Economics Unit 3

Economics basics.

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Factors contributing to Globalisation:

  • Improvements in transportation- cheaper
  • Improvements in information and communication technology- quicker and cheaper
  • Rising real living standards- citizens demanding more variety
  • Decline in protection- encouraging trade (WTO)
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Advantages of MNCs:

  • Cheaper Labour costs
  • Transport costs
  • A favourable tax environment
  • Ability of government grants
  • Ability to take advantage of the different strengths of many countries.

Disadvantages of MNCs:

  • Loss of jobs
  • Export of technology
  • Dependency on imports
  • Loss of tax revenues
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International specialisation and trade

Benefits of International Trade:

  • Can get goods not available in their country
  • Increases choice
  • Lower prices
  • Increases competition
  • Increases world output
  • Reduces firms reliance on domestic markets

Costs of International trade:

  • Pollution from 'dirty' industries- often manufacturing is moved to countries with lower environmental standards.
  • Transport of the finished goods or parts- a car may be assembled in the UK but the parts will come from many other countries
  • Air miles- contributing to global warming
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The World Trade Organisation

Benefits of Free Trade:

  • More Choice
  • Lower prices
  • Increased competition causes firms to innovate
  • Exports of goods and services will increase economic growth
  • Increases world output and wealth.

The WTO is responsibe for trying to increase free trade. It provides a set of rules so that members know what they are and are not allowed to do when it comes to trading between countries.

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Reasons for Protecting some industries:

  • Infant Industry- counties often clain that given the chance to develop ab industry they could have a potential advantage. They prtect this industry against more efficient existing industries in other countries, so that it can grow.
  • Dumping
  • Protect Jobs- Only by preventing foreign goods from entering a country will unemployment be prevented.
  • Prevent negative externalities-countries may want to prevent goods that have negative externalities 9such as illegal drugs0 from entering the country.
  • Political
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European Union

Advantages of the Single Market:

  • Free movement of Capital.
  • Free movement of Labour.
  • Competition- increasing competition should improve productivity.
  • Higher economic growth and standards of living.

Disadvantages of the Single Market:

  • Job Losses.
  • Sttracts capital and jobs away.
  • Manufacturing firms are attracted to low labour costs of these poorer member countries.
  • Multinational companies drive out local firms.
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European Union

Advantages of the Single Currency:

  • Elimination of exchange rate risks- firms buy and sell for future delivery. Having one currency removes the danger of the value changing before payment is made. This increases trade.
  • Price transparency
  • Transaction costs- no need to change currencies between member countires, thus saving money. This increases trade.
  • Employment- easier for people to cross into the next country to work.

Disadvantages of the Single Currency:

  • Sensitivity to interest rates- Unlike most European countires, most UK householders own their own house and their mortgages are a high percentage of their income. UK monetarpolicy needs to take this into account when changing interest rates.
  • Recession
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