T4 4.1 - 4.5.4 A Global Perspective

T4 4.1 Financial markets

4.1.1 GLOBALISATION

4.1.1 GLOBALISATION

What is globalisation

The increased integration and inter dependence of world economies

What are 3 ways this can be seen through

Rising number of global brands

Increasing connectivity of people and business

Expansion of financial capital flows between countries

Give 3 characteristics of globalisation

Expansion of free trade

Expansion of FDI by TNC’s

High levels of labour migration

Who are the East Asian Tigers

Newly industrialised countries who began to rise through export oriented industrialisation (70s and 80s)

What did the EATs do to make themselves off shoring hubs for FDI

They invested in their human capital which allowed them to diversify away from low value goods to higher value goods production

What percentage of global economic growth did the BRICs make up between 2000 - 2007

28% (2000 - 2007)

What was Chinese economy market share of global economy in 1980 vs now

2% vs 18%

What is a TNC

A firm that is registered or operates in one or more countries

Where are many TNCs coming from nowadays compared to before

Newly industrialised economies compared to western countries previously

What do many people see de-industrialisation (levelling up) as responsible for

The rise in populism and right leaning governments

Why might a TNC want to invest abroad

Abundant raw materials

Cheap labour

Quality of labour

Low regulation

Saturated markets domestically

Tax avoidance

What is offshoring

Setting up operations or production in another country

What is outsourcing

The contracting out of a supply chain to a third party in another country

What is a global value chain

Refers to the interconnected network of activities involved in the production and delivery of goods and services that are performed by multiple firms in different countries

Where are the different stages of production such as design, research and development performed

In different countries by different firms, each adding their own value to the final product or service

Pros of TNC/MNC investment

Create jobs, stimulating growth

Size and scale of operation enables lower unit costs

Profits of TNCs can be used for R&D

TNCs bring new technology to LDCs which they can copy to help develop

Cons of TNC investment

TNCs in LDCs have strong bargaining power which allows them to drive down wages

MNCs have monopoly power

Lots of pollution (negative externalities)

What is a joint venture

When two or more businesses come together to pursue a common project

With a joint venture, the businesses remain separate in legal terms

Why are joint ventures becoming more popular

Because firms want to benefit from collaborative work or access a market (ie big company teaming up with local company in china)

Also spreads the risk

What are some benefits of joint ventures

Allows sharing of costs with TNCs

Local businesses could gain access to resources including tech, human capital and finance

Risks of R&D are shared

Positive externalities

What are some Causes of the rise in globalisation

Advance in transport and containerasation

Role of World Trade Organisations (WTO) such as EU in reducing trade barriers

Improved technology (easier to communicate)

Improved mobility of capital

Growth of multinational companies

Further causes of rise in globalisation

Opening of formerly closed economies

Increased mobility of labour

Global trade cycles

Firms exploiting economies of scale to gain increased specialisation and reduced unit costs

Consumer welfare is an umbrella term that covers what 3 things:

Price

Choice

Quality

What are some benefits of globalisation

Higher growth rates (FDI injections + export led multipliers)

Increased allocative efficiency via using comparative advantage

Jobs created

Rise in consumer welfare

Attracting FDI

Fall in wage costs (increased migrant workers)

Reduction in absolute poverty

Is further up the supply chain closer to product or raw materials

Closer to the product

Is further down the supply chain closer to product or raw materials

Closer to the raw materials (Bottom up)

Define allocative efficiency

When price equals marginal cost

What is a monopsony

Monopsonies have buying power and can force costs to be lower

(ie NHS)

What is a monopoly

They have selling power (they own majority shares of market so can charge whatever price they want)

What does dynamic efficiency encompass

Product and process innovation

What are some costs of globalisation

Labour exploitation

Tax avoidance

Rising global income inequality

Large job losses (In higher income countries)
Environmental damage

Loss of cultural diversity

What do companies want to source

The lowest cost of production possible

What does this then cause LDCs to do with eachother

Compete with eachother to secure contracts which requires them to offer lower wages, taxes and reduced red tape

What can this lead to

A race to the bottom on wages and working conditions for workers

Name some supply side economic shocks

Tariffs (imports more spenny)

Extreme weather events

Volatile oil prices

Currency volatility

What are some demand side economic shocks

Covid

Global financial crisis

Currency volatility

Why was Covid - 19 a demand AND supply side shock

Demand because people were locked in houses so couldn’t go out and buy spend money

Supply because after borders reopened, some countries such as China opened later which meant there were supply side shortages for the UK in terms of Chinese imports

Why can currency volatility be both a supply side and demand side shock

Because when currency is weak in one country, imports become more expensive for that country which means that there will be less DEMAND for exports in the country experiencing a weak currency

Exports of that country become cheaper which means there is more supply for a different country

What does de - globalisation refer to

A process in which countries or regions become less integrated with the global economy

What does de globalisation involve

Reduction in the value of goods, services, capital, information and people flowing across international borders

What caused the rate of globalisation to decrease in 2008

The 2008 financial crisis

What are the main causes of De globalisation

Protectionism measures

Economic downturns in trading partners

Changing trade agreements

Environmental concerns

4.1.2 - 4.1.4 INTERNATIONAL TRADE

4.1.2 - 4.1.4 INTERNATIONAL TRADE

What is international trade

The exchange of products

What are static gains

Improvements in allocative and productive efficiency in markets

What are dynamic gains

The gains in welfare from product and process innovation, increased choice and more innovative behaviour

What is free trade

Trade free from artifical barriers such as import tariffs and regulations

What is absolute advantage

Where one country can produce goods using less resources/financial capital than another

What did Adam Smith Argue surrounding international trade (ABSOLUTE ADVANTAGE ONLY)

That a country should EXPORT those goods and services for which it is more efficient at producing and IMPORT those goods and services in which it is less efficient at producing

What did David Ricardo say about TRADE (COMPARATIVE ADVANTAGE - BEING RELATIVELY BETTER THAN ANOTHER COUNTRY)

That there is mutual benefit to trading even when a country has no absolute advantage in production of all goods as long as the countries’ opportunity costs for producing the goods differ

When does comparative advantage exist

When the relative opportunity cost of production for a good or service is lower than in another country

A country is RELATIVELY more productively efficient than another

What can potential gains from specialisation and trade lead to

More efficient allocation of scare resources

What did Hecksher Ohlins Theory (1933) do

It refined ricardos theory of comparative advantage

What did Hecksher and Ohlin suggest

That opportunity was based on a countries factor endowment rather than labour productivity

What are national factor endowments

The extent to which a country is endowed (inherently blessed with) with resources of LAND, LABOUR AND CAPITAL

What happens to the relative unit cost when a factor is more abundant

The relative cost will be lower

How does specialisation lead to increased output

Different countries have different factor endowments

This means some countries can produce certain goods more efficiently than others - Specialisation therefore occurs

As we specialise labour becomes more efficient due to repetition of task

Output and productivity rise

Why is comparative advantage said to be a dynamic concept

Because it changes over time (factor endowments can change)

What are some ways in which factor endowments can change over time

(LAND) Quantity and quality of natural resources available

(LABOUR) Ageing population or net outward/inward migration

(CAPITAL) Rates of investment in new capital goods

What is an artificial way of creating a comparative advantage

Import controls such as tariffs

What is the formula for opportunity cost calculations

Opportunity cost = Sacrifice / Gain

Debbie and Colin comparative advantage slide

What is the Law of Comparative advantage

Overall output can be increased if all individuals specialise in producing the goods in which they have a comparative advantage

What does it mean if the PPF of two countries has the same gradient

The opportunity costs are the same

No country has a comparative advantage

Therefore there are no gains to be had from trade

Comparative Advantage and gains from trade when gradient is EQUAL slide

How does comparative advantage lead to economic welfare (chains of reasoning)

If each country specialises where it has comparative advantage, total output increases

As countries specialise, their unit costs fall which can be passed on to consumers via lower prices - increased purchasing power

More goods being sold leads to higher labour demand (due to labour being a derived demand)

What are the 4 main limitations of comparative advantage

Assumes that there are no economies of scale

Assumes that the factors of production are perfectly mobile

Assumes no transport costs for exporting your good

Comparative advantage only considers static efficiency (here and now) and not dynamic efficiency (in the future via product and process innovation)

What was Paul Samuelsons critique in 2004 in the context of the debate surrounding international outsourcing and trade with China

That increases in productivity of labour in a developing country following trade liberalisation may diminish the developed nations share of the gains from trade (increased supply leading to cheaper export prices for developed countries)

4.1.3 THE TERMS OF TRADE

4.1.3 THE TERMS OF TRADE

What are the Terms of Trade of a country

The amount of imported goods and services an economy can purchase per unit of of exported goods and services

What does a rise in the price index for exports of goods improve

The terms of trade

What is the formula for calculating TERMS OF TRADE

When is a terms of trade bad

When it is less than 1 (Imports more expensive than income from exports)

What can the ToT be used as a measure of

A countries trade competitiveness

What are some factors that improve the ToT

The ouput of a country moving up the value chain (from primary production to secondary)

Demand for a countrys exports rising relatively faster than its own demand for imports

A fall in international competitiveness (inflation in the producing country causing the price of the exported good to be higher)

What are some factors that can worsen the ToT

Imports being relatively more income elastic than exports such that growth leads to a faster rate of rise in demand for imports than exports

Moving down the value chain

A rise in international competitiveness (relative disinflation leading to lower production costs and lower export prices)

What aspects of a countries economy are affected by a change in the terms of trade

Living standards

Impact on the balance of payments

Impact on inflation

Impact on growth and employment

Why may an improvement in the ToT improve or worsen the balance of payments

Improve - If country export prices have risen due to strong demand from trading partners

Worsen - If the export price rises are due to the country experiencing increasing costs of production, it is likely earnings will fall, as the countrys exports become less competitive

How may a change in the ToT affect inflation

An improvement in the ToT because of falling import prices could result in lower inflation

A woresening of the ToT could cause rising inflation as workers seek pay increaes to compensate for rising import prices (wage price spiral)

What are some benefits of trade

Allows for specialisation in comparative advantage (increase in world output)

Greater consumer welfare (lower prices from increased competitiveness)

Dynamic efficiency gains from international competition which allows countries to builld a comparative advantage

Greater tax revenue

What are the 4 types of efficiencies

Allocative efficiency (Type of static efficiency)

Productive efficiency (Type of static efficiency)

Dynamic efficiency

X - Inefficiency

What is impact of trade on allocative efficiency

Competition from lower cost of import sources drives market prices down and reduces monopoly

What is impact of trade on productive efficiency

Specialising and selling in larger markets encourages economies of scale (lower LRAC)

What is the impact of trade on dynamic efficiency

Open economies may see more innovative businesses who invest more in research and development to drive product and process innovation

What is the impact of trade on X - Inefficiency

Intense competition in markets will provide a discipline on businesses to keep their unit costs under control

Why do some countries have a ratio of trade in goods/services to GDP that is above 100%

Because they are small countries who specialise in a few profitable industries which they have a clear comparative advantage in

These industries may gain more money from exports than the entire domestic economy

Why is trade so significant for LDCs

It provides a source of forgein currency (allows surplus countries to build up US dollar reserves)

It is an important way of financing imports of essential capital equipment

An injection of demand into circular demand (X-M)

Increased employment in export industries

What are some risks of international trade

Volatile global prices affect export revenues and profits

Countries with little natural resources may suffer from resource trap (specialise heavily in commodity exports at expense of developing diversified economy)

Exports may be affected by geopolitical uncertainties

What are some costs of trade

Negative externalities (pollution)

Structural unemployment in MDCs as low skilled jobs move to LDCs

Increased global inequality as LDCs struggle to compete with MDCs in high value sectors

4.1.4 PATTERNS OF TRADE

4.1.4 PATTERNS OF TRADE

What are the two things we can focus on when considering patterns of trade

Geographical patterns of trade (Which countries a nation trades with)

Commodity pattern of trade (types of products traded)

What position is the UK in terms of largest exporters of goods

7th Largest in the world

What position is the UK in terms of largest importers of goods

4th Largest in the world

What is the UKs share of world exports and imports

Exports - 3.7%

Imports - 5%

Where do 62% of our exports go

Other members of the EU

Where do 50% of our imports come from

The EU

What are some reasons for the rise in global trading patterns

The rise of regional trading blocs (EU, NAFTA, APEC, KORUS)

Fall in the relative size of manufacturing export sector in industrialised countries (Due to competition from low cost developing countries)

Newly industrialised economies such as BRICS dramatically increasing their share of world trade

Further reasons for global trade patterns

The global rise in GDP has led to absolute poverty in China decreasing from 84% to 12% therefore more likely to spend money on imported goods

Free movement of capital (easier to invest in foreign countries)

Changing comparative advantage (Away from MEDCs to emerging economies with more factor abundance)

Why can large trade imbalances indicate lack of international competitiveness

An overreliance on imports could signify relatively lower levels of innovation and productivity compared to competitors (structural issues)

The domestic prices of production are relatively higher than in other countries so exports less competitive