Theme 4

• Globalisation interdependence Transnational corporation Multinational corporation Trade liberalisation key words Globalisation is the process by which countries are becomming more closely linked and interdependent. Interdependence is where countries become reliant upon each other Transnational corporation is a firm that operates in multiple countries but doesn't have a HQ in one country Multinational corporation is a firm that operates in multiple countries and does have a HQ in one country Trade liberalisation is the process of removing barriers to trade to allow more free trade
• Characteristics of globalisation 1. Increased interdependence ( Germany's success driven by car industry and the UK and USA are big buyers of these. We can therefore say that Germany's success depends on UK and USA success and their ability to import German cars)(Semi conductor shortage) 2. Global branding (Mc Donalds golden arches Pepsi Coca Cola) 3. Global sourcing (Buying goods and services from international markets) 4. Increased foreign ownership of companies (capital can flow more freely across borders (FDI) 5. Increase in trade in both goods and services (trade liberalisation 6. De industrialisation in developed countries and specialisation (UK heavy in services industry. For example exportation of financial services tourism Higher education defence and legal services) 7. Increased global media prescence 8. Increased sharing of knowledge and technology( MNCs train local workers. MNCs also bring new capital production methods to LEDCs and their local entrepreneuers will learn from the MNC.)
• Causes of globalisation 1. Transport infrastructure Shipping infrastructure has improved significantly over the last 50 years. (Suez canal) Technological advances have made it easier more affordable and quicker to ship goods This has resulted in firms moving production to low cost economies or LEDCs CONTEXT James Dyson moved production to Indonesia due to less regulation He wanted to build a bigger factory in UK but UK wouldnt let him so he moved abroad.
• Causes of globalisation 2. Communications technology Communications technology and IT has improved significantly Growing access to the internet has allowed a global media prescence This has better connected the world and made firms more efficient There is no longer a need to get on a plane and travel for business meetings as they can be done via video conferencing Video conferencing technology has enabled firms to work more seamlessly across international borders More efficient translation technology has made it more likely that firms will do business across international borders
• Causes of globalisation 3. Trade liberalisation and diagram This is concerned with removing barriers to trade between countries The most common method of protection is using tariffs which is a tax on imports. Removing tariffs makes prices of imports cheaper. The removal of barriers to trade results in more trade between countries This means greater globalisation and interdependence The world trade organisation aims to facilitate trade liberalisation and encourages free trade agreements where possible p2 to p1 is size of tariff 1 is the decrease in producer surplus 2 represents allocative efficiency because firms not willing to sell in this market leave the market and produce using their capital in another market where they would be more efficient Remember to know where additional imports and new imports are.
• Causes of globalisation 4. Global companies The growing influence of global firms means they expand production in other countries accessing new markets E.g Mc donalds have over 300 restaurants in India. Coca cola in Africa: has 3000 microdistribution centres across Africa They employ local people and are run by local entrepreneurs and sell to local sellers Transportation is main challenger as they have bumpy muddy roads so therefore there is poor infrastructure Some distributers have seen an increase in demand from 6000 cases per month to 32000 cases per month In macro distribution centres they can make up to 150K bottles per hour which requires significant infrastructure and automation Shows technology transfer
• Causes of globalisation 5. The ending of the cold war War is detrimental to relationships and therefore affects international trade The cold war made it more difficult for free trade agreements to be established There was a huge divide between countries and the economic systems followed It was a war based on capitalism vs communism The cold war lasted around 50 years and the end resulted in the spread of firms to other countries and increased globalisation There was freer movement of capital labour and enterprise
• Causes of globalisation 6. International financial markets The development of international financial markets has enabled more countries to engage in international trade Access to foreign currency makes it possible to buy imports Financial institutions operating internationally make it possible for firms and entrepreneurs to borrow money for investment Investment often results in higher productivity and efficiency making it more likely that globalisation will occur as firms seek to maximise profits
• Benefits of globalisation 1. Decreased prices = increased standards of living 2. Increased employment in LEDCs 3. Increased global power for LEDCs 4. Increased choices for consumers 5. Forces firms to seek efficiencies 6. Sharing of culture 7. Decreased barriers to trade 8. Knowledge and technology transfer 9. Freer movement of labour
• Drawbacks of globalisation 1. Increased interdependence so susceptible to external shocks 2. Loss of unskilled jobs in MEDCs 3. Decreased global power for MEDCs (rise of china) 4. Increased competition for firms so lower prices 5. Environmental problems (pollution) 6. Exploitation of workers in LEDCs 7. Increase in footloose companies 8. Loss of tax revenue for govt because of lower tariffs 9. Loss of culture
• Globalisation in context China is now the biggest economy in the world with 16.86% of the worlds global GDP. Followed by USA (16.1%) India (7.1%) Japan (4.3%) Germany(3.4%) Russia(3.1%) Brazil(2.9%) UK(2.4%) and France(2.3%) UK economy is open to external shocks in the market for oil This is because the UK is heavily reliant on foreign producers for oil. Even the economic development of LEDCs provides and external shock to the UK as it causes oil prices to rise globally External shocks have negative impacts on firms consumers and governments. An apple iPad is made in china but only 5% of the price paid for an iPad goes to China. 45% goes to Apple in the US and Korea tales 8% for componenets. China has to import all those things package them and then export the final product.
• Absolute advantage Comparative advantage Economic development Trade Specialisation Infant industry Dumping Economic integration and external shock key terms An absolute advantage is where a country can produce more of both goofd A comparative advantage is where a country has a lower relative opportunity cost ratio compared with another country Economic development is the process by which the quality of life for a nation is improved Trade is the exchange of goods and services between countries Specialisation is when a country chooses to produce a narrow range of goods and services An infant industry is a new industry which in its early stages experiences relative difficulty or is absolutely incapable of competing with established competitors abroad Dumping is when foreign firms sell surplus stock at below average cost (China dumping steel onto EU and US markets) Economic integration is an arrangement between countries to reduce barriers to trade and possible harmonise monetary and fiscal policy External shocks are unexpected changes or economic variables that take place outside the economy
• Trade Trade is mutually beneficial as it allows countries to specialise in order to operate at their most efficient and it enables them to consume other goods Trade happens because countries are not able to produce everything themselves. This may be due to: 1. Climate 2. Human capital of labour 3. Infrastructure 4. Access to raw materials 5. Technology
• Absolute advantage This is where one country is able to produce more of a good than another country If no figures are given draw PPF as a curve If figures are given PPF is drawn linear E.G UK can produce 9000 medicines or 6000 tractors Colombia can produce 7000 medicines or 3000 tractors The UK has an absolute advantage producing both goods (PPF would be drawn linear)
• Comparative advantage theory This theory was developed by David Ricardo whilst in Portugal when he noticed that the Portuguese were more efficient at producing wine and cloth than the English However he noticed that the O.C of producing cloth was lower for England compared with Portugal This created a basis for specialisation and trade Comparative advantage theory is when a country is able to engage in trade even though it may not have the absolute advantage This is because comparative advantage theory calculates relative O.C ratios O.C is assessing what is forgone for the chosen option
• Opportunity cost ratios By assessing this we can see that for every 1 apple that is produced by the US(blue) 0.33 papaya are produced. The opportunity cost of producing 1 apple in the US is 0.33 papayas. This O.C ratio is 1:0.33 And for every Papaya produced 3 apples are produced. The O.C of producing 1 papaya is 3 apples so the O.C ratio is 1:3 And in Mexico(green) For every 1 apple produced 2 papayas are produced so the O.C of producing 1 apple is 2 papaya. So the O.C ratio is 1:2 And for every Papaya produced 0.5 apples are produced. The O.C of producing 1 papaya is 0.5 apples so the O.C ratio is 1:0.5 When comparing these ratios we can see the O.C for producing apples is 1:0.33 in US and 1: 2 in Mexico The O.C of producing Papaya in the US is 1:3 and in Mexico it is 1: 0.5 May also be given as data in a table! From this it would be concluded that US would produce apples and Mexico would produce Papaya
• Assumptions made for Comparative advantage theory 1. Production costs are constant and there is no scope for Eos 2. Transport costs are zero 3. There is perfect knowledge (so countries know each others O.C ratios) 4. Factors of production can be switched easily 5. External costs of production are ignored
• Specialisation and trade benefits and drawbacks. (country) Benefits: 1. Decreased prices and increased choice for consumers 2. Larger markets and EoS opportunities for firms 3. Increased GDP and SOL (based on law of comparative advantage Drawbacks: 1. Risk of a deficit on the trade in goods and services balance if a country is uncompetitive (UK economy has trade deficit) 2. Danger of dumping by foreign firms (steel industry with China) 3. Increased unemployment from dumping (puts firms out of business if China sells at such a low price) 4. Increased exposure to external shocks 5. Unbalanced development 6. Global monopolies and increasing size of MNCs 7. Infant industries in LEDCs are unable to compete 8. Increased monopsony power of MNCs hurts LEDCs
• Trading bloc Inter-regional trade Intra-regional trade G7 emerging economies trade creation and trade diversion key terms A trading bloc is a group of countries that have agreed to abolish barriers to trade Inter regional trade is trade between countries in different geographical regions Intra regional trade is trade between different countries within the same region G7 are the worlds largest IMF described economies UK Canada France Germany Italy Japan and the US Emerging economies are countries with high rates of economic growth and fast economic development Trade creation is trade occuring between countries as a direct result of the removal of tariffs Trade diversion is when trade is diverted to a country within its trading bloc.
• Shifting pattern of trade Developed countries no longer have as large a share of international trade Between 1995 and 2010 their share in world merchandise trade dropped while developing countries increased their share Over this time period China's share increased from 2.6% to 10% Over the same period the market share of Latin America and the Caribbean increased from 4.5% to 5.9% The value of Africas merchandise exports rose from $100 billion in 1995 to $560 billion in 2010 Its share in world trade improved from 2.0% to 3.2% East and south Asia include three of the most dynamic emerging economies: China India and the republic of Korea MEDCs are facing a declining share of global exports 69% in 1995 to 55% in 2010 LEDCs and emerging economies are rapidly increasing their share of global exports Reasons for such rapid growth in LEDCs include: Low regulation(wage regs Health and safety regs Planning permission and environmental regs) Increased technological advances Larger workforce (China and India both have 1.4 billion people Transport infrastructure improvements
• Heckscher-ohlin theory Eli Filip Heckscher and Beril Ohlin were Swedish economists The Heckscher-Ohlin theory explains that the pattern of international trade is determined by a country's factor endowments (capital land labour) Asia has an abundance of land and low skilled labour giving it a comparative advantage in the production of cheap manufactured goods MEDCs have an abundance of high skilled labour giving it a comparative advantage in producing technologically advanced goods or providing highly skilled services
• Trading blocs and examples A trading bloc is where two or more countries agree to reduce or abolish barriers to trade to enable more free trade to take place between member states Mercosur: Brazil Argentina Paraguay Uraguay ASEAN+6 Association of South East Asian nations New ASEAN includes Japan Australia India and China AU African union made up of 55 member states EU European union Worlds largest trading bloc
• Reasons for changing patterns of trade 1. The emergence of trading blocs This has caused increased intra regional trade and decreased inter regional trade This leads to trade creation which is whom you buy from now as well as trade diversion which is from whom you bought from before the trading bloc Reducing costs such as transportation costs has also accelerated the growth of trading blocs
• Reasons for changing patterns of trade 2. The de-industrialisation of MEDCs LEDCs are more cost competitive as they have an abundance of low skilled labour This means they have a comparative advantage in manufacturing goods China has an abundance of land making it possible to build large factories and achieve greater EoS MEDCs have transitioned from manufacturing (secondary) to services (tertiary) This naturally leads to increased trade between countries as there is greater independence
• Reasons for changing patterns of trade 3. The collapse of communism This has led to more countries opening up to trade Adopting capitalism means encouraging competition Democratically elected governments pursuing capitalism will seek free trade agreements Former communist countries have benefited from employment as they have the comparative advantage in terms of cost of labour
• Reasons for changing patterns of trade 4. High rates of economic growth in India and China Averaging a GDP growth rate between 7% and 10% is the norm for these countries This brings many benefits such as tax revenue for the govt and FDI These actions further improve their comparative advantage in producing goods For example in 1995 the US captured nearly 25% of global trade in hi-tech goods while China had only 3%. By 2005 the US share had fallen to 15% while China's share had risen to 15%
• Reasons for changing patterns of trade 5. Changes in exchange rates The value of one currency against another determines the price paid This has a significant level of influence over which countries you trade with The UK has a relatively strong pound making trade with India and China favourable for imports but unfavourable for exports China has been long accused of currency devaluation in order to maintain its export led growth strategy Brexit and political instibility have weakened the pound affecting its current accounts Other factors to consider are the PED of imports.
• Terms of trade(T/T) Inflation rate Exchange rate and Tariff key terms Terms of trade are the average price of a country's exports relative to the average price of its imports Inflation rate is the rate of change in the average price level Exchange rate is the value of one currency against another Tariffs are a tax on imports
• UK trade Context 22.6% of exports go to Ireland Netherlands Germany Switzerland and France UK has signed a free trade agreement with Japan in 2021 which will reduce barriers to trade Motor vehicles make up 15% of the UKs exports which has increased from 10.7% in 1998 Areas of the most growth are pharmaceuticals and medicines. These are products with inelastic PED. 9.3% of exports Computer exports have decreased. Could be due to China's competitive advantage in manufacturing. Apple outsources manufacturing to foxcon in China. (also Nintendo)
• Calculating terms of trade Index of export prices / Index of import prices X100
• What does the terms of trade calculation measure? Terms of trade calculations are used to measure the rate of exchange of one product against another when two countries trade It measures how many exports have to be sold in order to pay for the level of imports consumed by a country If the T/T value increases then it is said to be favourable and called an improvement This is because fewer exports have to be sold to pay for imports This could be due to the price of exports increasing or the price of imports decreasing If the T/T value decreases then it is said to be unfavourable and called a deterioration because more exports have to be sold to pay for imports This could be due toe export prices decreasing or the price of imports increasing
• Factors influencing terms of trade 1. Relative inflation rates If the UK's inflation rate is higher than that of its trading partners then it will be favourable to the UK's terms of trade This is because export prices will be rising relative to import prices This causes a rise in the index value of the UK's terms of trade So it is seen as an improvement and is favourable This means that fewer exports have to be sold at a higher price to pay for imports
• Factors influencing terms of trade 2. Changes in raw material prices Raw materials tend to be imported for most countries This means that as the price of raw materials increases it has significant impact on a country's terms of trade assuming ceteris paribus. Paying more for imported raw materials increases the index prices values This means that their terms of trade are negatively impacted Examples of common imported raw materials are oil HOWEVER it depends on if the imported raw materials are used domestically or whether they are turned into finished goods and then exported to other countries. If the product has inelastic PED then increasing raw material costs can be passed onto consumers in the form of higher prices of exports
• Factors influencing terms of trade 3. Changes in exchange rates If a country's exchange rate increases and the currency gets stronger against other countries currencies then the terms of trade would improve. This is because a stronger currency means its exports become more expensive and imports become cheaper This causes the index of export prices value to increase and the index of import prices value to decrease This results in an improvement in the terms of trade assuming ceteris paribus (levels of imports and exports stay the same) The opposite is also true
• Factors influencing terms of trade 4. Tariffs Tariffs are a tax on imports by government of the receiving country Any tariff imposed would cause the import prices to rise This would increase the index of import prices and result in a deterioration of the country's terms of trade. More exports would need to be sold to pay for the same level of imports
• Factors influencing terms of trade 5. Dependency on primary products LEDCs often rely on primary sector activities such as fishing agriculture and excavation of raw materials These commodities have risen in price at a lower rate compared with high tech goods Not only this but they also command a much lower price Commodities also have a lower YED value compared with high tech goods This causes countries such as LEDCs to face declining terms of trade over time as they have to sell more of their exports which at a lower price (commodities) to pay for the high priced high tech imports This is the Prebisch-Singer hypothesis. E.G The Congo are exporters of cobalt but are importers of higher education from the UK Over time cobalt prices have increased but at a much slower rate than the increase in price of higher education. There is a rising gap between the cost of these two products. The index price for exports will be lower than the index price for imports and over time this divide will have gotten bigger which means the terms of trade will have deteriorated. This means that more cobalt will have to be sold in order to pay for the same amount of higher education.
• Impacts of changes in terms of trade Talk about the following: Living standards and purchasing power International competitiveness BoP and the current account GDP and FDI Unemployment and optimism and confidence
• Trade creation Trade diversion Trading bloc and monetary policy key terms Trade creation is where the removal of trade barriers between member states results in more specialisation and trade between them Trade diversion is the diversion of trade from low cost producers outside the trading bloc to one inside the bloc due to tariffs being imposed on goods outside the bloc Trading blocs are a group of countries that participate in a trade agreement Monetary policy is the use of interest rates and QE to influence economic performance
• Types of trading bloc Regional trade blocs are intergovernmental associations that manage and promote trade activities for specific regions of the world Lowest integration: Free trade area Customs union Common market Monetary union Highest integration
• Free trade areas A free trade area has the following characteristics: 1. Countries within the bloc agree to abolish trade barriers between themselves (e.g getting rid of tariffs Quotas Subsidies for domestic firms and regulations) 2. Trade restrictions remain in place when trading with countries outside the trading bloc and subsequent free trade area 3. Each member is able to set their own trade policy with countries outside the bloc 4. This is the lowest level of integration 5. A good example is the North Atlantic Free Trade Area made up of Canada Mexico and the USA 6. There is no free movement of labour or capital. (Have to pay tariffs on importing capital)