4.2.6 The international economy

• Characteristics of Globalisation:

  • Growth of international trade
  • Trade liberalisation
  • Enhanced mobility of labour & capital
  • Increased cultural exchange
  • Increased outsourcing
  • Falling transport costs (due to better technology)
  • Growth of size and influence of multinational corporations (MNC’s)
• • Improvements in transportation: Made global movement of people, goods, and services faster and cheaper
  • Growth of multinational corporations: Lower trade barriers, labour ability, and cheaper transportation have allowed firms to grow rapidly and enter new markets
  • Greater ‘openness’ of former ‘closed’ economies: Countries like India and China have become more integrated into the global economy
• Causes of Globalisation:

  • Trade agreements: WTO has assisted in reducing or removing trade barriers and there are more trade agreements globally
  • Reduced tariffs and protectionism: Many countries have lowered protectionist measures
  • Expansion of global trading blocks: EU and NAFTA have reduced national barriers and promoted more trade and integration
  • Improved technology: Revolutionised communications, lowered labour costs, and enabled businesses to access new foreign markets
  • Greater labour mobility: Workers are more willing to move across borders for employment
• Consequences of Globalisation - Positive:

  • Improved allocation of resources
  • Free trade
  • Inward investment
  • Specialisation
• Consequences of Globalisation - Negative:

  • Inequality
  • Environmental Impacts
  • Structural Unemployment
  • Movement of labour
  • Damage to traditional cultures
• Impact on developed and developing countries:

  • Free-market economists argue benefits outweigh costs
  • Opponents argue globalisation exploits the poor in developing countries for the benefit of the rich in the western world
• Globalisation is the process of greater integration and inter-connectedness between countries.
• Role of MNC: Capital Inflows and Inward Investment

  • MNCs are principally driven by profit motives, and if they can spot opportunities for new markets or the chance to reduce production costs by moving to low-wage economies, they may take advantage of these openings, which drives capital expenditure and investment funds into a country.
• Role of MNC's: Employment?

  Create employment opportunities for local workers
• Role of MNC's: Infrastructure?

  MNC’s will often invest in training the workforce to improve their skills, and also spend money on local roads and transport infrastructure to aid their own trading opportunities and distribution.
• Role of MNC's: Diversification?

  Developing countries may have very few industries to help them generate economic growth and the arrival of MNC’s may help to diversify the economy across a wider range of businesses and sectors.
• Are MNCS’s always good for developing economies?

  Profit motives MNC’s will be driven principally by profit, which may come at the expense of consumers and employees
• Impact of MNC's on small firms?

  It is unlikely that small, local companies will be able to compete with large MNCs, and consequently they may be unable to survive in the market place, so reducing overall competition
• Environmental Impact of MNC'S?

  MNCs may choose to locate in countries or regions with fewer environmental laws. Whilst this may reduce costs, it may also increase pollution and create negative externalities.
• MNC's leading to exploitation?

  MNC’s may exploit local resources and the labour force for their own gain, whilst the shareholders of the home nation enjoy the dividends from profits.
• Absolute Advantage?

  Absolute advantage is a situation where a country can produce a good or service using fewer resources than that of another country. In other words, it can produce more of that good or service more cheaply.
• Comparative Advantage?

  • Comparative advantage is therefore where a country can produce a good at a lower opportunity cost than that of another.
• Economist David Ricardo noted however that it was possible for a country not to have an absolute advantage in the production of a good, but through specialisation could gain from international trade if they had a lower opportunity cost.
• Benefits of trade?

  • Increased global output
  • Greater competition
  • Employment opportunities
  • Specialisation - greater efficiency
  • Improve quality of goods
• Costs of trade?

  • Over-specialisation
  • Structural unemployment
  • Infant industries - struggle to compete with MNC's
  • Dumping - selling goods at very low prices to drive local producers out of the market
  • Environmental concerns
• Trade Liberalisation = removal of trade barriers
• Protectionism = represents any attempt to impose restrictions on trade in goods and services.
• Protectionist Policies?

  • Tariffs
  • Quotas
  • Subsidies
  • Embargoes
  • Administrative barriers (countries may employ measures such as complex legal forms to discourage imports by raising costs
• To prevent ‘dumping’ - over production in developed countries may be released into markets of developing nations, which undercuts domestic prices and domestic producers may be forced to leave the market
• Domestic employment - protectionist measures might help to protect domestic jobs if infant industries are allopwed to grow or local firms arent undercut by MNC’s from developed countries
• Externalities - sopme goods, such as illegal drugs and weapons may be considered to habe significant harmful effects on society
• Balance of payments - placing restrictions on imports may help to reduce a balance of paytment deficit on current account
• Problems of tariffs:

  • Consumers face a higher price of p1 and consumer surplus falls indicating a fall in overall welfare
  • Area C is the revenuye gained from the tariff, which may invitr retaliation from other ountries
  • Areas b and d represents a net loss to society as they are not collected by any economic agents in the process

  
• Customs Unions - trading blocs in which member countries enjoy internal free trade in goods and services with all member countries protected by a common external tariff barrier.
• Free trade area = member countries abolish tariffs on mutual trade but each country can decixe its own tariffs on trade with non-member countries.
• Features of Customs Union?

  • Common set of import duty rates (tariffs)
  • Duty-free and quota-free movement of tradable goods among members (tariff)
  • A common trade policy that guides trade with non-member bloc states
• Single European Market (SEM)?

  In addition to having no internal trade barriers and a common external tariff, the SEM also involves the free movement of goods, services, capital and labour which promotes deeper economic integration and market liberalisation.
• World Trade Organisation:

  • Established in 1995, its purpose is to promote free trade by persuading countries to abolish import tariffs and other barriers.
  • It polices free trade agreements and settles trade disuputes between governments and organises trade negotiations.
• Patterns of Trade?

  -Emergence of Middle Income Countries (MIC’S)

  -The growth of trading blocs

  -Deindustrialisation
• The growth of trading blocs?

  • The formation and growth of trading blocs such as the EU and NAFTA which encourage greater free trade amongst members.
  • The majority of leading economic nations operate within a trading bloc and have several agreements with other nations
• Emergence of Middle Income Countries (MIC’S)?

  • Countries such as India and China have become significant global players in terms of all aspects of trade
  • The collapse of communism in Russia and other Eastern bloc states has opened up global markets signifiantly.
• Deindustrialisation?

  • Traditional western nations, including the UK, have seen a period of deindustrialisation occur as comparative advantage in the production of many goods has shifted to China, India and the Far East
• Components of BOP current account?

  -Trade in Goods (UK has big deficit)

  -Trade in Services (UK has medium surplus)

  -Investment Income (Income from overseas assets)

  -Net Transfers (foreign aid)
• UK current account deficit = volume of imports > volume of exports
• Factors affecting BOP?

  -Structure of the economy

  -Propensity to import

  -Exchange rates