Theme 4

What is meant by globalisation?

The deepening of relationships between countries, reflected in an increasing level of cross-border trade and investment and migration

What is meant by de-globalisation?

A reversal of the process of globalisation

What is meant by slowbalisaiton?

A slowdown in the speed of globalisation

What are the characteristics of globalisation?

Increased trade in goods and services; higher trade to GDP ratios

More capital transfers ad capital liberalisation

Global branding

Greater specialisation and division of global labour force

Labour migration

Shifting balance of economic and financial power from developed world to emerging markets

De-industrialisation and structural unemployment in developed economies

Increased global media presence; greater connectivity

Greater investment spending on infrastructure & innovation; more integrated global supply chains

Increasing interdependency of economic agents

What are MNCs/TNCs?

Companies that operate in more than one country. They have different parts of the firm all over

What are the causes of globalisation?

Containerisation and falling transport, freight and travel costs

Increasing influence of powerful corporations

Lower trade barriers/trade liberalisation

Increasing size and number of trading blocs

More FDI flows between countries

Greater labour migration and the emergence of a global labour force

Rapid spread of technologies, manufacturing systems and management techniques

Faster communication and information flows and the emergence of new markets, especially in global media presence

Improvements in infrastructure

Geopolitical change

New emerging markets

How are economies of scale a benefit of globalisation?

Globalisation encourages both producers and consumers to reap benefits from division of labour; greater productive efficiency

How is more cost-reducing innovation a benefit of globalisation?

More competitive markets reduces the level of monopoly profits and can incentivise businesses to innovate

How are lower consumer prices/better quality a benefit of globalisation?

Greater competition can drive down prices for consumers and may increase range and quality of goods available (increased consumer surplus)

How is faster economic growth a benefit of globalisation?

Leads to higher per capita incomes and reduced extreme poverty in many lower income countries

How is freer movement of labour migration a benefit of globalisation?

Helps to relieve skilled labour shortages & diversifies the workforce, promoting knowledge, technology & management practice transfers posting the innovation

How is increased awareness a benefit of globalisation?

Of the long-term global economic challenges from climate change and the impact of wealth & income inequality

How is rising inequality a cost of globalisation?

The gains from globalisation are unequal leading to growing political and social tensions when inequality of income and wealth increases; relative poverty may increase

How are environmental costs costs of globalisation?

Threats to the global commons including irreversible damage to ecosystems, land degradation, deforestation, loss of bio-diversity and water scarcity

How is macroeconomic fragility a cost of globalisation?

In an inter-connected world, external shocks in one region can rapidly spread to other centres (this is known as systemic risk)

How are trade imbalances a cost of globalisation?

Increasing trade imbalances (both surpluses and deficits) lead to protectionist tensions, more import tariffs and quotas and a move towards managed exchange rates – this can then lead to de-globalisation and slower growth

How are jobs a cost of globalisation?

Workers may suffer structural unemployment from out-sourcing of manufacturing to lower-cost countries and a rise in the share of imports in GDP

How is tax avoidance a cost of globalisation?

Many large MNCs can find ways of avoiding corporation tax and other taxes; the rich can also avoid tac using tax havens, reducing the tax revenue of governments

How are brain drains a cost of globalisation?

A more mobile global workforce means some countries suffer from emigration, losing their most productive workers

How is protectionism a cause of de-globalisation?

Measures such as tariffs, quotas, and trade barriers may be used to shield domestic industries from foreign competition

How are economic shocks a cause of de-globalisation?

Economic downturns/recessions can lead countries to reduce their reliance on global trade, supply chains and investment

How are changing trade agreements a cause of de-globalisation?

Countries might renegotiate or withdraw from trade agreements that were previously promoting globalisation

How are environment concerns a cause of de-globalisation?

Concerns about climate change might lead to prioritisation of local production to reduce the carbon footprint associated with long-distance trade

How are health crises a cause of de-globalisation?

Global health crises, such as pandemics, disrupt travel, trade, and supply chains

How is economic nationalism a cause of de-globalisation?

Governments might adopt policies to protect domestic industries and jobs, even if it means reducing international trade

What are the benefits of globalisation on developed countries?

Increased access to freeing markets

Attraction of foreign investment

Improved productivity and innovation

What are the costs of globalisation on developed countries?

Jobs displacement/ structural unemployment

Rise in income inequality

Environmental degradation

What are the benefits of globalisation on developing countries?

Increased access to global markets

Increase in foreign investment

Increased access to to knowledge and technology

What are the costs of globalisation on developing countries?

Economic dependence such as primary product dependency

Exploitation of labour and issues with emigration

Environmental degradation

What negative economic shocks is the interconnected world at greater risk to?

Pandemics

Financial crises

Currency crises

Natural disasters

Extreme weather

Geo-political shocks

Risks from terrorism, commodity price volatility

Unexpected changes in global interest rates

Why do countries trade?

To increase the availability of resources, goods and services

To increase choice for consumers/more product differentiation

To increase efficiency/reduce costs/reduce prices

What is meant by international specialisation?

Where countries/regions focus on producing & exporting specific goods or services in which they have a comparative advantage, while importing other goods or services that they can acquire more efficiently from trading partners

What is meant by absolute advantage?

A country produces a good at a lower direct costs. Means that each country is better at producing one good than another in relation to another country

Who created the theory of absolute advantage?

Adam Smith

What is meant by comparative advantage?

When one country can produce a good or service at a lower opportunity cost than another country. It considers where a country is relatively more efficient or relatively less inefficient at producing

Who created the theory of comparative advantage?

David Ricardo

What are opportunity cost ratios?

Total given up/total gained

What are the underlying assumptions for comparative advantage?

Transport costs

No barriers to trade

Homogenous goods

No economies of scale

No environmental costs

Perfect knowledge

Factor mobility between uses

All resources fully employed and all goods and services sold

What is meant by competitive advantage?

When your country/business has access to technology or innovations that allow cheaper and/or more efficient production of goods. This gives a cost advantage and, therefore, a price/quality advantage over competitors

What is meant by patterns of trade?

The mix of goods and services that a country and imports and exports in international trade; the range of countries it exports to and imports from

What are the factors that influence the pattern of trade?

Absolute and comparative advantages

Factor endowments - the quantity and quality of the resources a country has or has not got

Trading bloc and trade agreements

Globalisation, trade liberalisation, protectionism & FDI flows

Changes in world incomes and growth rates

Exchange rate movements

De-industrialisation & the pace of economic development

What is meant by geographical pattern of trade?

How businesses and consumers in other countries trade with businesses and consumers in a country

What is meant by intra-regional trade?

Trade between countries in the same region

What is meant by the gravity theory of trade?

Countries tend to trade most with other nations in closest proximity

What is meant by the commodity pattern of trade?

The type of products (goods and services) traded internationally. It shows if a country has a dependence on primary v manufactured v service exports. As a nation develops complexity and capabilities, they become capable of supplying and exporting a broader range of products

What is meant by primary product dependency?

Where a country's economy heavily relies on the export of raw materials or primary products, such as agricultural goods, minerals, or energy resources

What is meant by an emerging market?

Economy that cannot yet be classified as ‘developed’ and is investing heavily in its productive capacity

What is meant by a trading bloc?

Regional economic groupings/regional trade agreements (RTAs)

What is a bilateral trade agreement?

Trade agreement between two countries

What is a multilateral trade agreement?

Trade agreements between many countries or between a trading bloc and another country/trading bloc

How does free trade between members and the common external tariff (CET) cause trade creation?

Removal of tariffs between members increases trade between businesses within the bloc; more gains from specialisation and trade; greater exploitation of the bloc's countries' comparative advantages

How does free trade between members and the common external tariff (CET) cause trade diversion?

CET means trade may pivot away from the global lowest-cost producers to the lowest cost producer within the bloc; trade is diverted from outside to inside the bloc

How is a preferential trading a type of trading bloc?

Such as trade agreements between the EU and the less developed countries

How is a free trade area/agreement a type of trading bloc?

Free trade between members; tariffs and quotas removed

How is a customs union a type of trading bloc?

Trade between members and a common external tariff (CET) on non-members

How is a single (common) market a type of trading bloc?

Free trade and common policies on product regulation, and freedom of movement of the factors of production (capital and labour) and of enterprises and services. The physical (borders), technical (standards) and fiscal (taxes) barriers are removed to allow free movement among the member states – creates a ‘level playing field’ for trade by removing NTBs, which is particularly useful for services trade

How is a monetary union a type of trading bloc?

Members of the bloc share a common currency, central bank and interest rate

What is a free-trade area?

Eliminates tariffs, import quotas, and preferences on most (if not all) goods and services traded between them

What are some examples of free-trade areas?

ASEAN, USMCA, EFTA, ACFTA

What is a single or common market?

Has free movement of goods, services, capital and labour and a common set of rules on standards reducing both tariff and non-tariff barriers to trade

How is a tariff a type of restriction on trade?

Tax on importers (ad valorem or specific)

How is a quota a type of restriction on trade?

Physical limit on the quantity of imports allowed

How is a subsidy a type of restriction on trade?

Payments by the government to reduce the costs of producers, increases supply and reduces the price

How is a non-tariff barrier (NTB) a type of restriction on trade?

Barriers such as import quotas, tough environmental and product standards rules, trade embargoes and export subsidies

How are rules of origin a type of restriction on trade?

Rules of the national source of the traded goods

What are the different types of NTBs?

Intellectual property laws

Technical barriers to trade

Preferential state procurement polciies

Domestic subsidies

Financial protectionism

Managed exchange rates

How is protecting domestic subsidies an argument for protectionism?

Trade restrictions can shield domestic industries from foreign competition, preventing job losses and maintaining national self-sufficiency in critical sectors

How is national security an argument for protectionism?

Trade restrictions may be used to safeguard national security interests; export of certain technologies or goods could be restricted to prevent them from falling into the wrong hands

How is diversify an argument for protectionism?

An economy that is too dependent on one product

How is the infant industry argument an argument for protectionism?

Governments may protect emerging or "infant" industries until they can compete internationally; tend to be temporary trade barriers, like subsidies or tariffs, providing domestic industries time to grow

How is the sunset industry argument an argument for protectionism?

Use tariffs to slow the decline of older sectors and limit risks of structural unemployment

How are anti-dumping measures an argument for protectionism?

Duties are imposed when foreign companies sell products below their production cost in the domestic market, harming domestic producers protecting local industries form unfair competition

How are environmental and health concerns an argument for protectionism?

Restrictions prevent the import of products that do not meet domestic environmental, health, safety and quality standards

How is a balance of payments improvement an argument for protectionism?

Trade restrictions can be used to improve a country's balance of payments by reducing imports through tariffs or quotas can help reduce trade deficits that use up foreign currency reserves

How is a raise int ax revenues an argument for protectionism?

This is especially important for many developing countries who have a limited domestic tax base

What are the benefits of protectionism?

Domestic industries become more competitive with better products for consumers

Protects domestic industries and helps them grow; may create jobs

Can protect jobs, prevent structural unemployment

Governments can gain some tax revenue from tariffs

Can be used to improve the current account balance on the Balance of Payments

Can protect citizens from dangerous products, protect national security and help promote self-sufficiency in strategic industries

What are the problems with protectionism?

Higher prices for consumers

Less choice for consumers

Lower living standards

Over-reliance on protection

Danger of retaliation/trade war

Increase in income inequality

Shadow markets

How are job losses an issue associated with free trade?

Trade can lead to job losses in industries where other countries have a comparative advantage; when cheaper imports flood the market, this can lead to layoffs and unemployment

How is wage suppression an issue associated with free trade?

Free trade can lead to downward pressure on wages, as companies might move production to countries with lower labour costs

How is income inequality an issue associated with free trade?

Free trade can exacerbate income inequality within countries

What 3 things are included in the BoP?

Current account

Capital account

Financial account

What is the capital account on the BoP?

Records financial transactions that involve the acquisition or disposal of non-financial assets, such as real estate, patents and copyrights, between a country and the rest of the world. It also includes capital transfers, which involve the transfer of assets for specific purposes, like debt forgiveness

What is the financial account on the BoP?

Records transactions related to financial assets and liabilities, including FDI, portfolio investment, banking flows and changes in foreign exchange reserves. it details how a country’s residents and entities interact with foreign assets and liabilities

What is the current account on the BoP?

The current account records the transactions related to a. Country’s trade in goods, services, primary and secondary income

What is meant by a trade balance?

The balance of trade accounts for the difference between the value of a country's exports and imports of goods

What is meant by a services balance?

The balance in trade for services, such as tourism,

financial services, transportation, and consulting

What is meant by primary income?

Income includes net flows of earnings from investments, such as dividends, interest, and profits

What is meant by secondary income?

Net transfers of money or goods between countries, such as foreign aid, remittances from expatriates, and gifts

Current account deficit vs budget deficit

Current account deficit: when the value of exports is less than the value of imports in goods, services, primary and secondary income; a net withdrawal from the circular flow (X<M); AD shifts left, ceteris paribus, slowing growth.

Budget deficit: when the government spends more than it receives in tax revenue; a net injection into the circular flow (G>T); AD shifts right, ceteris paribus, encouraging growth

What is meant by a current account deficit?

The value of exports of goods and services, investment incomes and transfer inflows is lower than spending on imported goods and services, investment income outflow and outward transfers

What are the long term causes (often structural) of a current account deficit?

Low rates of capital investment which limits the overall productive capacity and cost competitiveness of key export industries

Relatively high cost & price inflation contrasted with trade partners

Weaknesses in non-price competition Such as branding & innovation

Long-term decline of previously dominant export sectors such as deindustrialisation in manufacturing

Decline in extractive sectors

Loss of comparative advantage

How do countries finance a current account deficit?

Attract inflows of FDI, portfolio investments, hot money, savings which may need higher interest rates or better rates of return

Use up foreign currency reserves

Sell assets/property to foreign investors

Find ways to increase its international competitiveness

What is meant by cyclical causes of a current account deficit?

When an economy is booming, rising real incomes boost consumer spending increasing demand for imports, causing a wider trade deficit; and vice versa in an economic downturn

What is meant by structural causes of a current account defiicit?

Arise from supply-side weaknesses such as relatively low capital investment, low productivity & research and businesses not operating at the cutting edge of innovation

What are the short run causes (often cyclical) of a current account deficit?

Fall in value of exporters

A boom in consumer spending or a broader economic boom (more imports)

AN appreciation of the exchange rate (less price competitive as exports prices rise and import prices fall

What does a current account deficit depend on?

Its size relative to GDP

It’s persistence

What has caused it

How easy it is to finance it

What is required to reduce a current account deficit?

Deflationary policies to reduce AD and spending on imports

Depreciation/devaluation of the currency: to restore price competitiveness

Direct controls: on imports via tariffs, quotas etc.

Supply-side improvements: to improve both price and non-price competitiveness

What are supply-side policies?

Infrastructure projects in improving transport networks, telecoms to increase supply-side capacity and productive efficiency

Incentives to promote enterprise/start-ups/new export businesses

Privatisation/deregulation to increase productivity & efficiency

Investment in education to improve a country’s human capital

Protecting property rights to drive a faster rate of innovation/ideas

Tax incentives to attract foreign direct investment from companies who subsequently export goods and services

What is meant by expenditure-switching policies?

Policies designed to change the relative prices of exports and imports

What is meant by expenditure-reducing policies?

Contractionary monetary and fiscal policies designed to lower real incomes and aggregate demand and thereby cut the demand for imports