A2/Final year of A level Economic exam - Summary notes covering entire syllabus
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Course
Unit 4 The Global Economy
Institution
PEARSON (PEARSON)
Concise economic notes covering pretty much every topic to that has been studied in the lead up to the second year A level economics final exam. Lots of summaries, bullet points and useful notes and hints. Spaced out clearly, each section is labelled, important points bolded and underlined. Brillia...
Globalisation – the integration of the world’s economies into a single international market rather
than many local or national markets. It refers to the growing interdependence of countries.
Factors that have contributed to globalisation:
Technology improvements
Communication improvements use of internet, mobile communications, etc (cost of
using internet has fallen and its availability has increased)
Development of transport allowing ease of movement of people and goods + fall in
transport costs – enabling goods to be imported and exported more cheaply –
containerships have helped to do this as more goods can be exported cheaper
Migration
Reduction in barriers to trade – one of the most powerful contributors to globalisation
Global economic growth led to increased demand, consumerism, etc
Scarcity of resources in some countries entice supply and demand forces in global
markets
Collapse of communism in Eastern Europe and the rise of the BRICs (Brazil, Russia,
India, China) in particular the opening up of China to trade
Growth of trading blocs
Deregulation of financial markets
Growth of MNCs (multinational/ transnational companies) – have taken advantage of the
reduction in trade barriers and development of the internet to organise trade on a global
scale. Enabled smaller firms to expand globally
WTO – part of the United Nations – promote free trade around the world
QUANGO – quasi non government organisation (autonomous) – a regulating body set up to
oversee something – seen as being inefficient
Benefits:
Peoples needs and wants are met – increased variety of products
Diversity – increased knowledge and understanding of other cultures
More exports = more jobs higher economic growth
Increased innovation – businesses develop new ideas
Wider range of products
Higher competition = better quality products and cheaper prices
Higher employment
Reduction in trade barriers = cheaper products
Development of developing countries
Producers – offshoring (move overseas to take advantage of lower costs) and economies
of scale lower production costs
Problems:
Negative environmental effect – depletion of natural resources
More imports can have a negative impact on the economy – globalisation and
environment are not a sustainable mix – pollutes the ocean
Potential global instability – if one country has problems they can create a knock on
effect to other countries e.g. the financial crises in Asia at the end of the 1990s and the
, global credit crunch following the collapse in confidence of the banking system makes
people become insular – stop buying foreign goods
Loss of cultures
Monopolization can lead to higher prices – lead to big businesses putting the small
businesses out of business
Increased inequality – rich countries have much greater access to the internet than poor
countries e.g. rich countries have better access to the internet – much wealth creation is
dependent upon up to date information marketing trends; rich companies can do accurate
market research
Characteristics:
Brands increasing their penetration internationally
Reduction in trade barriers due to improved relations between countries
More diverse range of products produced in other countries, e.g. bananas
Foreign ownership of firms increasing
Trade in services is growing
Far greater international finance flows
Increased international specialisation and division of labour – parts and components of
products to be made in different countries and assembly occurs in another country e.g. cars –
Nissan components made all over Europe (especially Japan) and assembled in Newcastle
Removal/reduction in trade barriers means cheaper goods would be manufactured by under
developed nations and used by developing countries in a major way production of goods at
cheaper rates – using cheaper raw materials and processes
De-globalisation – where countries adopt protectionist policies to protect domestic employment
(trading blocs could be accused of this)
This can lead to less specialisation and trade and less choice and higher prices – other countries
reciprocate (basically less benefits of globalisation)
Protectionist policies examples – subsidies to the US car industry, tariffs on imported cars to
Russia, import duties on Vietnamese shoes imported into the EU
Multinational – a company which has its headquarters in one country and its offices in other
countries. It has business operations in more than one country
Benefits of being a multinational to the multinational:
More competitive prices
Avoid import tariffs
Low labour costs
Increased innovation – new strategies and ideas – different cultures
Establish brand awareness to generate more sales
More access to raw materials
Reduces transport costs for distribution – closer to local markets
Closeness to suppliers: lower transport costs on deliveries + able to influence suppliers
more directly
Problems for multinationals:
Communication difficulties – between head office and branches abroad
Language barriers
, Costs of relocating
Different laws and cultures
Benefits to the host country:
Foreign currency – the investment of this money can help developing countries to pay
off interests on debts
Jobs for local workers which helps boost the economy + public finances
Improved skills for workers – they will be trained by the multinational these skills may
be transferred to help the local economy
Improved infrastructure – in developing countries, the multinational may pay to
improve transport links, etc
New technology – could benefit local businesses and also new ideas and management
techniques
Could benefit their capital account, however, if profits are repatriated then the host
country does not benefit
Problems for the host country:
Exploitation of local workers (paying them sub standard wages) and draining host
countries of their natural resources
Local businesses may suffer from the increased competition that a multinational brings
they will not be able to match the low prices, etc
Often the multinational will send profits home and not use them to reinvest in the host
country leading to a drain of money from the local economy + also a negative impact on
the current account
International trade – when countries buy and sell goods to/from each other.
Currently, countries specialise in products – focus on producing the products they are best at. As
many countries specialise and due to needs and unlimited wants it then becomes mutually
beneficial to trade
E.g. the UK specialises in financial services amongst other things. The Japanese produce
excellent cars
Benefits of trading for the UK economy:
Cheaper products due to lower costs of production in other countries
Increased choice of variety of products for consumers
More exports lead to more jobs and therefore economic growth
UK may have a surplus on the balance of payments (surplus in finance)
More innovation due to the import of new ideas, etc
Helps to satisfy growing consumer needs and wants
Trading can help firms benefit from economies of scale as output increases,
average cost falls
Potential problems of trade for the UK economy:
may have adverse impact on the value of the pound
environmental concerns of trading
may result in a deficit on the balance of payments (deficit in goods)
greater competition from abroad may lead to unemployment
country is vulnerable to global economic shocks/instability
, imported inflation – as the price of imports increase, the price of domestic goods using
imports also increase an increase in the general prices of all goods and services
too much reliance on imports may cause long term problems
lead to a fall in national economic growth
Absolute advantage – when a country is able to produce a good more cheaply in absolute terms
than another country
Comparative advantage – theory states that countries will find it mutually advantageous to trade
if comparative costs of production differ. If comparative costs are identical then there are no
benefits to trade (specialising in the production of those products in which its opportunity cost is
lowest – the country with the lower opportunity cost of producing the product has a comparative
advantage in that product)
Crucial requirement – there must be a difference in the opportunity cost of producing the
products – for trade to be beneficial, the terms of trade must lie between the opportunity cost
ratios
Terms of trade is measured as:
ToT = Average export price index / Average import price index x 100
If the opportunity cost were the same – there would be no benefit from specialisation and trade
TERMS OF TRADE – measures the rate of exchange of one good or service for another
when two countries trade with each other.
For international trade to be mutually beneficial for each country, the terms of trade must lay
within the opportunity cost ratios for both countries.
Terms of Trade Index
If export prices are rising faster than import prices, the terms of trade index will rise. This means
that fewer exports have to be given up in exchange for a given volume of imports.
If import prices rise faster than export prices, the terms of trade have deteriorated. A greater
volume of exports has to be sold to finance a given amount of imported goods and services.
The terms of trade fluctuate in line with changes in export and import prices. Clearly the
exchange rate and the rate of inflation can both influence the direction of any change in the terms
of trade.
OIL PRICES AND THE TERMS OF TRADE
Many developing countries are heavily dependent on exporting oil. And volatility in international
commodity markets creates serious problems with these countries’ terms of trade. In the chart
below, notice how closely the annual % change in the terms of trade follows the movement in oil
export prices.
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