This is a streamed version of a colour coded answer to a past exam question on the economics of globalisation. Each colour in the answer refers to a specific exam skill - knowledge, application, analysis and evaluation. I hope this approach might be interesting to students who want to configure their answer to get high marks in the A level exam. The crucial point is that contextual examples can make a huge different to the quality of your answer.

1. Colour Coded Approach to A2 Macro
Exam Skills – Globalisation Question

2. Assess the view that the main cause of globalisation is the increased significance
of transnational companies (20)
Globalisation is a process of deeper integration and inter-dependence between countries
evidenced by rising trade-to-GDP ratios, cross-border capital flows and labour migration.
TNCs base their manufacturing, assembly, research and retail operations in numerous
countries. Many TNCs have become synonymous with globalisation such as Apple, Wal-
Mart, Google and Samsung. Google has offices in more than 60 countries and the leading
500 TNCs account for nearly 70% of world trade. TNCs are a key driver of globalisation
because they have been re-locating manufacturing to countries with relatively lower unit
labour costs in order to increase their total profits and returns for shareholders. For
example VW, Nissan and General Motors all have bases in Mexico which helps this
country to build a comparative advantage in making vehicles within NAFTA.
However inward investment from overseas TNCs has met with resistance particularly
when manufacturing plants displace workers from domestic businesses and cause
structural unemployment. In addition, anger over dangerous working conditions and low
‘poverty’ wages has also caused a backlash and led to calls for greater controls on TNC
activity. For example, in 2013, the Rana Plaza garment factory collapsed in Bangladesh
killing over 1100 workers implicating clothing companies such as H&M, Primark and Gap.
Knowledge Application
Analysis Evaluation

3. Assess the view that the main cause of globalisation is the increased significance
of transnational companies (20)
Knowledge Application
Analysis Evaluation
Costs, Prices
Costs, Prices
LRAC (high labour cost)
LRAC (low labour cost)
LRMC
LRMC
AR
MR
P1
AC1
Profit
Q1Q2
P2
Analysis diagram shows increased total profits from moving manufacturing
to a lower unit cost country e.g. where wages relative to productivity are
lower or where the other costs of doing businesses are cheaper
AC2

4. Assess the view that the main cause of globalisation is the increased significance
of transnational companies (20)
Another feature of the growing significance of transnational companies in a
globalizing world is the rise of TNCs from emerging and developing countries. For
example, China Mobile has become one of the top ten consumer brands in the
world; Alibaba has expanded rapidly to be the biggest global online retailer. The Tata
Group conglomerate has made significant investments in Western economies and
Chinese car-maker Geely purchased Swedish firm Volvo. One of the main
motivations here was to acquire the technologies and intellectual property to fast
forward their expansion plans as China moves through the middle-income stage.
However one might argue that this would not have happened as quickly without
other key causes of globalisation, for example a fall in import tariffs and fewer non-
tariff barriers are another feature of globalisation. As barriers to trade and capital
have come down, so opportunities for trade creation of goods and services and
financial capital have grown. Many TNCs choose countries where operating costs are
low ease of doing business is good but they also to aim to get close to fast-growing
consumer markets. Samsung’s investment in Vietnam is motivated by both factors.
Knowledge Application
Analysis Evaluation

5. Assess the view that the main cause of globalisation is the increased significance
of transnational companies (20)
Globalisation is a process caused by a number of factors. One of these is containerization.
The costs of ocean shipping have come down, due to containerization, bulk shipping such
as offered by Danish TNC Maersk and other production efficiencies. The lower cost of
shipping products around the global economy helps to bring prices in the country of
manufacture closer to prices in the export market, and makes markets more contestable
in an international sense. Technological change has also been important reducing the cost
of transmitting and communicating information – sometimes known as “the death of
distance.” This has been a key factor behind trade in knowledge products using web
technology. Lower tariffs, containerization and rapid technology spillovers have also in
numerous ways benefitted TNCs who have the financial resources to take full advantage.
However one could argue that they have also increased the opportunities for smaller
non-TNCs to compete on more of a level playing field than giant businesses with a global
footprint. Some economists regard localization and regionalization as starting to take
over from globalisation as a key trend for the future. For example the share of intra-
regional trade among Asian countries has climbed from 48% in 2001 to 52% in 2011.
Knowledge Application
Analysis Evaluation

6. To what extent do the costs of globalisation outweigh the benefits (30)
Globalisation is not inevitable. The fall-out from the financial crisis of 2007-09 saw a
reduction of 12% in world trade which has recovered only slowly. One reason has been
opposition to some of the economic and social costs from globalisation. For example
globalisation has contributed towards higher inequality. A paradox of globalisation is that
whilst inequality has fallen between countries, income & wealth gaps within many
countries have grown. Increasing inequality can damage economic growth by leading to a
loss of spending power among millions of poorer households and a skewing of capital
investment towards the preferences of the rich. In addition, high rates of tax avoidance
by companies and individuals deprives governments of the tax revenues needed to
finance essential public & merit goods. However a counter-argument is that globalisation
has helped to achieve the biggest reduction in extreme poverty the world has seen. Per
capita GNI has been rising quickly in many lower-income nations including in Sub-Saharan
Africa. And countries such as China and Brazil have seen the Gini coefficient decline
because of strong export performance, many more jobs and successful pro-poor growth
policies including higher minimum wages and conditional cash transfer policies for
families. These policies can help overcome some of the costs of globalisation.
Knowledge Application
Analysis Evaluation

7. To what extent do the costs of globalisation outweigh the benefits (30)
Trucks
Cars
1200
300
1600900
South Korea
Mexico
450
2400
Mexico has a comparative advantage in producing cars and South
Korea has the advantage in manufacturing trucks. For Mexico the
opp.cost ratio is 3 cars to 1 truck and for South Korea it is 4 cars to 3
trucks. So a terms of trade of 2 cars to 1 truck will benefit both
countries and allow increased consumption after specialisation

8. To what extent do the costs of globalisation outweigh the benefits (30)
Another cost of globalisation is the fact that economic imbalances between countries
have grown. This is shown for example in the increasing gap between nations running
huge trade and current account surpluses (Singapore and Norway both have surpluses
greater than 10% of their GDP) and countries with persistently high trade deficits
including the UK, South Africa and Brazil with deficits of more than 5% of GDP. In
theory, globalisation is good for the majority of countries because it allows nations to
specialize in and export the goods and services in which they have a comparative
advantage. This ought to lead to mutually beneficial gains for all nations involved
through lower prices, higher real incomes and a more efficient allocation of resources.
More contestable markets at international level cause productivity to be higher and it
reduces the market power and profits of domestic corporations. But diverging
competitiveness in global markets has created winners and losers. Many poorer
countries are running large external deficits and becoming increasingly reliant on
external finance from the IMF and sovereign wealth funds of surplus countries. There is
also a danger that the imbalances that are a feature of globalisation are causing shifts
towards protectionism through capital controls and managed currencies.
Knowledge Application
Analysis Evaluation

9. To what extent do the costs of globalisation outweigh the benefits (30)
To some critics of globalisation, another cost has been the excessive power and reach of
global brands who dominate many consumer markets and whose standardized products
have caused a loss of cultural diversity, falling sales and employment for local producers
and a consequential increase in unemployment. For example, in the hotel industry, with
franchising the chief operating model, over half of the world's hotels are now branded
properties with many taking a big market share in some of the world’s poorest countries.
The profits from these hotels rarely stay in the host nation and it is argued that global
brands enjoy such economies of scale that they make much smaller local businesses
unable to compete effectively.
A counter-argument to this is to argue that the investment brought into poorer countries
by multinational hotel chains is a benefit of globalisation. They employ more people
offering pay and conditions better than available before, and their training schemes help
to boost the human capital of the labour force as well as providing a flow of foreign
exchange revenues for national governments. Many TNCs have made progress in recent
years in ethical sourcing of local products and in cutting the environmental footprint of
their operations helping to boost long term sustainable growth.
Knowledge Application
Analysis Evaluation

10. To what extent do the costs of globalisation outweigh the benefits (30)
On balance I would argue that the long-term benefits of globalisation are greater than
the disadvantages. Even thought the World Trade Organisation has yet to get close to
completing a new multi-lateral trade deal, the high volume of bi-lateral trade
agreements, current attempts to establish the Trans-Pacific Partnership and the
strengthening of free trade areas such as ASEAN shows how important international
trade and investment remains.
There is a trend towards regionalization rather than globalisation and this may
continue, and globalisation also faces threats from structural inequality and imbalances
in living standards and development outcomes. But the protectionist fears of the
immediate post-crash period have not materialized. Globalisation will continue,
accelerated by technological spill-overs and the movement of talented people across
borders because the long term benefits (tangible and intangible) are enormous.
Knowledge Application
Analysis Evaluation