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GLOBALISATION

ever increasing integration of the worlds local, regional and national economies into a
single, international market

CHARACTERISTICS:
- free trade of goods and services
- free movement of capital and labour
- free interchange of technology and intellectual capital
With the spread of globalization:

More trade between nations more countries participate in global trade, such as
China and India
More transfers of capital including FDI (Foreign Direct Investment) higher levels of
investment
Brands developed globally
More migration labour has been divided between several countries
Countries have become more interdependent performance of their own country
depends on the performance of other countries (could be seen in 2008 and
2009, when the effects of the global credit crunch spread across the
globe)

FACTORS CONTRIBUTING TO GLOBALISATION:


1. Trade in goods
Developing countries have acquired the capital and knowledge to
manufacture goods
Efficient form of transports make it easier and cheaper to transfer
goods across international borders
Some developing countries have the cost advantage of cheaper labour,
so MNCs move their production abroad (developed countries trade
with these developing countries, so they can access the same
manufactured goods)

2. Trade in services
For example, trade of tourism, call centre services, and software
production (particularly from India) has increased from developing
countries to developed countries

3. Trade liberalization
Growing strength and influence of organizations such as WTO, which
advocates free trade, has contributed to the decline in trade barriers

4. Multinational Companies (MNC)


Organizations which own or control the production of goods and
services in multiple countries
Used marketing to become global and by growing, they are able to
take advantage of economies of scale, such as risk bearing
economies of scale
Spread of technological knowledge and economies of scale results in
lower costs of production

5. International financial flows


Flow of capital and FDI across international borders has increased
(China and Malaysia have financed their growth with their capital
flows)
Foreign ownership of firms has increased (more investment in factories
abroad)
Removal of capital control has facilitated this increase

6. Communications and IT
Spread of IT makes it easier and cheaper to communicate, so world
becomes more interconnected
Better transport links and easier transfer of information

7. Containerisation (goods are distributed in standard sized containers)


Cheaper to ship goods across the world -> causes prices to fall ->
market more competitive
Cargo can be moved twenty times as fast as before
Economies of scale can be exploited
Less labour is required

POSITIVE IMPACTS OF GLOBALISATION:

1. Free Trade (a way for countries to exchange goods and resources)


- Countries can specialize in producing goods where they have comparative
advantage
- Lower prices for consumers
- Greater choice of goods
- Bigger export markets for domestic manufacturers
- Economies of scale through being able to specialize in certain goods
- Greater competition
2. Free Movement of Labour
- Reduce geographical inequality
-if a country experiences high unemployment, there are increased opportunities to
look for work
elsewhere
- Help countries with labour shortages fill important posts. For example, the UK needed
to recruit nurses from the far-east to fill shortages
- Can cause excess pressure on housing and social services
3. Increased Economies of Scale
- Production is increasingly specialized -> enables goods to be produced in different parts
of the world
- Greater specialization -> lower average costs -> lower prices for consumers
4. Greater Competition
- Domestic monopolies used to be protected by lack of competition
- Globalisation -> firms face greater competition from foreign firms
5. Increased Investment
- Easier for countries to attract short term and long term investment
- Investment by MNC plays a big role in improving the economies of developing countries
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Producers and Consumers
- benefit of specialization and economies of scale
- Firm operate in a more competitive environment -> encourages them to lower their
average costs and become more efficient -> switching production to places with cheaper
labour

- Globalisation leads to increase in world GDP -> increases consumer living standards
and helps lifts people out of absolute poverty. (however, hard to calculate proportion of
growth which was due to globalization)
- Rise in average consumer incomes -> increased demand of commodities -> increase
price of raw materials
- Wider range of goods and services -> increase availability (services might become
homogenized like hotels)

COSTS OF GLOBALISATION:
1. Free Trade can Harm Developing Economies
- developing countries often struggle to compete with developed countries
- free trade benefits developed countries more
- Industries in developing countries need protection from free trade in order to develop
- Developing countries are often harmed by tariff protection Western economies have on
agriculture
2. Environmental Costs
- Increase the use of non-renewable resources
- Increase pollution and global warming
3. Labour Drain
- Globalisation allows workers to move freely
- Higher wages elsewhere attracts workers -> countries cant hold onto their best skilled
workers
4. Tax Competition and Tax Avoidance
- MNC like Amazon and Google can set up offices in countries like Bermuda and
Luxembourg (very low rate of corporation tax) -> then funnel their profits through these
subsidiaries (they pay very little tax in countries where they do most of their business)
- Govt will have to increase taxes on VAT and income tax (unfair for domestic firms who
dont use the same tax avoidance measures)
- Greater mobility of capital -> countries encourages inward investment by offering low
corporation tax -> leads to higher forms of other tax