Welcome to the Global Economy!

Hello future economists! This chapter, Globalisation: benefits and drawbacks, is one of the most exciting parts of the International Trade section. It’s all about how the world is becoming more connected, like one giant market.

Understanding globalisation is essential because it affects everything: the price of your phone, the food you eat, and the jobs available in your country. Don't worry if this seems complicated—we will break down the good, the bad, and the sometimes tricky parts of this process!

Quick Prerequisite Check:

Before diving in, remember that globalisation builds on your knowledge of International Trade, especially the ideas of specialisation and interdependence.

Section 1: What is Globalisation?

1.1 Defining Globalisation

In simple terms, Globalisation is the process by which the world’s economies, cultures, and populations are becoming increasingly interconnected, primarily driven by international trade and advances in technology.

Think of it this way: when you can buy clothes made in Vietnam, drive a car assembled in Germany using parts from Japan, and pay for it using an American credit card, you are seeing globalisation in action. The world is shrinking into a global village.

Key Drivers of Globalisation:
  • Technology: Fast internet and cheap travel make it easier for companies (and people) to communicate and move goods across borders.
  • Trade Liberalisation: Countries have reduced barriers like tariffs (taxes on imports), making trade cheaper and easier.
  • Transnational Corporations (TNCs): These massive companies operate in many countries (like Apple or Coca-Cola) and drive the movement of capital and production.

1.2 The Four Flows of Globalisation

Globalisation is often measured by the increasing movement of four main things across borders:

  1. Goods and Services: The movement of products (like cars and shoes) and services (like banking and call centres).
  2. Capital (Money/Investment): Financial investment moving between countries, often called Foreign Direct Investment (FDI).
  3. Labour (People): The movement of workers seeking jobs (migration).
  4. Information/Data: Instant communication and the flow of data via the internet (crucial for TNCs).

Key Takeaway: Globalisation means the world’s economies are merging, primarily driven by technology and large companies (TNCs).


Section 2: The Benefits of Globalisation (The Good News)

The core argument for globalisation is that it increases efficiency and wealth overall. Let’s look at who benefits and how.

2.1 Benefits for Consumers

Increased Choice and Lower Prices
  • Greater Variety: You can access products from all over the world, not just what your local businesses produce. (Example: Access to exotic fruits or specialized foreign-made electronics.)
  • Lower Prices: Global competition forces businesses to keep prices low. TNCs can produce goods in countries where labour costs are cheaper. This saving is often passed on to you.
  • Improved Quality: Competition incentivises firms to innovate and produce better products to win market share globally.

2.2 Benefits for Producers and Firms

Access to New Markets and Inputs
  • Larger Market Size: A local firm is now able to sell its products globally, meaning potential sales increase dramatically. This is vital for growth.
  • Cheaper Inputs: Firms can source raw materials, components, and labour from wherever they are cheapest. This lowers their Costs of Production.
  • Exploiting Economies of Scale: By producing for a massive global market, firms can produce huge quantities, leading to lower average costs per unit. This is why international firms can offer such low prices.

Memory Aid: Economies of Scale is like buying in bulk—the more you produce, the cheaper each item becomes. Globalisation lets you buy (and sell) in the biggest bulk possible.

2.3 Benefits for Economies and Workers

Economic Growth and Efficiency
  • Increased Specialisation: Countries focus on producing what they are best at (comparative advantage), leading to greater global efficiency and output.
  • Job Creation (FDI): When a TNC invests in a developing country (Foreign Direct Investment), it builds factories or offices, creating new jobs and improving infrastructure (roads, electricity).
  • Transfer of Skills and Technology: TNCs bring modern technology, management skills, and training to the countries they invest in. This helps the local workforce and economy develop.
  • Higher GDP: Increased trade and investment boost a country's Gross Domestic Product (GDP).

Did You Know? Some of the largest TNCs have annual revenues greater than the entire GDP of many small countries. Their investment power can rapidly change a developing economy.

Key Takeaway: Globalisation leads to efficiency, lower prices, higher choices for consumers, and massive market expansion and job creation due to FDI.


Section 3: The Drawbacks of Globalisation (The Challenges)

While globalisation brings wealth, it also creates significant problems related to job security, inequality, and the environment. We must look at these challenges closely.

3.1 Drawbacks for Firms and Workers (Developed Countries)

Job Losses and Competition
  • Structural Unemployment: Jobs in manufacturing (factories) often move from higher-wage developed countries (like the UK or the USA) to lower-wage developing countries (a process called offshoring).
  • Increased Competition: Local firms that cannot compete with the low prices offered by huge international TNCs may be forced to close down.
  • Wage Depression: The constant threat of offshoring can prevent workers in developed countries from demanding higher wages, as companies can always threaten to move production elsewhere.

Common Mistake: Don't confuse Structural Unemployment (loss of factory jobs because the entire industry moved) with Frictional Unemployment (the time taken between jobs). Globalisation causes structural changes.

3.2 Drawbacks for Firms and Workers (Developing Countries)

Exploitation and Inequality
  • Exploitation of Labour: While jobs are created, the pressure for the lowest cost can lead to poor working conditions, long hours, and dangerously low wages (sometimes called "sweatshop labour").
  • Environmental Damage: TNCs might move production to countries with weaker environmental laws to cut costs, increasing local pollution.
  • The "Race to the Bottom": To attract TNC investment (FDI), developing countries may feel pressured to lower their corporate taxes, weaken labour laws, or reduce environmental protections.

3.3 Wider Economic and Social Drawbacks

  • Increased Inequality: The benefits of globalisation are often not shared equally. Highly skilled workers (who manage global systems) see their wages rise, while low-skilled workers (who face international competition) may see their wages fall or lose their jobs entirely. This widens the gap between the rich and poor.
  • Vulnerability to External Shocks: Because economies are so interconnected, a crisis in one country (e.g., a financial crash or a pandemic) can quickly spread globally (a contagion effect).
  • Loss of Cultural Identity: The spread of powerful TNC brands (movies, fast food, clothing) can sometimes overwhelm local cultures and traditions.

3.4 Environmental Impact

Globalisation significantly increases the need for transportation (ships, planes, trucks) to move goods across vast distances. This heavy reliance on global transport greatly increases Carbon Emissions and contributes to climate change.

Key Takeaway: Globalisation can cause job losses in developed countries (offshoring), exploit workers and harm the environment in developing countries, and increase national and global inequality.

Summary and Quick Review

Great job making it through the chapter! Globalisation is a powerful force with two sides. When answering exam questions, always remember to look at both the advantages and the disadvantages for different stakeholders (consumers, firms, workers, and the environment).

Quick Review Box: Globalisation Pros vs. Cons
BENEFITS (+) DRAWBACKS (-)
Lower Consumer Prices & Higher Choice Job losses in high-wage countries (Structural Unemployment)
Firms gain Economies of Scale (lower costs) Exploitation of labour in low-wage countries
FDI creates jobs and transfers technology Increased inequality (rich-poor gap widens)
Economic Specialisation leads to greater efficiency Greater environmental damage (transport & 'race to the bottom')

Keep practising those real-world examples, and you'll master this topic!