ECONOMICS Year 11

Chapter 22 Globalization

What is Globlisation?
 Globalisation means the integration of
national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. Example: Expansion of multinationals Rapid growth of certain countries economies Intercontinental travel Global climate change because of pollution

   

 According to dictionaries Globalisation (n) (n

is the "process enabling financial and investment markets to operate internationally, largely as a result of deregulation and improved communications" (Collins) or from the US - to "make worldwide in scope or application" application" (Webster). The financial markets, however, are where the story begins.

Specialization & Trade

 World wide specialization through
expansion of labour  As such countries have specialised in the prod of particular goods and trade them internationally.

The potential benefits from specialisation

By concentrating on what people and businesses do best rather than relying on self sufficiency:

 Higher output: Total output of goods and services is output:

raised and quality can be improved. A higher output at lower costs means more wants and needs might be satisfied with a given amount of scarce resources.

 Variety; Consumers have improved access to a greater

variety of higher quality products i.e. they have more and better choice both from their own economy and from the production of other countries

 A bigger market: specialisation and

international trade increase the size of the market offering opportunities for economies of scale (a fall in long run costs per unit of output)

 Competition and lower prices: Increased

competition for domestic producers acts as an incentive to minimise costs and innovate to remain competitive. Competition helps to keep prices down and maintains low inflation

comparative advantage and international trade

 Comparative advantage exists when a

country has a margin of superiority in the production of a good or service i.e. where the opportunity cost of production is lower.
DO exercise 1 page 404

Comparative Advantage Comparative & Absolute Advantage

Do exercise 2 Page 406

KEY THINGS TO CONSIDER IN INTERNATIONAL TRADE

 WHY DO WE TRADE WITH OTHER     

COUNTRIES? WHAT DO WE EXPORT (SELL ) ABROAD)? WHAT DO WE IMPORT (BUY) FROM ABROAD? WHAT IS THE BALANCE OF PAYMENTS? WHY DO EXCHANGE RATES MATTER? SHOULD WE KEEP THE OR JOIN THE EURO?

WHY DO COUNTRIES TRADE WITH EACH OTHER?

 To obtain goods that they cannot produce themselves  To increase choice for their consumers  To obtains goods at a cheaper price than what they can
produce themselves

 To make more revenues and profits. It an extra place in

which to sell their goods

 Countries specialise in the production of goods and

services at which they are better.

 To exploit a comparative or absolute advantage.

COMPARATIVE ADVANTAGE  Where one country can produce a good at a relatively cheaper cost in terms of other goods than another producer. (page ) ABSOLUTE ADVANTAGE  Where one producer is better at producing a product than another producer.

UK AND COMPARATIVE ADVANTAGE

 In recent years the UK had a comparative advantage in
a number of manufacturing industries such as textiles or motorcycles.

 This was because the UK had lots of natural resources

and raw materials, trained workers and lots of relevant machinery.

 However, now this advantage has been lost to other

areas of the world particularly Asia. They have extremely cheap labour, new technology and low transport costs.

Advantages from trade

 Can obtain goods that the country do not
have or cannot produce themselves  Cheaper to import from other countries  In international trade, more market opportunities thus economies of scale

Disadvantages of trade
 Increased transportation causing pollution
or greenhouse effect  Exploitation and unemployment to the people if multinationals decided to move  Increase to gap between rich and poor

Free Trade or Protectionism?

Protectionism Creation of barriers to free trade in an attempt to protect the economies from overseas competition Free Trade A system of trade policy that allows traders to trade across national boundaries without government interferences
Do exercise 3 page 408

Trade Barriers
 Tariffs  Subsidies  Quotas  Embargo

Reasons for Protectionism

 Protection of a young industry  To prevent unemployment  To prevent dumping  Because other countries use barriers to
trade  To prevent over-specialization over-

Arguments against protectionism

 Other countries will retaliate with trade
barriers  It protects inefficient domestic firms  The loss of domestic jobs from overseas competition will only be temporary  Trade barriers have increased the gap between the rich & poor countries

ARMS OR AID???

OR

Types of AID
 Food Aid  Financial Aid  Technological Aid  Loans  Debt relief

Arguments against AID

 Poor countries unable to utilize the
financial aid properly  Aid is sometimes use to fund wars  Aid is used to fund the lavish lifestyles of corrupted government officials  Aid used by ruthless dictators

Conservation or Commercialization?

DO EXERCISE 5 Page 415

 See Page 416 & 418 Textbook for

ARGUMENTS FOR CONSERVATION

Do exercise 6 Page 417

Promotion of free trade:

 Elimination of tariffs; creation of free trade zones      
with small or no tariffs Reduced transportation costs, especially resulting from development of containerization for ocean shipping. Reduction or elimination of capital controls Reduction, elimination, or harmonization of subsidies for local businesses Creation of subsidies for global corporations Harmonization of intellectual property laws across the majority of states, with more restrictions. Supranational recognition of intellectual property restrictions (e.g. patents granted by China would be recognized in the United States)

Benefits of Globalisation
 By buying products from other nations
customers are offered a much wider choice of goods and services.  Creates competition for local firms and thus keeps costs down.  Globalisation promotes specialisation. Countries can begin to specialise in those products they are best at making.  Economic Interdependence among different nations can build improved political and social links. Do exercise 3 page 408

Drawbacks of Globalisation
 Cheap imports from developing nations could
lead to unemployment in developed countries where the cost of production is high.  Choosing to specialise in certain products may lead to unemployment in other sectors which are not prioritised.  Increased competition for infant industry.  Dumping of goods by certain countries at Dumping below cost price may harm industries in order countries.

How fluctuation in exchange rate affects business

Who gains and Who loses

Lets take the example of Britain and US. If the value of US$ fluctuates in comparison to UK Pound, then, how will it affect different businesses in United States?

Affect of Appreciation of currency

US Dollar becomes expensive as compared to British Pound. In order words, there is an (because US$ has appreciated) It will directly . Lets see how

US importers will GAIN

because now US$ dollar can buy more from Britain. Earlier $1.5 could get only 1 Pound worth of goods from UK but now US importer have to pay only $1.3 to get 1 Pound worth of goods from UK. Imported goods from UK will become cheaper for US consumers. Goods using imported components from UK will become cheaper. US tourists travelling to UK will be able to enjoy more as they get more UK Pounds when they exchange dollars. Customers will be happy but it might as it will face competition from cheaper imports from UK.

   

US Exporters will LOSE LOSE

because now they will find it difficult to compete with other countries with comparatively cheaper exchange rate.  UK businesses will now think twice to buy from US because earlier they could buy US$1.5 worth of good for 1, but now, they can only buy US$1.3 worth of goods due to appreciation in the value of US$.

 Because of fewer exports, US business will exports,

reduce output, which will lead to unemployment.

So the moral of the story is is

Though it is nice to hear that the value of our currency has appreciated but, in fact, it is not so nice for the economy

Affect of Depreciation of currency

US Dollar falls in value as compared to UK Pound ( ) . In order words there is DEPRECIATION in the US$. Earlier 1 Pound could get $1.5, Now 1 Pound can get $1.8 (because US$ has depreciated)

US Importers will lose lose

 Imports will become more expensive  Products which use imported components will
become expensive.  US tourists to UK will have to shell out more money for their vacation.  Consumers will feel the pinch and might be unhappy. BUT domestic producers will gain as they will have a cost advantage over imported goods.  Output will rise and so will employment.

US Exporters will GAIN...

 UK businesses will prefer to buy from US
in the International market due to cost advantage.  As exports rise, more goods will be produced  Thus more jobs will be created