Globalisation, International Trade, and Macroeconomic Management

Definitions: Globalisation involves deepening relationships between countries via trade, investment, and migration. De-globalisation is the reversal, while 'slowbalisation' describes a slowdown in speed.
Causes: Driven by containerisation (falling transport costs), the power of Multi-national Corporations (MNCs), trade liberalisation, and rapid technology transfers.
Characteristics: Increased trade-to-GDP ratios, global branding, shifting power to emerging markets, and higher interdependency between economic agents.
Benefits: Economies of scale, cost-reducing innovation, lower consumer prices, and faster per capita income growth.
Costs: Rising inequality, environmental degradation (deforestation, loss of biodiversity), and systemic risk (macroeconomic fragility where shocks spread rapidly).

Absolute Advantage: Occurs when a country produces a good at a lower direct cost than others using the same factors.
Comparative Advantage (David Ricardo): Ability to produce at a lower opportunity cost. Specialisation increases joint output.
Opportunity Cost Calculation: For Country A, if getting $60$ more of X requires giving up $45$ of Y, the cost of $1X = \frac{45}{60} = 0.75Y$ .
Mutually Beneficial Terms of Trade: Trade is beneficial if the exchange rate (e.g., $1.5X:1Y$ ) lies between the internal opportunity cost ratios of both nations.
Theoretical Assumptions: No transport costs, no trade barriers, homogenous goods, perfect knowledge, and full factor mobility.

Geographical Patterns: Trade is often dominated by proximity (Gravity Theory). Example: $46\%$ of UK exports go to the EU, while the USA is its largest single export market.
Commodity Patterns: Shift from primary products to manufactured goods and services as nations develop complexity.
Primary Product Dependency: Heavy reliance on raw materials (e.g., Zambia and copper, Cote d'Ivoire and cocoa) leads to income instability due to price volatility.

Types of Blocs:
- Free Trade Area (FTA): No internal tariffs (e.g., USMCA, ASEAN).
- Customs Union: Internal free trade plus a Common External Tariff (CET) (e.g., Turkey and the EU).
- Single/Common Market: Free movement of goods, services, capital, and labour.
- Monetary Union: Shared currency and central bank (e.g., Eurozone).
Trade Creation vs. Diversion: Trade creation is a net welfare gain from removing tariffs. Trade diversion is a welfare loss when trade shifts from low-cost non-members to higher-cost members because of the CET.
World Trade Organisation (WTO): Functions include negotiation, dispute settlement, business monitoring, and technical assistance.

Methods: Tariffs (taxes), Quotas (physical limits), Subsidies (government payments to domestic producers), and Non-tariff barriers (NTBs) like stringent product standards.
Impact of Tariffs: Reduces consumer surplus by areas $1+2+3+4$ and increases producer surplus (area $1$ ) and government revenue (area $3$ ), resulting in a net welfare loss (areas $2+4$ ).
Arguments for Protectionism: Protecting infant industries, safeguarding national security, anti-dumping measures, and diversifying the economy.

Current Account: Records trade in goods/services, primary income (dividends/interest), and secondary income (transfers/aid).
Financial Account: Records FDI, portfolio investment, and "hot money" flows.
Current Account Deficit: Occurs when $X < M$ . Short-run causes include consumer booms or exchange rate appreciation; long-run causes include low investment and de-industrialisation.
Correction Policies:
- Expenditure-switching: Depreciation of the currency or tariffs.
- Expenditure-reducing: Deflationary fiscal or monetary policy to lower demand for imports.
Marshall-Lerner Condition: A depreciation only improves the current account if the sum of the Price Elasticity of Demand (PED) for exports and imports is greater than or equal to $1$ .

Systems: Floating (market-driven), Fixed (central bank peg), and Managed Floating.
Factors: Demand for currency is driven by exports and FDI; supply is driven by imports and outward investment.
Terms of Trade (ToT): Index calculated as $100 \times \frac{\text{Average export price index}}{\text{Average import price index}}$ .
Prebisch-Singer Hypothesis: Suggests the ToT for primary product producers deteriorates over time due to low Income Elasticity of Demand (YED) for raw materials.

Measures: Relative unit labour costs (ULCs) and relative export prices.
Strategies: Investment in human capital, infrastructure improvements, R&D tax incentives, and maintaining a stable macroeconomic environment.

Poverty Types: Absolute poverty is living on less than the World Bank line ( $2.15$ a day). Relative poverty is defined as living below a threshold (e.g., $60\%$ of median income).
Lorenz Curve and Gini Coefficient: Measures inequality. The Gini coefficient is calculated as $\frac{A}{A+B}$ , where $0$ is perfect equality and $1$ is perfect inequality.
Kuznets Curve: Hypothesis that inequality increases during early industrialisation but decreases as the country develops and redistributes wealth.