Globalization. Globalization refers to the increasing interdependence and connectivity of different economies around the world, economies integrate into a single global economy.
The Causes of Globalization
The causes of globalization include:
1) Trade Liberalization. After WW2, there was an increase in trade liberalization and consequent removal of trade barriers like tariffs and quotas which increased foreign trade. Most countries, especially former communist countries, opened up to foreign trade and integrated more closely.
2) Better Transport/Communication. The development of technology and transport has made it quicker, cheaper and easier to exchange goods and services internationally. For example, better communication technology means orders can be placed at any time and big cargo ships means bulks of goods can be transported around the globe at a low cost.
3) MNCs. Multinational companies (MNCs) like Coca Cola, McDonalds and Samsung have spread all over the globe to exploit economies of scale through larger markets.
4) More Free Capital Mobility. Over the last few decades it has become easier to move money from one country to another, making it easier for MNCs to move their investments and profits around the globe and thus causing MNCs to spread to different countries. It has also become easier for people to migrate to different countries all over the globe.
Benefits of Globalization
- Increased global income. Income rises across the globe because economies can access larger markets, specialize in their comparative advantage and trade more. Income also rises because technology and knowledge is transferred, increasing productivity.
- Booms spreading. Let’s say countries X and Y trade. A boom in country X means X’s income rises, X’s consumers demand more imports so Y’s exports rise, Y’s AD rises and real GDP rises so it may experience a boom.
- Less risk. Risk could fall because globalization brings opportunities to increase diversity and spread risks.
- Employment. Manufacturing has boomed in some countries like China who provide manufacture goods for the rest of the world, leading to an increase in employment in China.
- Lower prices. A good is produced in the country that has a comparative advantage for that good, so goods are produced efficiently and can be sold at a low price. Also, countries can import advanced technology from around the globe and produce even cheaper. Transport costs are low so other countries can import the good cheaply.
- More choice. More choice for consumers because they can buy goods from all over the globe. Many different goods are available.
- Environmental protection. If rich countries transfer green technology to LDCs then damage to the environment is reduced and economic growth may become sustainable.
- Multicultural diversity. Through migration, culture is spreading around the globe, multicultural diversity in economies has increased.
- Harmonious political ties. The prospects for mutually beneficial interdependent trades may foster more harmonious political relationships between economies.
Costs of Globalization
- Increased global income inequality. Rich countries get richer whilst poor countries get poorer because of declining terms of trade and primary product dependency. But, poverty seems to be falling all over the globe.
- Recessions spreading. Let’s say countries X and Y trade. A recession in country X means X’s income falls, X’s consumers demand less imports so Y’s exports fall, Y’s AD falls and real GDP falls so it may fall into a recession.
- More risk. Risk may increase if an economy becomes increasingly reliant and dependent on one other particular economy, recessions could then spread globally.
- Unemployment and de-industrialization. China’s manufacture boom has caused de- industrialization in the US where manufacture production switched from, causing a rise in unemployment in the US. Although, in the long- run employment in the US should rise because of the benefits that globalization brings for example, higher incomes so higher demand and more domestic production.
- Higher prices. Globalization causes world incomes to rise, so demand for goods increases and prices increase.
- Less choice. Maybe goods are becoming ‘homogenized’ or too identical and less diversity means less choice.
- Environmental damage. Increased world trade means increased pollution, the environment gets damaged more and global warming increases. Moreover, more goods are produced so more resources are used, more oil is extracted and more land is cultivated.
- Loss of culture. Culture is becoming homogenized across the globe for example, the loss of native culture and rise of ‘Americanization’.
- Loss of political sovereignty. An economy loses political sovereignty if it signs an international treaty or joins a monetary union or trading block.