Causes and effects of globalisation

Welcome to the World of Globalisation!

Hello there! Today we are diving into one of the most exciting topics in Economics: Globalisation. Even if you haven't heard the term before, you definitely live it every day. From the clothes you wear to the apps on your phone, you are part of a massive, connected global system. In these notes, we will explore why the world is becoming more connected and what that means for people, businesses, and governments.

Don’t worry if some of this seems big or complex at first—we’re going to break it down step-by-step!

1. What exactly is Globalisation?

In simple terms, Globalisation is the process by which the world’s economies become more integrated and interdependent.
• Integration means that different countries are acting more like one single market.
• Interdependence means that countries depend on each other for goods, services, and investments.

Quick Review: The Three Main Pillars

1. Trade in Goods and Services: Buying and selling across borders.
2. Trade in Capital: Money flowing between countries (like Foreign Direct Investment or FDI).
3. Trade in Labour: People moving to different countries for work (Migration).

2. What Causes Globalisation?

Why is this happening now and not 200 years ago? Several "engines" are driving this process. To help you remember them, just think of the word "T.R.I.P."

T - Transport Improvements

Moving goods used to be slow and expensive. Two big changes fixed this:
• Containerisation: Using those giant metal boxes you see on ships. It makes loading and unloading incredibly fast and cheap.
• Air travel: We can now fly fresh flowers from Kenya to London in hours.

R - Reduction in Trade Barriers (Trade Liberalisation)

Governments used to use Protectionism (like taxes on imports called tariffs) to block trade. Lately, organizations like the World Trade Organization (WTO) have encouraged countries to lower these barriers, making it easier to trade freely.

I - IT and Communications

The Internet changed everything! You can now provide services (like accounting or coding) to someone on the other side of the planet instantly. Information travels at the speed of light, making it easy to manage a business in ten different countries at once.

P - Profits and Multinational Corporations (MNCs)

Big companies like Apple, Samsung, or Nike are always looking for ways to lower costs and find new customers. They build factories where labour is cheaper and sell products where people have high incomes. This spreads technology and money around the world.

Key Takeaway: Globalisation didn't happen by accident; it was fueled by cheaper transport, better tech, and the removal of trade "walls."

3. The Effects of Globalisation

Globalisation has major impacts on the Macroeconomic Performance of a country. Let’s look at the good and the bad.

Positive Effects (The Benefits)

• Economic Growth: By trading with other countries, a nation can sell more exports. This increases Aggregate Demand (AD). As you know from your syllabus: \( AD = C + I + G + (X - M) \). When exports (X) go up, AD goes up, leading to Actual Growth.
• Foreign Direct Investment (FDI): When a foreign company builds a factory in your country, they bring jobs, new skills, and Innovation. This increases the Productive Potential of the economy (shifting the LRAS curve to the right).
• Lower Prices and More Choice: Competition from abroad forces local firms to be efficient. This means cheaper prices and more variety for you at the supermarket!
• Higher Living Standards: Generally, as countries trade more, their Gross Domestic Product (GDP) grows, which can lead to better schools and hospitals.

Negative Effects (The Challenges)

• Inequality: While some people get very rich, others might lose their jobs if their local factory moves to a country where wages are lower. This can increase the gap between the rich and the poor.
• Environmental Costs: Shipping goods halfway around the world creates a lot of pollution. Also, some firms might move to countries with weak environmental laws to save money.
• Interdependence Risk: If one country has an economic crisis (like a Recession), it can quickly spread to other countries because they are all connected. Think of it like a row of dominoes!
• Impact on the Balance of Payments: If a country starts buying way more imports (M) than it sells in exports (X), it will have a Current Account Deficit. (Remember: 2.3.1 in your syllabus covers this!)

Did you know? A typical smartphone contains components from over 40 different countries! That is globalisation in the palm of your hand.

4. Connecting the Dots: Globalisation and the Syllabus

To do well in your XEC11 exam, you need to link globalisation to other topics you've studied. Don't worry if this feels like a lot to remember—it all connects back to the basics!

Globalisation and Economic Growth (Section 2.3.5)

Globalisation is a "Cause of Growth."
• Actual Growth is caused by an increase in Net Trade (X - M).
• Potential Growth is caused by FDI and Innovation coming from overseas.
• Productivity increases because firms have to compete globally. Productivity is key to long-term growth!

Globalisation and the Balance of Payments (Section 2.3.1)

The Current Account tracks the money coming in and out of a country from trade.
• If a country is very Competitive, it will likely have a Surplus (Exports > Imports).
• If it loses its edge, it might face a Deficit (Imports > Exports).

Common Mistake to Avoid:

Don't confuse "Globalisation" with just "International Trade." Trade is the buying and selling of goods. Globalisation is much bigger—it includes the movement of people, the spread of culture, and companies building factories in different countries (FDI).

Summary: The "Big Picture"

Globalisation has made the world a "smaller" place. It is driven by technology, transport, and fewer trade barriers. While it brings economic growth, jobs, and lower prices, it also brings challenges like inequality, environmental damage, and economic instability. As an economist, your job is to weigh these pros and cons!

You've reached the end of these notes! Great job. Take a quick break, grab a snack, and maybe check where that snack was manufactured—you might just find a real-world example of globalisation right there!