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Economics Edexcel Theme 4 Notes - A global perspective
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- PEARSON (PEARSON)
Detailed notes for theme 4 edexcel economics a level. All content which you need for your a levels including examples and application.
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Theme 4,Slowing down
Globalisation
→ Process by which closer economic links develop between nations in areas such as trade, flow of WINNERS: capital, LOSERS: labour
capital (investment), movement of labour and transfer of technology
Associated with: Developed vs developing
a) Rise of global brands - coca cola, Labour: developing → developed
mcdonalds, starbucks e.g. standardised Capital (+tech): developed → developing
products → MNC’s → companies which operate in more than one country (produce/sell/both) →
b) Global sourcing → “offshoring” and global usually EDCs for new markets, raise sales, access natural resources, low cost labour and
supply chains regulations
c) China → advent into production,
importance as market
d) Rise of anti-globalisation movements/ Effects:
protests etc 1. Greater opportunities for export led growth and greater economic dependency
and event risk
2. Greater world efficiency and competition (leading to innovation, reduced
Factors promoting globalisation: inflationary pressures) although the competition is in product and factor
1. Reduced protectionism led by WTO and markets (wages of low skilled workers are drive down my migrants increasing
economic integration → increased trade overall labour supply) = winners and losers
2. IT improvements → communications 3. Greater import penetration from lower- cost competitors = pockets of
easier and cheaper - efficiency structural unemployment and increased income inequality
3. Falling transport costs → containerisation 4. Rise of BRICs and similar peers (Brazil, Russia, India, China) as producers and
→ huge economies of scale, promoting consumer markets
trade 5. The transfer of technology/best practice/skills and the improvement of living
4. Capital flow liberalisation → FDI standards in many developing countries
- BOP CA and financial 6. Greater flows of portfolio capital to emerging markets and a greater
5. Domestic market liberalisation → creating connectedness of global financial markets (transmitting shocks more widely
new opportunities for operations to be in bad times e.g. GFC)
established 7. Structural unemployment and deindustrialisation
, International Trade
Post brexit - UK wants to be global leader of free
trade - signed deal with EU
→ Trade is the movement of products across borders, ancient pre- dating ABSOLUTE AND COMPARATIVE ADVANTAGE
→ Seen as (x-m) in AD, increases AS, real GDP per capita increases Each country has a unique factor endowment (something they are
→ x = export revenues, m = import expenditures (neoclassical theory) given) FOP available to combine to produce goods and services)
→ Influences on x-m: E.g. hot/ cool/ dry/ rainy. Abundance of land/population density
- Incomes from abroad
- Prices/ price level/ competitiveness Differences in factor endowments (and to a lesser extent factor
- Exchange rate intensity) explain differences in what countries can produce (and
what they are better at)
Reasons for trade: Absolute advantage → exists when a country is the lowest cost
a) Access to products/resources not available domestically → produces (uses the fewer inputs to produce a given output)
widens production possibilities and consumption options = Comparative advantage → exists when a country can produce at a
increases choice lower opportunity cost than a trading partner
b) Lower prices → buy from more efficient produces overseas = DEPENDS ON RATE OF EXCHANGE and over specialisation = risk
raises living standards in price volatility and changes in tastes and preferences
c) Ability to specialise in producing, sell to greater markets There are benefits from specialisation and trade as long as there
overseas (much bigger than the domestic opportunity) are differences in opportunity costs (between trading partners)
→ can be illustrated using a PPF
Assume:
a) 2 countries, 2 products Country A has more AA
PC’s Cars b) Each use ½ of their resources to PCs PCs
produce each product Country x Country A than B in PCs and cars
200 but as long as there is a
Country 100 ¼ car 25 4 PCs c) Constant return to sale diff in opp cost
x 200 (doubles) 0 d) Factors are perfectly mobile World PPF
OPP cost for producing a car = car PCs
divided by car 100
Country 60 ½ car 30 2 PCs Country x has the comparative advantage
Y 0 60 for PCs and y for cars
→ switch all resources to producing the Country y
Country B
Total 160 55 “best use” = double
200 60 2 PCs per car → country y have 60 PCs and
30 cars = no gain, x have benefits
4 PCs per car → country x = 100 PCs and 25 60 Cars Cars
cars = no gain, y have benefits = 3PCs is fair
, Comparative Advantage (neoclassical theory)
Assumptions: Terms of trade:
1. Constant returns to scale → increasing returns/ economies of → rate of exchange of one product for another (Exports for imports)
scale
2. Factors are perfectly mobile → immobility Formula:
3. No transport costs → more realistic, containerisation TOT = index pf avg export prices/ index of any import prices x 100
4. Perfect knowledge → more realistic, the internet - Countries trade many products
5. No artificial barriers to trade (protectionism) → more - Use money instead of barter
realistic, WTO, EU - X,m have prices
6. Products are homogeneous → customers like choice If countries need to export to generate income to buy imports
7. FOP remain in their location → less realistic, globalisation - XpXv (export revs) = MpMv (import expen) (price x quantity)
labour flows from developing countries to developed and v=volume/quantity
capital flows from developed countries to developing p=price
Mv = Xp/Mp x Xv ] inputs increasing
ToT→ shows the amount of exports that need to be sold to fund a
Benefits of trade: given amount of imports
Questioning the model → “Free trade diagram” ToT → ratio improves and goes up, so you to sell fewer outputs
a) Assume small, open economy
b) Able to import unlimited amounts at the world price Commodity → homogenous (cannot distinguish between products)
Price World mrkt Price
UK mrkt for steel Dometic output falls (Share of market is OQ1 out
Perfectly inelastic
S of OQ2)
Sdom “world supply curve”
Comparative advantage and assumptions predict that
Mrkt price we specialise and trade with all other countries BUT
Q1 = total production
falls to Pw and consumption most countries produce most products and trade tends
Pw PUK
Pw Sw to be intraregional because of trade creation and trade
Q2= dom production - diversion.
imports
D D
Specialisation is only helpful if you trade and have a
Quantity Quantity
Qw Q2 QUK Q1 good rate of exchange
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