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Globalisation Stimulus Material
Terms in this set (57)
- an expansion in the world trade in goods and services
- and flows of factors of production
- leading to greater international interdependence
Define a recession
2 or more consecutive quarters of negative economic growth
Why is it important that the students' results are in PPP at constant prices?
- PPP = Purchasing Power Parity
- helps us see what the purchasing power of a currency actually is
- constant prices means that any growth is due to economic growth not inflation
How has the global economy changed in terms of size and position?
What is meant by specialisation?
- Where a worker/firm/region/country concentrates on producing a narrow range of goods and services
- OR on one stage in the production process
- because they are better than other countries at producing it in terms of quantity of output and lower costs
goods and services which are provided by firms based overseas to residents of the UK
goods and services which UK firms provide and sell to people and firms not resident here (money flows into UK)
Define international trade
the exchange of goods and services across INTERnational boundaries
Why do countries trade?
- Countries trade with each other when, on their own, they do not have the resources, or capacity to satisfy their own needs and wants. By developing and exploiting their domestic scarce resources, countries can produce a surplus, and trade this for the resources they need.
- greater choice for consumers
- wider variety of specific goods and services available to consumers (individuals and firms can obtain goods not available in their country) e.g. foreign brands
- lower prices for consumers
- increased competition for firms means fewer monopolies and so better prices & quality of goods and services for consumers
- economies of scale as firms increase output to sell to international markets, increase sales, reduce average costs and increase profits
More advantages of trade
- The exploitation of a country's comparative advantage, which means that trade encourages a country to specialise in producing only those goods and services which it can produce more effectively and efficiently, and at the lowest opportunity cost.
- Producing a narrow range of goods and services for the domestic and export market means that a country can produce in at higher volumes, which provides further cost benefits in terms of economies of scale.
- Trade increases competition and lowers world prices, which provides benefits to consumers by raising the purchasing power of their own income, and leads a rise in consumer surplus.
- Trade also breaks down domestic monopolies, which face competition from more efficient foreign firms.
- The quality of goods and services is likely to increases as competition encourages innovation, design and the application of new technologies. Trade will also encourage the transfer of technology between countries.
- Trade is also likely to increase employment, given that employment is closely related to production. Trade means that more will be employed in the export sector and, through the multiplier process, more jobs will be created across the whole economy.
Disadvantages of trade
- Trade can lead to over-specialisation, with workers at risk of losing their jobs should world demand fall or when goods for domestic consumption can be produced more cheaply abroad. Jobs lost through such changes cause severe structural unemployment. The recent credit crunch has exposed the inherent dangers in over-specialisation for the UK, with its reliance on its financial services sector.
- Certain industries do not get a chance to grow because they face competition from more established foreign firms, such as new infant industries which may find it difficult to establish themselves.
- Local producers, who may supply a unique product tailored to meet the needs of the domestic market, may suffer because cheaper imports may destroy their market. Over time, the diversity of output in an economy may diminish as local producers leave the market.
- negative externalities include air, water and noise pollution as goods are transported
Explain what is meant by global interdependence
Where one country depends on (or is reliant on)
.Explain how the problems of the world's biggest economies affect other countries they trade with
- A slowdown in a large world economy (caused by perhaps less education and training, a lower working population or fewer natural resources, leading to lower productivity, lower output and lower GDP), would result in lower incomes in that economy so lower aggregate demand, less revenue and profit for domestic firms so demand for raw materials and other imports would decrease.
- Less demand for its main export from a large consumer would cause the total value of a smaller economy's exports to greatly decrease, maybe even causing a current account deficit
- increased unemployment, decreased disposable incomes and tax revenues, decreased aggregate demand, cyclical unemployment, negative multiplier effect, recession
"When the US sneezes, the world catches a cold" - what does this mean?
- Many (if not most) countries in the world are reliant on demand for their exports or supply of raw materials, capital and imports from the US.
- If there was a slowdown in the economic growth of the US, there would be lower supply and demand which these countries are reliant on, causing a slowdown in their economies too.
Explain how countries such as Zambia may be affected by a slowdown in the Chinese economy
- A slowdown in the Chinese economy (caused by perhaps less education and training, a lower working population or fewer natural resources, leading to lower productivity, lower output and lower GDP), would result in lower incomes in Chinese economy so lower aggregate demand, less revenue and profit for Chinese firms so demand for copper from Zambia would decrease.
- Less demand for its main export from a large consumer would cause the total value of Zambia's exports to greatly decrease, maybe even causing a current account deficit
- increased unemployment, decreased disposable incomes and tax revenues, decreased aggregate demand, cyclical unemployment, negative multiplier effect, recession
When a country is competitive, what does this mean?
This means that companies in one country are able to compete successfully internationally and maintain improvements in real output and wealth
Define international competitiveness
the ability of companies to compete with companies from other countries
Explain how a country can become more internationally competitive
- lower unit labour costs
- fall in exchange rate
- higher productivity
- lower costs of raw materials
- less government regulations
- making sure qualifications and equipment are up to date
- lower inflation
lower unit labour costs
- a fall in unit labour costs makes a firm/country more competitive
- unit labour costs = cost of labour per unit of output
- As unit labour costs decrease (due to the cost of labour decreasing or productivity increasing), average costs fall
- means that more can be invested in capital or education and training to increase productivity further, allowing prices to be lower and more competitive abroad
- as productivity increases, competitiveness increases
- because increasing productivity lowers the unit labour costs and average costs
- allows countries to remain competitive even if they pay higher wages than their rivals, keeping their prices low and so increasing demand for them abroad
lower exchange rate
- a fall in exchange rate (lower value of a currency) means that exports are cheaper abroad, causing an extension in demand
- at the same time, the purchasing power of the currency is decreased, making imports more expensive in comparison to UK products, causing a contraction in demand
UK firms have more demand for their goods overall so GDP increases and they employ more workers (unemployment falls)
- current account balance improves
imports of raw materials become more expensive, raising the cost of production for UK firms and their imports
lower cost of raw materials
- if the cost of importing raw materials falls, the cost of production and average costs also falls
- increases competitiveness
- has less of an impact of firms that provide services because they don't depend on raw materials as much
less government regulations
- government regulations generate costs for firms (filling in forms, meeting environmental standards etc.)
- less regulations mean average costs fall, increasing competitiveness
- regulations are important to maintain quality of goods and prevent exploitation of workers
How has international competitiveness changed for different countries globally?
- Looking at figure 1, there have been major changes in the position of countries within the global economy.
- BRIC countries like India and China have gone up the international economic league table from 9th in 1990 to 3rd in 2014 and 7th in 1990 to 1st in 2014 respectively. The emerging economies have been able to compete internationally due to their cheap prices.
- Ever since the Chinese economy changed from a planned economy to a mixed economy, they have had a very high rate of economic growth and they have also had a lot of trade going on recently.
- Although Russia, being a BRIC country, has gone down the table from 3rd in 1990 to 6th in 2014, its percentage increase in GDP is still huge compared to other countries. The rankings of economies like Italy and France have gone down the table from 5th in 1990 to no longer in the top 10 ranking in 2014 and 6th in 1990 to 9th in 2014 respectively.
- Countries with higher GDP are more likely to be internationally competitive as they are more likely to be selling to more countries and have more trade.
What is an MNC?
- multinational company
- a company that has operations all over the world
output per worker per period of time
Explain the figures in fig.1
Despite an overall growth in the size of the global economy, some economies grew faster than others e.g. China grew faster than the United States, resulting in China's ascent from 7th to 1st place whilst the United States fell from 1st to 2nd place. China and India's rapid growth may have been caused by higher levels of productivity of their workers and better quality capital which they would have invested in. These two countries are also known to have the largest populations in the world and so the size of the working population would have greatly contributed to economic growth. Both China and India may have decreased taxation and increased government spending to increase aggregate demand and so economic growth using a fiscal policy, the effectiveness of this policy being greater than the USA's or Russia for example.
+ QUOTE MORE DATA AND MENTION SUCCESS OF BRIC COUNTRIES
What does fig.1 mean for the UK?
- Despite the overall size of the global economy increasing, the UK maintained its position as the 10th largest economy in the world from 1990 to 2014.
- This means that the UK had the 10th highest GDP (the total value of the goods and services produced in a year by the UK was 10th highest in the world).
- The fact that the UK's position was not different in the years 1990 and 2014 indicates that, despite the probable growth of the UK economy in this time, the rate of growth was not as fast as China, the US, India, Japan, Germany, Russia, Brazil, Indonesia and France - perhaps the rate at which productivity in these countries increased was higher or they all have faster growing working populations.
- As China and India develop and grow stronger, the UK will trade with them more and they will become more interdependent. China will become more significant to the UK and its economy and we will be affected by any changes in the Chinese economy
Analyse changes in the composition of trade for the UK between 2000 and 2014
In 2000, the United States was the largest consumer of UK exports of goods, consuming $44,751 million, rising to $52,757 million in 2005 and dropping to $42,549 million in 2010, however despite increasing to a value of $47,330 million in 2014, Germany was the largest consumer of UK goods, consuming $49,693 million worth of goods. During this time, Germany rose from being the second largest consumer of UK goods in 2000, 2005 and 2010 to the largest in 2014, France fell from 3rd to 4th place in 2010 and then to 5th in 2014, consuming $30,142 million worth of UK goods, $2596 million less than in 2000 but $4486 million less than the highest amount of $34628 million in 2005.
In 2000, the UK exported $16302 million worth of goods more than it imported from its top 5 export markets and sources of imports, making for a balance of trade surplus. However, it imported $245 million worth of goods more from the US than it exported to them in 2000.
What are the factors that have led to growth in India and China?
- China's growth has come from its huge exports to the rest of the world.
- Both countries have an absolute advantage based on low labour costs.
- Globalisation and trade have worked for both these countries as exports are an injection into the circular flow, creating increased AD, jobs and economic growth.
- The supply side policies of education etc. have helped increase the potential size of their economy and YES continued the growth.
- Raw materials - China has a great wealth of natural resources, having vast reserves of coal, oil and natural gas. These are being used to fuel the industrial development of the country. However, so large is the country's requirement for raw materials to feed its manufacturing industries, that it is a major importer of oil, gas, coal, iron-ore, copper and other key commodities in world trade.
- Education - Literacy levels of China have risen dramatically over the past 20 years. More human capital and more skilled workers means increased productivity, lower average costs, increased output and increased GDP.
- investing labour and capital in innovation so that it can sustain its economic growth and reduce the risk involved in having a narrow economic base (improve the efficiency of the goods and services produced).
- If workers demand higher wages, there are many more who will take the jobs available. Wages in other East Asian countries earn up to 10 times more than Chinese workers. This has increased profit margins and attracted inward FDI (Foreign Direct Investment) as American, European and Japanese companies open factories under licence in China.
- increasingly intricate and higher quality technology are more labour intensive to contsruct so manufacturers relocate to countries with lower labour costs
Define a current account deficit
- When the total value of imports exceeds the total value of exports
- expenditure exceeds revenue
- (results in an overall outflow of money from the economy)
Define a current account surplus
- When the total value of exports exceeds the total value of imports
- revenue exceeds expenditure
- (results in an overall inflow of money into the economy)
Has China's current account worsened or improved?
China's current account improved from a surplus of $32,657 million in 2000 to a surplus of $326,983 million in 2014
How have the changes in China's trade affected the UK?
- The UK imported $52681 million worth of goods more in 2014 than 2000 from China
- China has become a larger market for UK goods (increased economic growth, GDP per capita and material living standards in China mean that there will probably be more demand for UK goods and especially services which the population is now better able to afford)
- cheap imports from China has helped keep the prices of clothes and other products low, helping to control inflation and increase real incomes
- loss of jobs (mainly manufacture) as companies move to China to take advantage of lower labour costs
- increased global warming due to China's use of cheap coal to make electricity
- increased cost of raw materials as increased demand cannot be matched by supply
Has India's current account worsened or improved?
India's current account worsened from a surplus of $8951 million in 2000 to a deficit of $79042 million in 2014
How have the changes in India's trade affected the UK?
- India has become a larger market for UK goods (increased economic growth, GDP per capita and material living standards in India mean that there will probably be more demand for UK goods and especially services which the population is now better able to afford)
- cheap imports from India has helped keep the prices of clothes and other products low, helping to control inflation and increase real incomes
- loss of jobs (mainly manufacture) as companies move to India to take advantage of lower labour costs
- increased global warming
- increased cost of raw materials as increased demand cannot be matched by supply
What does fig.5 explain about the changes in patterns of trade between Zambia and the UK and Zambia and China?
- The value of Zambia's exports to the UK decreased overall, peaking at $500 million in 2001 and gradually decreasing to around $100 million in 2014.
- Contrastingly, the value of Zambia's exports to China at first stayed constant at barely $1 million before sharply increasing from the year 2005 to 2006 (increase of nearly $500 million), dropping to around $250 million in 2007 and then gradually increasing to around $ 2,400 million in 2013.
- From this, we can see that China's increased consumption may be caused by needing more raw materials, e.g. copper, to sustain their increased production and output as their economy grows
- The overall decrease in Zambia exports to the UK may be because the UK specialises mainly in producing services which do not require as many raw materials
Define patterns of trade
changes in what a country imports and exports, the countries it trades with and the goods it trades
the quantity firm are willing and able to produce at a given price in a given time period
the quantity of a good that consumers are willing and able to buy at a given price and in a given time period
Use a market equilibrium diagram to show a surplus in copper
Use a market equilibrium diagram to show a shortage in copper
Using fig.7, explain the changes in supply and demand of copper
- from the beginning of 2009 to the 3rd quarter of the same year, there was a market surplus in the global demand of copper (supply exceeded demand)
- in the third quarter of 2009, the supply of and demand for copper intersected (supply matched demand exactly)
- then, until the middle of 2011, there was surplus demand for copper (the quantity of copper supplied could not match the global demand for copper)
- after this period, however, the supply of copper exceeded the demand for it (a market surplus)
Using fig.6, explain why exports of copper to China has increased
- fig.6 shows that China ascended from 50th to 2nd place in the rankings of importance to Zambia's exports, the main export being copper
- this raw material would have been increasingly demanded by China as their export trade increased dramatically in the last couple of decades, to sustain their increasing production and so ability to meet the demand from other countries of products that contain copper parts
Using a diagram, explain how the price of copper fell between 2011 and 2015 as per line 4 of fig.8
- Due to China's economic slowdown, reducing their demand for copper (a metal essential for making components of electronic products) there was an excess supply of copper.
- decreased demand for copper (a leftward shift in the demand curve) means that the equilibrium price decreases
Define derived demand
- Derived demand occurs when there is a demand for a good or factor of production e.g. labour resulting from demand for an intermediate good or service
Using a diagram, explain how the demand for copper is impacted by the decline in other industries such as manufacturing
- decline in industries that use copper
- decreased derived demand for copper (a leftward shift in the demand curve) means that the equilibrium price decreases
Define currency depreciation
- A depreciation is a fall in the external value of one currency against another
- When there is a fall in the value of a currency in a floating exchange rate. This is not due to a government's decision, but due to supply and demand side factors
Explain, using a diagram, how a fall in commodity exports for a country such as Australia impacts upon its currency
- In order to buy Australian exports, the international holder of money would need to convert their currency to Australian dollars by selling their currency in exchange for Australian dollars, increasing the demand for Australian dollars in the foreign exchange market
- this increase in demand will increase the price of the Australian dollar
- oppositely, if the demand for Australian exports decreases, international holders of money will sell their Australian dollars in exchange for another currency, shifting the demand curve to the left and reducing the value of the Australian dollar
Define structural unemployment
- caused by long-term changes in the structure of industry when some industries decline
- the workers are often occupationally immobile (have the wrong skills and qualifications for other jobs)
- also geographically immobile (find it hard to move to where new jobs are located)
Discuss the extent to which unemployment was generated by Zambia's largest mining company announcing that it was going to lay off more than 9300 workers
- structural unemployment is long-term and may have left many occupationally and geographically immobile workers unemployed and unable to find work elsewhere
- these newly unemployed people would have less disposable income and therefore spend less, reducing demand for other products and therefore reducing the derived demand for labour to produce those products
- this could lead to cyclical unemployment where workers are laid off because fewer of them are needed to produce output
- this could lead to a vicious cycle and cause mass unemployment
- however, only one company laid off their workers so these newly unemployed may be able to relocate to other mining companies where their skills and qualifications are transferrable
What is absolute advantage?
- Absolute advantage means that an economy can
produce a good for lower costs
- It means that
are needed to produce the same amount of goods
How would the announcement about job losses impact the currency and why?
- the central bank of the country will decrease interest rates to make saving less rewarding, spending more encouraging, increasing aggregate demand to increase derived demand for labour and so employment
- decreasing interest rates will make saving in the banks of the country less attractive to foreign holders of money, reducing demand for and therefore the value of the currency (depreciation)
- unemployment also decreases confidence in the health of the economy, reducing the demand for the currency from international holders of money
What is comparative advantage?
- A country has a comparative advantage if it can produce a good at a
lower opportunity cost than another country
- A lower opportunity cost means it has to forego less of other goods in order to produce it.
Calculate unemployment rate
unemployment rate = number unemployed / total workforce * 100
What are the 4 components of the current account
1. Trade in goods (visible balance)
2. Trade in services (invisible balance) e.g. insurance and services
3. Investment incomes e.g. dividends, interest and migrants remittances from abroad
4. Net transfers - e.g. International aid
Discuss the extent to which access to education, productivity levels and the role of MNCs affects the competitiveness of a given economy. (8/12 marks)
- Competitiveness is the ability of a country to compete successfully internationally and maintain improvements in real output and wealth.
- Improving education is a large part of increasing competitiveness.
- This is because education gives people a wider range of developed transferable skills. The workforce will become more efficient and will be able to produce more.
- When the productive capacity of a firm is increased, the output increases, and average costs fall. By achieving economies of scale, firms are able to lower prices, which makes them more internationally competitive.
- However, this is not guaranteed, as some people can be trained in the wrong thing. This results in them becoming unemployed as they are not able to use their skills. If an entire industry declines, all the people who have higher education in that field, this will cause structural unemployment.
- This limits economic growth and reduces the productive capacity of the economy, which reduces competitiveness. In order to prevent this, the government could introduce training schemes that give all workers a wider range of transferable skills which will enable them to work in several industries, and would improve their skill set, making them more productive.
- Productivity levels are another key part of increasing competitiveness. A more productive workforce would produce more output for the same costs, which would cause lower average costs, and so this results in economies of scale. When a firm achieves economies of scale, they have the ability to lower prices, and this enables the economy to become more competitive. Cheaper goods will be more competitive against foreign goods
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