GLOBALIZATION -Local suppliers might benefit by contracts with MNCs.

-Work migration due to greater freedom of movement.

FEATURES OF GLOBALIZATION -Workers in less developed countries often learn new
-Free trade of goods and services across international skills.
borders. -The government may spend more money on educating
-People are free to live and work in any country they and training labor to attract MNCs.
choose. -Offshoring is a disadvantage, where cheaper labor in
-Interdependence between nations. foreign countries displaces labor at home.
-Capital can flow between countries.
-Free exchange of technology and intellectual property. THE ENVIRONMENT:
-Pollution due to transportation and production.
REASONS FOR GLOBALIZATION
-Fewer tariffs, quotas and lesser degree of protectionism.
-Reduced cost of transport.
-Reduced cost of communication.
-Increased significance of multinationals.
-Many countries have simplified their monetary systems.

IMPACT OF GLOBALIZATION
INDIVIDUAL COUNTRIES:
-Countries that provide sites for global companies
generally benefit from increase in employment and
GDP, and an improvement in current balance.
-Economic events in one country can have an impact on
many other countries.

GOVERNMENTS:
-Profits maybe by global companies can be taxed by the
host nation.
-MNCs might result in more local businesses being set
up, helping government economic policy in the
provision of employment.

PRODUCERS:
-Access to huge markets, lower costs, access to labor
and reduced taxation.

CONSUMERS:
-If an MNC can produce goods more cheaply in foreign
factories, prices are likely to be lower.,
-Wider choice.
-Improved and cheaper transport communications have
opened up tourism.

WORKERS:
-New jobs are created in the countries where MNCs
open new factories.
MULTINATIONAL COMPANIES -Developing skills.
-Developing capital and encouraging local suppliers to
(MNCs) AND FOREIGN DIRECT
invest in new capital projects to attract MNCs.
INVESTMENT -Contributing to taxes.

FEATURES OF MNCs DISADVANTAGES OF MNCs/FDI

-Huge assets (land, buildings etc.) and revenue. -Tax avoidance.
-Highly qualified and experienced executives. -Environmental damage.
-Powerful marketing and advertising. -Moving profits abroad due to repatriation, meaning the
-Highly advanced and up-to-date technology. host country loses out.
-Highly influential, both economically and politically.
-Vert efficient since they can exploit huge economies of
scale. INTERNATIONAL TRADE
FOREIGN DIRECT INVESTMENT (FDI) REASONS WHY COUNTRIES TRADE WITH
-FDI is when a company makes an investment in a
EACH OTHER
foreign country, such as a construction of a factory.
-Obtaining goods that cannot be produced domestically.
-Purchase of shares in a foreign business is another part
-Obtaining goods that can be bought more cheaply from
of FDI.
overseas.
-Selling off unwanted commodities.
REASONS FOR THE EMERGENCE OF
MNCs/FDI
ADVANTAGES OF FREE TRADE
ECONOMIES OF SCALE:
-Lower prices and increased choice of consumers.
-As companies get bigger and bigger, their costs get
-Lower input prices for a country’s industry. (inputs
lower and lower, hence the emergence of MNCs.
such as raw materials like iron, zinc or coal).
-Wider markets for a business and hence the reduced risk
ACCESS TO NATURAL REASOURCES/CHEAP
of business enterprise.
MATERIALS:
-MNCs are happy to invest overseas (FDI) in countries
DISADVANTAGES OF FREE TRADE
where there is cheap supply of resources/materials.
-Competition for domestic businesses.
-MNCs may also supply other countries with products
-Unemployment, as cheap foreign goods may displace
that are locally in shortage.
domestic industries.
-Unemployment and damage to the economy if demand
LOWER TRANSPORT AND COMMUNICATION
patterns change while a country is too dependent on a
COSTS:
narrow range of goods.
-Developments in the speed of transport and
-Dumping from foreign countries.
communication and their decrease in price have driven
the growth of MNC/FDI activity.

ACCESS TO CUSTOMERS IN DIFFERENT

REGIONS:
-MNCs have successfully developed because they can
sell far more goods in global markets than in domestic.

ADVANTAGES OF MNCs/FDI
-Job creation.
-Investment in infrastructure.
PROTECTIONISM them and increase demand for local products.

QUOTAS:
WHAT PROTECTIONISM IS
-A quota is a physical limit on the quantity of imports
-The approach used by governments to protect domestic
allowed into a country, and are set to lessen the threat
producers from foreign competition, usually using trade
domestic producers face.
barriers.
-Quotas also increase prices because fewer of the
.
cheaper imports are available.
REASONS FOR PROTECTIONISM
-However, consumer choice might be restricted and
PREVENTING DUMPING:
domestic producers may be over-protecting, failing to
-Dumping is when an overseas firm sells large quantities
improve efficiency.
of a product below cost in the domestic market, which
destroys domestic producers.
SUBSIDIES:
-Foreign governments may subsidize businesses to dump
-Subsidies can be given to domestic producers to make
in other countries to destroy foreign competition.
them lower prices by increasing supply, and thus
increasing their demand.
PROTECTING EMPLOYMENT:
-However, the disadvantage is that subsidies cost the
-Trade barriers may be used to protect domestic
government money.
industries and save jobs.

DISADVANTAGES OF PROTECTIONISM
PROTECTING INFANT INDUSTRIES:
-Consumers will end up paying more for products.
-Many governments want to product new industries from
-Lesser choice.
foreign rivals until they can become sizably established.
-If domestic producers are not exposed to competition,
the quality of their goods might decrease.
TO GAIN TARIFF REVENUE:
-Global growth will slow down.
-A government can raise revenue if it imposes tariffs on
-People’s living standards all over the world might
imports.
lower.
-Fewer jobs will be created.
PREVENTING THE ENTRY OF HARMFUL OR
UNWANTED GOODS:
-Protectionism can be justified if overseas producers try
to sell harmful goods.

REDUCE CURRENT DEFICITS:

-Trade barriers need to be used if a country has a very
large current deficit, and thus increase exports and
reduce imports.

RETALIATION:
-A country might want to retaliate against dumping or
foreign countries imposing trade barriers on its products,
and this might lead to a damaging trade war.

METHODS OF PROTECTION
TARIFFS/CUSTOM DUTIES:
-Imposing tariffs or duties means to tax imports to make
them more expensive.
-More expensive imports will reduce the demand for
TRADING BLOCS powerful, becoming a monopoly.
-Certain members may also benefit more than others.
WHAT A TRADING BLOC IS -Countries may start to rely too heavily on trade within
-Groups of countries situated in the same region that join the bloc.
together and enjoy free trade.
IMPACT OF TRADING BLOCS ON NON-
TYPES OF TRADE BLOCS MEMBER STATES
PREFERENTIAL TRADING AREAS (PTAS): -Non-members will face common trade barriers when
-Members agree to remove trade barriers on only a selling goods to any member inside the bloc
specific range of goods and services.

FREE TRADE AREAS (FTAs):

-Trade between members of an FTA is completely free
of trade barriers.

CUSTOMS UNIONS:
-Similar to FTAs but members of a customs union
impose a common set of trade-barrier on non-members.

COMMON MARKETS:
-Like customs unions but also allow the free movement
of labor and capital between member countries.
-Common markets have the same trading standards and
regulations.

ECONOMIC UNIONS:
-Most developed type of trade blocs, and members are
likely to even share cultures and political ties.

IMPACT OF TRADING BLOCS ON MEMBER

STATES
ADVANTAGES:
-Cheaper goods.
-More consumer choice.
-Faster economic growth.
-Firms will have access to larger markets and extra
competition will improve quality of goods.
-FDI is invited,.
-Closer cooperation.
-Reduced cross-border conflict.

DISADVANTAGES:
-Trade blocs encourage free trade regionally instead of
globally.
-There is financial cost to the members’ governments
and therefore the taxpayer.
-Firms within a trade bloc might merge and become too
EXCHANGE RATES AND THEIR thus domestic currency’s supply increases in the foreign
exchange market.
DETERMINATION
-This lowers its exchange rate.

EXCHANGE RATES DEMAND FOR IMPORTS:

-An exchange rate is the price of one currency in terms -If foreign imports have high demand in a country, then
of another. domestic currency would get exchanged for foreign
-They are needed because different countries use currency to pay foreign firms.
different currencies. -Domestic currency gets exchanged for foreign currency,
and thus domestic currency’s supply increases in the
FACTORS AFFECTING THE DEMAND FOR foreign exchange market.
A CURRENCY -This lowers its exchange rate.
INTEREST RATES:
-If a country has high interest rates, foreign savers may HOW EXCHANGE RATES ARE
would want to put their money in that country’s banks. DETERMINED
-Foreign savers first need to exchange their own -Currency is traded on the foreign exchange market like
currency to that country’s currency, thus increasing its any other commodity.
demand and driving its exchange rate up. -Thus, market forces affect the price and supply of the
currency, and determine the exchange rates.
CURRENCY SPECULATORS:
-If speculators think the price of a currency will be going
THE EFFECT OF CHANGES IN SUPPLY
up, they will quickly want to buy that currency.
AND DEMAND ON EXCHANGE RATES
-This increases its demand and drives up the exchange
Please see pages 337 and 338 for demand-supply
rate.
diagrams
-Increase in supply lowers the exchange rate.
DEMAND FOR EXPORTS:
-Increase in demand raises the exchange rate.
-If demand for exports produced by domestic firm
increases, then foreign consumers need to pay these
firms in their own currency.
-Thus, the demand for that currency increases and its
exchange rate is driven up.

FACTORS AFFECTIN THE SUPPLY FOR A

CURRENCY
INTEREST RATES:
-If a foreign country has higher interest rates, domestic
savers would want to put their money there.
-Domestic currency gets exchanged for foreign currency,
and thus domestic currency’s supply increases in the
foreign exchange market.
-This lowers its exchange rate.

CURRENCY SPECULATORS:
-If speculators think the price of a currency is going to
fall, they will quickly want to sell it for another
currency.
-That currency gets exchanged for foreign currency, and
IMPACT OF CHANGING EXCHANGE -Devaluation will only work if demand for exports and
imports is price elastic.
RATES
EXCHANGE RATE CHANGES AND PRICE
ELASTICITY
APPRECIATION, REVALUTAION,
PRICE ELASTIC EXPORTS AND IMPORTS:
DEPRECIATION AND DEVALUATION
-If imports and exports are price elastic, then changes in
-When a nation’s currency gets stronger it is said to
the exchange rate will affect their demand.
appreciate.
-This is because changes in the ER directly mean the
-If the government raises the exchange rate itself (only in
prices for exports and imports change, and thus demand
countries where ER is fixed), the rate is said to have
changes too.
been revalued.
-Depreciation and devaluation is the opposite of the
PRICE INELASTIC EXPORTS AND IMPORTS:
above two respectively.
-If imports and exports are price inelastic, changes in the
ER will hardly do much.
IMPACT OF EXCHANGE RATE
APPRECIATION
IMPACT ON EXPORTS:
-A country is likely to lose demand for its exports if its
exchange rate gets stronger, because exports become
more expensive.

IMPACT ON IMPORTS:
-If foreign imports are cheaper, due to a lower exchange
rate for their currency, demand is likely to rise for them.

IMPACT ON THE CURRENT ACCOUNT:

-When the ER appreciates, the impact on the current
account is likely to be negative due to less demand for
exports.

IMPACT OF EXCHANGE RATE

DEPRECIATION
-This is exactly the opposite of the impact of exchange
rate appreciation on imports, exports and the current
account.

EXCHANGE RATES AND GOVERNMENT

POLICY
-To fix a persistent current account deficit, a government
may let the currency depreciate.

LOWERING INTEREST RATES:

-This is a method to the let the currency depreciate.
-However, the government might not have complete
control over the interest rate.
-Reducing the IR to devalue a currency may also conflict
with other policies, such as reducing inflation.