Lecture notes
notes Unit 4 - A global perspective
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- PEARSON (PEARSON)
detailed alevel economics A unit 4 notes
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A Global PerspectiveGlobalisation – a process in which national economies have become increasingly integrated and interdependent.
Characteristics: - Trade to GDP ratio rising for most countries.
- Expansion of financial capital flows between countries.
- Increased international specialisation and dividing of labour.
- Growing importance of TNC’s.
- Increased FDI.
- Increased/new global supply chains and new trade routes.
- Wealth gap worse.
- Profits grow at expense of human rights.
Causes: - fall in transport costs and improved trade routes.
- Improved IT and communication.
- Lowering of trade barriers, trade liberalisation and reduce protectionism – cheaper and easier to trade.
- TNC’s.
- Growth in trading blocs.
- Scarcity.
- Profit maximise, lower costs, move production, link to TNC’s.
- Containerisation, efficiency.
- Increased demand.
Consequences: - lower prices, may have higher prices as incomes rise so higher demand.
- Reduced unemployment in developing countries.
- Increased migration may affect workers by lowering wage but increase AD increasing number of jobs.
- Fall in wages/reduced growth for low skilled workers in developed countries, increasing in developing.
- Export-led growth for developing.
- Interdependence.
- Innovation.
- Increased global inequalities.
- Increased competition.
- More choice.
- Environmental damage.
- ‘Foot loose’ companies, move from one country to another.
- Loss of identity and culture.
- Exploit comparative advantage and have larger markets by employ low skilled worked cheaper in developing.
- Firms unable to compete internationally lose out.
- Higher tax revenue as TNCs pay tax, but tax avoidance. Also from increased income tax.
- TNCs power to bride and lobby governments, corruption.
- Increased investment, by TNCs – injection into economy, multiplier, incentive to make supply-side improvements to
encourage TNCs to operate in their countries.
- Comparative cost advantages change over time so move country, structural unemployment, reduce growth.
Comparative advantage – a country can produce at a lower opportunity cost than another.
Assumptions: - no transport costs, no trade barriers, constant returns to scale, perfect mobility of
resources, perfect knowledge.
Absolute – a country can produce more than another, can produce it more cheaply.
Advantages of specialisation + trade:
- Comparative shows how world output can be increased if countries specialise in what
they’re best producing, increasing global economic growth.
- Economies of scale, reduces costs and so decreases prices globally.
- Different countries have different FoP, trade allows countries to make use of FoP.
- Greater choice, so greater consumer welfare.
- Greater competition, incentive to innovate, increases consumer welfare and lowers costs.
Disadvantages:
- Over-dependence between countries/on particular exports/imports, problems if large price fall in exports or imports cut
for political reasons.
- Structural unemployment, jobs lost. To foreign firms who are more efficient and competitive. Less mobile the workforce,
higher chance changed in demand due to trade will reduce output and employment over long periods of time.
- Environment.
- Loss of sovereignty due to international treaties and trading blocs.
- Loss of culture.
Factors influencing pattern of trade:
- Changes in comparative advantage – may change due to changes in labour costs/skills/productivity.
- Emerging economies – cheaper and more production, when countries grow need to import more and export more to pay
for more imports, they end up taking larger proportion of country’s imports and exports than they had previously.
, - Trading blocs and bilateral trade agreements – increase level of trade between countries.
- Relative exchange rates – affects relative prices of goods between countries, long term change affect relative
competitiveness, if depreciates – more competitive, exports increase, imports decrease.
Terms of trade – average price of country’s exports relative to imports.
- Pe/pm x 100
- Exports prices increase due to appreciation, terms of trade increase.
Influences:
- In short run: exchange rates – increase relative to others then export prices increase relative to imports, ToT increase,
exports may fall. Inflation rate – higher prices exports fall, if inflation higher than other countries, export prices rise relative
to import prices so rise in ToT. changes in demand/supply of imports or exports.
- In long run: improvement in productivity compared to country’s main trading partners decrease ToT as export prices will
fall relative to import prices. Changing incomes, affects demand and so prices.
- Tariffs – on imports, increase prices, fall in ToT.
- Dependency on primary products – prebisch-singer hypothesis – long run price of primary goods declines in proportion to
manufactured goods, those dependent on primary exports will see fall in ToT.
Impact of changes:
- Higher TOT implies higher living standards.
- TOT increase, decreases competitiveness, so BoP deteriorate.
- Increase TOT, fall in GDP and rise in unemployment as caused by increased export prices.
Trading blocs: - regional – intergovernmental associations that manage and promote trade activities for specific regions of the
world. Group of countries within a geographical region that protect themselves from imports from non-members.
- Bilateral – between two countries.
- Multilateral – between at least 3 countries.
- Free trade areas – reduce/eliminate trade barriers between member countries, members can impose tariffs and quotas on
goods it imports outside trading bloc.
- Customs unions – removal of tariff/free trade between members and common external tariff against non-members.
Members can negotiate as a single bloc with 3rd parties.
- Common markets – members trade freely in all economic resources, barriers on goods/services and FoP removed.
Common external tariff on imported goods from outside the markets.
- Preferential trading areas – tariff and other trade barriers reduced on some but not all goods traded between member
countries.
- Monetary union – customs unions that adopt a common currency with exchange rat that’s monitored and controlled by
one central bank/serval central banks with closely coordinated monetary policy.
o Prices are fixed as all currencies the same, reduced exchange rate costs.
o Easier for prices to be compared across the union so MNCs less able to price discriminate.
o Financial costs with starting new currency, costs if union broke up.
o Loss of policy independence, countries unable to change value of their currency and what’s good for one may not
be good for another.
o To be successful, there should be free movement of labour, capital mobility and wage and price flexibility, fiscal
transfers from one country to another when one is performing badly/poorly, countries should share same
business cycle.
Advantages of regional trade agreements:
- Trade creation – removal of trade barriers results in increased specialisation, increasing output due to comparative
advantage. Benefit from economies of scale, lower prices and costs.
- Increased FDI – global companies may invest inside trading bloc to avoid trade restrictions.
- Firms grow much larger by creating larger customer market.
- Firms inside bloc protected from cheaper imports from outside.
- Domestic industries face greater competition, encourages innovation and lower prices causing improvements in productive
and allocative efficiency.
- Job creation if leads to increase in output from increased trade.
- Increased choice for consumers.
Disadvantages:
- Trade diversion – trade may be diverted away from low-cost producers outside bloc to high-cost producers inside due to
tariffs on goods from outside.
- Distortion of comparative advantage – trade restrictions on goods from outside distort comparative advantage – less
efficient allocation of resources, lower economic growth.
- Loss of independent monetary policy – unable to control own interest and exchange rates.
- Reduction in competition as inefficient firms driven out of business.
- Retaliation by creation of other trade blocs, lead to trade disputes. Developed countries gain most, distribute gains from
trade unequally.
- Less national sovereignty.
WTO: - bring about trade liberalisation and ensure countries act according to the trade agreements they’ve signed.
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