Globalization is a process of increasing economic integration between countries through trade and financial flows. It has led to rising trade as a percentage of GDP for most countries as global supply chains have developed. Smaller and poorer countries like Malawi have seen particularly large increases in trade as a share of their economy, reflecting their specialization in just a few primary exports and dependence on imports. While globalization can boost growth, it also exposes smaller economies to volatility from global markets.
2. OCR F585 Economics â For June 2016
Pre-Release A2 Economics Case Study Toolkit from Tutor2u
3. Extract 1: Key Term Glossary
Key term Brief definition
Globalisation
A process of deeper economic integration and
interdependence between countries
Capital markets Markets for bonds (debt) and equities (shares)
Foreign direct investment (FDI) Inflows of capital from overseas including takeovers
Specialisation Specializing factor inputs in a certain task
Division of labour Breaking down production into smaller individual tasks
Comparative advantage
Comparative advantage refers to the relative cost
advantage that one country has over another
Economic efficiency Making optimum use of scarce factor inputs
Import tariffs Ad valorem taxes on the value of imported products
Absolute advantage
The ability to produce a product (good or service) at a
lower absolute unit cost
4. Globalisation is a process in which national economies have
become increasingly integrated and inter-dependent
5. The OECD defines globalization as
âThe geographic dispersion of industrial and service
activities, for example research and development, sourcing
of inputs, production and distribution, and the cross-border
networking of companies, for example through joint
ventures and the sharing of assets.â
6. Trade to GDP ratios are
rising for most countries
Expansion of Financial
Capital Flows between
countries
Rising Foreign Direct
Investment and Cross
Border M&A
Rise of global brands â
including many from
emerging countries
Deeper specialization of
labour â i.e. components
from many nations
Global supply chains & new
trade and investment
routes
Selection of Important Aspects of Globalisation
7. Extract 1: Text and Commentary
⢠The closer links between the
worldâs economies are seen in a
number of indicators.
⢠These include:
1. The value of trade in goods
and services as a percentage
of world GDP is increasing
2. Foreign Direct Investment
(FDI) as a percentage of world
GDP has increased six-fold
since 1980
3. The number of migrant
workers has trebled since the
1960s.
⢠Merchandise trade as a share of GDP
is the sum of exports and imports
divided by the value of GDP, all
expressed in current US$.
⢠This trade-to-global GDP ratio has
risen in the long term but has actually
been stable or declining gently in
recent years. (Source IMF)
⢠World trade-to-GDP ratio since 2006
⢠2006: 47%
⢠2008: 53%
⢠2009: 43%
⢠2011: 51%
⢠2014: 48%
⢠The growth of world trade is currently
slowing down casting doubt on the
points made in this extract â has the
current phase of Globalisation stalled?
Sharp drop in world
trade in recession year
8. Extract 1: Text and Commentary
⢠It is argued that
globalisation brings
significant benefits both to
individual economies and
to the global economy as a
whole.
⢠It opens up markets
throughout the world,
promoting specialisation
and division of labour as
economies focus
production according to
their comparative
advantage.
Comparative advantage
⢠First introduced by David
Ricardo in 1817,
comparative advantage
exists when a country has a
âmargin of superiorityâ in
the supply of a good or
service i.e. where the
marginal cost of production
is lower
⢠Countries will generally
specialise in and export
products which use
intensively the factor inputs
which they are most
abundantly endowed
9. Comparative Advantage and Economic Welfare
⢠If each country specializes, total output increases leading
to better allocative efficiency and economic welfare
⢠As a country develops more capabilities it can produce a
wider range of closely-linked goods and services â it can
diversify
⢠Countries such as South Korea, Japan, Germany, the USA
and UK all have a highly diversified pattern of exports
⢠Nations at a lower stage of development (e.g. Zambia and
Malawi) have fewer capabilities and export a narrower
range of products
10. Vertical Specialisation and Global Value Chains
⢠The last 20 years has seen more countries contributing to
global value chains
⢠Many nations specialize in particular stages of production (this
is vertical specialization) e.g. the components, design &
branding that go into making an iPad or iPhone
⢠For many developing countries, foreign direct investment in
manufacturing has led to a rise in vertical specialisation.
Examples include:
⢠âFactory Asiaâ in China, South Korea, Vietnam and others
⢠Specialisation in chemicals, glass, electrical in Poland and
Czech Republic â both countries are inside the EU
⢠Light manufacturing in sub Saharan African countries such
as Ethiopia and Kenya
11. New Global Value Chains â The iPad and Added Value!
âAn Apple iPad is "Made in China" (it says so on the box) but only around 5% of
the price paid for an Apple iPad is actually paid for Chinese economic activity.
About 45% goes to Apple in the US, Korea takes around 8% for components, and
so forth. China has to import all those things, package them together, and then
export the finished product.â (Source: WTO Report published in 2015)
12. Overview of the Wider Gains from Trade
Export revenues and
jobs help to reduce the
scale of extreme poverty
Increased market
contestability reduces
prices for consumers
Better access to new
technologies lifts
productivity
Inflows of knowledge
across borders raises
human capital
Exploiting economies of
scale â causing lower
unit costs and prices
Better use of scarce
resources from trade in
sustainable technologies
13. Rising Developing Country Share of Global Trade
⢠âDeveloping economies have increased their participation in
international trade over the last 20 years.
⢠The share of exports to developing economies increased
from 26 per cent in 1995 to 39 per cent in 2014 â
⢠(Source WTO, 2015)
14. Why is Trade important for Developing Countries?
⢠Successful trade provides for developing nations:
1. A source of foreign currency to help a nationâs balance of
payments (trade surplus countries build up US$ reserves)
2. An important way of financing imports of essential imports of
capital equipment / technologies and energy supplies
3. An injection of demand into the circular flow of income and
spending + creating positive export multiplier effects
4. Increased employment in export industries and related industries
and rising per capita incomes and strong HDI scores
5. Falling prices for consumers helps to increase real incomes e.g. by
opening up monopoly suppliers of energy to new competition
The share of the least-developed countries (LDCs) in world exports
increased from 0.5% of total trade in 1995 to 1.1% in 2014 (Source: WTO)
15. Risks of Trade & Investment for Developing Countries
⢠Overseas trade and investment also carries risks
1. Volatile global prices affecting export revenues and
profits and tax revenues for governments
2. There are risks that exports will be affected by geo-
political uncertainties and cyclical shifts in demand
3. Capital flows into developing nations are highly volatile
4. Opening up to trade and investment may actually cause
rising structural unemployment in some industries as the
pattern of demand, output and jobs changes â poorer
countries may opt for rapid industrialisation aided by
import protectionism before they open up
5. Countries that specialise in only a few natural resources
may suffer from the ânatural resource trapâ
16. Summary of Main Gains from Globalisation
1. Encourages producers and consumers to reap benefits from deeper
division of labour and economies of scale
2. Competitive markets reduce the scale of monopoly profits and incentivize
businesses to seek cost-reducing innovations
3. Enhanced growth has led to higher per capita incomes â and helped many
of poorest countries to achieve higher growth and reduce extreme poverty
4. Advantages from the freer movement of labour between countries
5. Dynamic efficiency gains from the sharing of ideas / skills / technologies
across national borders
6. Opening up of capital markets increases the opportunities for developing
countries to borrow money to help overcome a domestic savings gap
7. Increased awareness among people around the world of the substantial
challenges from climate change and wealth/income inequality
8. Competitive pressures of globalisation may prompt improved governance
and better labour protection through improved business standards
17. Summary of Disadvantages from Globalisation
1. More inequality / relative poverty leading to political and social tensions
and instability as a backlash.
2. Threats to the Global Commons e.g. threats of irreversible damage to
ecosystems, land degradation, deforestation, loss of bio-diversity and the
fears of a permanent shortage of water
3. Macroeconomic fragility â in an inter-connected world economy, external
shocks in region can rapidly spread to other centres â this can lead to highly
volatile capital movements and swings in trade flows
4. Trade Imbalances: Increasing trade imbalances lead to protectionist
tensions and a move towards managed exchange rates
5. Higher structural unemployment in countries where production has shifted
to lower cost centres
6. Standardization: Critics of globalisation point to less cultural diversity as
giant firms and global brands dominate domestic markets
7. Dominant Global Brands â businesses with dominant brands and superior
technologies may squeeze out local producers
18. Examples of Regional Trade Agreements
⢠The number of RTAs has risen from 70 in 1990 to over 300 now
⢠The World Trade Organisation permits the existence of trade blocs, provided
that they result in lower protection against outside countries than existed
before the creation of the trade bloc
⢠EUâ a customs union, a single market and now with a single currency
⢠North American Free Trade Agreement (NAFTA) (1994)
⢠Mercosur â Brazil, Argentina, Uruguay, Paraguay and Venezuela
⢠Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA)
⢠Common Market of Eastern and Southern Africa (COMESA) free trade area
that includes Zambia, Rwanda, Swaziland, Ethiopia and Kenya
⢠Pacific Alliance â 2013 â a regional trade agreement between Chile, Colombia,
Mexico and Peru
⢠Trans-Pacific Partnership (TPP) 2015 â this is a major new free trade
agreement negotiated between Australia, Brunei, Chile, Canada, Malaysia,
Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam
19. Extract 1: Text and Commentary
⢠Economies can access
larger markets than would
be the case without
globalisation.
⢠They can access more
capital goods and more
advanced technology, as
well as larger markets for
their exports.
⢠At the same time they can
benefit from cheaper
imports.
⢠Economic theory provides
strong support for the
process of globalisation in
terms of the benefits of
increased economic
efficiency.
⢠Larger markets:
⢠For most developing /
emerging countries this
means accessing markets of
countries with a higher GNI
per capita and larger GDP
(i.e. a bigger market size)
⢠The United States and China
are now officially the two
biggest countries in the
world
⢠For advanced countries,
growing consumer markets
in emerging countries offer
rich potential for trade in
goods and services and
investment
20. Economic Efficiency in Markets
For the exam make sure you are confident on each type of economic efficiency.
Then become confident in handling economic efficiency concepts and apply them
to the effects of trade, investment and the effects of successful supply-side policies
21. What is Economic Efficiency?
⢠Economic efficiency is achieved when optimum use is made of scarce
productive resources
⢠Allocative efficiency:
⢠Occurs when Price = Marginal Cost (or when the sum of consumer
and producer surplus is maximized)
⢠Allocative inefficiency: when P>MC; i.e. a deadweight loss exists
⢠Productive efficiency:
⢠When MC=ATC, when ATC is at its minimum; when producing at the
minimum efficient scale
⢠Dynamic efficiency:
⢠This occurs when a firm constantly updates its product offering/range
to reflect changing consumer preferences and wants
⢠X-inefficiency:
⢠This is the inefficiency that arises from complacency / lack of
motivation/morale existing from a lack of competition in an industry
22. Extract 1: Falling Tariffs â Average Tariffs in 2011-15
⢠Extract: âOne of the many factors
promoting globalisation has been a
reduction of trade barriers, including
import tariffs.â
Source: WTO, 2015
23. Extract 1: Trade to GDP Ratios for 4 Countries
Malawi â a low income economy
Zambia â a lower-middle income economy
Brazil â an upper-middle income economy
Australia â a high income economy.
Malawi
Zambia
Australia
Brazil
24. Extract 1: Trade to GDP Ratios for 4 Countries
Malawi has seen a sharp rise in the ratio
of trade to GDP (from 69% to 111%)
whereas the trade-ratio for Zambia has
actually declined from 66% to 63%.
Malawi
Zambia
25. Extract 1: Trade to GDP Ratios for 4 Countries
Australian trade/GDP rose in 2009
whereas it fell for the other 3
countries. Australia avoided recession
partly because of continued
economic growth in China
Australia
26. Trade to GDP Ratios for 4 Countries â The Long View
This chart provides
long-run data on
trade as % of GDP
for the four
selected countries.
Zambiaâs trade to
GDP ratio has
declined since
1960 whereas it
has risen for the
other 3 countries.
Malawi stands out
in terms of the
steep rise in the
trade-to-GDP ratio
to over 100% in
2011.
27. Explaining Trade to GDP Ratios in Excess of 100%
⢠The ratio of trade in goods and services to a nationâs GDP can be above
100% How can this happen?
⢠Many much smaller countries specialise in a few profitable industries in
which they have a clear comparative advantage.
⢠These industries may produce more money from exports than the entire
domestic economy!
⢠Export revenues then allows them to purchase imports in excess of what
their domestic economy could otherwise support.
⢠This leads to a high trade-to-GDP ratio perhaps in excess of 100%
⢠A country might also import intermediate products (e.g. essential
components) and then simply assemble for re-export. Again this causes
the value of trade to exceed measured GDP
1. Export-driven or import-dependent countries nearly always have a
high trade to GDP ratio.
2. Larger countries with more sophisticated production capabilities such
as the United States tend to have lower trade ratios
3. Small poor countries highly reliant on world trade have a high trade-to-
GDP ratio â it does not mean that these countries must remain poor
28. Focus on Malawi
⢠Malawi is landlocked (Zambia is one border)
⢠It is one of the poorest countries in the world
⢠National Income
⢠GDP per capita, PPP (constant 2011 international $): $756
⢠GNI per capita, PPP (constant 2011 international $): $726
⢠Exports and Imports
⢠Exports of goods and services (% of GDP): 47.6%
⢠Imports of goods and services (% of GDP): 60.5%
Malawiâs currency is the Kwacha and has been the
official currency since 1970
29. Malawi â Trade in a Global Context
⢠Malawi is a tiny economy in a global context
⢠It is the 147th largest export economy in the world and
itâs exports are 0.01% of the world total
⢠It is the 96th most complex economy according to the
Economic Complexity Index (ECI)
⢠GDP (million current US$, 2013) 3 705
⢠Merchandise exports (million US$) 1 208
⢠Merchandise imports (million US$) 2 845
⢠Total value of merchandise trade 4 053
⢠Merchandise trade as a % of GDP 109%
30. Malawi â Low Complexity / High Primary Dependence
Over 90% of Malawiâs exports of goods are agriculture or mining/extractive
products. Only 8% of their exports are manufactured goods
31. Malawi â Pattern of Imports of Goods
Malawi is dependent on final manufactured products and components for imports.
The biggest single import is fertilizer. South Africa is the key source of imports.
32. Explaining the Rise in Malawi Trade to GDP
⢠Malawiâs economy is very narrowly based.
⢠Agriculture represents approximately 37% of her GDP. The
rising value of their food exports has contributed to an
increase in their trade to GDP ratio
⢠So too has a surge in spending on imports due to a weakening
exchange rate (the demand for imports is price inelastic so a
weaker currency means that more money must be spent on
buying these imported products)
⢠Wholesale and retail trade, including hotel industry and
restaurants is the second largest contributor to GDP at 24%
⢠The growth of tourism into Malawi is another factor behind
the steep climb in the trade-to-GDP ratio â this could be good
news for future growth and development prospects
⢠Malawi has also joined a number of regional trade
agreements â leading to some trade creation effects
33. 2015 Global Competitiveness Index for Malawi
Indicator
Malawi ranking out
of 140 countries
Overall
competitiveness
135/140
Institutions 92/140
Infrastructure 135/140
Macroeconomic
environment
140/140
Labour market
efficiency
29/140
Technological
readiness
133/140
Highlighted problems for business
⢠Access to financing
⢠Endemic corruption
⢠Crime and theft
34. Extract 1: Text and Commentary
⢠In 2007â08, financial and
economic crises in high
income developed
economies reduced the
growth in world trade as
their effects spread to the
global economy.
⢠There was a fear that the
sharp increase in
unemployment, particularly
in developed economies,
would lead to protectionist
measures.
⢠However, fears of global
trade wars quickly subsided
and the growth in world
trade recovered in 2010.
⢠Why did the crisis lead to a
slowdown in world trade?
1. The credit crunch led to a
steep fall in the
availability of trade credit
and trade insurance
2. Falling real incomes and
rising unemployment
caused consumption to
drop â leading to weaker
demand for imports
3. Fiscal austerity measures
also weakened global
aggregate demand
4. There was a rise in non-
tariff trade barriers and
managed exchange rates
35. WTO Report (2015) Annual Growth of World Trade
Source: www.wto.org/english/news_e/pres15_e/pr739_e.pdf
The biggest drop
in trade over the
past 20 years
36. Volume of world merchandise exports and gross domestic product, 1950-2014
(Annual percentage change) Trade Global GDP
1995-00 7.0 3.4
2000-05 4.9 2.9
2005-10 3.4 2.3
2010-14 3.3 2.5
2006 8.7 4.1
2007 6.5 3.9
2008 2.0 1.5
2009 -12.2 -2.1
2010 14.1 4.1
2011 5.5 2.8
2012 2.3 2.2
2013 2.9 2.4
2014 2.5 2.5
The Slowing Growth of World Trade since 2010
Source: WTO, 2015
37. Why is World Trade Growing Slowly at the Moment?
1. Weak economic growth in many of the worldâs richest
countries â indeed some economists believe that Western
nations are suffering from secular stagnation
2. Impetus to global trade from the industrialization of Asia
seems to be fading. As Asian industrialization has slowed so
capital investment spending has declined in importance and
Asian demand for goods and services has softened.
3. Slowing pace of trade liberalization. The big gains to trade
from cutting tariffs may have already happened.
4. Non-tariff barriers have grown and regional trade blocs
such as ASEAN have become more common in place of a
new global trade agreement which seems a long way from
being achieved
5. Rising prosperity itself. As people become richer they spend
a higher proportion of their income on services, such as
education, leisure and health â global trade in services is
actually lower as a share of GDP than manufactured
products
38. Q3
Analysis: Diagram showing Import Tariffs
Q4Q1
Price
Domestic
Demand
OutputQ2
Domestic
Supply
World supply
pre-tariffP1
Supply after tariff
Volume of
imports
after tariff
P2
Import tariffs have economic welfare consequences, one of which is that the welfare of consumers who
must now purchase imports at a higher price has fallen â there is a deadweight loss of consumer surplus.
The effects of an import tariff on quantities depend on the price elasticity of demand and price elasticity
of supply of domestic businesses who are given a cushion of increased competitiveness by the tariff.
39. Analysis: Examples of Non-Tariff Barriers
1. Voluntary Export Restraint â where two countries make an
agreement to limit their exports to one another each year
2. Intellectual property laws e.g. patents and copyright protection
3. Technical barriers to trade including labeling rules and stringent
sanitary standards. These increase product compliance costs
4. Preferential state procurement policies â where government favour
local producers when finalizing contracts for state spending e.g.
infrastructure projects or purchasing new defence equipment
5. Domestic subsidies â government help (state aid) for domestic
businesses facing financial problems e.g. subsidies for car
manufacturers or loss-making airlines.
6. Financial protectionism â e.g. when a government instructs banks to
give priority when making loans to domestic businesses
7. Murky or hidden protectionism - e.g. state measures that indirectly
discriminate against foreign workers, investors and traders.
40. Understanding: Motivations for Protectionism
Response to export
âdumpingâ e.g. steel
Response to a chronic
trade gap
Employment
protection
Protect âfledglingâ -
infant sectors
Protect key /politically
strategic industries
Raise tax revenues for
the government
Response to a
recession / low
aggregate demand
41. Arguments against Trade Barriers / Protectionism
Risk of Retaliation Market Distortions
Higher prices for
consumers
Regressive effect on
income inequality
By-passing import
controls
Higher costs for exporters