Achieve Mastery in Edexcel A-Level Macroeconomics with Our Comprehensive Year 2 Notes!
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Topic 4.1 – International Economics
Globalisation
Globalisation refers to the growing interdependence of countries and the rapid rate of
change it brings around. It can also be defined as ‘the increasing integration of the
world’s local, regional and national economies into a single international market’.
Factors that contribute to globalisation include:
- Improvements in transport infrastructure and operations; quick, reliable and cheap
methods to allow production to be separated around the world.
- Improvements in IT and communication allow companies to operate across the
globe.
- Trade liberalisation and reduced protectionism has made it cheaper and more
feasible to trade.
- Trans-National Corporations have led to globalisation by acting to increase their own
profits as they want to take advantage of low labour costs, therefore operating
across the world and integrating markets. They can also then sell their products in
many different regional markets.
Impacts of globalisation include:
- For consumers:
o More choice and variety as there are a wider range of goods available from
around the world, not limited to domestic production.
o Lower prices as firms can take advantage of comparative advantage and
produce in countries with lower costs.
o However, globalisation can lead to a loss of culture and also a rise in prices
as incomes rise due to a higher demand for goods and services.
- For workers:
o Unemployment may increase if domestic production is outcompeted by
foreign goods at lower prices, however unemployment can decrease if TNCs
demand labour.
o Increased migration may affect workers by lowering wages, but migrants can
also provide important skills and an increase in LRAS.
o International competition has led to a fall in wages for low skilled workers in
developing countries.
o Increased income inequality
- For Governments:
o Higher tax revenue from TNCs
, - Economic growth:
o Increases investment within countries; investment of TNCs represents an
injection into the circular flow of income, increase in AD, multiplier effect.
o Trade increases output and efficiency through comparative advantage; mutually
advantageous.
Specialisation and Trade
Absolute and Comparative Advantage:
- The theory of comparative advantage states that counties find specialisation
mutually advantageous if the opportunity cost of production is different; the country
with the comparative advantage in production should produce that good.
- Absolute advantage exists when a country can produce goods more cheaply in
absolute terms than another country.
- The diagram below demonstrates an absolute advantage of country 1 in producing
both goods, as they can produce more goods in total (with all resources dedicated).
As they have the same opportunity costs as the gradient of the same, neither
country has a comparative advantage and therefore trade it not beneficial.
- In the diagram below, country 1 has an absolute advantage in providing good B and
country 2 has an absolute advantage in producing good A. Specialisation is
worthwhile as the opportunity costs are different; both countries are able to
produce above the PPF on the green line after specialisation.
- In the diagram below, country 2 has an absolute advantage in producing both goods,
and it also has a comparative advantage in producing Good B. Country one has a
comparative advantage in producing good A. This is because the opportunity cost of
in country 1 of 1 of good B is 1.5 of good a (30/20), and the opportunity cost in
, country 2 is 2 of good a (20/10). Therefore, country 1 has a comparative advantage
in good A and country 2 in good B.
REMEMBER: opportunity cost of producing good A = quantity of good B/quantity of
good A.
Opportunity cost = sacrifice/gain
Limitations and assumptions of comparative advantage:
- Assumption of no transport costs; the cost of transport for trades could diminish
advantageous from trade.
- In the model, goods are assumed to be homogenous. However, as goods are all of
different qualities, comparative advantage may not be advantageous as the quality
of imports may not be as good as domestic production, and trade cannot be
compared.
- Assumption of perfectly mobile factors of production, no tariffs or barriers to trade
(no protectionism) and perfect knowledge.
Advantages and Disadvantages of Specialisation and Trade
Advantages:
- Comparative advantage shows how trade is mutually beneficial and can therefore
increase global output and efficiency, global economic growth.
- Countries can benefit from economies of scale, falling long run average costs.
- Greater variety of goods through imports; not limited to domestic supply, better
consumer welfare.
- Competition incentive to innovate; new production methods increase consumer
welfare and lower production costs.
, Disadvantages:
- Trade can lead to over-dependence, where economies become dependent on
imports and exports.
- Structural employment as jobs are lost to foreign firms, domestic industries are
outcompeted.
- Environmental problems through transport.
Patterns of Trade
Factors influencing the patterns of trade:
Comparative advantage: Countries will trade when there is a comparative advantage to
trading. The deindustrialisation of countries such as the UK has meant the
manufacturing sector has declined; this means the production of manufactured goods
has shifted to other countries such as China; China now has a comparative advantage in
the production of manufactured goods.
Emerging economies: Countries are growing at different rates, meaning demand for
imports and supply of exports is varied. Emerging economies shift the trade pattern by
taking up a larger proportion of a country’s imports and exports than previously. Lower
wage rates allow emerging economies to export goods at a lower price due to a lower
cost of production.
Trading blocs and bilateral agreements: Directly affects the ability of a country to trade
within or outside trading bloc and trading partnerships with single countries.
Degree of protectionism
Relative exchange rates: SPICED.
Terms of Trade
The terms of trade measures the rate of exchange of one product for another one two
countries trade. It tells us the quantity of exports needed to be sold in order to purchase
a given level of imports. Improvements in the terms of trade is when they increase and
you can buy more imports with the same level of exports; a deterioration is
when terms of trade fall and you can buy less imports with the same level of exports.
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