Globalisation Essay Pack

H2 Economics Globalisation Essay Pack 0 Definitions and Key Clarifications 1 1 Theory of Comparative Advantage 1 (a) The Basis of Trade: The Theory of Comparative Advantage 3 1 (b) Limitations of the Theory of Comparative Advantage 6 2 (a) Differences and Changes in Countries’ Comparative Advantage 10 3 (b) Patterns of Trade 12 2 Causes of Globalisation 4 (a) The Trend towards Globalisation 17 3 Effects of Globalisation and Trade Policies 5 (a) Macroeconomic Impacts of Globalisation I 22 6 (b) Macroeconomic Impacts of Globalisation II 31 7 (a) Microeconomic Impacts of Globalisation 33 8 (a) Types of Protectionist Measures 37 8 (b) Impacts of Protectionism 42 5 (b) Free Trade Agreements 50 9 (a) Impacts of a Trade War 54 Appendix: Global Market Diagrams A. Free Trade Diagram 57 B. Import Tariff Diagram 60 C. Import Quota Diagram 62

This document is intended as a comprehensive set of analytical points designed to answer most questions, based primarily on ideas raised in the NJC 2024 H2 Economics Chapter 15 Seminar Notes. While the primary function of this set of notes is to provide analytical answers, learning objectives are provided at the top of each essay as a study guide for content learning. 0 Definitions and Key Clarifications International Trade is defined as the transaction in goods and services between countries. ● Trade can refer to both the volume (Q X and Q M ) and value (X and M) of exports and imports. A country has a Comparative Advantage over another country in the production of a good if it can produce it at a lower opportunity cost, i.e. it has to forgo less of other goods in order to produce it. The Theory of Comparative Advantage states that trade can benefit all countries if they specialise and export the goods in which they have a comparative advantage in producing. Dynamic comparative advantage refers to a country’s comparative advantage changing over time due to changes in factor endowments. Pattern of Trade refers to the trends in the flow of goods and services between countries. It reflects which countries trade with each other, the types of goods and services they exchange, and the volumes involved. Trade liberalisation refers to the removal or reduction of trade barriers, such as tariffs, quotas, and regulations, to encourage free trade between countries. Protectionism refers to the use of tariff and non-tariff policies as barriers to free trade imposed by a government to protect domestic industries. Free trade agreements (FTAs) aim to lower trade barriers and promote international trade as well as capital flows between countries. Globalisation refers to the increasing integration of national economies in terms of financial flows, trade, movement of factors of production, ideas, and changes in information and technology. 1

1 Theory of Comparative Advantage 1 In order for specialisation to be beneficial, it must be accompanied by exchange. (a) Explain how benefits to the economy can arise from specialisation and exchange. [10] (b) Very often these benefits are not fully achieved in domestic and international markets. Discuss the reasons for this. [15] 2014 ‘A’ Levels P2 Learning Objectives ● Distinguish between comparative advantage and absolute advantage. ● Understand the theory of comparative advantage as a basis for specialisation and trade. ● Understand that free trade is traditionally considered to be an economic activity which benefits all countries. ● Analyse the reasons for not trading by discussing the limitations of the theory of comparative advantage. 1 (a) The theory of comparative advantage states that trade can benefit all countries if they specialise and export the goods in which they have a comparative advantage, meaning the country can produce those goods at a lower opportunity cost. ● This suggests that even if a country can produce all goods at lower opportunity costs compared to other countries, countries involved can still benefit from trade if each country specialises in producing the goods for which it has the lowest opportunity costs and trades them for goods produced by other countries. Therefore, specialisation is considered to be the main benefit of free trade. Assume that two countries produce two homogeneous (identical) goods, whereby factors of production are homogeneous (equally productive) and perfectly mobile within the country but not homogeneous and immobile across countries. Further assume that there are constant returns to scale, no transport costs and no barriers to trade. ● These assumptions are used as a basis for the limitations of the theory of comparative advantage. They can be used to explain why countries trade despite not having comparative advantage, or why countries do not trade despite apparently having comparative advantage. Before specialisation, if countries were self-sufficient, a country like the US may produce 0Q C1 units of cloth and 0Q E1 units of engines in Fig 1 while a country like Vietnam may produce 0Q C1 units of cloth and 0Q E1 units of engines in Fig 2. ● Notice that Q C1 for the US is larger than Q C1 for Vietnam and the same is true for the output of engines. This implies that the US can produce both goods at a lower absolute cost and hence with less resources compared to Vietnam. Hence, the US has an absolute advantage in producing both goods. ● Hence, differences in absolute advantage is not the main reason for trade because then the US would have no incentive to trade at all in this scenario since it produces both goods at a lower cost. 2

If the US and Vietnam have lower opportunity costs and thus comparative advantages in the production of engines and cloth respectively, they should specialise in the production of engines and cloth respectively, by allocating more resources to producing the respective goods. This would mean each country forgoes less of the next best alternative good in producing the good they specialise in and hence the same number of world resources are allocated more efficiently to produce a greater world output compared to the combined output of the countries when they tried to be self-sufficient and allocated resources to produce all the goods by themselves. (The US now produces 0Q C2 units of cloth and 0Q E2 units of engines in Fig 1 while Vietnam now produces 0Q C2 units of cloth and 0Q E2 units of engines in Fig 2.) ● This is typically explained in textbooks and notes with numerical illustratio