8. International Trade
Content
International Trade
Definitions:
1. International trade: is the exchange of goods and services between
countries.
2. The Theory of Absolute Advantage: states that a country is said to
have absolute advantage over another in the production of a good if
with the same amount of resources, she can produce more of that
commodity.
3. The Theory of Comparative Advantage: States that a country is said to
have comparative advantage over another country in producing a good
when it can produce that good at a lower opportunity cost than
another country i.e. it has to forego less of the other goods in other to
produce the commodity. It states that countries can still benefit from
specialisation and trade even though one country has absolute
advantage in all goods i.e. ability to produce more of all goods given
the same amount for resources, provided opportunity costs of
producing various goods differ in two countries and both of them can
gain from mutual trade if they specialise in producing (and exporting)
those goods that have relatively low opportunity costs compared with
other countries.
4. The Law of Comparative Advantage: states that trade can benefit all
countries if they specialise in the goods in which they have a
comparative advantage.
5. Terms of Trade: is the rate at which exports can be exchanged for
imports.
6. Balance of Trade: is the difference between the value of commodity
exports and imports.
7. Protectionism: is the policy of sheltering domestic industries from
foreign competition through barriers.
8. Infant industry is an industry with potential comparative advantage but
too young or undeveloped to realise its potential especially when faced
with more established foreign competition.
9. Sunset industry is an industry in decline.
10.
Dumping: is the selling of goods in foreign market below
marginal cost or below the price sold at domestic market.
11.
Globalisation: is the increasing integration of national economies
in terms of financial flows, trade, movement of factors production,
ideas, and changes in information and technology.
Reasons for trade
1. Increased of competition
2.
3.
4.
5.
6.
a. Domestic firms faced competition from foreign firms improve
efficiencies + reduce monopoly power improved consumers’
welfare
Economies of scale
a. They specialise in industries with potential EOS gain EOS in
the long run cost savings CA
b. The small domestic market limits potential EOS with trade
bigger market large-scale production gain EOS CA
Economic growth
a. The greater demand for exports, especially if it is price inelastic,
increases aggregate demand, national income and output,
resulting in economic growth.
Greater variety of goods and services
a. It consumes goods and services previously unavailable in
domestic market due to the lack of CA>
Dynamic gains
a. The competition promotes R&D, innovation and technological
advances which increases productivity and efficiencies.
Non-economic benefits
a. They promote international cooperation, minimise conflicts and
foster closer ties.
b. There are cultural and language exchanges.
Limitation
1. Over-dependence
a. It is dependent on other countries for essential goods and
services e.g. weapons, oil, food, water leading to higher risks of
falls in supply due to unforeseen circumstances e.g. political
conflicts between trading countries or disasters. Trade is
hindered, therefore countries to produce essential goods and
services even though there is comparative disadvantage.
2. Economic stability
a. Transmission of economic cycles: If the economy is heavily
dependent on trade, recession in trading partner threatens
economic growth, national income and employment in the
domestic country.
3. Dumping
a. The foreign firm sells goods and services below the cost of
production in domestic firms, aims to drive out competition and
aim market or monopoly power, consumers enjoy lower prices
now but higher prices in the future.
4. Income disparity
a. Industries expand, requiring more skilled labour and less
unskilled labour so the income of skilled labour increases but the
income of unskilled labour decreases. This greater income
disparity may result in social disintegration and unhappiness
between income groups.
5. Environmental effects
a. The greater demand for goods and services due to the expansion
of industries and production of some goods and services may
result in negative externalities e.g. pollution resulting in
environmental degradation.
Absolute Advantage
1. Assumptions
a. It consists of two countries
b. Two goods are traded
c. There is equal quantity and quality of resources.
How it works: Country A has an advantage in the production of goods A and
country B has an absolute advantage in the production of goods B. Both
countries specialise to increase in total world output, specialising in goods
and in which the country has absolute advantage in. They trade with each
other for goods which it does not have absolute advantage in.
Comparative Advantage
Assumptions
1. It involves two countries.
2. Two goods are traded.
3. Equal quantity and quality of resources; each country devotes 50% of
her resources to the production of each good.
4. There is constant opportunity cost of production.
5. There is perfect actor mobility within country but factor immobility
between countries.
6. It has negligible transport costs.
7. There is no trade or currency restrictions or problems.
How it works: Country A has lower opportunity cost in the production of
goods A and country B has lower opportunity cost in the production of goods
B. Country A has and country B has comparative advantage in the production
of goods B. They specialise in goods in which the country has CA in and trade
with each other for goods which it does not have CA in. Total world output
increases after trade.
Determinants
1. Factors of Production
a. Quality and quantity lower cost of production e.g. abundant
land, CA in land-intensive goods, educated labour, CA in
knowledge-based industry.
2. Research and development
a. Better production methods and technology lower cost of
production develop CA e.g. US has comparative advantage in
high-tech gadgets.
3. Exchange rate
a. Appreciation/ depreciation prices of imports/ exports affected
price competitiveness of exports e.g. China’s undervalued
exchange rate makes exports cheaper than trading rivals
enjoy CA>
4. Inflation rate
a. High and persistent inflation: Exports are more expensive relative
to other countries so lose price competitiveness in world market
thus lose CA.
Why do opportunity costs differ?
1. Different in productivity
a. High labour productivity CA in value-added knowledge based
industries e.g. high tech goods
b. Low labour productivity --. CA in labour intensive industries e.g.
textiles
2. Differences in factor endowments
a. Land fertile land CA in land-intensive industries.
b. Labour abundant labour CA in labour-intensive industries
c. Climate especially agriculture
d. Geographical location e.g. Singapore as a port hub, CA in port
services
3. Differences in technology
a. Access to new technology cost savings CA
Limitations
1. Increasing opportunity cost
a. Lose CA if specialise further resources less suitable for
production of the goods.
2. Factors immobility
a. Factors e.g. labour: mismatch of skills and geographical barriers
reduces specialisation unable to enjoy CA
3. Transport costs
a. It may be high so cheaper to produce domestically even though
there is no CA.
4. Protectionism
a. Some countries use protectionism to protect their domestic
industries and distorts CA.
Terms of Trade
Terms of trade index
1. Measurement: In the base year, TOT index is 100.
2. Rise: TOT improved favourable every unit of exports exchanged
for more imports than before due to increase in export prices/
decrease in important prices/ export prices increase faster than import
prices (ceteris paribus).
3. Fall: TOT worsened unfavourable every unit of exports exchanged
for less imports than before due to decrease in export prices/
increase in import prices/ export prices increase slower than increase
in import prices (ceteris paribus).
Effects
1. Balance of trade (BOT): Positive but = surplus; negative BOT = deficit
effects of TOT on BOT depends on price elasticity of exports and
imports
a. The demand for exports is price elastic export price increases
(TOT improves) more than proportionate fall in quantity
demanded export revenue falls BOT worsens.
b. The demand for exports is price inelastic export price
increases (TOT improves) less than proportionate fall in
quantity demanded export revenue rises BOT improves.
c. The demand for imports is price elastic import price decreases
(TOT improves) more than proportionate increase in quantity
demanded import expenditure rises BOT worsens.
d. The demand for imports is price inelastic import price
decreases (TOT improves) less than proportionate increase in
quantity demanded import expenditure falls BOT improves.
2. Standard of living
a. Favourable TOT each unit of exports exchanged for more
imports if demand for export is price elastic SOL worsens but if
demand for exports is price inelastic, SOL improves.
b. Unfavourable TOT each unit of exports exchanged for less
imports if demand for export is price lactic SOL improves but if
demand for exports is price inelastic SOL worsens.
Patterns of Trade
Factors
1. Supply-side factors
a. Comparative advantage
b. Fragmentation
c. Transport costs
2. Demanded-side factors
a. Consumer tastes and preferences
b. Trade agreements and restrictions
c. Changes in income
d. National interest
Trade between Singapore and the rest of the world
1. Main exports
a. Oil petroleum trade
b. Non-oil domestic exports -> pharmaceutical electronics,
engineering
c. Re-exports entrepot trade goods imported to Singapore and
then exporting without value added Singapore acts as
distributor
2. Main imports
a. Food and beverages
b. Crude oil
c. Electronic parts
d. Machinery
3. Main exports
a. Malaysia
b. China
c. United States
4. Main importers
a. China
b. Malaysia
c. United states
d. European Union
Inter- vs intra-industry trade
1. Inter-industry trade
a. Trading of goods and services from different industries e.g.
Singapore exports electronics to US and imports cars from US.
2. Intra-industry trade
a. Trading of goods and services from the same or similar industry,
e.g. Japan exports cars such as Honda and Toyota to US and also
imports cars such as Ford from US.
Protectionism
Forms of barrier
1. Tariffs
a. Raise price of imports increase price consumers pay aimed
at decreasing consumption of imports or getting consumers to
switch to domestic goods.
i. Specific tax per unit of goods and services imported.
ii. Ad Valorem fixed percentage of tax on the price of goods
and services imported
b. Import quotas
i. This is the legal limit on the quantity of imports allowed in
a given time period.
c. Export subsidies
i. Given to producer to increase competitive against
foreign firms by lowering price of goods and services.
d. Technical and Administration Barriers
i. Requirements e.g. technical, quality, safety unnecessary
bureaucracy and red tape
e. Exchange control
i. Government controls exchange rate (buy/sell foreign
currencies) control availability of foreign currency in
market regulate imports and exports aimed at
achieving a healthy balance of payment and stabilising the
country’s exchange rate.
f. Embargo
i. This is a total ban on certain on certain goods and services
e.g. narcotics, pornography
Quota vs Tariffs
1. Quota
a. This is preferred when the demand for import is price inelastic
tariff raises price but does not limit quantity
b. It cannot adjust tariff rates due to treaties.
c. There is certainty and precision quantity of import definition
decreased.
d. The government does not earn revenue
2. Tariffs
a. The quota supports collusion among importers and exporters
thus encouraging monopoly
b. The quota distorts market forces/ price mechanism
c. The government earns revenue
The case for protectionism
1. Infant industry
a. Temporary protections gives time to develop workers’
experience, technology and reputation gains EOS and
expands.
2. Evaluation
a. It results in complacency sheltered from competition and
inefficient
b. It is difficult to identify infant industry not all new industries
are infant industries need to have potential CA sometimes
the government protects the wrong industry.
c. The ‘permanent’ infant is given extended periods of protection
beyond the specified time frame so CA is not developed.
Advantages
1. Trade creation
a. More trading + lower cost greater variety + lower prices
greater consumer welfare
2. Greater output and better efficiencies
a. Greater mobility of factors of production + exchange of ideas and
technology large market firms can expand and reap egos.
b. Open to trade more competition greater incentive to
improve efficiencies.
Globalisation
Involves
1.
2.
3.
4.
5.
Expansion of goods and services traded internationally
Large capital transfers across countries
Shift pf production and consumption across countries e.g. out-sourcing
Movement of factors of production
Exchange of ideas, information and technology.
Factors
1. Technological innovations
a. Improvement in transportation declining transport costs +
increased efficiency + speed of travel lowering prices +
increased cross-border trading facilitates business relations
e.g. aviation
b. Information and communication technology declining
communication costs increase transition of information
production of new products that contributes to economic
revolution e.g. Internet
c. Economies of scale increased MES due to technological
improvements.
d. Change in production methods cheaper and more efficient
methods + discovery of new resources
2. Economic policies
a. Decline in protectionism more FTA signed minimises trade
barriers
b. Deregulation of financial markets more open to capital flows
more FDI
c. Differences in tax systems lower tax rate increase post-tax
profits attract MNCs.
3. Political changes
a. Example: Cold War, Berlin Wall, China economics reform.
Positive Effects
1. Higher economic growth
a. Greater access to foreign markets increase in exports
increase in AD actual economic growth
b. FDI inflows increase in AS potential economic growth
2. Higher consumer welfare
a. Greater variety of goods and services traded greater variety of
goods and services available for consumers higher consumer
welfare
b. Increase competition greater efficiency lower prices
higher consumer welfare
3. Technological progress and dynamic efficiency
a. Increased competition firms have incentive to invest in R&D
develop new products with better quality, functions, etc.
stimulate technological improvement increase AS potential
economic growth
Negative effects
1. Greater volatility and instability
a. Greater interconnectedness trade cycles are transmitted from
country to country at a faster rate especially urging recession
global effects lower employment rates and national income,
e.g. 2008 US Subprime Crisis
2. Increased unemployment
a. Labour cheaper in developing countries production shifts to
developing countries developed countries experience high
unemployment rate
3. Greater inequality
a. Benefits developed countries more than developing countries
unfair trade practices e.g. developed countries exercise
protectionism against developing industries, especially
agricultural industry.
b. Benefits the skilled and educated more than the low-skilled
labour MNCs exploit low-skilled labour by paying low wages,
especially in developing countries where labour is abundant.
4. Greater vulnerability to capital flows
a. FDI inflow benefits economic growth and employment BUT
excessive inflow inflationary pressures globalisation
spreads to other countries e.g. 1997 Asian Financial Crisis
5. Environmental costs
a. Unsustainable economic growth pollution, depletion of natural
resources MNCs exploit cheap resources lack of
responsibility no consideration for environmental damage and
protection.
Definitions:
1. International trade: is the exchange of goods and services between
countries.
2. The Theory of Absolute Advantage: states that a country is said to
have absolute advantage over another in the production of a good if
with the same amount of resources, she can produce more of that
commodity.
3. The Theory of Comparative Advantage: States that a country is said to
have comparative advantage over another country in producing a good
when it can produce that good at a lower opportunity cost than
another country i.e. it has to forego less of the other goods in other to
produce the commodity. It states that countries can still benefit from
specialisation and trade even though one country has absolute
advantage in all goods i.e. ability to produce more of all goods given
the same amount for resources, provided opportunity costs of
producing various goods differ in two countries and both of them can
gain from mutual trade if they specialise in producing (and exporting)
those goods that have relatively low opportunity costs compared with
other countries.
4. The Law of Comparative Advantage: states that trade can benefit all
countries if they specialise in the goods in which they have a
comparative advantage.
5. Terms of Trade: is the rate at which exports can be exchanged for
imports.
6. Balance of Trade: is the difference between the value of commodity
exports and imports.
7. Protectionism: is the policy of sheltering domestic industries from
foreign competition through barriers.
8. Infant industry is an industry with potential comparative advantage but
too young or undeveloped to realise its potential especially when faced
with more established foreign competition.
9. Sunset industry is an industry in decline.
10.
Dumping: is the selling of goods in foreign market below
marginal cost or below the price sold at domestic market.
11.
Globalisation: is the increasing integration of national economies
in terms of financial flows, trade, movement of factors production,
ideas, and changes in information and technology.
Reasons for trade
1. Increased of competition
2.
3.
4.
5.
6.
a. Domestic firms faced competition from foreign firms improve
efficiencies + reduce monopoly power improved consumers’
welfare
Economies of scale
a. They specialise in industries with potential EOS gain EOS in
the long run cost savings CA
b. The small domestic market limits potential EOS with trade
bigger market large-scale production gain EOS CA
Economic growth
a. The greater demand for exports, especially if it is price inelastic,
increases aggregate demand, national income and output,
resulting in economic growth.
Greater variety of goods and services
a. It consumes goods and services previously unavailable in
domestic market due to the lack of CA>
Dynamic gains
a. The competition promotes R&D, innovation and technological
advances which increases productivity and efficiencies.
Non-economic benefits
a. They promote international cooperation, minimise conflicts and
foster closer ties.
b. There are cultural and language exchanges.
Limitation
1. Over-dependence
a. It is dependent on other countries for essential goods and
services e.g. weapons, oil, food, water leading to higher risks of
falls in supply due to unforeseen circumstances e.g. political
conflicts between trading countries or disasters. Trade is
hindered, therefore countries to produce essential goods and
services even though there is comparative disadvantage.
2. Economic stability
a. Transmission of economic cycles: If the economy is heavily
dependent on trade, recession in trading partner threatens
economic growth, national income and employment in the
domestic country.
3. Dumping
a. The foreign firm sells goods and services below the cost of
production in domestic firms, aims to drive out competition and
aim market or monopoly power, consumers enjoy lower prices
now but higher prices in the future.
4. Income disparity
a. Industries expand, requiring more skilled labour and less
unskilled labour so the income of skilled labour increases but the
income of unskilled labour decreases. This greater income
disparity may result in social disintegration and unhappiness
between income groups.
5. Environmental effects
a. The greater demand for goods and services due to the expansion
of industries and production of some goods and services may
result in negative externalities e.g. pollution resulting in
environmental degradation.
Absolute Advantage
1. Assumptions
a. It consists of two countries
b. Two goods are traded
c. There is equal quantity and quality of resources.
How it works: Country A has an advantage in the production of goods A and
country B has an absolute advantage in the production of goods B. Both
countries specialise to increase in total world output, specialising in goods
and in which the country has absolute advantage in. They trade with each
other for goods which it does not have absolute advantage in.
Comparative Advantage
Assumptions
1. It involves two countries.
2. Two goods are traded.
3. Equal quantity and quality of resources; each country devotes 50% of
her resources to the production of each good.
4. There is constant opportunity cost of production.
5. There is perfect actor mobility within country but factor immobility
between countries.
6. It has negligible transport costs.
7. There is no trade or currency restrictions or problems.
How it works: Country A has lower opportunity cost in the production of
goods A and country B has lower opportunity cost in the production of goods
B. Country A has and country B has comparative advantage in the production
of goods B. They specialise in goods in which the country has CA in and trade
with each other for goods which it does not have CA in. Total world output
increases after trade.
Determinants
1. Factors of Production
a. Quality and quantity lower cost of production e.g. abundant
land, CA in land-intensive goods, educated labour, CA in
knowledge-based industry.
2. Research and development
a. Better production methods and technology lower cost of
production develop CA e.g. US has comparative advantage in
high-tech gadgets.
3. Exchange rate
a. Appreciation/ depreciation prices of imports/ exports affected
price competitiveness of exports e.g. China’s undervalued
exchange rate makes exports cheaper than trading rivals
enjoy CA>
4. Inflation rate
a. High and persistent inflation: Exports are more expensive relative
to other countries so lose price competitiveness in world market
thus lose CA.
Why do opportunity costs differ?
1. Different in productivity
a. High labour productivity CA in value-added knowledge based
industries e.g. high tech goods
b. Low labour productivity --. CA in labour intensive industries e.g.
textiles
2. Differences in factor endowments
a. Land fertile land CA in land-intensive industries.
b. Labour abundant labour CA in labour-intensive industries
c. Climate especially agriculture
d. Geographical location e.g. Singapore as a port hub, CA in port
services
3. Differences in technology
a. Access to new technology cost savings CA
Limitations
1. Increasing opportunity cost
a. Lose CA if specialise further resources less suitable for
production of the goods.
2. Factors immobility
a. Factors e.g. labour: mismatch of skills and geographical barriers
reduces specialisation unable to enjoy CA
3. Transport costs
a. It may be high so cheaper to produce domestically even though
there is no CA.
4. Protectionism
a. Some countries use protectionism to protect their domestic
industries and distorts CA.
Terms of Trade
Terms of trade index
1. Measurement: In the base year, TOT index is 100.
2. Rise: TOT improved favourable every unit of exports exchanged
for more imports than before due to increase in export prices/
decrease in important prices/ export prices increase faster than import
prices (ceteris paribus).
3. Fall: TOT worsened unfavourable every unit of exports exchanged
for less imports than before due to decrease in export prices/
increase in import prices/ export prices increase slower than increase
in import prices (ceteris paribus).
Effects
1. Balance of trade (BOT): Positive but = surplus; negative BOT = deficit
effects of TOT on BOT depends on price elasticity of exports and
imports
a. The demand for exports is price elastic export price increases
(TOT improves) more than proportionate fall in quantity
demanded export revenue falls BOT worsens.
b. The demand for exports is price inelastic export price
increases (TOT improves) less than proportionate fall in
quantity demanded export revenue rises BOT improves.
c. The demand for imports is price elastic import price decreases
(TOT improves) more than proportionate increase in quantity
demanded import expenditure rises BOT worsens.
d. The demand for imports is price inelastic import price
decreases (TOT improves) less than proportionate increase in
quantity demanded import expenditure falls BOT improves.
2. Standard of living
a. Favourable TOT each unit of exports exchanged for more
imports if demand for export is price elastic SOL worsens but if
demand for exports is price inelastic, SOL improves.
b. Unfavourable TOT each unit of exports exchanged for less
imports if demand for export is price lactic SOL improves but if
demand for exports is price inelastic SOL worsens.
Patterns of Trade
Factors
1. Supply-side factors
a. Comparative advantage
b. Fragmentation
c. Transport costs
2. Demanded-side factors
a. Consumer tastes and preferences
b. Trade agreements and restrictions
c. Changes in income
d. National interest
Trade between Singapore and the rest of the world
1. Main exports
a. Oil petroleum trade
b. Non-oil domestic exports -> pharmaceutical electronics,
engineering
c. Re-exports entrepot trade goods imported to Singapore and
then exporting without value added Singapore acts as
distributor
2. Main imports
a. Food and beverages
b. Crude oil
c. Electronic parts
d. Machinery
3. Main exports
a. Malaysia
b. China
c. United States
4. Main importers
a. China
b. Malaysia
c. United states
d. European Union
Inter- vs intra-industry trade
1. Inter-industry trade
a. Trading of goods and services from different industries e.g.
Singapore exports electronics to US and imports cars from US.
2. Intra-industry trade
a. Trading of goods and services from the same or similar industry,
e.g. Japan exports cars such as Honda and Toyota to US and also
imports cars such as Ford from US.
Protectionism
Forms of barrier
1. Tariffs
a. Raise price of imports increase price consumers pay aimed
at decreasing consumption of imports or getting consumers to
switch to domestic goods.
i. Specific tax per unit of goods and services imported.
ii. Ad Valorem fixed percentage of tax on the price of goods
and services imported
b. Import quotas
i. This is the legal limit on the quantity of imports allowed in
a given time period.
c. Export subsidies
i. Given to producer to increase competitive against
foreign firms by lowering price of goods and services.
d. Technical and Administration Barriers
i. Requirements e.g. technical, quality, safety unnecessary
bureaucracy and red tape
e. Exchange control
i. Government controls exchange rate (buy/sell foreign
currencies) control availability of foreign currency in
market regulate imports and exports aimed at
achieving a healthy balance of payment and stabilising the
country’s exchange rate.
f. Embargo
i. This is a total ban on certain on certain goods and services
e.g. narcotics, pornography
Quota vs Tariffs
1. Quota
a. This is preferred when the demand for import is price inelastic
tariff raises price but does not limit quantity
b. It cannot adjust tariff rates due to treaties.
c. There is certainty and precision quantity of import definition
decreased.
d. The government does not earn revenue
2. Tariffs
a. The quota supports collusion among importers and exporters
thus encouraging monopoly
b. The quota distorts market forces/ price mechanism
c. The government earns revenue
The case for protectionism
1. Infant industry
a. Temporary protections gives time to develop workers’
experience, technology and reputation gains EOS and
expands.
2. Evaluation
a. It results in complacency sheltered from competition and
inefficient
b. It is difficult to identify infant industry not all new industries
are infant industries need to have potential CA sometimes
the government protects the wrong industry.
c. The ‘permanent’ infant is given extended periods of protection
beyond the specified time frame so CA is not developed.
Advantages
1. Trade creation
a. More trading + lower cost greater variety + lower prices
greater consumer welfare
2. Greater output and better efficiencies
a. Greater mobility of factors of production + exchange of ideas and
technology large market firms can expand and reap egos.
b. Open to trade more competition greater incentive to
improve efficiencies.
Globalisation
Involves
1.
2.
3.
4.
5.
Expansion of goods and services traded internationally
Large capital transfers across countries
Shift pf production and consumption across countries e.g. out-sourcing
Movement of factors of production
Exchange of ideas, information and technology.
Factors
1. Technological innovations
a. Improvement in transportation declining transport costs +
increased efficiency + speed of travel lowering prices +
increased cross-border trading facilitates business relations
e.g. aviation
b. Information and communication technology declining
communication costs increase transition of information
production of new products that contributes to economic
revolution e.g. Internet
c. Economies of scale increased MES due to technological
improvements.
d. Change in production methods cheaper and more efficient
methods + discovery of new resources
2. Economic policies
a. Decline in protectionism more FTA signed minimises trade
barriers
b. Deregulation of financial markets more open to capital flows
more FDI
c. Differences in tax systems lower tax rate increase post-tax
profits attract MNCs.
3. Political changes
a. Example: Cold War, Berlin Wall, China economics reform.
Positive Effects
1. Higher economic growth
a. Greater access to foreign markets increase in exports
increase in AD actual economic growth
b. FDI inflows increase in AS potential economic growth
2. Higher consumer welfare
a. Greater variety of goods and services traded greater variety of
goods and services available for consumers higher consumer
welfare
b. Increase competition greater efficiency lower prices
higher consumer welfare
3. Technological progress and dynamic efficiency
a. Increased competition firms have incentive to invest in R&D
develop new products with better quality, functions, etc.
stimulate technological improvement increase AS potential
economic growth
Negative effects
1. Greater volatility and instability
a. Greater interconnectedness trade cycles are transmitted from
country to country at a faster rate especially urging recession
global effects lower employment rates and national income,
e.g. 2008 US Subprime Crisis
2. Increased unemployment
a. Labour cheaper in developing countries production shifts to
developing countries developed countries experience high
unemployment rate
3. Greater inequality
a. Benefits developed countries more than developing countries
unfair trade practices e.g. developed countries exercise
protectionism against developing industries, especially
agricultural industry.
b. Benefits the skilled and educated more than the low-skilled
labour MNCs exploit low-skilled labour by paying low wages,
especially in developing countries where labour is abundant.
4. Greater vulnerability to capital flows
a. FDI inflow benefits economic growth and employment BUT
excessive inflow inflationary pressures globalisation
spreads to other countries e.g. 1997 Asian Financial Crisis
5. Environmental costs
a. Unsustainable economic growth pollution, depletion of natural
resources MNCs exploit cheap resources lack of
responsibility no consideration for environmental damage and
protection.
