Economics Theme 4 Partial

Test 20/10/26

What is the core definition of globalisation?

Globalisation is the increasing reliance of countries on one another (interdependence), alongside the rapid economic, technological, and social change this creates.

What is a major macroeconomic risk associated with growing interdependence?

A disruption in one country can directly affect production, prices, and employment in other countries.

How does the OECD describe geographical dispersion in globalisation?

The Organisation for Economic Co-operation and Development describes geographical dispersion in globalisation as the trend of production activities (research, sourcing, production and distribution) being spread across different countries.

Through what mechanisms do global firms connect geographically dispersed activities?

Through international networks, joint ventures, and shared assets.

What is meant by economic integration in globalisation?

Local, regional, and national economies becoming connected within a more unified international market.

What four international flows become freer under globalisation?

• Goods and services (freer trade)

• Mobility of labour

• Mobility of capital

• Sharing of technology and knowledge

How have transport improvements enabled globalised manufacturing?

Faster, cheaper, and more reliable ships, aircraft, railways, and logistics systems allow different production stages to be located around the world (e.g., overseas component manufacturing with final assembly elsewhere).

What role do information technology and communication play in globalisation?

The internet, cloud computing, and video communication allow firms to coordinate workers, suppliers, and customers seamlessly across different time zones.

How do international financial markets support globalisation?

They allow firms to raise finance, exchange currencies, and transfer capital internationally to support overseas trade and investment.

What are Transnational Corporations (TNCs), and how do they promote globalisation?

TNCs operate in several countries and promote globalisation by seeking lower costs, larger markets, and higher profits. They manufacture/sell internationally and influence governments via lobbying.

What are two key benefits of globalisation for consumers?

• Greater choice: Ability to buy a wider variety of global products rather than relying solely on domestic goods.

• Potentially lower prices: Firms exploit comparative advantage and lower input/labour costs overseas.

How can globalisation lead to higher prices for certain consumer goods?

Globalisation raises global incomes and demand, placing upward pressure on the prices of products whose supply cannot increase quickly.

What is cultural homogenisation, and why does it concern consumers?

The spread of global brands and products weakening local customs, independent businesses, or cultural identities.

Why are the employment effects of globalisation uneven across countries?

Some workers gain jobs from expanding trade and FDI, while others lose jobs when production shifts to lower-cost locations (e.g., manufacturing job losses in developed economies to China or Poland).

What are three distinct macroeconomic effects of increased labour migration?

1. Expands labour supply, which may place downward pressure on wages in specific occupations.

2. Fills domestic skills shortages and increases productive capacity.

3. Creates additional aggregate demand, supporting overall employment.

How does international competition affect low-skilled vs high-skilled wages?

• Low-skilled: Competition may reduce wages or wage growth in developed countries while raising demand/wages in developing countries.

• High-skilled: High demand for managers, engineers, and tech specialists raises their wages faster, potentially increasing income inequality.

What dual impact do TNCs have on working conditions and skills in developing nations?

They create jobs and provide productivity-enhancing training, but some supply chains involve sweatshops with low wages, excessive hours, or unsafe conditions.

How does operating across multiple international markets diversify risk for producers?

Declining sales/demand in one country can be offset by stronger market performance and sales elsewhere.

What are the major benefits and competitive pressures globalisation creates for producers?

• Benefits: Access to cheaper inputs, larger customer bases, lower average costs, higher revenues/profits.

• Pressures: Domestic firms that cannot match the price, quality, or innovation of international competitors lose market share or go out of business.

How can TNCs both support and erode government tax revenues?

They generate tax revenue through corporate profits and employee income taxes, but may use complex international arrangements (profit shifting) to transfer profits to low-tax jurisdictions to avoid taxes.

What is the legal distinction between TNC lobbying and bribery?

Lobbying is legal political influence; bribery is illegal and causes political corruption, inefficient government decisions, and a loss of public trust.

What environmental market failures are caused by global economic expansion?

Increased extraction of raw materials (habitat destruction, pollution, resource depletion) and higher transport emissions, occurring because environmental costs are excluded from market prices (negative externalities).

How can globalisation assist in solving environmental challenges?

It enables countries, researchers, and firms to share environmental knowledge, green finance, and low-carbon technologies globally.

How does TNC investment create a multiplier effect in an economy?

FDI is an injection into the circular flow of income, generating multiplied national income as employees and suppliers spend their extra earnings.

What are technology and management spillovers?

Domestic workers and local firms learn advanced technology and modern management methods introduced by TNCs, raising overall national productivity.

Why can a shift in comparative advantage lead to structural unemployment?

As wages, skills, technology, and exchange rates change, a TNC may relocate to a lower-cost country, leaving workers in the former host country structurally unemployed.

How does globalisation increase market contestability?

Foreign firms can enter or threaten to enter domestic markets, creating competitive pressure on domestic firms even if the foreign firms have not yet gained a large market share.

Define Absolute Advantage vs Comparative Advantage.

• Absolute: Producing more output using the same resources, or producing the same output at a lower resource cost, than another country.

• Comparative: Producing a good at a lower opportunity cost relative to another good than another country.

Under what circumstance is there no comparative advantage between two countries?

When both countries face identical opportunity cost ratios for producing the goods.

Maximum outputs: UK = 70 Umbrellas OR 140 Cars. Spain = 140 Umbrellas OR 80 Cars. Calculate opportunity costs and identify comparative advantages.

• UK 1 Umbrella: Costs $2 Cars; UK 1 Car: Costs $0.5 Umbrellas.

• Spain 1 Umbrella: Costs $0.57 Cars; Spain 1 Car: Costs $1.75 Umbrellas.

• Comparative Advantage: Spain in Umbrellas ($0.57 < 2$); UK in Cars ($0.5 < 1.75$).

If UK and Spain move from 50:50 resource allocation (105 Umbrellas, 110 Cars) to full specialisation according to comparative advantage, what is the net output gain?

• Full specialisation = UK produces 140 Cars; Spain produces 140 Umbrellas.

• Net Gain: $+35 Umbrellas</span> and <span>$+30 Cars.

Maximum outputs: UK = 70 Umbrellas OR 80 Cars. Spain = 140 Umbrellas OR 120 Cars. Spain has an absolute advantage in both. Who has the comparative advantage in Cars?

• UK 1 Car: Costs $0.875 Umbrellas (70/80).

• Spain 1 Car: Costs $1.17 Umbrellas} (140/120).

• UK has the comparative advantage in Cars because $0.875 < 1.17$.

What does the gradient of a straight-line Production Possibility Frontier (PPF) represent?

The opportunity cost of switching production between the two goods.

On a PPF diagram, what does an outer consumption boundary (beyond the PPF) illustrate?

It shows that specialisation according to comparative advantage followed by trade allows countries to consume beyond their domestic production capacity.

List 6 key limitations/assumptions of the basic comparative advantage model.

1. Assumes no transport costs (shipping/insurance could outweigh trade gains).

2. Assumes constant opportunity costs (ignores economies of scale).

3. Assumes goods are homogeneous (ignores quality/design differences).

4. Assumes perfect factor mobility within countries.

5. Assumes no tariffs or trade barriers.

6. Assumes buyers and producers have perfect knowledge.

Where must the Terms of Trade ratio lie for both trading countries to benefit?

The terms of trade must lie strictly between the opportunity-cost ratios of the two countries.

What are five key economic advantages of international specialisation and trade?

• Higher global output and productive efficiency.

• Realisation of economies of scale (lower average costs).

• Access to resources unavailable domestically (factor endowments).

• Greater choice and lower prices for consumers.

• Increased market competition driving domestic innovation.

What are four major disadvantages/risks of international specialisation?

• Over-dependence on exports or imports (vulnerability to demand/supply shocks).

• Structural unemployment when domestic industries lose competitiveness.

• Environmental damage from transport emissions and over-extraction.

• Reduced policy sovereignty and risk of loss of local culture.

Define Absolute Poverty and state the World Bank income benchmark.

When people cannot afford basic necessities needed to stay alive (food, safe water, sanitation, shelter, healthcare). Measured by the World Bank as living on less than US$1.90 per day.

How is Relative Poverty defined in the UK?

Having a household income below 60% of the median household income after housing costs (e.g., approximately 14 million people living below this line in the UK benchmark context).

How does a social-norms definition explain relative poverty?

Being unable to afford goods and services considered "normal" for societal participation (e.g., a fridge or smartphone), limiting social inclusion.

How can relative poverty increase even if a low-income household's cash income remains unchanged?

If median national income rises, the 60% threshold rises as well, dragging households whose incomes stagnated into relative poverty.

What is the Poverty Line?

The minimum income judged necessary to achieve an adequate standard of living in a specific country.

Explain the mechanics of the Poverty Trap.

Occurs when the tax-and-benefits system makes working extra hours unrewarding because increased earnings lead to income tax, National Insurance deductions, and benefit withdrawal, leaving little or no net gain.

Why does higher GDP growth not automatically eliminate absolute poverty?

Growth mainly reduces absolute poverty if the state supports those who cannot directly participate in or benefit from market growth.

What six specific structural factors have driven growing relative poverty in the UK?

• Increased wage inequality: Top earners' pay growing 170x average worker pay (vs 60x historically).

• De-industrialisation: Shift from manufacturing to lower-paid, less secure service roles.

• Underemployment: Growth of zero-hour, part-time, and temporary contracts.

• Decline of trade unions: Weakened worker bargaining power.

• Regressive tax/benefit shifts: Benefits failing to keep pace with living costs.

• Structural unemployment: Persistent skills gaps following industrial shifts.

Distinguish between Income and Wealth.

• Income: A flow of earnings measured over time (e.g., salary, rent, dividends per week/year).

• Wealth: A stock of assets owned at a point in time (e.g., property, stocks, savings minus debts).

Why is wealth almost always more unequally distributed than income?

Wealth accumulates over time; existing wealth generates additional income (rent, interest), allowing owners to buy more assets; and wealth persists across generations via inheritance.

Explain how a Lorenz Curve measures income distribution

It plots the cumulative percentage of the population (poorest to richest) against the cumulative percentage of income received. The further it bows away from the 45° line of equality, the greater the inequality.

What is the formula and scale for the Gini Coefficient?

• Formula: A/A+B (where $A$ is the area between the 45 degree line and the Lorenz curve, and A+B is the entire area beneath the 45 degree line).

• Scale: Ranges from 0 (perfect equality) to 1 (maximum inequality).

List four main factors driving income/wealth inequality within countries.

1. Wages: Differentials based on scarce skills, qualifications, or hours worked.

2. Wealth levels: Ability of rich individuals to take high-return risks and earn passive income.

3. Chance: Being in the right place at the right time (e.g., buying property before an urban boom) or inheriting wealth.

4. Age: Accumulation of assets and career experience over a lifetime.

What three structural issues cause inequality between countries?

• Negative shocks: Wars, droughts, famines, and earthquakes destroying capital and productivity.

• Exclusion/Marginalisation: Restricting education or land rights for women or minority groups.

• Trade advantages: Developed nations favoring each other through trade blocs and biased rules.

Explain the Kuznets Hypothesis (Inverted-U Curve).

As an economy transitions from agriculture to industry, inequality first rises (industrial wages outpace rural wages). Later, inequality falls as development allows governments to fund transfers and education.

What was Thomas Piketty’s (2014) critique of the Kuznets Curve?

Piketty argued that falling inequality is not automatic. Capitalism continually increases inequality whenever the rate of return on capital (r) exceeds the rate of economic growth (g), allowing asset owners' wealth to outpace wage earners.

Why is some inequality argued to be necessary in a capitalist system?

Inequality acts as an incentive structure. The opportunity for higher earnings, profits, or bonuses encourages work effort, skill acquisition, and entrepreneurial risk-taking.

How can excessive inequality reduce overall economic efficiency?

It restricts opportunities for low-income households (e.g., inadequate education/housing), wasting talent, limiting human capital formation, and reducing aggregate consumer spending.

Distinguish between Economic Growth and Economic Development.

• Growth: Quantitative increase in real GDP and productive potential.

• Development: Qualitative improvement in living standards, health, education, security, and human wellbeing.

What are six common economic features of a developed country?

High GDP per capita, strong health/education systems, reliable transport infrastructure, high labor productivity, deindustrialisation (large service sector dominance), and lower levels of corruption.

What are six common structural challenges faced by developing countries?

Low GDP per head, low physical and human capital, high underemployment/unemployment, poor health outcomes, high population growth rates, and weaker/corrupt institutions.

What three dimensions make up the Human Development Index (HDI)?

Health: Life expectancy at birth.

• Education: Mean years of schooling (adults 25+) and Expected years of schooling (child).

• Income: Real GNI per capita adjusted for Purchasing Power Parity (PPP).

Why is GNI per capita (PPP) used in HDI instead of nominal GDP?

GNI includes net primary income from abroad, and PPP adjusts for domestic cost-of-living differences, measuring what income can actually purchase.

What are two main advantages and three main limitations of HDI?

• Advantages: Broader than GDP alone; uses easily accessible national data.

• Limitations: Ignores quality of health/education; fails to account for income inequality; ignores corruption and environmental destruction.

How does the Inequality-adjusted Human Development Index (IHDI) modify standard HDI?

It uses the Atkinson Index to discount ("penalise") health, education, and income scores based on how unequally those outcomes are distributed across the population.

What specific deprivations are measured by the Multidimensional Poverty Index (MPI)?

• Education: Schooling years and child attendance.

• Health: Child mortality and nutrition.

• Living Standards: Electricity, sanitation, drinking water, cooking fuel, floor type, and basic assets.

What are the three indicator categories in the Genuine Progress Indicator (GPI)?

• Economic: Personal consumption, inequality, cost of unemployment.

• Environmental: Pollution costs, deforestation, carbon emissions, resource depletion.

• Social: Value of unpaid care/volunteering minus costs of crime and commuting.

Give two examples of single, non-index indicators of economic development.

• Electricity production per capita.

• Number of mobile phones per 1,000 people.

What is Primary Product Dependency?

When a developing country relies heavily on exporting raw materials from agriculture or mining for its national income and foreign exchange.

Explain the Prebisch-Singer Hypothesis.

Primary commodities have a low Income Elasticity of Demand (YED < 1), whereas manufactured goods have a higher YED. Over time, global demand and prices for manufactures rise faster than for primary goods, leading to worsening terms of trade for commodity exporters.

Explain the mechanics of Dutch Disease.

A primary commodity boom generates massive foreign currency inflows, causing the domestic currency to appreciate. This makes non-commodity export sectors (like manufacturing and tourism) uncompetitive, causing them to shrink.

Why do primary commodities experience extreme short-run price volatility?

Both demand and supply are highly price-inelastic in the short run. Small shifts in supply (harvest shocks) or demand cause large price adjustments to clear the market.

How does commodity price volatility hurt long-run development?

Unstable export earnings create uncertainty, making it hard for households, firms, and governments to plan, secure credit, or fund long-term capital investments.

Why can extended periods of high commodity prices lead to a market crash?

High prices cause firms to over-invest in long-term capacity. When new supply comes online years later, global demand may have cooled, creating oversupply, price crashes, debt defaults, and wasted capital.

What is a Savings Gap?

The shortfall between domestic savings and the level of investment required to fund a target rate of economic growth.

What does the Harrod-Domar Model argue regarding economic growth?