Globalisation 2026 SH2 H2 Econ Ch15 Seminar notes

1 SECTION CONTENT PAGE 1 What is globalisation? 2 2 Drivers of / Factors affecting globalisation 3 - 14 3a Benefits and costs of globalization 15 - 33 3b Benefit and costs of globalisation: An evaluation 34 - 40 4 What is protectionism? 41 5 Types of protectionist measures 41 - 52 6a Benefits and costs of protectionism 53 – 64 6b Benefit and costs of protectionism: An evaluation 65 7 Economic co-operation and trade agreements between countries TBC Syllabus

2 1. What is globalisation? o Gobalisation refers to the increasing integration of national economies in terms of trade, financial flows, movement of factors of production (including labour) and technology. o One common measure of globalisation is the global trade -to-GDP ratio which measures the openness of an economy at a country level. ▪ Global trade-to-GDP ratio = 𝑋+𝑀 𝐺𝐷𝑃 x 100% Overview of globalisation Globalisation Trade (Flow of goods and services) Exports Imports Financial flow FDI Hot money Movement of factors of production Labour -Brain drain / gain - Foreign workers Raw materials Technological flow

3 2. Drivers of / Factors affecting globalisation o Globalisation is largely driven by the desire of firms to increase profits and also by the motivation of governments to tap into the wider macroeconomic and social benefits that come with globalisation. Overview • Refer to A-Level 2019 EQ6a Drivers of globalisation Gains from specialisation and trade because of differences in opportunity costs Sources of comparative advantages - Differences in resource endownment resource productivity - Differentces in technological advancement -Internal economies of scale Technological innovation Transportation technology Information and communication technology Production technology Economic policies Reduction in protectionist measures Investment liberalisation and promotion Differences in tax systems Development of global value chain

4 a. (i) Gains from specialisation and trade – Theory of comparative advantage o The concept of free trade and the gains from free trade drives globalisation. Explanation without numerical illustration o Trade occurs because nations have different resource endowments and technological capabilities. o Because of these differences, there exist differences in opportunity costs between countries in the production of different types of goods. ▪ Refer to the next subsection for an understanding of why opportunity costs differ / sources of comparative advantage. o This in turn determines a range of terms of trade (TOT) for which trade is mutually beneficial to both countries. ▪ Refer to the footnote in the numerical illustration for an understanding of TOT. o The theory of comparative advantage states that trade can be mutually beneficial if countries specialise in the goods in which they have a comparative advantage (i.e. can produce at a lower opportunity costs than other countries) and export the goods they produced to exchange for goods in which they can produce on their own only at a higher opportunity costs (but which other countries can produce at lower opportunity costs). o Specialisation and trade based on comparative advantage therefore allows countries to expand their consumption possibilities beyond their production possibilities → More access to goods and services to meet needs and wants → Assuming population size remains unchanged → Higher material SOL.

5 Extension with numerical illustration Diagram 1: PPCs of Singapore and Indonesia o Consider the production possibility curves of two countries, namely, Indonesia and Singapore illustrated by PPC Indonesia and PPC Singapore respectively in Diagram 1. o Indonesia, being a resource -abundant economy, would be able to produce more of both palm oil (P) and computers (C) than Singapore (i.e. PPC Indonesia is further from the origin than PPC Singapore) as the maximum possible output a country can produced depends on the quantity and quality of resource endowment it has and its level of technology. o However, Indonesia only has comparative advantage in the production of palm oil because it has lower opportunity cost in the production of palm oil as illustrated by the gentler PPCIndonesia i.e. Indonesia forgoes fewer units of computers to produce an additional 10,000 litres of palm oil (i.e. 10,000P = 4C) compared to Singapore (i.e. 10,000P = 10C). o On the other hand, Singapore has comparative advantage in the production of computers because it has lower opportunity cost in the production of computers illustrated by the steeper PPCSingapore i.e. Singapore forgoes fewer litres of palm oil to produce an additional unit of computer (i.e. 1C = 1000P) compared to Indonesia (1C = 2500P).

6 o Assuming the following for simplicity: ▪ Following their respective comparative advantages, Singapore fully specialises in the production of computers (e.g. by producing 200C at Point A) while Indonesia only partially specialises (e.g. 70% of on P and 30% on C) in the production of palm oil (e.g. by producing 700,000P and 120C at Point B). Without trade, countries can only consume as much as they can produce and thus cannot consume beyond their PPCs. ▪ Terms of trade e.g. (10,000P= 6C). Terms of trade 1 refers to the rate at which countries exchange their exports for imports. For mutually beneficial trade, the terms of trade must lie between the opportunity cost ratios of the 2 countries (i.e. between 10,000P = 4C and 10,000P = 10C). ▪ Singapore exports computers in exchange for palm oil from Indonesia (e.g. 90C for 150,000P). o Therefore, after specialisation and trade, Indonesia can consume 550,000P and 210C (i.e. Point X) while Singapore can consume 150,000P and 110C (i.e. Point Y). o The theory of comparative advantage suggests that when economies specialise and trade in accordance with their comparative advantages, they can expand their consumption possibilities beyond their production possibilities i.e. PPCIndonesia and PPCSingapore expand outward to CPCIndonesia and CPCSingapore respectively. o The gains from specialisation and trade drives globalisation via increasing trade 1 Terms of trade (TOT) = (Index of export prices / Index of import prices) x 100. TOT determines how many imports can be purchased per unit of exported goods. If the TOT is increasing, the country can buy more imports with the same amount of exports.

7 a. (ii) Sources of comparative advantage – Why do opportunity costs differ? o Note that comparative advantage is not static / can be dynamic – i.e. it can change overtime. ▪ For example, economies that invest sufficiently in physical capital, human capital and technology can gain comparative advantages. Comparative advantage can also be acquired by allowing or promoting targeted inflows of foreign investments and foreign labour. On the other hand, economies can loss comparative advantages if brain drain occurs. o Differences in resource endowment / resource productivity ▪ A country like Singapore is skilled -labour abundance 2 while a country like Indonesia is unskilled-labour abundance3. ▪ Every unit of skilled labour allocated away from palm oil (unskilled- labour intensive4) production to computers (skilled-labour intensive5) production would result in a large increase in the number of computers ( skilled-labour intensive good ) produced in Singapore compared to Indonesia, giving Singapore a comparative advantage in producing computers. This is due to Singapore’s high productivity in skill-labour intensive production as Singapore is a skilled -labour abundance economy. Similarly, in the case of Indonesia for unskilled labour-intensive production. ▪ Therefore, skilled-labour abundance countries like Singapore is likely to be