4.1 International Economics

• Characteristics of globalisation

  • Free trade of goods and services
  • Free movement of capital and labour
  • Free interchange of technology and intellectual capital
• Globalisation


  The ever increasing integration of the world’s local, regional, and national economies into a single, international market
• Effects of globalisation

  • More trade between nations
  • More transfers of capital including FDI (foreign direct investment)
  • Global development of brands
  • Division of labor between countries
  • Increased migration
  • More countries participating in global trade
  • Higher levels of investment
  • Countries becoming more interdependent
• Trade in services

  Increase in trade of tourism, call center services, and software production from developing countries to developed countries
• Effects of the global credit crunch spread across the globe

  2008 and 2009
• Trade in goods

  1. Developing countries acquiring capital and knowledge to manufacture goods

  2. Efficient forms of transport making it easier and cheaper to transfer goods across international borders

  3. MNCs moving production abroad due to cost advantages of cheaper labor

  4. Developed countries trading with developing countries to access manufactured goods
• Trade liberalisation

  Decline in trade barriers due to the growing strength and influence of organizations like the World Trade Organization (WTO)
• Countries becoming more interdependent


  The performance of one country depends on the performance of other countries
• Multinational Corporations (MNCs)

  1. Organizations owning or controlling production in multiple countries

  2. Using marketing to become global

  3. Taking advantage of economies of scale

  4. Resulting in lower costs of production
• Containerisation

  1. Cheaper shipping of goods across the world

  2. Prices falling and market becoming more competitive

  3. Goods distributed in standard sized containers for easier loading and distribution using rail and sea transport

  4. Mainly exploited by MNCs and could result in some structural unemployment
• Communications and IT

  1. Spread of IT making communication easier and cheaper

  2. World becoming more interconnected

  3. Better transport links and easier transfer of information
• International financial flows

  1. Increased flow of capital and FDI across international borders

  2. Foreign ownership of firms increasing

  3. More investment in factories abroad

  4. Facilitated by the removal of capital controls
• Impacts of globalisation and global companies

  • Trade imbalances between countries
  • Income and wealth inequalities within and between countries
  • Spread of culture across the globe
  • Governments potentially losing sovereignty
  • Consumers and producers benefiting from specialisation and economies of scale
  • Firms operating in a more competitive environment and becoming more efficient
  • General increase in world GDP leading to higher living standards and poverty reduction
• Structural unemployment can occur due to globalisation, as seen in the UK after the collapse of certain industries
• Workers can take advantage of job opportunities across the globe
• Globalisation has led to fewer people in extreme poverty globally, but not in Sub-Saharan Africa
• Globalisation could lead to increased inequality
• Effects of globalisation on markets

  • Lower average costs by switching production to places with cheaper labour
  • Employment of advanced machines and production methods due to the spread of technology
  • General increase in world GDP leading to higher consumer living standards and lifting people out of absolute poverty
  • Offsetting lower production costs with rise in consumer incomes
  • Increased demand from China affecting commodity prices and raw material prices
  • Some consumers benefiting more than others
  • Increased availability of goods and services leading to a wider range of choices
  • Possibility of increased inequality
• Negative impacts on the environment due to globalisation

  • Deforestation
  • Water scarcity
  • Land degradation
  • Higher emissions from increased trade
• Consumers might show more concern towards the environment as their average incomes increase
• The creation of jobs in lower labour cost countries due to production shifts can be seen as either beneficial or harmful
• Globalisation could speed up the transition from agriculture to manufacturing to services
• Globalisation has clear microeconomic effects on consumers and producers, as well as negative externalities
• Globalisation has contributed to the increasing contestability of markets
• Absolute advantage


  A country can produce a good or service using fewer resources and at a lower cost than another country
• Countries can specialise in the production of certain goods to benefit from absolute and comparative advantages
• Comparative advantage

  A country can produce a good or service at a lower opportunity cost than another country
• Opportunity cost of production is reflected in the gradient of the PPF
• Specialisation and trade can lead to increased production efficiency and benefits from comparative advantage
• Country B should produce wheat and country A should produce wine based on comparative advantage
• Assumptions and limitations of the theory of comparative advantage include the need for a perfectly competitive market and the risk of structural unemployment
• Changes in relative exchange rates

  • Affect the relative prices of goods between countries, determining consumer buying decisions
  • A rise in the exchange rate of a country decreases its exports and shifts trade to another country
• Advantages of specialisation and trade in an international context

  • Greater world output, so there is a gain in economic welfare
  • Higher quality production focusing on what people and businesses are best at
  • Greater variety of goods and services for consumers
  • Lower average costs due to increased market competitiveness
  • Outward shift in the PPF curve
  • More opportunities for economies of scale
• Disadvantages of specialisation and trade in an international context

  • Less developed countries might use up their non-renewable resources too quickly
  • Countries could become over-dependent on the export of one commodity
  • More structural unemployment as production moves abroad
  • Some countries might become stuck in the production of one good or service
• Comparative advantage

  1. Recent growth in exports of manufactured goods from developing countries to developed countries due to lower labour costs

  2. Deindustrialisation leading to decline in the manufacturing sector in countries like the UK, shifting production to other countries

  3. Impact of emerging economies participating more in world trade

  4. Growth of trading blocs and bilateral trading agreements shifting trade between members

  5. Policies of developed countries limiting developing countries' ability to export primary commodities
• Factors influencing the pattern of trade and changes in trade flows between countries
• Terms of trade above 100 are improving, below 100 are worsening
• Example calculation of terms of trade: The index price of exports increases by 15%. The index price of imports increases by 20%. The terms of trade are (115/120) x 100 = 95.83, indicating a reduction in terms of trade
• Calculation of terms of trade measures the volume of imports an economy can receive per unit of exports
• Factors influencing a country’s terms of trade are affected by anything that affects the price of a country's imports or exports, influenced by demand and supply for imports