UK Economy and Globalisation

Revision Notes – if you do one thing …..

Globalisation and Development - This unit is about globalisation and

international trade. There are both benefits and drawbacks of international trade:

Benefits Drawbacks

Specialisation means countries can focus on the areas to which they are best suited (where they have an absolute advantage) which should lead to increased global output

Allows individuals and firms to obtain goods that are not available in their country

Increases choice for consumers

Enables goods and services to be obtained at lower prices (raises living standards and may reduce inflation)

Increases competition helping to prevent monopolies

Leads to bigger market enabling firms to gain from economies of scale and increase sales and profits

Reduces firms’ reliance on domestic markets (risk bearing economies of scale)

How trade reduces poverty – trade can help people to earn more money and therefore buy more goods and services. For example, as China has developed, many people are now paid more for working in factories than they used to get from working on farms etc in rural areas.

Increased competition from foreign firms may lead to domestic firms closing and jobs being lost

Global Interdependence rises as a result of trade. When economies are doing well this will lead to higher growth and employment but when a global shock hits, such as the credit crunch, the resulting recession spreads to other countries. – eg if the USA has a recession they will buy less products from China causing problems for Chinese business.

Environment – International trade can bring with it a variety of negative externalities such as pollution, increased CO2 emissions etc. This increased trade increases these costs, eg environmental costs associated with transporting goods

How trade leads to income inequality – Often the benefits of trade are not shared out equally. Developed countries tend to benefit more from trade than some developing countries. Also within countries the benefits may not be shared out equally. Entrepreneurs and business people may see more of the benefits than the workers, particularly in developing countries where wages are often low. Trade may also lead to income inequality if people are made unemployed due to foreign competition.

Does trade benefit all?

Developing countries and their peoples sometimes face problems in gaining the benefits

from trade. Factors such as those below can limit the benefits to be had from trade:

Poor infrastructure

Poor education and training

Health and population problems

Debt

Weak government and corruption

Low inward investment

Lack of foreign currency

In addition sometimes trade can pose problems for developed countries and for the people

who live in them. For example - Jobs may be lost and people unemployed due to

competition from cheap goods produced overseas. Countries may experience balance of

payments problems if they are not competitive.

Increasing Globalisation

Globalisation – an expansion of world trade in goods and services leading to greater

international interdependence

Benefits of globalisation to the UK

Low Inflation – due to greater competition and ability to produce in low cost countries

Wider choice of products and services

Larger Market for UK Products

Rising Productivity - caused by foreign companies setting up in UK and bringing with them new

methods and ideas (skills and technology transfer)

High levels of FDI

Costs of globalisation to the UK

Increased Competition

Loss of Jobs due to above

FDI may leave - to move to low cost countries

Increased Vulnerability to External Shocks – due to international interdependence

Environmental Problems - negative externalities associated with trade and economic development

Factors Contributing to Globalisation Improvements in Transportation The costs of moving goods between countries have been reduced due to new technologies and competition. Containerisation means that goods can quickly move from ship to lorry so handling and hence costs can be reduced. With lower transport costs, goods can be traded competitively around the world.

Improvements in ICT ICT has made sending and communicating information very quick and very cheap. Contracts, orders, information and payments can be sent between countries immediately and at low cost. The promotion of products via the internet to a worldwide market has greatly encouraged world trade.

Rising Living Standards As countries have become richer, their citizens have demanded not only more goods but a wider variety. This growth in consumer demand has stimulated world trade.

Decline in Protectionism More countries now encourage trade. There are fewer barriers to trade with fewer tariffs on imports. Organisations such as the WTO promote world trade.

Economies of Scale Technological improvements often mean that companies have to mass produce and sell to large markets. This means that domestic markets are not enough and large businesses have to look overseas. In addition, they often open up factories overseas to take advantage of cheaper production costs.

Pre Release Page 2.) Globalisation and Development

The evidence suggests that globalisation has been hugely important. The growth in world

trade has brought many benefits but it has also caused a range of different problems for a

number of countries. The intro suggests the focus of the case study is:

Globalisation – costs and benefits to developed and developing countries

How countries develop, barriers and the impact of trade

The impact of trade on different economies

The evidence sets the scene for the case study and also provides us with some possible

clues for the last question. Could it be something like?

Using the information in the case study and your own knowledge of economics,

evaluate the extent to which the benefits of international trade outweigh the costs

for the UK economy/ less developed countries

To what extent has increased globalisation benefited the UK / less developed

countries

To what extent has increased trade benefited all countries. Use the evidence from

the data to give reasons for your answer

Using the information in the case study and your own knowledge of economics,

evaluate why some countries benefit more from trade than others

Using the information in the case study and your own knowledge of economics,

evaluate the effectiveness of Aid for Trade and other policies in supporting the

growth of less developed countries

Page 3 – Figure 1.)

The evidence looks at the five most important import and export markets for UK services in

2011.

Export – goods and services which UK firms provide and sell to people and firms outside the

UK. They result in money coming into the UK.

Import - goods and services which UK firms and consumers buy from firms outside the UK.

They result in money flowing out of the UK.

Trade in services forms one part of the current account of the balance of payments.

From the evidence we can calculate the balance of trade in services with a number of

countries.

Balance of Trade in Services (Invisible Balance) – the value of exports of tertiary sector

services minus the value of imports of these services.

For example, the UK has an invisible trade surplus of £4.2bn with Ireland.

EU Countries - Most of the countries in the table are part of the EU. (only Switzerland isn’t)

Advantages of the EU Disadvantages of the EU

Larger Market - single market

Specialisation and Economies of Scale

Inward Investment

Free Movement of Labour

One Product Fits All

Higher Economic Growth and Standards of Living

More Competition for UK Business

MNCs drive out local firms

Job Losses

Movement of Jobs and Capital to centre of EU

Movement of Manufacturing Jobs to Low Cost Countries

Euro Countries - All but two of the countries (Sweden and Switzerland use the Euro)

Specialisation and Absolute Advantage - International Trade allows countries to specialise

in producing goods in which they have an advantage over another country. As countries

specialise in what they do best, costs of production should be lower and global output and

GDP should rise. Absolute Advantage is where a country is able to provide a good or

service, using fewer resources and at a lower cost than another country. The UK specialises

to some extent in services and imports a far higher value of goods.

Page 4 and 5 – Figure 2.) and Figure 3.)

The evidence looks at the value of UK exports and imports of services in 2011. From this

information we can calculate the balance of trade in services in 2011.

Balance of Trade in Services (Invisible Balance) = the value of exports of tertiary sector

services minus the value of imports of these services.

=£97,311m - £43,564m = £53747m surplus

Or £53bn surplus

Overall Balance of Payments Deficit – whilst the evidence suggests we have an invisible

trade surplus it does say that the overall current account showed a continued deficit.

The current account of the balance of payments is the balance of trade in goods and

services plus net investment incomes from overseas assets.

Potential Reasons for the Deficit

Loss of advantage in many industries – eg decline of traditional manufacturing industries due to

cheaper imports

Globalisation – cheaper to produce goods where labour costs are low – eg China

Growth in people’s real income – Pre 2008 the UK had a long period of uninterrupted economic

growth. As incomes rose people bought more imports BUT then recession hit …. we still have a

deficit

Exchange rate – A strong exchange rate can affect competitiveness BUT £ low in 2010 and 2011 so

not this

Low levels of productivity and Investment – Our productivity has been lower than many of our

competitors due to a lack of capital investment

Relatively weak product innovation – this can be linked to low spending by UK business on R&D

Dealing with the current account deficit – May be demand side in short term BUT mostly supply side

Manipulate the Exchange Rate – low interest rates should encourage the exchange rate to fall

increasing competitiveness

Keep Inflation Under Control

Encourage more spending on R&D – tax incentives

Improve Productivity - tax incentives, training, education

Tariffs – no, no, no

Recent Budgets – George’s budgets were an attempt to tackle this problem. By cutting the top rate of

income tax he hopes to encourage entrepreneurship. A lower rate of corporation tax should encourage

investment and attract more business to the UK. Will it work???

Page 6 – Figure 4.) – The evidence looks at the possible problems associated with increased

world trade. These have been covered at the start along with the benefits of international

trade. Free trade is likely to lead to more of these problems but also more of the benefits.

Problems of Increased World Trade

Increased Negative Externalities – higher pollution, CO2 emissions etc. These may result

from producing and transporting more goods.

Global Interdependence – Makes the UK more vulnerable to external shocks. For example

slow growth and recessions in the Eurozone countries are currently impacting on the UK as

these nations buy our exports

Possible Increased Income Inequality - Often the benefits of trade are not shared out

equally. Developed countries tend to benefit more from trade than some developing

countries. Also within countries the benefits may not be shared out equally. Entrepreneurs

and business people may see more of the benefits than the workers, particularly in

developing countries where wages are often low. Trade may also lead to income inequality

if people are made unemployed due to foreign competition.

Some Critics call for the use of protectionist policies ……

Embargo – this is a ban on the import of a good or service

Quota – limits the amount of a good that is allowed into a country. This restricts the supply

and raises the price

Tariff – makes foreign goods less competitive by increasing the price

Subsidy – makes our goods cheaper and therefore more competitive

Why Protectionism?

Infant Industry Argument – develop and protect industry so it can grow and gain the

economies of scale which will enable it to compete

Dumping – protect domestic industry against unfair foreign competition.

Protect Jobs

Prevent negative externalities

Political – usually linked to the jobs argument

Evaluation of Protectionism – we have discussed the benefits of trade loads of times. A

major problem with protectionism is it leads to retaliation. This is likely to lead to higher

prices, lower quality and less choice. The benefits of free trade are lost!!!

Page 7 – Figure 5.) - WTO Cuts Trade Forecast – the evidence suggests trade will grow by

3.3% rather than 4.5%. There are two key points here. This suggests global trade is

slowing, but it is still growing just by a lower amount. Also this is a forecast (a prediction)

so may not be accurate.

Why?

Interdependence – The Eurozone economies have been struggling with low growth and a

number of countries in recession. With lower or negative growth and potentially lower

incomes these countries will be buying fewer products from other countries than they

might have done reducing the growth of trade.

Important – It may be worth learning the costs and benefits of a single currency as the

Euro has been mentioned

Protectionism – where an action is taken that reduces international trade. With

disappointing growth some countries may look to reduce competition for domestic firms

through protectionist policies. The aim is to reduce imports and so increase demand for

domestic products boosting growth. Whilst this may reduce imports in the short term, in

the long term the benefits of free trade will be lost.

China – the evidence suggests China will continue to grow strongly. With the Eurozone

economies slowing there may be opportunities for UK firms to switch their focus to

exporting to BRIC economies such as India and China.

BRIC – Brazil, Russia, India and China

Emerging economies have contributed to the growth in trade. How?

Larger Market for Products – As countries such as China have developed they are

buying more products from the developed economies. The BRIC countries are highly

populated and, as incomes rise within these countries, they are buying more

products. Car manufacturers, for example, have seen this as a huge opportunity.

HOWEVER – they have also purchased more raw materials which has seen the price

of scarce resources such as metals etc soar (may be adding to cost push inflationary

pressures).

Source of Cheap Products – many manufactured goods are now being made in

countries such as India and China where there is a large supply of labour and wages

are low. This has meant products can be produced at low cost. This has helped keep

our inflation rate low.

Costs of Growth of China and India – Loss of (mainly) manufacturing jobs, rising prices of

raw materials, increased negative externalities

Page 7 – Figure 6.)

This evidence is all about the WTO although it does also mention India so there may be

some scope for the examiner to ask questions about India as well.

The WTO – The World Trade Organisation is responsible for trying to increase free trade. It

provides a set of rules so members know what they are and are not supposed to do. It also

settles disputes over trade between member countries. It does this as it believes free trade

is good for the following reasons

More choice at lower prices

Increased competition encourages firms to innovate

Exports of goods and services will boost economic growth

Encourages efficiency

Increases world output and wealth

WTO Trade Negotiations - Free Trade is advanced through a series of negotiations called

rounds. The evidence suggests that the latest round of negotiations might fail with

potentially disastrous consequences.

- countries may engage in more protectionist policies leading to the benefits of free

trade (see above) not being realised.

- with less trade global economic growth may be lower.

Page 8 – Figure 7.)

The evidence shows data on certain world economies. It is hard to predict how the

examiner may use this data!

Export – goods and services which a countries firms provide and sell to people and firms

outside that country. They result in money coming into the country

Specialisation and Absolute Advantage - International Trade allows countries to specialise

in producing goods in which they have an advantage over another country. As countries

specialise in what they do best, costs of production should be lower and global output and

GDP should rise. Absolute Advantage is where, a country is able to provide a good or

service, using fewer resources and at a lower cost than another country. In this evidence

the UK has an absolute advantage and specialises in services , manufactured goods etc and

Benin in cotton and palm oil.

National Income Per Capita – or income per person. This is mean income and it is

calculated by dividing total GDP by the total population. We can see that developing

economies such as India and less developed countries such as Benin have much lower per

capita incomes. This suggests that the benefits of increased trade and globalisation are

unevenly distributed.

Life Expectancy – seems higher in the richer economies as people have access to better

health care and also are less likely to be malnourished. HOWEVER – life expectancy in

Bangladesh is high suggesting per capita income to be not the only important factor.

Page 9. – Figure 8.) and Figure 9.)

The evidence shows the number of people living in poverty in Nigeria. In countries such as

China poverty has decreased markedly as a result of international trade and as its economy

has grown. This does not seem to be the case with Nigeria!

Explain what has happened to poverty in Nigeria

Between 1980 and 2010 poverty in Nigeria has increased sharply. In 1980 there were 17.1

million people in poverty whilst in 2010 this figure has grown to 112.47 million

We must differentiate between absolute and relative poverty.

Absolute Poverty – is where someone has insufficient income to live on. They cannot

afford the basic essentials such as food, clothing, shelter/housing. According to the world

bank absolute poverty is having less than $1.25 to live on

Relative Poverty - Is poverty defined relative to standards of income in society at a time.

(poverty relative to the situation). In the EU and the UK we define relative poverty as being

where you earn less than 60% of median income.

How trade reduces poverty – trade can help people to earn more money and therefore buy

more goods and services. For example as china has developed many people are now paid

more working in factories than they used to get from working on farms etc in rural areas.

Trade and economic growth also gives more tax revenue to the government which can be

used to tackle poverty

How trade leads to income inequality – Often the benefits of trade are not shared out

equally. Developed countries tend to benefit more from trade than some developing

countries. Also within countries the benefits may not be shared out equally. Entrepreneurs

and business people may see more of the benefits than the workers. Particularly in

developing countries where wages are often low. Trade may also lead to income inequality

if people are made unemployed due to foreign competition.

Barriers that prevent countries achieving the benefits of trade

Developing countries and their populations often face problems when it comes to accessing

the benefits of globalisation. A country may lack sufficient infrastructure or investment, or

may suffer from a corrupt and/or inefficient government

Poor Infastructure – Infrastructure is the basic facilities, services etc needed for the

functioning of a community or society, such as transportation and communications

systems, water and power lines. If infrastructure is poor a country will be less attractive to

FDI and costs will be higher making it less competitive

Poor Education and Training – Education and training are vital in a world that depends

more and more on advanced technology and knowledge. A poorly educated work force is

only going to be able to do poorly paid low skilled jobs. The competitiveness of countries is

oftern determined by how educated their workers are (also affects productivity)

Health and Population Problems – can lead to lower life expectancy and affect growth.

Look at the impact of Ebola on a number of African economies

Debt – High debt levels can mean countries have to use any revenue they gain to service

and pay debt back rather than investing in infrastructure and education

Weak Government – Weak corrupt government can mean the benefits of globalisation go

to a small proportion of people in a country rather than being used to benefit the general

population

Low FDI – developing economies can benefit greatly from FDI. This brings jobs, a multiplier

effect and also skills and technology transfer. However many of the issues above may make

a country less attractive to FDI

Location – can also have a big impact. Some countries have advantages because of where

they are situated. Others struggle because of natural disadvantages such as being

landlocked which makes it difficult, costly and slow for firms to get products to the

countries of trade partners.

Policies to Reduce Absolute Poverty

to reduce poverty in developing economies, the focus may be on different policies.

1. Education – greater spending on education and training can enable higher skilled workforce who are able

to earn higher wages

2. Aid – aid from developed countries can be used to invest in better health care, education and

infrastructure. However, some argue aid can encourage dependency.

3. Diversification of economy away from low value primary (eg agriculture) to higher value manufacturing.

A constraint developing economies may face is that their current absolute advantage is in the production

of primary products. However, these limit economic development due to volatile prices, low income

elasticity of demand and finite nature. Therefore, economic development may require government

encouragement of new industries in different sectors, such as manufacturing. This enables greater

economic development, and jobs in these areas tend to pay higher wages, but this may be difficult to do

without the right skills and infrastructure.

However - Attempts to diversify away from agriculture can have mixed results. Sometimes, countries with

a poor basic level of infrastructure struggle to make effective use of capital investment in manufacturing.

In addition land locked countries can find it harder to export products at a competitive price than those

with access to ports.

Poverty and Economic Growth A successful strategy of poverty reduction must have at its core measures to promote rapid and sustained

economic growth. If GDP rises income can more easily be shared and more jobs are created. In addition

the Government has more tax revenue to invest in infrastructure. This helps to diversify the economy away

from dependency on the primary sector towards higher value manufacturing. In addition the government

can invest more in improving education which helps workers earn more money.

Around two-thirds of poverty reduction within a country comes from growth BUT According to the United

Nations – “Economic growth will not produce jobs and cut poverty unless it is inclusive and equitable, and

unless the needs of the poor and marginalized are at the centre of development priorities. When men and

women have equal opportunities and freedoms, economic growth accelerates and poverty declines more

rapidly” In many developing countries large groups are socially excluded and poverty is perpetuated through

inequalities of power. For example:

Political – where the better off dominate positions of power and ensure the economy works in their

interest

Economic – in some countries workers are bonded to their employers in a kind of slavery

Social and Cultural Practices – that discriminate against groups

Any attempts to reduce poverty need to tackle the above.

Policies to Reduce Relative Poverty - May focus on redistributing income and wealth through,

taxation, government spending (transfer payments) and the use of policies such as the minimum wage.

Figure 9. Nigeria and the Oil Industry

Oil counts for 80% of Nigeria’s state revenue. This should mean the government has a significant source of

revenue to spend on improving infrastructure and the wellbeing of the population. However with 61% of

Nigerians living in poverty this doesn’t seem to be happening.

The evidence also suggests that the Nigerian oil industry could be even more important and generate even

more government revenue than it does. The problem is that Nigeria does not have the capacity to refine

crude oil into fuel. This could be because of:

A lack of knowledge / skills

A lack of sufficient infrastructure / investment

Either way the oil is being exported and processed elsewhere. If this could be refined into the higher

value product in Nigeria:

Value of Exports would likely be higher as fuel is worth more than oil

GDP and growth would be higher as Nigeria would be producing a higher value product (fuel)

The value of imports would be lower as Nigeria would not need to reimport the oil as fuel

The Current Account position would be stronger due to imports being lower and exports higher

Nigeria and the Benefits of Globalisation / Trade

Nigeria benefits from Globalisation as it is able to specialise in a product in which it has has an absolute

advantage. It has a larger market for its product (oil) and this industry generates government revenue and

also creates jobs and adds to its GDP

BUT it is not able to benefit fully as it does not currently have the capacity to turn the oil into the higher

value fuel.

Is Specialisation always good? - Nigeria and Dependency on Oil

We have talked about the benefits of specialisation and absolute advantage but is this always good?

Interdependence - Is Nigeria Vulnerable to External Shocks? - Oil accounts for 80% of Nigeria’s state

revenue and is a big export for the country. As Nigeria is so specialised it does mean that Nigeria is

vulnerable to any changes in demand for and the price of oil.

Is Nigeria overly dependent on oil?

Oil is a scarce resource and will one day run out

Currently the price of oil has been plummeting. This is likely to mean lower tax revenues for the

government, lower value of exports and weaker economic growth.

In addition Nigeria is not able to gain much of the benefits of its oil production as it does not have

the ability to process it into fuel.

Figure 10 and Figure 11 Supporting Growth in Developing Economies

A developing country, also called a less-developed country, is a nation with a lower

standard of living, underdeveloped industrial base, and low Human Development Index

(HDI) relative to other countries. HOWEVER – Developing countries will quite often have

higher growth rates than developed economies.

The evidence talks about trade related constrains that limit a countries ability to engage in

and benefit from international trade. (these have been discussed earlier under the

heading “Barriers that prevent countries achieving the benefits of trade”)

Please see the attached grid for how to support growth in developing countries

Factor Explanation – What is it? How does it work? How is it supposed to work?

Evaluation Why might it not work? Disadvantages / losers

Aid

Aid can be given in terms of money and in the form of goods (such as machinery, or people with specialist skills). Money can be given as a grant, or as a loan

Can be important for solving economic, environmental and food crises. Without aid the developing country would struggle to rebuild. e.g. after tsunami disaster. Provides foreign capital which can be used for investment and to increase the productive capacity of the economy. This can help the country to produce a higher value of goods and services

If aid is in the form of loans it can lead to countries getting into lots of debt. Servicing the interest on this debt can mean countries getting poorer and not having the money to spend on things such as infrastructure and education. A large % of aid is tied aid. This means it is fixed for certain investment projects which benefits the donor countries. In a sense this is not really aid, but it is classed as Aid. (e.g. building of dams in Argentina) There is a concern aid can lead to dependency. Developing countries come to rely on aid and lose incentives to improve productivity. This depends on the type of aid given. E.g. some aid can be just to improve infrastructure, this is more beneficial than handouts. Aid may not be used in an effective way by the governments in LDCs. It may be used for prestige projects that provide little benefit or may not be used for the purpose given at all Foreign aid has its limitations in increasing productive capacity. Arguably long term growth requires building up trade and new industries

Trade

Economic theory says that international trade is the most efficient way to encourage growth, because each country specialises in producing the goods and services in which it has an absolute advantage.

If trade is free countries should benefit because: They will be able to specialise in producing the goods in which they have an absolute advantage. By exporting these goods to a global market of 7 billion people this will add to economic growth and create employment and boost living standards Developing countries can use tax revenue gained from the above to improve infrastructure and education to fuel further development Trade will allow developing countries to purchase resources they do not have in their own countries or at a lower cost than they would be able to produce themselves Trade will allow countries to access capital and skilled labour

Trade rules favour richer countries. Countries dependent on commodities (coffee, tea, cocoa, food crops) or raw materials are at the mercy of international markets, because the prices of these products are lower than other goods, and tend to -fluctuate dramatically. If they can produce more and increase supply the price will often fall! Some countries are unable to benefit fully from trade due to barriers such as:

Being landlocked

Poor infrastructure

Education Levels An additional problem is that free trade is not equally free. Agricultural subsidies and other trade barriers in the US and the EU prevent poor countries from gaining access to the most important markets.

Aid for Trade Aid for Trade is about helping developing countries, in particular the least developed, to build the trade capacity and infrastructure they need to benefit from trade. It includes grants and loans targeted at trade-related programmes and projects

Aid could be used for education and training to increase labour productivity. This enables the country to become more competitive in the long run. Aid could be targeted to improve infrastructure enabling LDCs to send exports to market in a competitive way. Without this they will struggle to gain from trade Aid may include technical assistance helping countries to produce goods and services more effectively Aid may focus on productive capacity — investing in industries and sectors so countries can diversify exports and build on absolute advantages

Trade isn’t always fair (see above) Aid for trade may not always be effectively targeted. A Traidcraft report states that many Aid for Trade programs “have only an indirect effect on poor and excluded groups and poverty reduction.” In other words some critics claim it has not been very effective in reducing poverty due to inequalities of power (In many developing countries large groups are socially excluded and poverty is perpetuated through inequalities of power. – see earlier in revision guide)

Debt Relief/Cancellation

The foreign debt of many developing countries has hindered progress

Interest payments and debt repayments can use up much of a developing countries export revenue limiting economic development A number of countries have had debt cancelled and a number are working towards this. If debt is cancelled governments have more revenue to spend on improving infrastructure and investing in education enabling them to increase productive capacity, attract FDI and develop further. This is a virtuous circle as they should then generate even more revenue.

Not all poor countries have yet been able to benefit from debt cancellation. Some countries were excluded from the original deal because they had done a relatively good job in managing their debts. Many countries where debt has been cancelled are already getting back into debt. No incentive to manage debt if you know you will be bailed out. Debt cancellation doesn’t always benefit the people of the country just benefits those in power

Investment (including help with investment in human capital)

This may take the form of: Investment in a countries resources or FDI

Investment in a Countries Resources – for example investment in human capital through education and training can equip people with the knowledge and skills to take advantage of opportunities associated with international trade. Increases productivity making the country more competitive. It may also attract FDI FDI - Foreign Direct Investment Can create employment and lead to a local multiplier effect boosting growth Can lead to a skills and technology transfer where local citizens and firms learn from the MNC and as a result are able to produce their own higher value goods and services. This boosts both growth and economic development

FDI can mean investment falls as countries become reliant on inflows of capital FDI often sees profits repatriated to host countries and the benefits in terms of employment may be less than expected. MNCs have been accused of exploiting countries and their work forces

Fair Trade Schemes

Fairtrade is about better prices, decent working conditions and fair terms of trade for farmers and workers.

The key aims of Fair Trade are to:

Guarantee a higher price to certified producers

Achieve greater price stability for growers

Improve production standards. A grower will be able to receive a Fair Trade licence if it can improve working conditions, better pay and guarantees of environmental sustainability

This should help boost economic output and hence development. It should also reduce poverty and enable families to educate children.

The Fair Trade movement has critics 1. Impact on non-participating farmers: Some claim that by encouraging consumers to buy their products from Fairtrade sources, this cuts demand for farmers in poorer nations not covered by the Fairtrade label 2. Who captures the gains from Fair-Trade coffee? There is some evidence that a large part of the premium price goes to processors not the farmers 3. Others argue that the fundamental causes of poverty are not really addressed by Fairtrade. Greater investment needs to be made in raising farm productivity 4. Some economists believe that the fair trade movement has resulted for example in excess production of coffee, which has driven down world coffee prices.

Non Government Organisations

A non-governmental organization (NGO) is an organization that is neither a part of a government nor a conventional for-profit business. They include charities such as Oxfam

Charities and other NGOs may help developing countries with aid, help, advice, support and technology. In many cases they have a better knowledge of the country or situation than the government of a developed country

Effectiveness is very much dependent on the project or work being done

Figure 12 Economic indicators for selected world economies in 2012

GDP – measures the value of output of goods and services in a country for a period of time.

Note that GDP figures in this case are totals and not per head (per capita). Whilst India has

a relatively high GDP figure It is also has a population of over 1billion people. Countries

such as Australia, Germany the UK and France are developed economies.

GDP Growth – is in the increase in the value of goods and services in a country in a period

of time. It is worth noting that the developing and less developed economies such as

Ghana actually have higher growth figures. This suggests that over time they are catching

up the developed economies. At a country level at least the world is becoming more equal.

This suggests that globalisation and trade may well be helping the developing countries.

Exports of Goods and Services

Some countries more than others rely on exports to increase their GDP. In Germany over

half of its GDP is dependent on exports. This means:

Germany is more likely to be impacted by any global economic shocks. For example

if global growth slowed or if the value of its currency changes

Germany is better placed to benefit from any increases in global economic growth

rates

Other countries are less reliant on trade for their economic growth. In India for example

only 24% of its GDP comes from exports. This means India:

Was protected to some extent from the global recession of 2008 as it relied more on

domestic demand than external demand

BUT – India is less likely to benefit from any increases in growth rates around the

world

Figure 13 – Trade, growth and jobs

At the start of this revision guide (first page)we looked at the costs and benefits of

international trade it is worth looking again at this considering figure 13 (go on look again,

yes that means you ). The evidence suggests trade can increase economic growth in

countries at different levels of development

If TRADE IS FREE countries should benefit because:

They will be able to specialise in producing the goods in which they have an absolute

advantage. By exporting these goods to a global market of 7 billion people this will add to

economic growth and create employment in these export industries. Exporters are likely to

pay higher wages and boost living standards as a result.

Countries can use tax revenue gained from the above to improve infrastructure and

education to fuel further development and growth. This can also be used to support

people on low incomes.

Trade will allow countries to purchase resources they do not have in their own countries

or at a lower cost than they would be able to produce themselves. This helps keep

inflation low and may help increase competitiveness by enabling firms to reduce costs of

production

Trade will allow countries to access capital, new technology, skilled labour and ideas.

This will likely boost productivity and competitiveness adding to economic growth

BUT

If you read this report …

It suggests openness to trade is not sufficient to enable growth. There are barriers that

prevent countries benefiting from trade as we have discussed earlier

Eg - Some countries are unable to benefit fully from trade due to barriers such as:

Being landlocked

Poor infrastructure

Education Levels

Corruption

Also trade may not necessarily boost income levels for many due to inequalities of power.

For example:

• Political – where the better off dominate positions of power and ensure the economy works in their

interest

• Economic – in some countries workers are bonded to their employers in a kind of slavery

• Social and Cultural Practices – that discriminate against groups

Any attempts to reduce poverty need to tackle the above.

The Big Question – worth 12 marks

Here are all the previous 12 mark questions we have had

Possible Big Mark Questions

Using the information in the case study and your own knowledge of economics,

evaluate the extent to which the benefits of international trade outweigh the costs

for the UK economy

Using the information in the case study and your own knowledge of economics,

evaluate the extent to which the benefits of international trade outweigh the costs

for less developed countries

To what extent has increased globalisation benefited the UK / less developed

countries

To what extent has increased trade benefited all countries. Use the evidence from

the data to give reasons for your answer

Using the information in the case study and your own knowledge of economics,

evaluate why some countries benefit more from trade than others

Using the information in the case study and your own knowledge of economics,

evaluate the effectiveness of Aid for Trade and other policies in supporting the

growth of less developed countries

Using the information in the case study and your own knowledge of economics,

evaluate strategies to increase the growth of less developed countries

Examiners Report - feedback from last year. Read this and take note:

Data – don’t just trawl through. Pick out key trends and use the data to illustrate points

Answer the Specific Question! & be specific

Evaluation – prioritise, discuss which might have a larger influence. Look for counter

arguments to points you have made

Conclusion – prioritise or offer something new. Don’t just repeat points

Feedback on Last Question

What can we learn from this?

Responses must be specific with direct reference to the country in the question or

the data from the stimulus material

Develop points fully

Use the stimulus material to support arguments / evaluation. Support though - don’t

just repeat chunks of case study as an answer to the question.

Develop analysis using economic concepts – you need to demonstrate a strong

command of economics and use economic terminology

You need a justified conclusion