no tax
3. Transfer production facilities to low tax countries – Ireland + Apple – Ireland has attracted
many firms because of low corporation tax (12.5%)
Impact on governments:
- Provides both threats and opportunities for governments – bringing prosperity and
economic problems
- Governments have to adopt policies which will capture as large share as possible of the
benefits of globalisation and minimise the losses
Governments have become increasingly aware of the ability of TNC’s to avoid paying taxes – some
have responded by lowering tax rates to encourage TNC’s to relocate their tax jurisdiction
- Governments are prone to bribery and corruption – likely to distort development and leads
to lower income for countries – major problem for African countries
Impact on the environment:
Extra demand for raw materials and increased emissions and waste have had a negative impact on
the environment
- Economic growth can be environmentally friendly as countries like the UK and Sweden have
proved
- Although some multinationals have been said to be destroying the environment they actual
often have a better environmental record than smaller national companies – TNC’s have the
financial and technical knowledge to minimise their impact
Impact on individual countries:
- They can benefit if globalisation leads to rising incomes, more jobs, lower prices and more
consumer choice
- But can also lose if it leads to loss of industries, higher unemployment and lower wages
In countries like China the benefits from rapid growth have been offset against by the very large
negative impact it has had on the environment
- In the UK the loss of the textiles and steel industries in the 60s had a drastic impact on these
industries in Scotland and Wales
Non-economic impact of globalisation:
- Globalisation has been said to be ruining cultures as it gives the sense of “Westernisation” –
but due to the ease of labour mobility it could be said to be diversifying cultures due to
integration
- Politics is also effected – nation states have lost sovereignty due to the increasing number of
treaties signed
Key Terms:
Transfer Pricing: An account technique used by multinationals for reducing taxes on profits by selling
goods at a low price internally from a high tax country to another part of the company in a low tax
country
STUDENT
ECONOMICS THEME 4
REVISION NOTES
,Chapter 61: Globalisation:
Globalisation: Ever increasing integration of the world’s local, regional and national economies into
a single international market
Economic integration:
1. Free movement of labour: E.g free movement of labour between the UK and EU (before
Brexit)
2. Free movement of capital: E.g Chinese central bank may invest in the USA
3. Free trade of goods and services: It becomes as easy as a London based firm to sell to China
as it is to sell in Manchester
4. Free interchange of technology and intellectual capital: UK firm can use its patented
technology in a factory in Brazil the same as it can in the UK
The Causes of Globalisation:
Trade in goods: For many HIC goods are manufactured abroad – developing countries have acquired
the capital, are efficient and have cost advantage in the form of very cheap labour
Trade in services: Call centres for customers in developed countries are being located in developing
countries – India
Trade Liberalisation: Trade in goods and services is growing because of trade liberalisation – lower
protectionist barriers have encouraged growth in world trade – protectionist policies have gradually
fallen since 1945
Multinational and transnational companies growing in numbers and size: In some industries
(manufacturing/oil) economies of scale allow for products to be made that are cheap and
technologically advanced
- In other industries advanced marketing techniques have created global brands such as Coke
and MacDonald’s – both available in five continents
International financial flows: International financial flows are becoming greater – China have
financed their economic growth from inwards flows of international capital
Foreign Ownership of firms: This is ever increasing – large TNC’s have invested in China (companies
and factories)
- Oil rich states (Dubai and Qatar) have state investment funds which buy stakes in foreign
companies or purchase them
Communications and IT: Developments in communications and information technologies have
decreased the time taken for communication
Impact on Consumers:
Consumer Choice: The availability of goods and services has considerably increased with
globalisation leading to greater choice
- But some argue goods have become homogenised – a holiday in Spain has become the same
as one in Peru apart from the culture – same hotels with the same facilities and rooms with
“international food”
Prices: The relative price of goods and services is changing – leading to a fall in the prices as
production is switched from high cost to low cost locations
, - But it is also rising prices due to rising global incomes – higher incomes means higher
demand for individual products – when supply is not perfectly elastic in the long run this
puts upwards pressure on prices
Incomes: Overall globalisation has raised incomes worldwide consumers can therefore buy more –
but a worker who has lost his job due to outsourcing to China is worse off
Impact on Workers:
Employment and Unemployment: Winners and losers – transfer of manufacturing from Western
Europe and the USA to China and the Middle East has led to higher unemployment in the developed
world but reduction in the developing world
- Caused structural unemployment in traditional manufacturing areas
Migration: Many migrants are forced away due to war and conflict but economic migrants move to
enjoy a better standard of living/income for themselves and family
- They can fill skill gaps and raise the productivity of existing workers – creating jobs and
businesses due to higher demand of goods etc
- Immigration can cause strain on housing, education and healthcare – they can also lower
wage rates due to a surplus of labour supply
Wages: Globalisation is shifting workers to different locations and shifting places of work from one
place to another – a multinational manufacturing company will base in countries with low wage
rates – international competition has depressed the wages of unskilled workers in developed
countries
- Demand for these workers has increased in developing countries therefore pushing their
wages up
- In developed countries inequality has increased as there has been downward wage pressure
on low skilled workers and upwards pressure on high skilled workers
Multinationals: They create jobs wherever they set up – sometimes criticised for only creating low
skilled jobs for locals and recruiting high skilled labour from abroad
- Training workers is now recognised to benefit the firm as well as the worker – it also
influences the local economy raising the level of human capital
Impact on producers:
Specialisation and Economic Dependency: Globalisation comes through increased specialisation and
trade – firms and economic agents are increasingly interdependent
- A fault at a Chinese factory can impact a UK – e.g Russian trade sanctions on the UK can
destroy a market for a UK firm selling into Russia
Costs and Markets: Globalisation allows for firms to source products from a wider variety of
countries/firms – therefore lowering production costs
- It also allows for firms to sell to previously closed markets
Footloose capitalism: Firms which operate in several countries have the power to move production
from country to country – doing so to maximise profits
- Globalisation is inevitably leading to the shifting of production to developing countries –
helping to raise living standards
- Multinationals are part of a trend which is exploiting comparative advantage
Tax Avoidance: Firms which operate in multiple countries can engage in tax avoidance
, 1. Based on genuine and transfer pricing – firm produces good X in country A then transports
to country B to turn X into Y – country A has high taxes on profits and country B has low
ones – therefore the TNC places a very high artificial notional price on product X – profits
are then reduced in country A and increased in B
2. Set up an office in a low tax country such as Ireland, Luxembourg etc – ownership of a key
production element is assigned to the country (patent, copyright or sales) – significant
proportion of costs is assigned to that key element – revenue then taxed at virtually no tax
3. Transfer production facilities to low tax countries – Ireland + Apple – Ireland has attracted
many firms because of low corporation tax (12.5%)
Impact on governments:
- Provides both threats and opportunities for governments – bringing prosperity and
economic problems
- Governments have to adopt policies which will capture as large share as possible of the
benefits of globalisation and minimise the losses
Governments have become increasingly aware of the ability of TNC’s to avoid paying taxes – some
have responded by lowering tax rates to encourage TNC’s to relocate their tax jurisdiction
- Governments are prone to bribery and corruption – likely to distort development and leads
to lower income for countries – major problem for African countries
Impact on the environment:
Extra demand for raw materials and increased emissions and waste have had a negative impact on
the environment
- Economic growth can be environmentally friendly as countries like the UK and Sweden have
proved
- Although some multinationals have been said to be destroying the environment they actual
often have a better environmental record than smaller national companies – TNC’s have the
financial and technical knowledge to minimise their impact
Impact on individual countries:
- They can benefit if globalisation leads to rising incomes, more jobs, lower prices and more
consumer choice
- But can also lose if it leads to loss of industries, higher unemployment and lower wages
In countries like China the benefits from rapid growth have been offset against by the very large
negative impact it has had on the environment
- In the UK the loss of the textiles and steel industries in the 60s had a drastic impact on these
industries in Scotland and Wales
Non-economic impact of globalisation:
- Globalisation has been said to be ruining cultures as it gives the sense of “Westernisation” –
but due to the ease of labour mobility it could be said to be diversifying cultures due to
integration
- Politics is also effected – nation states have lost sovereignty due to the increasing number of
treaties signed
Key Terms:
Transfer Pricing: An account technique used by multinationals for reducing taxes on profits by selling
goods at a low price internally from a high tax country to another part of the company in a low tax
country
