International Trade and Globalisation
International Trade and Globalisation
International Trade and Globalisation
ADVANTAGES OF SPECIALISATION
● Higher levels of output: max efficiency, economies of scale so avg cost is low, world output
increases
● Increased employment and incomes: increased output, increased business opportunities,
creation of more jobs
● Economic growth and improved living standards: increased output means that revenues will
increase, especially as productivity/quality rises. Creation of jobs, revenue and better
products = higher living standards
● Opportunities for increased international trade: larger market base, can obtain the best and
cheapest products internationally
○ Enjoy economies of scale: expand internationally
○ Wider variety of products
○ Competitiveness increases bc of international firms
DISADVANTAGES OF SPECIALISATION
● Structural unemployment may occur
○ Short run: as a country moves into specialisation and allocates more and more
resources to a smaller number of specific industries, this will cause unemployment in
currently functional industries.
○ Short run: many workers may not have the training/knowledge to focus on the
specialised jobs, causing them to become unemployed in the short run
● Over-specialisation
○ Long run: being too dependent on a single industry could seriously harm the
economy if that industry were to fall out of demand (i.e. oil crisis in the Gulf)
● Limited consumer choice
○ Country specialises in a narrow range of products: not enough variety (esp without
int’l trade)
● Over-exploitation of resources
○ Limited resources: if they are used up the country could face economic collapse
● Over-reliance on international trade
○ Weather or transportation problems could be seriously harmful: no access to
necessary goods/services
○ Forced to uphold relations with countries: i.e. China US trade war
ADVANTAGES
● Large scale operation: economies of scale
○ Large market base: large demand, strong brand loyalty/reputation
○ Usually sell standardised, mass-produced goods and services
○ Can pass on cost savings to customers as lower prices → higher competitiveness
● Creation of jobs
○ Massive scale of production: requires a lot of jobs
○ Stable employment: unlikely to go bankrupt or out of business, constant flow of
income
● High profit: sell to a larger customer base
● Risk aversion
○ Operate in many markets
○ If one country suffers economically, the other countries will still be okay
○ Spread risks
● Avoid trade restrictions/tariffs/taxes
○ Different counties have different tax laws
○ MNCs set up in countries with relaxed trade restrictions
○ MNCs can also set up in countries with low corporate tax rates
● Transport costs saved
○ Can set up factories in many countries
○ Therefore products are created in the country and distributed within the country:
less transport costs
DISADVANTAGES
● Different legal systems, tax regulations, and environmental/quality control guidelines in each
country: lack of local knowledge can make management difficult
● Massive size and geographic spread: harder to control, harder to ensure that all branches
operate to the same standard, language barriers in communication
● Fluctuating exchange rates: difficult to measure/compare the value of an MNC’s sales and
profits in overseas markets
● MNCs often are exploitative, cost-cutting spills over to the workers below → poor working
conditions, low wages
● Influence on gov: often generate a lot of revenue and create a lot of jobs, have powerful
negotiating positions with governments
● Harms domestic economy: highly competitive prices, hard to compete with MNCs especially
for newer, smaller local firms
● Over-reliance on MNCs: can cause structural unemployment if they shut down operations in
countries
● Goods and services do not tailor to local tastes/customs → unsuccessful
ADVANTAGES:
● Access to resources - enables firms and consumers to gain access to goods and services that
they cannot produce themselves
● Lower prices - reduces the costs of trading, whereas protectionism increases the costs of
trading. For example, it is cheaper for Germans to purchase foreign produced smartphones
made in China and Taiwan because of the high labour costs in Germany
○ By contrast, the imposition of trade barriers would mean that both domestic firms
and consumers have to pay more for imported goods and services
● Economies of scale - larger scale operations in global markets → cost savings can be passed
on to consumers in the form of lower prices and/or kept by the firms in the form of higher
profits
● Greater choice - access a larger variety of goods and services from different producers
around the world
● Increased market size - enables firms to earn more revenues and profits by having access to a
larger market
● Efficiency gains - forces domestic firms to focus on improving the quality of their output due
to foreign competition
○ By contrast, protectionist measures give domestic firms a false sense of security,
which can make them inefficient
● Improved international relations - The absence of trade barriers encourages international
trade and cooperation between countries
○ By contrast, if a country uses international trade barriers, other nations are likely to
retaliate by doing the same.
DISADVANTAGES:
● Int’l trade harms domestic economy
○ threatens many established businesses in developed countries as well as new, small
businesses trying to grow in less developed countries
○ Established businesses may lose market share/be forced out of business if they
cannot compete with larger overseas firms, or firms in low cost countries
○ Small businesses in less developed economies may also be unable to grow if
consumers in their countries can buy imported goods at much cheaper prices than
locally made goods
● contributes to rapid resource depletion and climate change
○ international trade has increased access to a greater number and variety of goods
we can consume
○ Higher demand = faster resource depletion
○ Increasing travel and the increased transportation by road, rail, ship or air is
increasing pollution
● may increase exploitation of workers and the environment
○ The free movement of capital has made it easy for MNCs to shift their production to
countries where wages, land prices and taxes on profits are lower
○ This increases structural unemployment in many developed countries
○ It also leads to exploitation of workers in less developed countries where health and
safety laws may be more relaxed or easy to ignore
○ it has also led to environmental damage in less developed countries where
environmental laws may be weak or their governments choose not to enforce them
● Increases international wealth gap
○ MNC’s and consumers from developed and rapidly developing countries dominate
the global demand for many natural resources, including foodstuffs, timber, zinc,
copper and other ores
○ MNCs use their purchasing power to force down prices
○ This has reduced revenues for producers of natural resources in less-developed
countries
○ Less developed countries tend to specialise in the extraction of minerals and the
production of foodstuffs
○ Cost-cutting means less wages for the FoPs
● Quotas: a legal limit to the quantity of a good that can be imported over a particular time
period (typically a year)
○ limits the quantity imported and thus raises the market price of foreign goods
○ Does not create revenue for gov, unlike tariffs
● Subsidies: provide subsidies (lump-sum payments or per unit payments to domestic
producers) to help local firms compete with foreign imports
○ ower the costs of production for home firms, thereby helping to protect local jobs
○ Producers’ revenues rise → increased profit
○ Possible increase in exports
○ Lower prices for consumers
○ Gov has to spend on subsidies → less for other welfare
● Embargo: a ban on trade with a certain country, often due to a trade dispute or military
conflict
○ rarely benefits local consumers, who suffer from a lack of choice and higher prices
(due to the lack of supply)
○ More about the moral implications of it, as well as not wanting to enable or
encourage the country’s practices
● Administrative barriers: use bureaucratic rules and regulations as a form of protection
○ i.e. strict rules regarding food safety, environmental standards and product quality
○ Complying with these rules and regulations consumes a lot of time, and increases
the costs of production for overseas firms
STRATEGIC INDUSTRY
● Many governments want to protect their agricultural, energy and defense industries so they
are not entirely dependent on overseas supplies
● if a war were to break out then protectionist measures give the country the ability and
capacity to produce all the goods and services that it needs, rather than having to rely on
foreign countries
● Protect country from food shortages
DUMPING
● Dumping is a type of predatory pricing and unfair competition
○ Involves one country ‘flooding’ another with a product at a price significantly below
its global market price to increase sales and force domestic producers out of
business
○ After this happens, overseas firms can ‘capture’ the market and raise prices
○ This is usually only possible if exporting firms receive generous subsidies from their
own government
● International markets would raise tariffs so that these firms cannot afford to dump products
LIMIT OVER-SPECIALISATION
● Free trade encourages countries to specialise in the goods in which they have a comparative
advantage
● However, narrow range of products puts a country at high economic risk if demand for those
products fall
● Trade barriers allow a country to maintain a wider range of industries that would have
otherwise been threatened by overseas competition
● This prevents over-specialisation
● If demand shifts outwards, the value of the pound to the dollar increases
● If supply shifts inwards, the value of the pound to the dollar increases
DEPRECIATION OF CURRENCY
● Price of exports goes down, price of imports goes up
● Less imports will be purchased: expensive
● If PED<1 for exports, an exchange rate depreciation will worsen a current account deficit
○ As long as PED is inelastic, the same number of exports will be purchased at lower
price, so exports < imports (in terms of value)
● If PED>1 for exports, an exchange rate depreciation will improve a current account deficit
○ PED is elastic, so more exports will be purchased. Exports > imports
PROS CONS
PROS CONS
6.4.1 Structure
DEFINITIONS
Balance of Payments is a record of all economic transactions between residents of a country and the
rest of the world in a particular time period (usually ¼ of a year).
Credits: money flowing into the country
Debits: money flowing out of the country
Trade deficit: deficit in the current account. More imports than exports