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Economic Globalisation

Economic Globalisation

To observe the effects of economic globalisation around you, you don't have to go very far. Just take a look at the ingredients of your almond butter! Made in the UK with almonds from California and Himalayan salt from Pakistan. How is it possible to source all these ingredients from different places worldwide while keeping the product affordable? The answer lies in economic globalisation. Economic globalisation allows us to consume a wide variety of goods we often take for granted. But if you are willing to stay a little longer, you could learn more about economic globalisation and how it came about. All you need to do is to keep scrolling!

What is the definition of globalisation in economics?

The definition of globalisation in economics revolves around the increasing interdependence of the economies worldwide. The economic integration of the world economies is inevitable and constantly occurring.

Economic globalisation is the increasing interdependence of the different economies worldwide through integration.

Causes of globalisation economics

There are several causes of economic globalisation. The late 19th century saw a significant improvement in transportation and communication networks worldwide. A considerable amount of foreign direct investment started flowing from more industrialised countries to less industrialised in the form of outsourcing. Increasing global trade was another essential factor that contributed to the increasing interdependence. Vast technological improvements led to increased speed of processing information and dealing with specific tasks. All these factors opened opportunities for international cooperation of businesses, which inevitably led to the increased interconnection between the different economies.

Characteristics of globalisation economics

What are the characteristics of economic globalisation? Well, there are several of them. Let's go over a few of them below!Of course, the main characteristic of economic globalisation is the increased mobility of capital and labour. Both these factors of production can move around more freely, at a lower cost, contributing to the more efficient functioning of the global markets. Increased mobility of these factors of production also contributes to the increasing scale of production processes. This subsequently leads to more efficient production processes and greater availability and affordability of products for consumers.

Explore more with us!Why not check out:- Markets for Factors of Production.

The vast expansion of international trade and removal of trade barriers is another crucial characteristic of economic globalisation. Goods being able to reach where there is demand for them is only possible with global trade! Trade agreements such as General Agreement on Tariffs and Trade (GATT), signed in 1947, promoted the elimination of trade barriers. Important negotiations during the Uruguay Round led to the creation of trade organisations such as the World Trade Organization, established in 1995.

Dive into the topics of trade with our articles:- World Trade Organisation;- The Uruguay Round.

As capitalism became more prevalent, so did major multinational corporations (MNCs). These giant companies were able to expand globally and reach consumers throughout the world. MNCs became so large that they could almost freely move their operations to more convenient locations. Government power was lessened compared to the bargaining power of these giants. This led to a balance tipping in favour of the MNCs and their increased prevalence worldwide.

Check out these excellent topics that will aid your understanding:- Government Intervention in Markets;- Multinational Enterprises.

Lastly, economic globalisation is characterised by the growth of newly industrialised countries (NICs). This occurred as a direct result of developed countries outsourcing their industry, further increasing interconnection between their economies. Entire industrial sectors and even services, such as call centres, have moved overseas where there is abundant cheaper labour. As the NICs grow and further develop their own industries, they can increase trade with the rest of the world. This means that this characteristic of globalisation is self-reinforcing.

Economic effects and aspects of globalisation

There are various aspects and economic effects of globalisation. Let's go through them by categorising them into positive and negative impacts.

Advantages of economic globalisation

Some advantages of economic globalisation include the following:

  • Increases economic productivity;
  • Decreases under-utilisation of the factors of production;
  • Promotes competition between companies;
  • Stimulates economic growth;
  • Generates positive spillover effects on the markets.

Economic globalisation leads to abundant job opportunities as the need for more production grows. As more skilled labour is matched to relevant job positions, resource waste is minimised, and productivity increases together with the economic output. Increased mobility of capital improves efficiency. Unemployment arguably reduces as it becomes easier to fill the available vacancies. Increased competition promotes consumer welfare, as monopoly power is diminished. Globalisation fosters the development of global supply chains and transportation, positively affecting international industries.

Figure 1 below summarises the advantages of economic globalisation.

Economic Globalisation Diagram showing the advantages of economic globalisation StudySmarterFig. 1 - Advantages of economic globalisation

Negative economic impacts of globalisation

Some negative economic impacts of globalisation include the following:

  • Endorses standardisation;
  • Increases the use of scarce natural resources;
  • Allows the growth of MNCs and their increased influence;
  • Encourages more protectionism;
  • Encourages dominance of the developed world;
  • Increases foreign direct investment (FDI).

Economic globalisation can lead to lost local industries and products through standardisation. Fast food chains that spread around the globe became a standard in many countries and arguably contributed to the lower health of people who consume fast food. As economic globalisation extends its reach and scale, more and more scarce natural resources are being utilised, which is not sustainable. MNCs have become so large that they can avoid government influence and international tax rules because they can pay almost any fine imaginable. Economic globalisation may create situations where some countries favour trading with their chosen counterparts more than others. Such trade imbalances may lead to left-out countries retaliating and imposing more protectionist measures, which inhibit free trade. Countries from the developed world benefit more from economic globalisation as their industries are already formed. This means that they can pursue environmental objectives at the expense of developing countries. As FDI increases, more and more industries are owned by international corporations, which pay unfair wages and maintain poor working conditions for the workers that they employ in less developed countries.

Figure 2 below summarises the disadvantages of economic globalisation.

Economic Globalisation Diagram showing the disadvantages of economic globalisation StudySmarterFig. 2 - Disadvantages of economic globalisation

Economic globalisation examples

'McDonaldisation' and 'Coca-Colonisation' are terms often referred to illustrate some examples of economic globalisation. These two well-known companies have expanded globally. It is often argued that these companies drive local producers out of business. Their brand impact, popularity, and cost competitiveness contribute to the vast expansion of their consumer base. It is often argued that this contributes to US brands' replacement of local cultures. The counterargument to these critiques is that companies usually try to adapt their products to consumer tastes locally. This arguably improves consumer welfare as they can now consume what they weren't before. Nevertheless, this adaptation only extends the global outreach of these firms, thereby enlarging their profit margins.Multinational corporations are often accused of providing low wages and poor working conditions to their workers in less developed countries. Companies like Nike and Adidas are creating 'sweatshops' where employees are induced to work excessive hours at low compensation rates. Although these companies argue that they pay their workers above the local minimum wages and promote safer working conditions through health and safety practices, this is poorly justified. The prices for these products in developed countries have huge markups, which are way above the costs of producing them.

Economic Globalisation - Key takeaways

  • Economic globalisation is the increasing interdependence of the different economies worldwide through integration.
  • Some characteristics of economic globalisation include increased mobility of capital and labour, expansion of international trade, removal of trade barriers, growth of MNCs, growth of NICs.
  • Advantages of economic globalisation are increased output and productivity, more competitive industries, better utilisation of the factors of production, positive externalities.
  • Disadvantages of economic globalisation are increased use of scarce resources, increased protectionism, growing power of MNCs, standardisation.

Frequently Asked Questions about Economic Globalisation

Economic globalisation is the increasing interdependence of the different economies worldwide through integration.

Globalisation increases economic growth.

There are many positive and negative consequences of globalisation. Some of the positive ones include increased economic output, productivity and growth. Increased use of scarce resources, standardisation and increased protectionism are some negative ones.

The main purpose of economic globalisation is the increase in the interconnectedness between the economies worldwide.

The challenges of economic globalisation include the need for better allocation of scarce resources; for legislation to adapt to serve the needs of the more interconnected world. The benefits of globalisation are an improvement in employment and productivity of the factors of production.

Final Economic Globalisation Quiz

Question

What is globalisation?

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Answer

Globalisation is a process of growing integration of the world's economies, populations, and cultures. 

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Question

Give three characteristics of globalisation.

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Answer

Any three of:

  • Greater international mobility of capital
  • Growth of international trade 
  • Reduction of trade barriers and trade liberalisation (WTO)
  • Increased power of multinational corporations (MNCs)
  • Greater international mobility of labour
  • Deindustrialisation of previously industrial regions
  • Decreased power of governments
  • Reduced distance between countries (technology development)
  • Lower transportation costs (transport development)

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What are MNCs?


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Answer

Multinational corporations (MNCs) are companies that operate in at least one country other than their home country.

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What is WTO?


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Answer

WTO stands for World Trade Organization. It is an international organisation that encourages countries to trade with one another by promoting free trade.

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What is free trade?


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Answer

Free trade refers to reducing or completely removing import tariffs and any other trade barriers.

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What are two advantages of globalisation regarding labour and jobs?


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Answer

Any two of:

  • New job opportunities leading to the reduction of poverty and the increased output and productivity of an economy. 
  • Filling labour and staff shortages by immigrants preventing an economy from being stagnant.
  • Increase in migration of highly qualified labour sharing new skills and technologies.

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Question

How does globalisation influence politics?


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Answer

It encourages international cooperation between countries and governments.

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What is FDI?

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Answer

Foreign direct investment

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What encourages companies to expand internationally?


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Answer

Technology development, transport development, new customers, revenue increase, cheaper labour, and lower land costs.

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What are three disadvantages of multinational corporations?


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Answer

Any three of:

  • Environmental pollution
  • Driving local companies out of business
  • Encouraging political corruption
  • Monopoly creation
  • Labour overuse
  • Repatriating profits 

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Question

Provide a definition of developing countries.


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Answer

Developing countries are countries with a low level of economic development, low income per person, and low living standards. Their economy is typically dependent on export.

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What is the dominant industry in developed countries?


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Answer

The service industry.

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What are the consequences of globalisation on developed countries?


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Answer

  • Closing factories and moving them to less developed countries
  • Increasing social inequalities
  • Higher number of immigrants
  • Market dominated by multinational corporations
  • Increased business competitiveness

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Question

What are the three main ways in which globalisation affects the environment?


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Answer

Growth of multinational corporations, transport development, and environmental awareness.

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Question

What are the three types of globalisation?

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Answer

Economic, political, and cultural globalisation

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