4.1.1-4.1.4, Globalisation, specialisation and trade, Patterns of trade, terms of trade

What is globalisation?

Globalisation refers to the growing interdependence of countries and the integration of local, regional, and national economies into a single international market.

What are the key factors contributing to globalisation? (Transport infrastructure and IT)

Improvements in transport infrastructure and operations mean there are quick, reliable and cheap methods to allow production across the world.

Improvements in IT and communication allow companies to operate across the globe.

What are the key factors contributing to globalisation? (Trade lib, int fin markets, TNC’s)

Trade liberalisation and reduced protectionism has made it cheaper and more feasible to trade.

International financial markets provide the ability to raise and move money around the world, necessary for international trade.

TNC's have led to globalisation by acting to increase their profits through low labour costs. Sell and produce goods across the world

What are the impacts of globalisation on consumers?

More choice since there are a wider range of goods. Can also lead to lower prices as firms take advantage of comparative advantage and produce in countries with lower costs. However, many consumers believe that it could lead to a loss of culture.

What are the impacts of globalisation on workers?

Depends on the country. There have been many large scale job losses in the western world in the manufacturing sector as these jobs have been transferred to countries like China and Poland. Increased migration may affect workers by lowering wages but migrants can also provide important skills and an increase in AD which increases the number of jobs.

However, international competition has lead to a fall in wages for low skilled workers in developed countries whilst increasing those in developing countries. The wages for high skilled workers is also increased due to the demand for their work, increasing inequality.

What are the impacts of globalisation on producers?

Firms are able to source products from more countries and sell them in more countries. This reduces risk since a collapse of the market in one country has little effect on the business.

They are also able to employ lower skilled worker much cheaper and can exploit comparative advantage in larger markets, both increasing profit.

However, firms who are unable to compete internationally lose out, which could lead to the formation of monopolies and/or oligopolies.

What are the impacts of globalisation on the government?

May be able to receive higher taxes, since TNCs pay tax and so do the people they employ. However, could lose out through tax avoidance. TNCs also have the power to bribe and lobby governments which could cause corruption.

What are the impacts of globalisation on the environment?

Increase in world production increases demand for raw materials, which negatively impacts the environment. Increased trade and production also leads to more emissions. However, globalisation means the world can work together to tackle climate change and share ideas and technology.

What are the impacts of globalisation on economic growth?

Globalisation increases investment within countries through investments by TNCs, increasing AD+effect of multiplier. Also creates an incentive for countries to make supply-side improvements to encourage TNCs to operate in their countries. TNCs may bring world class management techniques and technology which could benefit all industries.

However, comparative advantage changes over time, so TNCs may leave the country when it no longer offers an advantage, causing structural unemployment and reducing growth.

What is the difference between absolute and comparative advantage?

Absolute advantage - When a country can produce a good more cheaply in absolute terms than another country.

Comparative advantage - When a country can produce a good more cheaply relative to other goods produced. Can be shown on a diagram by comparing the output of good A against the output of good B.

What are the assumptions and limitations of comparative advantage theory?

Comparative advantage assumes no transport costs, which could lower or prevent comparative advantage

Also assumes goods are homogenous, which is unlikely to be true. Therefore, as the products are different, it's hard to conclude whether a country actually has a comparative advantage.

Also assumes that there are no tariffs or other trade barriers.

What are the advantages of specialisation and trade?

World output can be increased if countries specialise in what they are best at producing, increasing global economic growth.

Trading and specialising allows countries to benefit from economies of scale, reducing costs and therefore prices globally.

Trade enables greater consumer choice.

Trade also means there is greater competition, which provides an incentive to innovate. This lead to improved quality and lower cost of goods and services.

What are the disadvantages of specialisation and trade?

Trade can lead to over-dependence, where some countries become dependent on one type of export. This can cause problems if there are large price falls in the export.

Can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and competitive. This is a big problem in areas of the UK such as Manchester which suffer from unemployment as their traditional industries declined, for example ship-building.

The environment will suffer due to the problems of transport and increased demand for resources.

What is patterns of trade and how does comparative advantage effect it?

Patterns of trade refers to the changes in a countries imports and exports over time.

Comparative advantage - Countries will trade where there is a comparative advantage to trading. This means that over time, different types of goods will be imported and exported, for example a recent increase in the exportation of manufactured goods from developing to developed countries.

How do emerging economies influence pattern of trade?

Countries grow at different rates and when they grow, they are likely to need to import more goods and services than before as well as exporting more to pay for this. Emerging economies shift the trade pattern by taking up a larger proportion of a country's imports and exports than before. For example, China contributes towards 20% of LDC economies.

How do trading blocs influence pattern of trade?

These increase the level of trade between certain countries. For example, joining the EU means the UK traded a lot more with countries within Europe.

How do exchange rates influence pattern of trade?

The exchange rate affects the relative prices of goods and services, and therefore how much is imported/exported.

For example, China have kept their currency weak in order to increase their trade surplus by making exports more competitive

What are the terms of trade and how is it calculated?

Terms of trade is the ratio of an index of a countries export prices to an index of its import prices.

Calculated by the formula (Average export price index/average import price index) x 100. Increasing the terms of trade is generally favourable, as a country can buy more exports with the same level of imports.

What are the factors influencing a country's terms of trade in the short run?

An improvement in the terms of trade will be caused by a rise in export prices or a fall in import prices. Deterioration is the opposite.

In the short run, exchange rates, inflation and changes in demand/supply of imports or exports affect the relative prices of imports and exports so affect the terms of trade.

What are the factors influencing a country's terms of trade in the long run?

In the long run, improvement in productivity compared to a country's main trading partners will decrease the terms of trade since export prices will fall relative to import prices.

Another long run factor is changing incomes. For example, a rise in world income causes a rise in demand for tourism and so a country with a strong tourism industry may see a rise in prices and therefore increased ToT.

The Prebisch-Singer hypothesis suggests the long run ToT for countries producing primary goods declines more than countries producing manufactured goods. This is because over time, as incomes increase, people tend to buy more manufactured goods rather than primary goods.

What are impacts to changes of Terms of trade?

If PED of exports and imports is inelastic, increased ToT would improve the current account on the balance of payments whereas, if its elastic, increased ToT would worsen the current account

An improvement in the ToT likely leads to a fall in GDP and a rise in unemployment. This is because it can either be caused by a rise in export prices or a fall in import prices, each causing a fall in net trade, reducing GDP. Also causes a reduction in production so a fall in jobs and output. However, a long term decline in ToT suggests a long term decline in living standards as less imports can be bought.

Overall, what does a change in the ToT mean?

A change in the ToT doesn't say much and is more down to why it changed. If an improvement has occurred due to increased demand for exports, this will be beneficial. If a deterioration is caused by improvements in international competitiveness due to increased productivity, it will also be beneficial. The export and import revenues are more important.