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Define globalisation and identify its four main features.
Globalisation is the process by which economies become more integrated through the freer movement of goods, services, and resources like labour, capital, entrepreneurship, and technology. Its four main features are increased trade in goods and services, increased capital flows (including technological transfers), increased labour flows, and increased competition.
Explain how the recognition of trade benefits, particularly through the theory of comparative advantage, acts as a factor affecting globalisation.
Governments' increased awareness of the benefits of trade, as explained by the theory of comparative advantage, has led them to seek more trade opportunities. This realization promotes specialisation among countries, leading to lower prices, increased consumption, economies of scale, economic growth, and a higher standard of living, thereby driving the trend towards globalisation.
Discuss the impact of falling transport costs on globalisation and provide an example.
Falling transport costs have significantly contributed to globalisation by removing a major barrier to trade. Historically, high transport costs made imports uneconomical even with comparative advantage. The advent of standardised shipping containers, for instance, dramatically increased port efficiency and decreased shipping costs, leading to a greater volume of trade and wider access to goods at lower prices for consumers.
How do technological advancements contribute to the trend of globalisation?
Technological advancements facilitate globalisation by enabling the remote delivery of services, such as industrial maintenance and telemedicine, which increases the volume of trade in services. Additionally, improvements in information and communication technology (ICT) have drastically reduced the costs of communicating information and coordinating across borders, further integrating economies.
Explain the concept of 'Dynamic Comparative Advantage' and how it differs from the static theory of comparative advantage.
Dynamic comparative advantage posits that a country's comparative advantage is not static but can be acquired and changes over time. Unlike the static theory which analyzes 'natural advantage' at a given point, dynamic comparative advantage considers how changes in factor endowments, their quality, technology levels, or government intervention (e.g., heavy investment) can shift a country's specialisation over time.
Provide an example of a country that has demonstrated dynamic comparative advantage, illustrating the shift in its specialisation.
Japan serves as a good example of dynamic comparative advantage. Initially a labour-abundant country, it transformed into a leading exporter of capital-intensive products after WWII due to high investment rates. Over time, Japan's comparative advantage shifted from unskilled labour-intensive industries like apparel to skilled labour and high-technology intensive industries such as machinery and transport equipment, demonstrating an investment-driven change in factor endowments.
What is the 'Ladder of Comparative Advantage' and what does it illustrate about economic development?
The 'Ladder of Comparative Advantage' illustrates the progression of a country's exports from those embodying basic factors like natural resources and unskilled labour to those embodying more advanced and specialised factors, such as highly educated personnel and R&D activities. It shows how countries upgrade their comparative advantage over time through investment in human and physical capital, allowing them to move into differentiated products and proprietary production technology as they develop.
Identify and explain one limitation of the theory of comparative advantage related to trade policies.
One limitation is the imposition of trade barriers and other trade policies. The theory assumes free trade, but in reality, governments often impose tariffs or quotas, which raise import prices and curb trade. Additionally, subsidies to exporters can artificially lower export prices, leading countries to produce and export goods without actual comparative advantage, thus distorting trade patterns.
How does factor immobility within a country limit the usefulness of the theory of comparative advantage?
The theory assumes perfect mobility of factors of production within a country. However, in reality, factors like labour or capital may not easily move between industries. This immobility reduces the scope for specialisation, increases production costs, and consequently diminishes the potential gains from international trade that the theory predicts.
Explain how high transport costs can limit the gains from trade, even if a country has a comparative advantage.
High transport costs can significantly reduce or even eliminate the cost differentials that give rise to gains from trade. If the cost of transporting goods internationally is too high, a country might find it more economical to produce a good domestically, even if it does not possess a comparative advantage, rather than importing it.