MJC H2 ECONS EQ6

1 6 Globalisation has made our world more in terconnected than ever before and presented a wealth of opportunities. Yet, globalisation has also presented an uneven distribution of its benefits and costs. (a) Explain the factors that have fuelled globalisation. [10] (b) Globalisation has presented an uneven distribution of its benefits and costs. Discuss the reasons for this. [15] Suggested answers to part (a) (a) Explain the factors that have fuelled globalisation. [10] Introduction: Define globalisat ion and briefly describe the main factors that have fuelled globalisation Globalisation is the increas ed integration and interdepe ndence of economies. It can be categorised as economic globalisation ; the greater integration of goods and services (via trade), labour and capital markets and geographical globalisation; the reduction in travel times between location s and the rapid (elect ronic) exchange of information. Knowledge and production previous ly confined to certain geographical areas may now cross borders and be made av ailable because of the communication and transport technological innovations. Body 1: Explain how trade liberalisation led to increase trade flows based on the theory of CA. One main factor that fa cilitates globalisation is trade liberalisation and the promotion of free trade based on the Theory of Comparative Advantage. The theory of comparative advant age posits that economies c an mutually benefit from specialisation and exchange of goods they have a lower opportunity cost in producing. For example, between Thailand and Singapore, Thailand’s vast amount of arable land and large number of rice farmers meant that it has resources that are more suited for the cultivation of rice over Singapore. In the cultivation of rice, Thailand has a lower opportunity cost as compared to Singapore as Singapore does not have the similar factor endowments that are suitable for rice cultivation. On the other hand, Singapore would have a lower opportunity cost in the production and manufacturing of electronic goods because of its skillful labour force and level of technological adoption. If Thailand devotes its resources to the cult ivation of rice and Si ngapore devotes its resource to the production of electronic goods, both countries would be more efficient in their production. With subsequent exchange, that is, Thailand to export rice and import electronic goods, while Singapore w ould import rice and export electronic goods, both countries could exploit their differences in relative opportunity cost and consume a combination of goods outside what they possibly could if they produce both goods on their own (consume beyond their PPC). The greater amount as well as variety of goods available for consumption among other potential gains from free trade have led to increasing liberalisation of trade and capital

2 markets, facilitated by governments movi ng towards policies such as Free Trade Agreements (FTAs) to reduce trade barriers (removing import tariff and quotas). These led to greater economic integration amongst economies and the trend of globalisation. Body 2: Explain how development in communication technology has led to increased intergration The revolutionary break-through in informa tion and communication technology (ICT) and development in transport technology hav e also provided the drive for global integration by facilitating trade. Development in communication technology has facilitated the transmission of information over geographical borders quickly and efficiently. This allows transnational firms to coordinate their oper ations worldwide via different avenues such as video conferences & emails. The implication is that firms such as Toyota and Apple Inc. are able to set up plants worldwide by tapping on the comparative advantages in production of different types of goods in different countries to improve their productivity and efficiency. These firms ar e also able to outsource part of the production process yet maintain control ov er them with the ease of communication. This “slicing up of the value chain ” results in increased flow of intermediate goods as well as capital amongst the economies leading to higher degree of globalisation. Body 3: Explain how development in tr ansport technology has led to increase intergration Last but not least, developments in transport technology have caused transportation cost and time for goods and people to shrink tremendously increasing mobility of goods and fact ors of production. These have enhance economies trade network and aid in the increase in trade vo lume. For example, sea transport has become more efficient with new technology such as (automated cargo handling and faster vessels). Better navigation system also enhanced the safety and efficiency of sea transport. The reduction in time for sea transport and cargo handling has helped to transport goods and documents for firms faster. Conclusion: Summarise Salient Points Not only has these technologies enhance the benefits of trade, t hey are essential enablers of trade, without whic h, there would not be as much integration amongst world economies.

3 Syllabus 9757 Level of Response Marking Scheme (LORMS) L3 For a well-developed answer that clearly explains factors that fuelled globalisation based on economic reasoning (e.g. Theory of Comparative Advantage) Answers are well-supported with appropriate examples. 8 – 10 L2 For an undeveloped answer that attempts to explain factors which fuelled globalisation. Answers are descriptive and lacks economic reasoning (e.g. Theory of Comparative Advantage). Answers are supported with some example. 5 – 7 L1 For an answer that is irrelevant and contains conceptual error. 1 - 4

4 (b) Globalisation has presented an uneven distribution of its benefits and costs. Discuss the reasons for this. [15] Introduction Globalisation brings about several benefits and costs to the economy. Increasing trade, capital and labour flows will benefit an economy in terms of higher economic growth, higher employment opportunities and increasing SOL while at the same time they may also lead to rising income inequity, structural unemployment and environment degradation. At the same time, there is an uneven distribution of benefits and costs between countries (LDCs vs DCs, small country vs large country) and within a country and there is a need to consider the reasons behind the differences in distribution. The reasons could stem from: 1) Factor immobility: Ge ographical, occupational. 2) Unfair trade practices 3) Nature of economy 4) Lack of laws/enforcements/Less established banking sector/corporate governance Reason 1: Factor immobility One of the reasons that would limit the benefits within the domestic markets would be factor immobility. Factors of production (land, labour, capital) are not perfectly mobile within a country. As a country specialises in the production of a good, it will eventually be forced to utilise resources which are less suited to the production of the good. For example, as Singapore specialises in the production of pharmaceutical products, it will be forced to use labour that lacks the relevant skills and knowledge needed. As such, in reality, a country’s PPC would be concave to the origin. This reflects the law of increasing opportunity costs, whereby the opportunity costs of producing each successive unit of pharmaceutical products rises. The increase in opportunity cost would limit the extent of specialisation and thus reduces the full benefits of specialisation and exchange. a) Occupational immobility In addition, Globalisation has merely hasten ed the speed at which countries (like SG) move up the value-added chain, shedding jobs in sunset industries (low value added ma