What is meant by globalisation?

1. Globalisation is generally defined as the opening up of the global

market to international trade, where goods and services, financial
capital, labour and technology are free to move about. (increased
economic integration between countries.)

2. The world that we live in now seems to be much smaller because of
the mobility of factor.

3. Globalisation did not start in recent decades. In fact it started very long
time ago when small traders e.g. people like Marco Polo travelled from
one continent to others to engage in trade. It is just that globalisation
expedites in the recent 20 years.

4.

What are the causes of globalisation:
1. Better transports:
Better technology allows for the development of more modern
carriers such as airplanes and ships. They are faster and more
reliable allowing the shipment of goods to be done more rapidly
and hence spread across the globe.
Modern transports allow for greater geographical reach
Fall in transport costs is because of more freight firms being set
up, resulting in greater price competition to fight for clients
Secondly, fall in costs is due to containerisation. From
1970,there was a rapid adoption of steel transport containers.
Large cargo ships can carry up to 6000 containers and this
effectively helps to reduce the costs of carrying/ transporting one
unit of container which will affect goods carried within. This is
related to technical EOS or principles of dimension. The ultimate
effect is fall in the price of goods traded.


2. Better communication
Modern communication such as phones, email, video conferencing
and others have assisted many businesses
Easier and faster to communicate and less travelling is required
Also, the cost of using the Internet has fallen greatly over the last 20
years and its availability has increased. Hence, online transactions
can be easily done by the click of a button and the goods will be
sent from one country to another in few weeks time.

3. Role of WTO
WTO refers to World Trade Organisation formerly known as the
General Agreement on Tariffs and Trade(GATT)
It is set up primarily to reduce trade barriers among all countries. Trade
barriers here refer to issues like tariffs, quotas and other
restrictions/protectionist measures which hinder the free movement of
goods. It also settles trade disputes between member countries

After its establishments, average tariffs around the world fell to a
historical low level and more trade activities are encouraged. This has
led to rise in global income particularly developing countries.
A recent addition to the WTO is Russia who became a member in 2012


4. Collapse of Communism in Eastern Europe and Opening up of
China
Before the demise of communism, many countries such as China,
Latvia, Lithuania and Hungary practiced a closed economy. This
means they try to become self-sufficient and not relying on any other
countries
Once the concept of socialism diminishes, more and more of these
countries gradually open up their doors for international trade. This
means a new market for existing industrialised nations like the UK and
USA. More goods are shipped out to these economies that are in
transitions
Another significant issue here is that labour costs as well as overall
costs of production are very low in the former communist countries.
Rich nations took advantage by setting up production facilities there
allowing more goods to be produced at lower price. This has further
boost international trade

5. Role of multinational companies
These are firms that have operations in more than one country
Many of them set up and move their production facilities to many parts
of the world, particularly in emerging economies and this is known as
offshoring. The reason is cheap labour, near to source of raw materials
and also weak environmental and labour regulations which can be
exploited. As a result, number of goods increased tremendously
allowing more to be exported to every part of the world

6. Creation of trading blocs
Trading bloc is where a group of countries usually located close to one
another, get together and agree to increase trade among themselves
by reducing trade barriers. Some popular examples are like EU,
NAFTA (USA, Canada and Mexico), ASEAN, MERCOSUR(South
America),SADC(Southern Africa) and ECOWAS(West African).
By agreeing to reduce trade barriers among themselves, goods will
become much cheaper and hence more transactions are possible

7. The reduction and removal of controls on the flow of capital
It is very easy for large firms to transfer a large sum of money from
their country to another
Unlike in the past, there were many regulations that governed the
movement of capital. One of the most common methods being used is
tax on capital flight. Such regulation makes it inflexible for the money to
be transferred from one place to another and so multinational
companies/ foreign investors usually avoid transferring money to these
countries knowing that it will be problematic later especially when there
is an economic crisis but their money is stuck there.

Benefits of globalisation:
a. Higher living standards as people get to consume goods of better
quality and more choice is available.With lower trade barriers and
increased trade,countries can specialise in producing goods in which
they have a comparative advantage.This results in higher world output
and a wider variety of goods being available in countries thus enabling
an increase in living standards.
b. Lower prices.Globalisation has meant that manufacturing has moved
to countries where the costs of production(especially labour) are
lowest.This has resulted in lower real prices for many goods,especially
clothes and electronic equipment.Also,firms will be producing on a
larger scale and so will benefit from falling long run average costs as a
result of economies of scale.Lower prices will result in an increase in
consumer surplus.
c. More jobs created especially is countries that specialise in
manufacturing sector
d. Narrowing the income inequality/ gap between developed and
developing countries
e. Reduction in absolute poverty in developing countries.As
developing countries have become more closely integrated into the
world economy, they have experienced an increase in their real GDPs
which have helped to reduce the number of people in absolute poverty
f. Reduce the balance of payments deficit for countries that are
export-led
g. Economic growth because of more international trade and job
creations
h. Higher profits for firms because more could be sold at a lower price
and also fall in production costs associated with economies of scale
and offshoring to take advantage of lower costs abroad.
i. Better diplomatic relations between countries that come together
as a trading bloc or those that trade more frequently
j. Higher tax revenue for governments because firms would be more
profitable resulting in higher corporate tax revenue and will also hire
more working people leading to higher income tax revenue
k. Technology Transfer. When TNCs invest in other countries they are
likely to bring modern technology with them. Domestic firms might
benefit from adopting this technology, which should result in increased
productivity.
l. New managerial techniques.Similarly,TNCs are likely to introduce
modern managerial techniques designed to increase productivity.

Costs of globalisation:
Job losses in First World because all the jobs go to emerging
economies. Inevitably some jobs are lost as firms switch their
production to countries with lower unit labour costs. This can lead to
higher levels of structural unemployment and put huge pressure on
government budgets causing rising fiscal deficits.
Some countries like the UK have to face a structural shift in the
economy e.g. shrinking manufacturing sector. Deindustrialisation
Faster depletion of natural resources as well as negative
externalities.For example,with increased trade there will be increased
road and air transport which involves carbon dioxide emissions,so
causing pollution.
Risk of contagion is increased. Increased integration of countries
into the world economy makes them more susceptible to global
economic crises.For example,those countries heavily dependent on
exports were particularly affected by the global financial crisis in 2008.
Increased inequality.Within the developing economies, there will a
widening of income gap. Owners of resources will become richer while
working class people poorer. Within developed economies,there will
also be increased income inequality as demand for unskilled labour
has decreased in developed countries, so increasing the earnings gap
between the highest-paid and lowest paid workers.
Exploitation of workers in poor countries. They are told to work long
hours and yet not paid accordingly e.g. in China
While those countries within the trading bloc get together it
comes at a price where they are increasingly disassociating
themselves from others. For an instance, UK used to import dairy
products from New Zealand and Australia. But, upon joining the EU,
trade is created between the UK and France diverted away from New
Zealand and Australia. Reason is, to encourage trade between
members, common external tariffs will be imposed making foreign
imported dairy products to be artificially more expensive. It is arguable
that level of international trade will actually increase with the
establishments of trading blocs.

Some firms cleverly exploit the system through transfer pricing. The
main aim is to reduce the tax paid.Transfer pricing refers to the price
that has been charged by one part of a company for products and
services it provides to another part of the same company.This system
enables TNCs to declare profits in the country in which corporate tax is
lowest.
Cultural Homogeneity. It means, more and more countries are
practicing single culture e.g. the lifestyle of rich countries. Many
traditional values are no longer followed
Brain Drain. This is very common when skilled workers from poor
countries migrate to rich countries. This has the effect of reducing the
productive potential of the poor country itself. The effects are not felt
immediately but in the long run, it is very difficult for the poor countries
to exit the poverty cycle.








Examine the significance of the factors which have contributed to globalisation
in recent years (20m) (2005)

Factors include:
Reduction/removal of trade barriers; reference to WTO
Growth in trading blocs, especially economic unions adopting a single
currency
Improvements in communications
Growth in use of internet
Increased significance of multinational companies
Increased capital mobility
Collapse of Soviet Union
Evaluation might take the following form:
Discussion of relative significance of points made
View that globalisation is not a recent phenomenon
The value of world trade has been growing at a faster rate than world GDP. Explain
factors which might explain this trend (20m) (2008)
Growth of trade associated with increased globalisation. Factors include:
Reduction in trade barriers linked to the work of the WTO; application of
law of comparative advantage
Opening up of economies to world market e.g. China; former Communist
countries
Economic development in LDCs leading to more demand for foreign goods
Growth of offshoring and outsourcing by multinationals
Higher real incomes create increased demand for imported goods
(depending on value of the marginal propensity to import)
Expansion of trade blocs
Evaluation comments could include:
Prioritisation of factors
Critical view of accuracy of measures of trade and world GDP
Application of concepts such as income elasticity of demand and marginal
propensity to import

Articles for reference:
http://www.tutor2u.net/economics/revision-notes/a2-macro-globalisation-effects.html
http://www.tutor2u.net/business/strategy/global-business-introduction.html
http://www.tutor2u.net/economics/content/topics/trade/globalisation_ukeconomy.htm