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Complete Notes Unit 4 Economics Edexcel/Pearson
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Unit 4Globalisation:
Globalisation in the increase in integration and interdependence of countries around the
world. The ability to produce goods and services anywhere in the world by sourcing raw
materials anywhere in the world and selling the end product anywhere in the world and
putting your profit anywhere in the world.
Causes of globalisation:
- Reduction in transport costs (containerisation). Over the years shipping costs have
reduced such that between January 2015 and August 2015 the average cost of
shipping dropped by over 50%. This means that the costs of transporting goods
across the globe have significantly reduced. This is because modern vessels have the
capacity through their use of containers to transport a significant volume of cargo
which increases economies of scale and so reduces their unit cost of operation. As a
result of this it is cheaper for firms to source raw material and outsource the
production of certain items to countries where cost of production is low
(comparative advantage). E.g. dyson outsources most of its production to factories in
Malaysia. Apple manufactures most of its devices in China and Taiwan called
Foxconn.
- Improvement in technology. Technological advancement such as the internet has
improved the quality and access to easy and less costly means of communication
where firms can operate at different locations and still manage to communicate at a
more cost effective level using such communications as skype, teleconferencing and
social media (twitter). It significantly reduced the cost of communicating. Since the
data is more readily available it improves efficiency of the firm e.g. financial
managers of multi-national firms such as coke cola and McDonalds are able to check
on their subsidiaries across the globe. As a result countries are more integrated, the
world has become a big global village.
- Increased membership of trading blocs. Trade blocs are organisations consisting of a
group of countries usually in close geographical proximity who agree to trade with
few or not barriers (e.g. reduced tariffs). Trade blocs such as NAFTA (North American
Free Trade Association – made up of USA, Canada, Mexico) and the EU made up of
28 member states, have increased trade between the member states as well as
increased the level of interdependence as members of the trade blocs tend to
specialise in the production of certain goods and services in order to export it to the
other members. E.g. all the EU countries route their international financial
transactions through the UK financial markets. It is more efficient and cheaper to
transact their payment and receipts through UK forex market. UK financial industry
have comparative advantage in international financial transactions, so EU countries
tend to use UK firms for their international transactions rather than duplicate, which
would be misallocation of resource. E.g. UK firms tend to buy more agricultural
produce from France. 50% of UK exports go to the EU, 70% of Spain’s exports go to
the EU. Dell produces all its monitors in factories in Mexico.
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