Week 11 Globalization

Q1: What are the economic, political and cultural drivers of globalization?
Answer 
The economic driver of globalization is the comparative advantage that economies have over
others in the production of goods and services. Economies will specialize in the good that they
are comparatively better at making and trade with the economies that specialize in other goods.
Non-economic drivers are technology, film and media, travel and culture. The ability to
communicate with anyone, at any time, anywhere in the world increases the perception of a
global village, as opposed to a large fragmented global system. Media are an important facilitator
for companies selling their brands around the globe.

Q2: What does the law of comparative advantage state?

 Answer 
The law of comparative advantage states that economies should specialize in the good that they
are comparatively better at making.

Q3: What are tariffs and non-tariff barriers?

Answer  
A tariff is a tax on imports and raises the price of imports.
Governments can restrict trade in other ways. A quota, for example, restricts trade by limiting the
amount of a product that can be imported into a country. Other methods include the application
of standards.

Q4: What is trade diversion and trade creation?

 Answer 
Trade creation occurs when trade flows are created after the formation of free trade areas. Trade
diversion occurs when the establishment of a trade bloc diverts trade from low-cost global
suppliers to higher-cost member nations.

Q5: How does the Common Agricultural Policy (CAP) affect trade in the European Union?
Answer  
The CAP is a system of direct income payments to farmers and reduces the price of agricultural
products in the EU and beyond. The Common Agricultural Policy (CAP) was until 2003 a system
of subsidies which provided price support for agricultural produce. It has now been modified to
become a system of direct income payments to farmers.

Q6: What is the economic rationale behind trade? Explain with an example.
Answer  
A rationale of globalization is the comparative advantage that economies have over others in the
production of goods and services. Economies will specialize in the good that they are
comparatively better at making and trade with the economies that specialize in other goods. For
example, suppose that the opportunity cost of producing one car is lower for the USA than for
Japan. Hence, the USA has a comparative advantage in the production of cars over Japan.

Q7: Why do countries adopt policies that restrict international trade?

Answer  
If an inefficient industry has political influence, perhaps stemming from the number of voters that
they potentially employ, then the government may be asked to provide so-called protectionist
measures to restrict international trade.

Q8: How do countries benefit from being a part of the European Union?
 Answer 
The European Union is an area of free trade between member nations and it can be described
as a trade bloc. Belonging to a trade bloc brings international competition and innovation.

Q9: Explain why a firm might expand into the international market.
 Answer 
Firms can expand to new markets and export overseas. 
In addition firms can even operate overseas. They can exploit cheaper labour, capital or finance
overseas.

Q10: What are the factors that limit the success of globalization?
Answer  
International operations of multinational firms incur specific problems, such as language, legal
issues, co-ordination problems and possible damage to the global brand. As a consequence,
some multinational enterprises are beginning to reappraise their global activities, as evidenced
by the falling levels of FDI.