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Summary A Level Edexcel Economics Theme 4 Notes
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Section 1: Globalisation1. Define Globalisation:
The process of increased integration and co-operation of different national economies. It
involves national economies becoming increasingly inter-related and integrated. Results in
increased international trade, inward investment, role for global businesses
2. What are the reasons for globalisation?
1. Supply chain integration and dependence of multinationals on gathering materials from
around the world
2. Formation of trade blocs and harmonisation of monetary policy
3. Inter- dependent economies having cycles that move in synch with one another
3. What are the benefits of globalisation?
1. Increased international trade
2. Increased investment as easier for countries to attract it
3. Better economies of scale due to specialisation
4. Increased competition pushing down prices
5. Increased choice of goods, services and work opportunities
4. What are the costs of globalisation?
1. Growth of global monopolies can exploit customers
2. Environmental costs from increased use of raw materials
3. Less cultural diversity
4. Can harm developing economies
5. Can result in tax avoidance.
5. Define ‘Absolute Advantage’
Absolute advantage is when an economy can produce a greater total quality of goods for the
same quantity of inputs. Thus fewer resources are needed to produce the same amount of
goods and costs will be lower than in other economies.
6. Define ‘Comparative Advantage’
1
,Comparative advantage is when an economy can produce a good at a lower opportunity cost
than another country. It has to forego less of another good to produce it.
EXAMPLE:
Textiles:
Opportunity cost for the UK: (4/1)= 4
Opportunity cost for India: (3/2)= 1.5
Thus India has comparative advantage.
Books:
Opportunity cost for the UK: (1/4)= 0.25
Opportunity cost for India: (2/3)= 0.67
Thus the UK has comparative advantage
7. Outline the concept of specialisation & trade and competitive advantage
- Specialisation within an economy means that a country produces only the goods that it is best
at producing, referring to comparative advantage.
- Specialisation at economy- level requires trade.
- This helps reduce the problem of scarcity and the country’s PPF should shift outwards. (see
below)
- In theory, the output should double assuming constant returns to scale
- Thus, specialising in a good where the country has a competitive advantage, increases
economic welfare
2
,8. What is the difference between absolute and comparative advantages?
- Absolute advantage is simply which country can
produce more of a good within a time period, due to
costs
- A country can be at an absolute disadvantage, but
still possess a comparative advantage
-Here US has absolute advantage, but Brazil has a
comparative advantage in clothes, as it has a lower opportunity cost when producing clothes.
- So US should specialise in aeroplanes, and Brazil in clothes.
9. Illustrate the concept of comparative advantage using a PPF.
- PPFs Without trade and specialisation are
presented above
- When the two countries specialise, the
combined PPF results in double the
quantity of goods produced without the
specialised PPFs.
3
, 10. What are the constant and diminishing returns to scale.
CONSTANT: With constant returns to scale, an
increase in inputs (capital and labour), cause a
proportional increase in output.
DIMINISHING: Diminishing returns to scale occur
when increasing all inputs leads to a proportionally
smaller decrease in output.
Section 2: Terms of trade
1. Define terms of trade
Terms of trade measures the rate of exchange of one product for another when countries trade
When the terms of trade >100 they are said to be improving, when they <100 they are said to be
worsening
2. How is the terms of trade index calculated?
(Average export price index/ Average import price index) X 100
3. What improves terms of trade?
- If a country can buy more imports with a given quantity of exports, the terms of trade would
have improved
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