What globalisation is and its causes

Globalisation refers to the growing integration of economies worldwide through increased trade, movement of people, and flow of capital across borders.

Key features of globalisation

• Free trade agreements - Arrangements where countries remove barriers to trade, such as taxes on imports or limits on quantities, to facilitate smoother exchanges of goods and services.
• Import tariffs - Taxes imposed on goods entering a country, which increase the cost of foreign products.
• Import quotas - Limits set on the amount of a specific product that can be brought into a country.
• Protectionism - Government policies, like tariffs and quotas, designed to shield local businesses from overseas competition.

Causes of increased globalisation

• Expansion of free trade agreements - More countries are forming pacts to eliminate trade barriers, boosting international commerce.
• Advances in travel and communication - Cheaper and faster transport, along with improved technology like the internet, makes global connections easier and more affordable.
• Rapid industrialisation in emerging markets - Developing economies are building manufacturing capabilities quickly, leading to higher exports and integration into global supply chains.

Opportunities and threats of globalisation for businesses

Globalisation presents both advantages and challenges for businesses, influencing their strategies for growth and competition in an interconnected world.

Opportunities from globalisation for businesses

• Access to new markets - Businesses can sell products in additional countries, expanding their customer base.
• Establishing operations abroad - Setting up factories or offices in other nations allows for local production and better market penetration.
• Increased import options - Firms can source a wider variety of goods from overseas suppliers.
• Cost reductions through imports - Importing raw materials or components at lower prices helps cut production expenses.

Threats from globalisation for businesses

• Heightened competition from imports - More foreign goods entering the domestic market can challenge local sales.
• Investment by foreign multinationals - Overseas companies may establish operations in the home country, increasing rivalry.
• Rising wage pressures - Competition from multinationals can drive up local wages to match international standards, raising costs.

Effects of globalisation on consumers and associated issues

Globalisation affects everyday life by altering the availability and cost of products, but it also raises concerns about economic and social impacts.

Positive effects on consumers

• Greater choice - Access to a wider range of goods and services from around the world.
• Lower prices - Increased competition often reduces costs for buyers.
• Improved efficiency - Businesses become more productive, helping to keep prices stable.

Issues associated with globalisation

• Job losses in domestic industries - Workers may be displaced as companies face competition from cheaper imports, creating demands for protective measures like tariffs or quotas.
• Higher prices due to protectionism - Tariffs and quotas can make goods more expensive compared to unrestricted foreign alternatives.

Benefits and drawbacks of multinational businesses

Multinational businesses operate production or service facilities in multiple countries, often called transnational companies. They bring various advantages but also pose challenges for both the firms and host nations.

Benefits to businesses of operating as a multinational

• Expansion into new markets - Access to additional customers leads to higher sales volumes.
• Cheaper raw materials - Sourcing inputs from low-cost locations reduces expenses.
• Bypassing trade barriers - Local production avoids tariffs and quotas on imports.
• Lower labour costs - Operating in countries with cheaper wages cuts operational expenses.
• Risk diversification - Spreading activities across markets reduces dependence on any single economy.

Advantages to a country of hosting multinationals

Drawbacks to a country of hosting multinationals

The impact of exchange rate changes

Exchange rates represent the value of one currency compared to another, such as £1 equalling $1.35. Changes in these rates, known as appreciation or depreciation, affect trade costs and competitiveness.

Key concepts in exchange rates

• Currency appreciation - When a currency's value increases, allowing it to buy more of another currency.
• Currency depreciation - When a currency's value decreases, allowing it to buy less of another currency.

Effects of currency appreciation

• On exports - Domestic goods become more expensive abroad, potentially reducing sales unless prices are adjusted.
• On imports - Foreign goods become cheaper, benefiting businesses that rely on imported materials.

Effects of currency depreciation

• On exports - Domestic goods become cheaper abroad, often boosting demand and competitiveness.
• On imports - Foreign goods become more expensive, which can raise costs for businesses dependent on them.

Common misconceptions about international trade

• Increased global competition can be balanced by access to larger markets and cheaper supplies, rather than always harming local businesses.
• Exporting requires adapting products to local preferences and overcoming potential import restrictions in target countries.
• Becoming a multinational involves establishing production in other countries, not just exporting to them.

Worked example - Calculating the effect of currency appreciation on import costs

A UK business imports components priced at $5.00 each. The initial exchange rate is £1 = $1.25. Later, the pound appreciates to £1 = $1.50. Calculate the cost per component in pounds at both rates.

Step 1: Identify the values

• Cost in dollars = $5.00 per component
• Initial exchange rate = £1 = $1.25
• New exchange rate = £1 = $1.50

Step 2: Calculate cost at initial exchange rate

Cost in pounds = $5.00 ÷ 1.25 = £4.00 per component

Step 3: Calculate cost at new exchange rate

Cost in pounds = $5.00 ÷ 1.50 = £3.33 per component (rounded)

Worked example - Calculating the effect of currency depreciation on export prices

A UK firm exports goods priced at £6.00 each to the US. The initial exchange rate is £1 = $1.20. Later, the pound depreciates to £1 = $1.05. Calculate the price per item in dollars at both rates.

Step 1: Identify the values

• Price in pounds = £6.00 per item
• Initial exchange rate = £1 = $1.20
• New exchange rate = £1 = $1.05

Step 2: Calculate price at initial exchange rate

Price in dollars = £6.00 × 1.20 = $7.20 per item

Step 3: Calculate price at new exchange rate

Price in dollars = £6.00 × 1.05 = $6.30 per item