Edexcel A-Level Economics · Revision notes

4.1.1 Globalisation

Globalisation is the increasing integration of national economies into a single world economy, through trade, investment, the movement of people and the flow of information. It is the organising idea of Theme 4: almost everything that follows assumes economies are connected rather than self-contained.

Characteristics of globalisation

• Trade in goods and services has grown far faster than world output over the past half-century.
• Global supply chains mean a single product is designed in one country, assembled from parts made in several others, and sold worldwide.
• Foreign direct investment (FDI) flows between countries, with firms owning productive assets abroad rather than simply exporting to those markets.
• Transnational corporations (TNCs) operate across borders, some with revenues larger than the national income of mid-sized economies.
• Migration moves labour between countries, both low-skilled and high-skilled.
• Financial integration means capital moves across borders rapidly, and a shock in one market transmits to others within hours.
• Convergence of consumption patterns, with the same brands, media and products available in most countries.

Causes of globalisation

• Falling transport costs, above all containerisation. Standardised containers cut the cost and time of moving goods dramatically, making it viable to manufacture far from the customer.
• Improved communications technology. Cheap, instant communication allows a firm to coordinate production across continents, and makes services such as software and customer support tradeable.
• Trade liberalisation. Successive rounds of tariff reduction, the work of the WTO, and regional agreements such as the EU single market removed many barriers to trade.
• Capital liberalisation. Removal of exchange controls allowed money to move across borders freely.
• The growth of TNCs, which both respond to and drive integration.
• The opening of large economies, notably China's reforms from 1978 and its WTO accession in 2001, and India's liberalisation from 1991, adding hundreds of millions of workers and consumers to the world economy.

Impacts of globalisation

Consumers generally gain from lower prices and wider choice, since goods are produced wherever they can be made most cheaply. Against that, some argue local culture and local products are displaced.

Evaluation: Workers experience globalisation unevenly. Workers in low-cost economies gained employment and rising real wages; workers in higher-cost economies who competed directly with those imports faced job losses concentrated in particular industries and regions.

Some workers abroad work in conditions that would be illegal in the UK, though wages in those jobs are often above the local alternative.

Producers gain access to larger markets, cheaper inputs and economies of scale, and can locate each stage of production where it is cheapest. Firms unable to compete with imports may shrink or close.

Governments gain from faster growth and, often, cheaper public procurement. They lose some control: TNCs can shift profits to low-tax jurisdictions, and the threat of relocation constrains tax and regulation. Interdependence also means an external shock cannot be contained at the border.

The environment bears substantial costs: emissions from freight, the extraction of resources for global supply chains, and the risk that production migrates to countries with weaker environmental regulation. Set against this, globalisation spreads clean technology and raises the income that funds environmental protection.

Key distinction: Inequality moves in two directions at once, which is why the evidence is so often disputed. Inequality between many countries has narrowed as low-income economies grew faster than rich ones, while inequality within several developed economies has widened.

Key terms

Common mistakes

• Treating globalisation as new. Trade integration was already high before 1914; the modern phase is distinctive in scale and in the fragmentation of supply chains, not in the fact of trade.
• Assuming it moves in one direction only. Tariff increases, supply-chain reshoring after recent disruption, and restrictions on technology trade have all pushed the other way.
• Confusing FDI with portfolio investment. FDI buys productive assets and control; portfolio investment buys shares or bonds without control.
• Treating "globalisation increases inequality" as settled. It depends entirely on whether inequality is measured between countries or within them.

How this has been examined

In the Edexcel papers indexed on this site, this topic has appeared in one format:

• 25-mark "Evaluate" essay — asked twice across 2 series (2022 to 2024)

Where this goes next

Globalisation sets up the rest of Theme 4: 4.1.2 Specialisation and trade, which explains why countries trade at all, 4.1.5 Trading blocs and the World Trade Organisation (WTO), which covers the institutions that shaped it, and 4.1.6 Restrictions on free trade, which deals with the barriers that remain. The role of transnational corporations returns in 4.3.2 Factors influencing growth and development and 4.3.3 Strategies influencing growth and development.