Econs 6.

1: Globalisation

Globalisation: Increasing social, technological, political and economic interdependence and

interaction between people, firms and entire economies around the world

- Imports, exports
- Moving within countries for work and capitals
- Loans and borrowing
- International trade
- Growth of global financial markets

International specialisation allows an economy to produce a greater volume of their goods

and services more efficiently. (can focus more on producing and research)

Absolute advantage: When the product can be produced at a much lower cost per unit in a
country than in others

Comparative advantage: When the product has a lower opportunity cost of producing in a
country than others
- Eg. Country A: To produce 100 cars, production of 400 televisions has to be given up
Country B: To produce 100 cars, production of 700 televisions has to be given
up
- Country A has higher comparative advantage since lower opportunity cost

Advantages of country specialisation:

1. Higher output -> higher living standards of consumers around the world
2. Specialisation -> Lower costs since government money allocation more focused ->
advantages of economies of scale -> price of goods also decrease
3. Taking part in international trade -> Increase competition, competitive pressure
on firms -> more efficient, give more choice to consumers
4. Increase employment and incomes
5. Opportunities to increase international trade

Disadvantages of country specialisation:

1. An over reliance on other countries to supply goods and services
2. Risk of over specialisation -> If specialised product has prolonged decline in global
demand, structural unemployment ->
3. Consumer choice may be limited
4. Risk of over-exploitation of resources
5. Structural unemployment for workers with other skill sets in a country as country
becomes more specialised

Econs 6.2: Globalisation, free trade and protectionism

Globalisation:
Free trade: Allowing trades of goods and services without any barriers and government
intervention
Protectionism:
Multinational: A firm that operates in more than one country but usually hav headquarters in
its origin country

Benefits for firms to be multinational:

- Larger global customer base and revenue potential
- Minimise travel costs of exports
- Reduce wage costs by producing in low wage countries

Benefits of multinational firms for governments:

- Provide jobs and incomes
- Brings business knowledge, skills and technologies
- Pays taxes, boosting government revenue
- Increase export earnings from trade

Disadvantages of multinational firms for governments:

- The firm could transfer their profits to other countries to avoid tax
- Force local companies out of business
- Exploit workers in low wage economies by paying low wages
- Se its power to secure generous subsidies and tax breaks from a government if
country is still developing and the firm is large enough

International trade involves movement and exchange of physical goods across international
borders

Gains from free trade:

- Allow countries to benefit from specialisation
- Increase consumer choice
- Increase competition and efficiency
- Quality and quality of products has to be improved for firm to compete with
other international firms
- Creates additional business and employment opportunities
- Allows firms to access the best workforces, materials and technologies from
anywhere in the world

Arguments against uncontrolled trade

- Trade with low-cost economies is threatening jobs in many developed economies
and reducing opportunities for less developed economies to grow their industries
- Trade is increasing the rate at which we are depleting natural resources
- Trade may increase exploitation of workers and the environment in many less-
developed economies as multinationals are attracted to them by low wages and
taxes
- Increase gap between rich and poor nations
Trade barriers:
1. Tariffs: Indirect taxes on the prices of imported goods to discourage domestic
demand,
- Expenditure switching method: from imported goods to domestic substitutes
2. Subsidies: Government give subsidies to local firms to reduce
3. Quota: Restrictions on amount of products that could be imported to the country
4. Embargo: 0 Imports/ exports - imports/ exports banned
5. Excessive quality standard and bureaucracy: Being picky on imports: Keep testing on
quality and details, delay, etc
- Makes the import of goods into a country more difficult and costly

These barriers make other countries who want to import angry because they can’t sell
- They will retaliate by also putting on trading barriers on the country
- A lose-lose condition in the long run, only helps in the short run.

Arguments for trade protection

1. Protect infant/new/sunrise industries
a. Give chance for it to develop, grow, and become more globally competitive
2. Protect sunset industries
a. Slow down rate of decline and loss of jobs in these dying industries, give time
for other industries to develop and provide new jobs and incomes
3. To protect strategic industries, such as agriculture, energy and defence equipment
a. Reduce dependency on important supplies from overseas countries
4. Protect domestic firms from dumping
a. Dumping: a form of predatory pricing, involves one country ‘flooding’ another
with a product at a price significantly below market price to force rival
producers out of business.
5. Limit over-specialisation

Arguments against trade protection

1. Trade protection reduce the gains from trade
2. It restricts consumer choice
3. Restricts new business opportunities
4. Inefficient domestic firms protected from overseas competition will continue to be
inefficient: infant industries will always remain infants, no growth