ec-2.2 the global economy

define globalisation

the increased integration and interdependence of economies

features of globalisation

free trade of goods and services / international geographical mobility / high levels of interdependence / international flows of capital / free exchange of technology and intellectual property

reasons for globalisation

fewer tariffs and quotas / reduced cost of transport / reduced cost of communication / increased significance of multinational corporations (MNCs) / relaxed trade barriers / trade agreements / travel and consumer awareness

(reasons for globalisation) fewer tariffs and quotas

trade restrictions protect domestic industries / foreign firms reduce costs by setting up production facilities in host countries / adaptation of monetary and legal systems allow for easing of international trade

define tariff

a tax or duty to be paid on a particular class of imports; also known as customs duties

define quota

a physical limit on the quantity of imports allowed into a country in a given period of time

define embargo

a complete ban on imports from a certain country

(reasons for globalisation) reduced cost of transport

improved international transport systems / increased geographical mobility / falling cost of distribution

(reasons for globalisation) reduced cost of communication

technological developments / instant transfer of data / increased workplace flexibility

(reasons for globalisation) increased significance of multinational corporations (MNCs)

saturation of domestic markets / easier access to suppliers and consumers / MNCs dominate international markets

(reasons for globalisation) relaxed trade barriers

failure of protectionism to promote economic growth / incentive to increase free trade

(reasons for globalisation) trade agreements

trade agreements with neighbouring nations / formation of trading blocs

(reasons for globalisation) travel and consumer awareness

increase in travel / consumers welcome greater choice / imports can satisfy growing needs and wants

impact of globalisation and global companies

rising living standards / greater choice / lower prices / reduced costs of communication / closing of traditional industries / environmental impact

(impact of globalisation and global companies) individual countries

higher employment / economic growth / raised living standards / decline in traditional industries is offset by job creation in other sectors / MNC output counted as exports / increased foreign currency reserves / interdependence

(impact of globalisation and global companies) governments

increased tax revenue / improved government services / lower tax rates / improved quality of domestic labour force / increased employment / subject to trade regulations

(impact of globalisation and global companies) producers

access to international markets / lower business costs / access to labour / reduced taxation

(impact of globalisation and global companies) consumers

lower prices / more choice / higher standard of living

(impact of globalisation and global companies) workers

job creation at MNC facilities / local suppliers benefit / freedom of movement and migration / reduction of regional labour shortage / education and training / disadvantaged by offshoring

define offshoring

practice of moving business processes overseas to take advantage of lower costs

(impact of globalisation and global companies) the environment

more economic growth / more environmental damage / increased travel / increased emissions / use of non-renewable resources

definition of multinational corporations (MNCs)

companies that operate in multiple different countries

features of multinational corporations (MNCs)

huge assets and revenue / well-resourced / able to afford large-scale contracts / high quality of human capital / powerful advertising capability / advanced technology / high economic and political influence / highly efficient

definition of foreign direct investment (FDI)

the investment of a company into a foreign country or the purchase of shares (exceeding 10%) in a foreign business

reasons for emergence of MNCs/FDI

to benefit from economies of scale / to access natural resources/cheap materials / lower transport and communication costs / to access customers in different regions

(reasons for emergence of MNCs/FDI) to benefit from economies of scale

large firm / lower costs / pressure suppliers to lower prices

(reasons for emergence of MNCs/FDI) to access natural resources/cheap materials

need to purchase large quantities of resources / reduce intermediary costs

(reasons for emergence of MNCs/FDI) lower transport and communication costs

cheaper and more efficient transportation / incentive to distribute goods overseas / ease of travel to organise business activity / advances in communication technology / increased efficiency of global business

(reasons for emergence of MNCs/FDI) to access customers in different regions

large market / increased revenue / increased shareholder returns / perpetuates business expansion

government methods to attract FDI

offering incentives (tax breaks, subsidies, grants, low interest loans) / relaxing restrictions and regulations / investing in infrastructure / investing in education

advantages of MNCs/FDI

job creation / investment in infrastructure / developing skills / developing capital / contributing to taxes

(advantages of MNCs/FDI) job creation

employment created by MNC facilities / local suppliers get work / extra output generates economic growth / MNCs offer higher wages / rising national income / higher standard of living

(advantages of MNCs/FDI) investment in infrastructure

good infrastructure attracts FDI / foreign investment contributes to infrastructure (e.g. transport/mining facilities)

(advantages of MNCs/FDI) developing skills

MNCs provide training and experience / governments invest in education to attract FDI / MNCs encourage local enterprise / MNCs can assist foreign and local suppliers

(advantages of MNCs/FDI) developing capital

construction of MNC facilities / increased capital stock in host countries / MNCs encourage local investment in capital projects

(advantages of MNCs/FDI) contributing to taxes

MNC profits are taxed by host nation / increased tax revenue / improved government services

disadvantages of MNCs/FDI

tax avoidance / environmental damage / moving profits abroad

(disadvantages of MNCs/FDI) tax avoidance

MNCs may fail to pay taxes / developing nations with rudimentary legal systems are disadvantaged

(disadvantages of MNCs/FDI) environmental damage

heavy involvement of MNCs in mining and extraction industries / high emission levels / external costs

(disadvantages of MNCs/FDI) moving profits abroad

MNC profits are subject to repatriation / host country is disadvantaged / benefits are unequal for developed and developing nations

define repatriation (of profits)

when a multinational taxpaying entity (MNC) transfers profits from an overseas venture back to the country where it is based; typically from a developing country to a developed country

reasons for international trade

obtaining goods that cannot be produced domestically /

obtaining goods that can be bought more cheaply from overseas / selling off unwanted commodities

advantages of free trade

lower prices and increased choice / lower input prices / wider markets for businesses

(advantages of free trade) lower prices and increased choice

increased choice / access to goods not produced domestically / lower price of goods / greater purchasing power / improved standard of living

(advantages of free trade) lower input prices

easier access to essential inputs / allows for extension of specialisation / increased efficiency / minimised costs

(advantages of free trade) wider markets for businesses

reduced risk of business enterprise / (risk-bearing) economies of scale / higher output / lower costs / improved efficiency

disadvantages of free trade

competition for domestic businesses / unemployment

(disadvantages of free trade) competition for domestic businesses

cheap and high quality imports / domestic producers may struggle to compete / decline in manufacturing / growth in tertiary sector (services)

(disadvantages of free trade) unemployment

domestic industries threatened by cheap imports / trade deficits / lower employment / effect of overspecialisation and demand patterns / low income elasticity of primary goods

define protectionism

approach used by governments to protect domestic producers

reasons for protectionism

prevent dumping / protect employment / protecting infant industries / to gain tariff revenue / protect consumers from unsafe products / reducing current account deficits / retaliation

(reasons for protectionism) prevent dumping

foreign firms may be subsidised by their governments / unfair competition for domestic producers

define dumping

when a foreign firm sells large quantities of a product below cost in the domestic market

(reasons for protectionism) protect employment

cheap imports / domestic industries decline / low employment

(reasons for protectionism) protecting infant industries

infant industries need time to grow and become established / to exploit economies of scale / may not be successful if governments fail to identify potential

define infant industries

new industries yet to establish themselves

(reasons for protectionism) to gain tariff revenue

import tariffs raise revenue / improved government services / improved living standards

(reasons for protectionism) protect consumers from unsafe products

prevents inflow of demerit goods / prevents social costs

(reasons for protectionism) reducing current account deficits

trade barriers prevent imports / mitigates current account deficit / measures to increase exports

(reasons for protectionism) retaliation

imposition of tariffs to retaliate against dumping / other countries may retaliate against exports / may lead to trade wars / negative impact on both nations

methods of protectionism

tariffs / quotas / subsidies

(tariffs) advantages

reduced imports / protect domestic industries / improved current account / raised revenue

(tariffs) disadvantages

imports may cease / government receives no revenue / higher prices for consumers

(tariffs) impact on markets

supply curve shifts leftward / price rises / quantity falls

(quotas) advantages

reduced threat of imports / larger market share for domestic producers / protects employment / time lags limit impact of shortages on prices

(quotas) disadvantages

higher prices / restricted consumer choice / overprotection of domestic producers / failure to improve efficiency

(quotas) impact on markets

supply curve shifts leftward / price rises / quantity falls

(subsidies) advantages

reduced production costs / increased domestic production / lower prices / encourages domestic firms to break into foreign markets / boost exports / higher employment / reduced trade deficits / improved current account balance

(subsidies) disadvantages

may break the terms of free trade agreements / expensive / high opportunity cost

(subsidies) impact on markets

supply curve shifts rightward / price falls / quantity rises

disadvantages of protectionism

generally higher prices / restricted consumer choice / lack of competition reduces incentive to innovate / inferior quality of domestic goods / global growth slows / lower standard of living / fewer jobs created

define trading bloc

groups of countries situated in the same region that join together and enjoy trade free of tariffs, quotas, and other forms of trade barriers

types of trading blocs

preferential trading areas (PTAs) / free trade areas (FTAs) / customs unions / common markets / economic unions

(types of trading blocs) preferential trading areas (PTAs)

members agree to remove trade barriers / on a range of goods and services / does not cover all goods and services / some trade restrictions still exist

(types of trading blocs) free trade areas (FTAs)

completely free trade between members / members may impose restrictions on non-members

(types of trading blocs) customs unions

similar to FTAs / members impose a common set of trade barriers on non-members / products imported by one member can be resold and transported to other union members

(types of trading blocs) common markets

similar to customs unions / allows free movement of labour and capital between members / standardised trading regulations

(types of trading blocs) economic unions

adopts arrangements of common markets and customs unions / aim for increased integration / may adopt closer economic, political, and cultural ties

(impact of trading blocs) member state advantages

cheaper goods / more consumer choice / faster economic growth / access to large markets / firms can exploit economies of scale / business competition / improved quality / more innovation / invites FDI / encourages diplomatic cooperation / reduces cross-border conflict

(impact of trading blocs) member state disadvantages

encourages regional (not global) trade / unequal distribution of benefits / overdependence on trade within bloc / increased vulnerability / financial cost to governments and taxpayers / may create regional monopolies / protects inefficient producers / consumers may be exploited

(impact of trading blocs) non-member states

may face common trade barriers / may be forced to find new markets

examples of trading blocs

north american free trade agreement (NAFTA) / association of southeast asian nations (ASEAN) / south african customs union (SACU) / european union (EU)

define the world trade organisation (WTO)

international agency overseeing the rules of international trade

role of the WTO

reduce or eliminate trade barriers / encourage trade agreements and trade liberalisation / administer and monitor WTO rules / review reports submitted by member countries / settle trade disputes

define trade liberalisation

move towards greater free trade through the removal of trade barriers

actions by the WTO

trade negotiations / implementation and monitoring / settling trade disputes / building membership

(trade patterns) developed countries

loss of trade in manufacturing / more air travel / widening of the development gap

(trade patterns) developing countries

increase in net migration / increased FDI in africa / rise in commodity dependence / debt cancellation / reduction in barriers

criticisms of the WTO

undemocratic / favours corporations / excludes interests of consumers, workers, etc. / destroys the environment / favours wealthy nations over poorer ones / causes harshop for poorer nations (e.g. agricultural policies)

define exchange rates

the price of one currency in terms of another

factors affecting supply and demand of currencies

interest rates / currency speculators / imports and exports

define currency speculators

firms, individuals, or financial institutions that buy and sell currencies in the hope of making a capital gain

(factors affecting supply of currencies) interest rates

high interest rates in foreign countries / domestic savers may place money in foreign banks / increased demand for foreign currencies / increased supply of domestic currency in foreign exchange markets / reduced exchange rate

(factors affecting demand of currencies) interest rates

high domestic interest rates / foreign savers may place money in domestic banks / increased demand for domestic currency increased supply of foreign currency in foreign exchange markets / increased exchange rate

(factors affecting supply of currencies) currency speculators

speculators believe domestic currency will fall in value / speculators sell domestic currency / increased supply of domestic currency in market / reduced exchange rate

(factors affecting demand of currencies) currency speculators

speculators believe domestic currency will rise in value / speculators purchase domestic currency / increased demand for domestic currency / increased exchange rate

(factors affecting supply of currencies) imports and exports

increased demand for imports / increase in outward FDI / increased demand for foreign currencies / increased supply of domestic currency / reduced exchange rate

(factors affecting demand of currencies) imports and exports

movement of investment capital / increase in inward FDI / increased demand for domestic exports / increased demand for domestic currency / increased exchange rate

effect of changes in supply on exchange rates

increased supply of domestic currency --> reduced exchange rate (supply shifts outward) / increased supply of foreign currency --> increased exchange rate

effect of changes in demand on exchange rates

increased demand for domestic currency --> increased exchange rate (demand shifts outward) / decreased demand for foreign currency --> reduced exchange rate