Globalisation and Trade

Globalisation and Trade

1. The process of growing economic integration of the world's economies

2. Benefits

   • Lower cost per unit
   • Growth of international trade
   • Improving poorer countries
     • 500 million Chinese have moved out of poverty
   • Greater mobility of labour and capital
   • Increase in power of international capitalism
   • New markets

3. Key Terms

   • Absolute Advantage
     • Where a country using a given resource input is able to produce more than other countries with the same input
   • Comparative Advantage
     • Where a country can produce a good with a lower input cost than other countries
     • Assumptions
       • Ignores advancements in technology
       • Assumes perfect competition
       • Assumes perfectly mobile factors of production
       • Ignores currency fluctuations
   • Terms of trade
     • Is the rate of exchange between goods and services in different countries
     • The rate at which a given number of exports is exchanged for a given number of imports
     • (Index of Import Prices/Index of export prices)x100
   • Marshall-Lerner Condition
     • Depreciation of a currency will lead to an overall increase in the current account, given that the elasticity's of exports and imports combined exceed one

4. J Curve Effect

   • In the short term, a devaluation of a currency will lead to a deterioration of the current account, before it starts to improve
   • A = Depreciation of currency
   • A - B = Worsening of the current account
     • Current account deteriorates in the short run because the country with the depreciated exchange rate can't immediately get out of their trade contracts, so they are selling the same amount for lower prices
   • B - C = Marshall-Lerner condition, where the current account begins to improve
     • The improvement in the current account occurs in the long run because this country are able to negotiate better trade deals, meaning the are able to sell more for the current price. (Marshall-Lerner condition)

5. Free trade

   • Trade with the removal of barriers e.g. no quotas/embargoes

6. Arguments for Free Trade and Protectionism

   • Free Trade
     • Specialisation leads to resources being used more efficiently. With greater efficiency the prices of goods should fall, and falling import prices will put on pressure on domestic producers to improve their efficiency and lower their prices
     • Access to larger markets = economies of scale and comparative advantage
     • Helps towards achieving full employment = economic growth and better living standards
   • Protectionism
     • Types of Protectionism
       • Tarriffs
         • Quotas
       • Subsidies
         • Embargoes
     • Infant industry argument
       • Allowing newly developed industries to develop and achieve Economies of Scale
     • Strategic trade theory
       • Allowing firms to establish comparative advantage
     • To maintain domestic employment and to prevent dumping

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