Macroeconomics
Theme 4: A Global Perspective
, Globalisation
The growing interdependence between countries.
Characteristics of Globalisation
- Free trade across national boundaries.
- Free movement of labour between countries.
- Global supply chains.
- Free interchange of technology and knowledge.
Causes of Globalisation
- Trade in goods: Rich countries increasingly manufacture goods abroad.
- Trade in services: Growth in tourism.
- Opening of trade borders: 1978 in China and 1991 in India.
- Increased political alliances: USMCA and WTO in 1995.
- Multinational companies.
Impact on Consumers
- Consumer choice: Availability of goods and services have increased with
globalization.
- Prices: Relative price of goods is changing as there are cheaper costs of production.
- Incomes: Globalisation has risen incomes generally.
Impact on Workers
- Employment: Globalisation has created employment but also unemployment. E.g.,
there is more employment in developing countries such as China but growing
unemployment in USA and Europe due to the shift in production.
- Migration: Increased migration as they move to countries with better working
conditions and prospects.
- Wages: International competition has tended to depress wages of lower skilled work.
Impact on Producers
- Specialisation and economic dependency: Economic agents are increasingly more
dependent on each other.
- Costs and markets: Allow firms to source products from a wider variety of countries
to the costs will likely be lower.
- Footloose capitalism: Ability to move production from country to country (creating
and destroying jobs and prosperity) in order to maximise profits.
, Specialisation and Trade
Reasons for International Trade
- Differences in factor endowments (the amount of capital, land, labour or enterprise a
country can exploit).
- Price: Some countries produce goods at lower prices to others.
- Product differentiation: Different countries may produce goods that are similar but
not identical.
Patterns of Trade
- Impact of emerging economies: Some countries are growing very fast and as it grows
it’s likely to import more and export more.
- Growth of trade blocs: Proliferation of trade blocs are designed to increase trade
between those countries.
- Changes in exchange rates: These affect the relative prices of goods between
countries.
Comparative Advantage vs Absolute Advantage
- Comparative advantages: When a country can produce something at a lower
opportunity cost than another country
- Absolute advantages: When a country can produce more of a good.
Assumptions of Comparative Advantage
- No transport costs.
- Costs are constant and there are no economies of scale.
- Traded goods are homogeneous.
- Factor of production are perfectly mobile.
Terms of Trade
- Terms of trade is said to increase if a country can buy more imports with a given
quantity of exports.
o Price of exports increases proportionally more than price of imports.
Non-Price Theories of Trade
- Preference similarity theory: Suggests many manufactured goods aren’t imported
because they are cheaper than domestic goods but because some consumers want
greater choice than provided by domestic manufacturers.
Benefits of Trade
- Specialisation: Comparative advantage shows world output can be increased if
countries specialize in what they produce at lowest opportunity cost.
- Economies of scale: Trade allows economies of scale to be maximized and thus costs
reduced.
- Choice: Trade allows for more variety of goods.
- Innovation: As free trade means more international competition, firms are
incentivized to innovate to outcompete competitors.
Costs of Trade
Theme 4: A Global Perspective
, Globalisation
The growing interdependence between countries.
Characteristics of Globalisation
- Free trade across national boundaries.
- Free movement of labour between countries.
- Global supply chains.
- Free interchange of technology and knowledge.
Causes of Globalisation
- Trade in goods: Rich countries increasingly manufacture goods abroad.
- Trade in services: Growth in tourism.
- Opening of trade borders: 1978 in China and 1991 in India.
- Increased political alliances: USMCA and WTO in 1995.
- Multinational companies.
Impact on Consumers
- Consumer choice: Availability of goods and services have increased with
globalization.
- Prices: Relative price of goods is changing as there are cheaper costs of production.
- Incomes: Globalisation has risen incomes generally.
Impact on Workers
- Employment: Globalisation has created employment but also unemployment. E.g.,
there is more employment in developing countries such as China but growing
unemployment in USA and Europe due to the shift in production.
- Migration: Increased migration as they move to countries with better working
conditions and prospects.
- Wages: International competition has tended to depress wages of lower skilled work.
Impact on Producers
- Specialisation and economic dependency: Economic agents are increasingly more
dependent on each other.
- Costs and markets: Allow firms to source products from a wider variety of countries
to the costs will likely be lower.
- Footloose capitalism: Ability to move production from country to country (creating
and destroying jobs and prosperity) in order to maximise profits.
, Specialisation and Trade
Reasons for International Trade
- Differences in factor endowments (the amount of capital, land, labour or enterprise a
country can exploit).
- Price: Some countries produce goods at lower prices to others.
- Product differentiation: Different countries may produce goods that are similar but
not identical.
Patterns of Trade
- Impact of emerging economies: Some countries are growing very fast and as it grows
it’s likely to import more and export more.
- Growth of trade blocs: Proliferation of trade blocs are designed to increase trade
between those countries.
- Changes in exchange rates: These affect the relative prices of goods between
countries.
Comparative Advantage vs Absolute Advantage
- Comparative advantages: When a country can produce something at a lower
opportunity cost than another country
- Absolute advantages: When a country can produce more of a good.
Assumptions of Comparative Advantage
- No transport costs.
- Costs are constant and there are no economies of scale.
- Traded goods are homogeneous.
- Factor of production are perfectly mobile.
Terms of Trade
- Terms of trade is said to increase if a country can buy more imports with a given
quantity of exports.
o Price of exports increases proportionally more than price of imports.
Non-Price Theories of Trade
- Preference similarity theory: Suggests many manufactured goods aren’t imported
because they are cheaper than domestic goods but because some consumers want
greater choice than provided by domestic manufacturers.
Benefits of Trade
- Specialisation: Comparative advantage shows world output can be increased if
countries specialize in what they produce at lowest opportunity cost.
- Economies of scale: Trade allows economies of scale to be maximized and thus costs
reduced.
- Choice: Trade allows for more variety of goods.
- Innovation: As free trade means more international competition, firms are
incentivized to innovate to outcompete competitors.
Costs of Trade
