A Level Economics: A Comprehensive Guide to Globalisation & the International Economy (Theme 3.3)
In previous articles, Zenith, Singapore’s top A Level Economics tuition centre, has covered both concepts on Microeconomics and Macroeconomics. This article focuses on Theme 3.3: Globalisation and the International Economy, which is only applicable to H2 students. The A Level H1 Economics syllabus ends at Theme 3.2, which has been covered in the following two articles:
If you have yet to understand the key concepts upon which the study of A Level Macroeconomics is founded, Zenith also advises that you check out this article on Theme 3.1: Introduction to Macroeconomics.
Theme 3.3, applicable only to A Level H2 Economics students, acts as an extension of studying Macroeconomics on a domestic level, encourages students to explore how international forces interact with domestic economies. Drawing on various case studies, it promotes an understanding of the big picture in terms of global markets. Fig 1. below shows the concepts which are covered under this theme.
Fig 1. A Level H2 Economics Syllabus for Theme 3.3
3.3.1: Globalisation and its impact on the economy
Globalisation is defined as the interconnectedness of national economies around the globe through the trade of products (goods and services), foreign direct investments, capital flows, technology, information, and labour. This integration of national economies fosters an interdependence between them that is related to their engagement in free trade with each other.
Factors affecting globalisation
1. Economic Factors
Globalisation benefits a country as it is now able to acquire, through trade, goods, and services that it is unable to produce and sell, or which are highly costly for it to produce for various reasons. With trade agreements and routes in place, an economy favours globalisation because it can now produce at a lower opportunity cost what it specialises in producing. These goods are then exchanged with other countries for goods that the country itself is not able to produce. For instance, Spain is a key exporter of cars, which it specialises in producing. It exchanges these cars with other countries for commodities such as crude oil and petroleum gas, which it is less able to produce. This results in a win-win situation, as all countries would then tend similarly towards producing goods that they specialise in at a lower opportunity cost and thereafter, exchange them for goods that they do not specialise in producing. An overall rise in the SOL of the country then occurs as consumers are able to consume goods beyond what the economy itself can produce due to the trade that occurs, which brings in foreign imports. Producers are also able to maximise profits when they are able to export their goods at a higher price than if they were to sell them in the domestic market. Collectively, the benefits of trade, which Zenith will elaborate on further in the next section of this article, encourage globalization.
2. Technological Factors
Increasingly advanced technology has facilitated communication between countries and also made transporting goods and services across international boundaries more convenient and less expensive. The geographical boundaries restricting consumption and production in the past are overcome through technology. In the past, it was not uncommon that shipping or air freight costs could overwrite the gains obtained from the exporting of goods and services. Today, this is no longer the case as long-haul aircrafts and container ships have become accessible, resulting in the cost of freight dropping significantly.
The advent of the internet has also seen the massive rise of the e-commerce industry, where mega-platforms such as Taobao, Lazada, Shopee, and Amazon facilitate cross-border business transactions. In the past, these cross-border transactions had been limited mainly to exports and imports exchanged between large companies, however, individuals themselves are able to make international purchases today. The scale of online shopping has benefitted economies significantly as local businesses are able to reach out to international consumers. The costs of production and running a business are lowered as well since online marketing costs are lower, and businesses can procure inputs at a lower price from abroad.
Benefits of globalisation
Globalisation benefits an economy by increasing their accessibility to the following:
Factors of production (FOPs)
It is inevitable that, due to geographical conditions, different countries have different FOPs. For instance, countries such as Venezuela have huge oil reserves, while China and Russia are top producers of steel. Globalisation allows for the exchange of FOPs, which are raw materials required in the production of other goods. Singapore relies heavily on imported inputs to run our factories, build HDB flats, and function on a day-to-day basis as we do not have our own oil reserves, steel or cement, thus we need to import these FOPs from other economies.
Aside from exchanging raw materials, globalisation also encourages labour migration. For labour short economies like Singapore, whose population is small and gradually aging, globalisation is an important means through which we secure foreign labour for driving economic growth. Most of Singapore’s buildings today, including HDBs and private property, are built by foreign labourers from China, India, and Bangladesh, among others. Foreign talents are also an important way for the economy to achieve brain gain, which is the opposite of brain drain. Brain gain brings highly trained, skillful, and knowledgeable professionals to Singapore’s economy, where they work in Professional, Managerial, Executive, and Technician (PMET) positions. They help to further develop and grow the Singapore economy by enhancing its knowledge and innovation. Brain drain is elaborated on further under the costs of globalisation.
Globalisation also allows countries to utilise foreign capital as an effective means for driving growth. Foreign Direct Investment (FDIs) refers to the investment of an overseas company in a local company. For example, the Straits Times reported that Singapore secured a total of $17.2 billion in FDI in 2020, which created over 19 000 jobs for locals. You can access the article here. These FDIs help to support a country’s local economy by providing it with more capital which can be used for expansion, as well as more employment opportunities for locals. This includes both employed and unemployed locals, the former consisting of those who are seeking to make career switches, or who are looking for better employment opportunities. An increase in FDI is effectively an injection into the economy, which causes an increase in the Aggregate Demand (AD) of a country. As AD rises, GPL rises, which marks an expansion in the economy. AD and Aggregate Supply (AS) are elaborated in this article.
Costs of globalisation
Reaping the benefits of globalisation relies on the cooperation of multiple countries. In reality, a country can choose to adopt protective measures at any time. This means that the countries it is in cooperation with can suffer economic shrinkage if their economies are heavily dependent on the benefits of globalisation. A case in point is Singapore, which relies heavily on external trade, capital, and foreign labour inflows for its economic growth. For instance, if China or the United States, for example, decides to restrict foreign trade, Singapore, which is trade partners with them, will no longer be able to do so on a quantity and quality as before. This will affect her significantly as most of Singapore’s GDP comprises external trade. In the same vein, the instability that other countries experience can also easily affect her, resulting in price volatility and sudden growth disruptions.
Another cost of globalisation is brain drain. Brain drain occurs when an economy loses its talent to a foreign economy where the prospects of growth are better. This problem especially afflicts developing nations, such as India, whose professionals are attracted to more developed foreign economies where there are better job prospects, opportunities and lifestyles. Some of them might also be seeking to escape the lower living standards, corruption, and poverty of their home countries behind, which makes migration highly attractive. This is negative for developing countries as it slows down their country’s economic growth further by depriving them of the talent required for kickstarting new initiatives for growth.
3.3.2: Trade policy decisions and their impact on the economy
Different trade policy decisions will result in different impacts on a domestic economy and the economies of the countries they engage in trade with. For the A Level H2 Economics examinations, students are required to understand how economies engage in free trade and protectionism, and how these measures affect their relationship with other countries.
Free trade is the exchange of goods and services by economies on an international level. It is beneficial for countries because it allows them to leverage their comparative advantage in the production of specific goods and services.
Theory of Comparative Advantage: A particular economy has a comparative advantage in producing a specific good or service when it is able to produce the good at a lower opportunity cost than another country. The Law of Comparative Advantage explains that trade has the potential to benefit all countries if they specialise in producing the goods they have a comparative advantage in, thereafter exchanging some of these goods for other goods they have a comparative disadvantage in.
Fig 2. Example of Comparative Advantage when Country A and Country B engage in specialisation and trade with each other.
From the above example, it becomes clear that when Country A and Country B each specialise in producing the goods they have a comparative advantage in producing, they are subsequently able to exchange these goods for the goods they have a comparative disadvantage in producing. This results in a net increase in consumption as the total number of goods being shared by the two countries increases, as seen where the initial number of units of laptops increased from 80 units to 120 units, while the number of units of clothes increased from 70 to 80. This demonstrates how specialisation and trade allow both countries to consume beyond what they are able to produce within the domestic economy.
Singapore benefits from free trade as it is heavily dependent on trading, and has the highest trade to GDP ratio in the world. The Singapore economy relies heavily on imports as the source of food, energy, and raw materials, as previously mentioned, because we do not have natural resources of our own. We mainly import food, beverages, electronic parts, and machinery, and depend on oil, cement, food, as well as pharmaceutical exports.
Protectionism occurs when a government decides to restrict the domestic economy from free trade, usually to narrow its trade gap and protect more vulnerable industries. This typically takes place in the form of tariffs and taxes on imported goods, making them more expensive and hence less preferable for domestic consumers, who turn instead to locally produced goods and services. Protectionism is usually carried out on sunset or infant industries, or against unfair trade practices.
1. Sunset Industries
Sunset industries are declining industries that may cease to exist in the coming years within the near future. Governments might want to temporarily, for a short period of time, protect sunset industries to prevent a sudden influx of unemployment, which will negatively affect the economy. While protecting the sunset industries, governments tend to encourage employees in these industries to upskill themselves and seek new opportunities in younger industries. After a significant proportion of the workforce in the sunset industry has pivoted to another industry, they will stop protecting it and allow it to fade. For instance, wholesale trade is seen as a sunset industry in Singapore. Wholesale trade is a business-to-business operating model, where, for example, Business A buys 100 pieces of clothing from Business B, before selling it to consumers. This is as it has become increasingly unnecessary with the advent of e-commerce, as consumers can make purchases directly from businesses, instead of relying on a third party such as Business A.
2. Infant Industries
Infant industries are young industries that have potential comparative advantages which are at the moment, unrealized. Governments protect these industries as they are unable to stand up to foreign competitors that are more established and developed. These industries will not be able to thrive without intervention that levels the playing field for them. By protecting them, the government drives expenditure to these infant industries, allowing them to grow and thrive, becoming a sector in which the country develops comparative advantage for the future. In many countries, Artificial Intelligence (AI) is viewed as a nascent sunrise industry that should be protected. This is as few countries have managed to develop advanced AIs successfully as of the present, and it is believed that the countries which are able to develop a headstart in the industry will gain Comparative Advantage (CA) that they can leverage for trading with other countries.
3. Unfair Trade Practices
Unfair trade practices include dumping which creates an unfair advantage against domestic producers as these exports are sold at a lower price to a foreign country than when sold to domestic buyers. Dumping occurs when, for instance, Country A produces Good A and sells it to foreign markets at a much lower cost, for example, $3 per unit, however, Good A is sold to citizens of Country A at $6 per unit. This method strives to eliminate rival producers in the importing country. When they become the monopoly in the importing country, having driven out all the rivaling domestic producers, the dumping country then increases the prices of its goods, which makes local consumers worse off, as they do not have cheaper alternatives to turn to. China has accused the United States of dumping in the past, and vice versa. This was a pertinent issue back in 2018, where the US claimed that China was putting US business suppliers out of business by selling compound fuels required in military operations at a lower price to foreign markets than it was being sold at within China.
Economic cooperation and trade agreements between countries
Free Trade Agreements (FTAs) are formed when certain countries, gathering in a committee, agree to remove tariff and non-tariff barriers among themselves. Oftentimes, they also agree on improved terms for investment in one another’s countries. As a legally binding agreement, FTAs encourage frequent trade between the member countries of the committee, which promotes interdependent and simultaneous economic growth among them. This is as it becomes cheaper and more convenient for the export of goods across borders, where custom procedures are simplified, market access is improved and tariffs are removed. ASEAN, for instance, is engaged in an FTA which comprises trade, investment, and services. It allows member states of ASEAN to trade at a lower price, experience fewer barriers to entry, and leverage their Comparative Advantage (CA) to the benefit of one another. Many nations in the world, like Singapore, are engaged in multiple FTAs, which are listed here on this website (Zenith is in no way affiliated with the resource!).
With that, Zenith has come to the end of Theme 3.3, which can be viewed as a consolidated application of the key concepts of Macroeconomics learnt in Theme 3.1 and Theme 3.2. In this article, Zenith has covered the following key ideas in Theme 3.3:
Globalisation and its impact on the economy
Factors affecting globalisation
Benefits of globalisation
Costs of globalisation
Trade policy decisions and their impact on the economy
Economic cooperation and trade agreements between countries
We hope that this article has been useful for you! Here at Zenith, we understand that A Level Economics, especially at the H2 level, can feel daunting for many students. This is why we have curated a whole series of articles to guide your understanding of the syllabus so that you can ace both your in-school assessments and A Levels! Access these articles on A Level Economics, written by Singapore’s top A Level Economics tuition center, at the following links:
Theme 1.1: Scarcity as the Central Economic Problem
Themes 2.1.1. and 2.1.2: Price Mechanisms, Demand and Supply
Theme 2.1.3: Price Elasticity and Government Intervention
Theme 3.1: Introduction to Macroeconomics
Theme 3.2.1 and 3.2.2: Macroeconomic Aims
Theme 3.3.3: Macroeconomic Policies
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