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Edexel Macroeconomics theme 4 notes and essay plans
- Module
- Macroeconomics - Theme 2 + 3
- Institution
- PEARSON (PEARSON)
Edexel Macroeconomics theme 4 notes and essay plans
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Theme 4Theme 4
Globalization
Globalisation = national economies becoming increasingly integrated and interdependent
Increased reliance of economies on each other
Labour and capital opportunities
Growth of global markets
Capitalist philosophy
Factors effecting:
Improvement in transport infrastructure = production supplied around the world. This is a
factor mobility, reducing imperfect info and allows price elastic supply.
Increase in new industrialised country economies – rise in growth of dev countries, from
primary production to advanced manufacturing creating D for consumer and capital goods
worldwide
IT improvement = customer online purchasing from international stores. More aware of
global brands. Holidays
International financial markets allows money to move, good for int trade
TNC’s acting to increase profits, take advantage of low labour costs and raw materials. Sell
produce around world
Impact of globalisation:
Consumers – wider choice of goods. Lead to rise in prices as D exceeds S, rising income
leads to greater D. However may lower prices as low labour costs. Loss of culture
Workers – increased migration lowers wages, but new workers provide important skills and
increase in AD which increases job numbers. TNC’s provide training for workers and create
jobs
Producers – raw material from wider sources. Employ low skilled workers cheaper in dev
countries = increased profit
Environment – TNC’s exploit natural recourses in dev countries not worried about external
costs.
Gov – receive higher taxes as TNC’s pay tax and their workers, however TNC’s can bribe gov
= corruption in dev countries
Growth of economies – increases investment and exports as dev countries can sell raw
materials. FDI from TNC leads to supply side improvement and increases jobs. Trade
increases output as it allows exploitation of comparative advantage, when a country no
longer provides an advantage the company will move to another who does provide
,Theme 4
Specialisation
International trade = Exchange of goods and services between business or consumers in the
countries. External trade brings benefits to all countries, drives GDP growth and living
standards. Ways of expressing gains from trade:
1. Static gains (improvement in allocative and productive efficiency in markets)
2. Dynamic gains (gains in welfare from improved product quality, choices and faster,
innovative bahavior.
Free trade = International trade free from trade barriers. Trade reflects impact of:
Specialisation (of scarce resources) and exchange (part based on comparative adv in
supplying different g+s)
Model of comparative adv (David Ricardo) = Relative opp cost of production for g+s lower
than other countries and when a country is more productively efficient than others.
Basic rule = specialise in what nest at producing
Opens potential gains from specialisation and trade leading to efficient allocation of
resources.
Absolute adv = Country produce product using fewer resources than other. If using
same FOP and can produce more, this is absolute adv
Comparative adv = Country has lower relative opp cost when specialising in
particular product
Factor Endowment model (Heckscher and Ohlin) = Countries with relative factor abundance
of labour or capital can specialise then trade. Therefore can trade for products that they
aren’t specialised in as result of e.g. an abundance of unskilled labour. Exports embody the
abundant factor, imports embody the scarce factor
Comparative advantage and economic welfare:
If country specialised, output can be increased leading to better allocative efficiency
and econ welfare.
Providing that good price can be found from buyers, specialisation should focus on
g+s that provide best value – such as high technology goods and high knowledge
services
As a country develops more capabilities, can produce wider range of closely linked
g+s
, Theme 4
Assumptions behind theory of comparative adv:
Constand returns to scale – no economies of scale – may amplify the gains from
trade
Factor mobility between industries (geo + occupational)
Assumes no import controls such as tariffs +quotas. low transport costs. Higher costs
may erode comparative adv
Ignores possible externalities of production and consumption
Assumes both countries benefit equally
Products in real life are mostly manufactured from materials imported from other countries
Factors determining comparative adv:
Quantity and quality of natural resources
Demographics- ageing population, net inward or outward migration, education,
quantity and quality of labour force
Rates of capital investments including infrastructure
Exchange rates which effect prices of imports and exports
Tariffs
Non price comp of producers
Vertical specialisation = specialising in particular stages of production
Why trade Important for developing countries:
Source of foreign currency to help balance of payments
Finance imports of essential equipment / energy supplies
Injection of demand into the circular flow of income, spending increase
Increased employment
Falling prices for consumers increases real incomes
Risk of trade and investment for developing countries:
Volatile global prices affecting export revenues and profits and tax revenues for gov
Risk exports effected by geo-political uncertainties + shifts in demand
Opening up to trade and investment may cause rising structural unemployment in
some industries as demand and job and output changes. Countries may opt for rapid
industrialisation before open up
Countries may specialise in few natural resources – suffer from ‘natural recourse
trap’
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