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Summary 4.1 International Economics
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Notes on 4.1 international economics as per the Edexcel Economics A spec. Summarised notes with each sub topic alongside key images to help understand the content.
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4.1 International economics4.1.1 Globalisation
• This refers to interaction and integration among people, companies and governments
worldwide
• Factors that contribute to it: (1) improvements in transporting infrastructure and operations.
(2) improvements in IT and communication (3) trade liberalisation (4) TNC’s
• Impact of globalisation on consumers: they have more choice since there’s a wider range of
goods available from all around the world, not just from the UK. It can lead to lower prices
because firms take advantage of comparative advantage and produce in countries with
lower costs e.g. lower labour costs. It could lead to a rise in prices since incomes are rising
and so there is high demand for goods and services.
• Impact of globalisation on workers: In terms of enjoyment, some have gained while some
have lost. There have been large scale job losses in manufacturing sectors because these
jobs have been transferred to countries like China. Increased migration may affect workers
by lowering wages but migrants can also provide important skills to increase AD. Wages for
high skilled workers appears to be increasing, since there’s more demand for their work –
increasing inequality.
• Impact of globalisation on producers: Firms can source products from more countries and
sell them in more countries. This reduce risk since a collapse of the market in one company
will have a smaller impact on the business. They can employ low skilled workers for much
cheaper in developing countries and can exploit comparative advantage and have larger
markers, both which can increase profits.
• Impact of globalisation on government: The government can receive higher taxes, since
TNC’s pax tax
• Impact of globalisation on the environment: Increase in world production had led to
increased demand for raw materials which is bad for the environment. Increased trade and
production has also led to more emissions
4.1.2 Specialisation and trade
• Comparative advantage: countries find specialisation mutually advantageous if the
opportunity costs of production are different. If they are the same, there will be no gain
from trade.
• Absolute advantage exists when a country can produce a good more cheaply in absolute
terms than any other country.
• Comparative advantage exists when a country is able to produce a good more cheaply
relative to other goods produced.
, • Assumptions and limitations: Comparative advantage assumes there are no transport costs,
which could lower or prevent any comparative advantage. It assumes costs are constant and
there are no economies of scale – these help to increase the gains from specialisation. It
assumes that the factors of production are perfect mobile, there are no tariffs or other trade
barriers and that there is perfect knowledge.
• Advantages of specialisation and trade:
• Comparative advantage shows that world output can be increased if countries specialise in
what they’re best at producing, this will increase global economic growth.
• Different countries have different factors of production, so trade allows countries to make
use of factors of production / things produced by these factors, they would otherwise be
unable to
• Trade enables greater choice for consumers so greater consumer welfare
• Trade also means there is greater competition, which provides incentive to innovate. New
goods and services and production methods created, increasing consumer welfare and
lowering costs for them respectively
• Disadvantages:
• Trade can lead to over dependence, where some countries become too dependent on
particularly exports while some on imports.
• It can cause structural unemployment ad jokes are lost to foreign firms who are more
efficient and competitive
• The environment will suffer due to the problems of transport aswell as increased demand
for resources e.g. deforestation
4.1.3 Pattern of trade
• Absolute advantage means an economy can produce a greater total of goods for the same
quantity of inputs. It means that fewer resources are needed to produce the same amount
of goods and there will be lower costs than other economies.
• Comparative advantage occurs when one country can produce a good or service at a lower
opportunity cost than another. So a country can produce a good relatively cheaper than
other countries.
• This causes terms of trade to change: over time, a countries factors of production can
change e.g. the workforce can get smaller or the capital stock can improve through
investment. As a result, the opportunity costs for producing different goods and services will
change. This means comparative advantage also changes in turn causing the pattern of trade
to also change.
• Emerging economies: They are economies that are progressing towards becoming more
advanced, usually by means of rapid growth and industrialisation. They can cause both the
pattern of trade and size of trade flows to change.
• Impact of emerging economies on pattern of trade:
• Rising incomes means that they have to purchase more goods/services from elsewhere in
the world. This will increase imports of commodities which can push up prices of
commodities for others.
• Selling more medium to high value exports e.g. manufactured items and electronics, rather
than commodities or low value added items
• Currency volatility in emerging markets can have a large impact on commodity prices and
raw material prices in other countries.
• Rising tensions between developed countries and emerging countries resulting in trade wars
/ protectionist measures as each countries wants a larger slice of the world trading pie
• Trade blocs: remove or reduce barriers to trade. This makes exports within the bloc more
competitive. This leads to trade creation and trade diversion. As a result, trade flows within
the bloc will increase and some trade will shift towards the bloc.
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