Readers Question: To what extent does the trade war between USA and China actually impact on the economies of other nations? A trade war between the US and China is concerning for other countries because a trade war can precipitate a fall in global trade, and lead to lower investment, lower confidence and a drop …
Globalisation is a complex and controversial issue. This is a look at some of the main benefits and costs associated with the greater globalisation of the world economy.
Definition of Globalisation The process of increased integration and co-operation of different national economies. It involves national economies becoming increasingly inter-related and integrated.
Globalisation has involved:
Greater free trade.
Greater movement of labour.
Increased capital flows.
The growth of multi-national companies.
Increased integration of global trade cycle.
Increased communication and improved transport, effectively reducing barriers between countries.
Summary of costs/benefits
Benefits
Costs
Lower prices/ greater choice
Structural unemployment
Economies of scale – lower prices
Environmental costs
Increased global investment
Tax competition and avoidance
Free movement of labour
Brain drain from some countries
May reduce global inequality
Less cultural diversity
Benefits of globalisation
1. Free trade is a way for countries to exchange goods and resources. This means countries can specialise in producing goods where they have a comparative advantage (this means they can produce goods at a lower opportunity cost). When countries specialise there will be several gains from trade:
Lower prices for consumers
Greater choice of goods, e.g food imports enable a more extensive diet.
Bigger export markets for domestic manufacturers
Economies of scale through being able to specialise in certain goods
Definition: Scarcity refers to resources being finite and limited. Scarcity means we have to decide how and what to produce from these limited resources. It means there is a constant opportunity cost involved in making economic decisions. Scarcity is one of the fundamental issues in economics.
Examples of scarcity
Land – a shortage of fertile land for populations to grow food. For example, the desertification of the Sahara is causing a decline in land useful for farming in Sub-Saharan African countries.
Water scarcity – Global warming and changing weather, has caused some parts of the world to become drier and rivers to dry up. This has led to a shortage of drinking water for both humans and animals.
Labour shortages. In the post-war period, the UK experienced labour shortages – insufficient workers to fill jobs, such as bus drivers. In more recent years, shortages have been focused on particular skilled areas, such as nursing, doctors and engineers
Health care shortages. In any health care system, there are limits on the available supply of doctors and hospital beds. This causes waiting lists for certain operations.
Seasonal shortages. If there is a surge in demand for a popular Christmas present, it can cause temporary shortages as demand as greater than supply and it takes time to provide.
Fixed supply of roads. Many city centres experience congestion – there is a shortage of road space compared to number of road users. There is a scarcity of available land to build new roads or railways.
How does the free market solve the problem of scarcity?
If we take a good like oil. The reserves of oil are limited; there is a scarcity of the raw material. As we use up oil reserves, the supply of oil will start to fall.
Diagram of fall in supply of oil
If there is a scarcity of a good the supply will be falling, and this causes the price to rise. In a free market, this rising price acts as a signal and therefore demand for the good falls (movement along the demand curve). Also, the higher price of the good provides incentives for firms to:
Look for alternative sources of the good e.g. new supplies of oil from the Antarctic.
Look for alternatives to oil, e.g. solar panel cars.
If we were unable to find alternatives to oil, then we would have to respond by using less transport. People would cut back on transatlantic flights and make fewer trips.
Demand over time
In the short-term, demand is price inelastic. People with petrol cars, need to keep buying petrol. However, over time, people may buy electric cars or bicycles, therefore, the demand for petrol falls. Demand is more price elastic over time.
Therefore, in a free market, there are incentives for the market mechanisms to deal with the issue of scarcity.
With scarcity, there is a potential for market failure. For example, firms may not think about the future until it is too late. Therefore, when the good becomes scarce, there might not be any practical alternative that has been developed.
Another problem with the free market is that since goods are rationed by price, there may be a danger that some people cannot afford to buy certain goods; they have limited income. Therefore, economics is also concerned with the redistribution of income to help everyone be able to afford necessities.
Another potential market failure is a scarcity of environmental resources. Decisions we take in this present generation may affect the future availability of resources for future generations. For example, the production of CO2 emissions lead to global warming, rising sea levels, and therefore, future generations will face less available land and a shortage of drinking water.
The problem is that the free market is not factoring in this impact on future resource availability. Production of CO2 has negative externalities, which worsen future scarcity.
Tragedy of the commons
The tragedy of the commons occurs when there is over-grazing of a particular land/field. It can occur in areas such as deep-sea fishing which cause loss of fish stocks. Again the free-market may fail to adequately deal with this scarce resource.
Definition of a Giffen Good. A good where a higher price causes an increase in demand (reversing the usual law of demand). The increase in demand is due to the income effect of the higher price outweighing the substitution effect. The concept of a Giffen good is limited to very poor communities with a very limited …
Economic growth is an increase in real GDP; it means an increase in the value of goods and services produced in an economy. The rate of economic growth is the annual percentage increase in real GDP. There are several factors affecting economic growth, but it is helpful to split them up into: Demand-side factors (e.g. …
A shift in demand means at the same price, consumers wish to buy more. A movement along the demand curve occurs following a change in price. Movement along the demand curve A change in price causes a movement along the demand curve. It can either be contraction (less demand) or expansion/extension. (more demand) Contraction in …
A list and definition of different types of economic costs. Fixed Costs (FC) The costs which don’t vary with changing output. Fixed costs might include the cost of building a factory, insurance and legal bills. Even if your output changes or you don’t produce anything, your fixed costs stay the same. In the above example, …
Education and training to help reduce structural unemployment.
Geographical subsidies to encourage firms to invest in depressed areas.
Lower minimum wage to reduce real wage unemployment.
More flexible labour markets, to make it easier to hire and fire workers.
Video summary
Policies to reduce unemployment
Demand side policies
Demand side policies are critical when there is a recession and rise in cyclical unemployment. (e.g. after 1991/92 recession and after 2008 recession)
1. Fiscal Policy
Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate of economic growth. The government will need to pursue expansionary fiscal policy; this involves cutting taxes and increasing government spending. Lower taxes increase disposable income (e.g. VAT cut to 15% in 2008) and therefore help to increase consumption, leading to higher aggregate demand (AD).
With an increase in AD, there will be an increase in Real GDP (as long as there is spare capacity in the economy.) If firms produce more, there will be an increase in demand for workers and therefore lower demand-deficient unemployment. Also, with higher aggregate demand and strong economic growth, fewer firms will go bankrupt meaning fewer job losses.
Keynes was an active advocate of expansionary fiscal policy during a prolonged recession. He argues that in a recession, resources (both capital and labour) are idle. Therefore the government should intervene and create additional demand to reduce unemployment.
