Where economies and cultures are more inter-connected through global networks of trade, captial flows, and the rapid spread of technology and social media
Features of Globalisation
Reduction of trade barriers —-> Growth in trade
Expansion in financial capital flows between countries
Rising power of global brands
Deeper specialisation of labour
New trade and investment routes
Increased international labour migration
Benefits of Globalisation
Increased Economic Growth —-> Trade and investment, larger markets + more consumers leads to more production.
Job Creation + Higher Income —> FDI brings capital, new tech and expertise to host countries. Creates jobs.
Tech Innovation —> Exchange of ideas and knowledge across borders. Collaboration and competition drives innovation.
Collaboration on global issues —> WHO for covid.
Drawbacks of Globalisation
Economic Inequality —> Winners and Losers of globalisation.
Job Insecurity —> Low skill labour moved to countries where labour is cheaper, or wages stagnate.
Environmental Degradation —> Puts pressure on natural resources. More transport + energy consumption.
Loss of Cultural Identity —> Homogenisation of culture as western influence becomes more persuasive.
Exploiting low paid labour
Economic volatility and financial crisis —> Housing market crash lead to global crisis.
Stolper Samuelson Theorem
An increase in the price of a good will cause an increase in the price of the factor used intensively in that industry and a decrease in the price of the other factor.
Increased inequality in high skill countries and decreased inequality in low skill countries
Absolute and Comparative Advantage
The theory of comparative advantage states that countries find specialisation mutually advantageous if the opportunity costs of production are different.
If they are the same, there will be no gain from trade.
Absolute advantage exists when a country can produce a good more cheaply in absolute terms than another country.
Comparative advantage exists when a country is able to produce a good more cheaply relative to other goods produced.
Country 1 has an absolute advantage in both as they can produce more of both. However, trade is not worthwhile because they have the same opportunity cost since the gradients of the lines are the same.
Assumptions of Comparative Advantage
Constant returns to scale - No economies of scale which may amplify gains from trade
Factor mobility between industries - Workers are assumed to be equally productive in any industry and can switch work easily
No trade barriers - Such as import tariffs and import quotas and other trade frictions
Low/no transportation costs - High logistic costs may erode any comparative advantage between nations
No externalities from production and consumption.
Advantages of Specialisation & Trade
World output can be increased
Economies of scale
Different countries have different factors sof production
Greater consumer welfare
Disadvantages of Specialisation & Trade
Environment will suffer
Loss of Sovreignty
Loss of culture
Patterns of Trade
Changes in comparative advantage over time
Changes in exchange rates
Terms of Trade
(Index of Export / Index of Import) * 100
The terms of trade measures the rate of exchange of one product for another when two countries trade. It tells us the quantity of exports that need to be sold in order to purchase a given level of imports.
Factors of Terms of Trade
Short Run - Exchange rate, inflation, changes in demand/supply of imports/exports
Long Run - Productivity, changing incomes, technology
Anything that affects the price of a country’s imports/exports
Impacts of Terms of Trade
Balance of payments —> Increase in terms of trade improves balance of payments and vice versa
GDP —> Improvement in terms of trade signals fall in GDP or rise in unemployment
Types of RTA
Preferential trading areas (PTA): These are where tariff and other trade barriers are reduced on some but not all goods traded between member countries.
Free trade areas (FTA): Two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members. Each member is able to impose its own tariffs and quotas on goods it imports from outside the trading bloc.
Customs unions: Involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members. This means that members may negotiate as a single bloc with third parties such as other trading blocs or countries.
Common markets: Members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed. They impose a common external tariff on imported goods from outside the markets. For a common market to be successful there must also be a significant level of harmonisation of micro-economic policies, common rules regarding monopoly power and anti-competitive practices and the removal of custom posts. There may also be common policies affecting key industries such as the Common Agricultural Policy (CAP). The main goal of a common market is to establish a single market, the same way in which there is a single market within an individual economy.
Monetary unions: Two or more countries with a single currency, with an exchange rate that is monitored and controlled by one central bank or several central banks with closely coordinated monetary policy. Some examples include the EU, the West African Economic and Monetary Union and the Economic and Monetary Community of Central Africa.
The WTO has two main aims: to bring about trade liberalisation and to ensure countries act according to the trade agreements they have signed. It regulates world trade.
WTO view of ideal trade
Free from barriers
Beneficial for developing countries
Conflicts with WTO
RTAs contradict WTO's principles as a common external tariff on trade outside the trading bloc introduces protectionism. Customs unions and free trade areas can be seen as violating the WTO's principle since not all trading partners are treated equally.
However, they can complement the trading system and the WTO strives to ensure non-members can trade freely and easily with members of a trade bloc.
The protectionist approach of the USA and China currently provides a threat to the WTO system.
Taxes placed on imported goods to make them more expensive and domestic goods more price competitive.
Limits placed on the level of imports allowed into a country. Leads to welfare loss when people want a good but quota is already used up so forced to buy domestically. Same effect as a tariff in diagram.
Payments to domestic producers to lower costs. Helps them be more price competitive, enabling cheaper prices. Can lead to zombie companies / industries.
Pros of Protectionist Policy
Protects infant industries against free trade, allowing them to survive
Diversifies the economy
Higher revenue for the government
Safeguards jobs and protects industries, reducing structural unemployment
Protects “national security”
Cons of Protectionist Policy
Leads to retaliation which increases import and consumer prices
Higher prices leads to a fall in consumer demand
Lower demand leads to less output and potentially structural unemployment
May encourage inefficient firms to stay in business and there is less scope for specialisation and economies of scale
There is less competitive pressure for firms and economies to cut costs, leading to poor allocative efficiency.
No benefits of free trade e.g. comparative advantage, trade creation, increased exports, economies of scale and increased competition.