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(a)Ê Globalisation is defined as a process by which the world͛s economies are becoming
more closely integrated. This can also be defined as the growing interdependence of
world economies as they become more reliant upon each other. Extract 2 states how
globalisation can be a force for good as it has the potential to generate wealth and
improve living standards.

(b) i. Ê Developing economies like China including Hong Kong attracted $100bn of foreign
direct investment in 2005 due to a number of reasons. The first reason is that China has
an immense population of over 1bn people. This provides a large workforce and the
intense competition in the labour market drives down wages. This means that labour is
cheaper in developing economies such as China. As a result, multinati onal companies
are more likely to locate here to benefit from lower costs of production. Hence, China is
more effective at attracting foreign direct investment due to its large pool of cheap
labour.

However, the cheap labour available in China may not be the most significant factor.
Another, more important reason could be the low corporation tax in China which could
be attracting these multinational firms. The fact that fewer profits of these companies
are lost in taxes provides an incentive for these firm s to locate to China. This means that
more profits are available to invest in research and development and for relocating in
other parts of the world.

In 2005, the developed economy of the USA attracted $219.1bn of foreign direct
investment. This could be due to the fact that the USA possesses more infrastructure
than developing countries. The government in the USA is more stable and more
transparent. This is a key factor which attracts multinational firms to the USA. The
developed economies of the EU attr acted a total of $573.2bn in foreign direct
investment in 2005 which was a rise of 38% from the previous year. Multinational
corporations locate into the EU to have access to a larger market. There are also no
trade barriers with member states allowing these companies to benefit from free trade.

(b) ii. Ê Increasing foreign direct investment is a significant factor contributing to

globalisation. This involves an increase in transfers of financial capital across national
boundaries including the expansion of foreign direct investment (FDI) by multi-national
companies. These company operations are being dispersed around the world as firms
carry out efficiency seeking FDI. This increase in investment allows firm to improve their
research and development. They are able to make use of technological advancements
which in turn increases productivity. This allows multinational corporations to gro w and
become more integrated so that they can trade goods and components all over the
world. This would lead to economies being mor e dependent and reliant upon each
other. The first extract mentions how the UK benefits from foreign direct investment in
the form of helping to create new jobs, financing new infrastructure and providing
access to new technologies.

(b) iii. Ê One factor which contributes to globalisation is the reduction or removal of trade
barriers. The GATT and WTO have reduced tariffs and various non -tariff barriers to
trade, enabling more countries to exploit their comparative advantage. Then, the

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Uruguay Round of Negotiations involved the agreeing of a large package of measures,

which freed up trade in both goods and services. This increased the volume of trade by
50% in the 6 years following the conclusion of the Uruguay round. Between 1948 and
2008, trade rose from 5% to a ma ssive 25% of world GDP. This meant that countries
became more reliant upon each other for their export earnings, income and
employment. This exposes them to the international trade multiplier, where domestic
business cycles become vulnerable to changes in the level of economic activity in the
rest of the world. Therefore, the removal of trade barriers has increased world trade and
increased interdependence of world economies.

However, to evaluate, the recent global recession has brought international trade on a
downhill path. With world demand for all goods and services in decline, there is a
temptation for many countries to impose protectionist barriers in order to protect jobs.
The WTO in 2009 forecasted a 9% fall in global trade flows. This is the first time since the
end of World War Two that trade has gone into decline and has been termed
͚deglobalisation͛.

The second factor contributing to globalisation is transport costs. The improvements in

containerisation have considerably lowered freight charges. For example, in the past 20
years, sea transport unit costs have fallen by over 70% and air freight costs have fallen
by 3-4% year on year. This led to a boost in trade flows since, transport costs are now
less likely to cancel out gains from comparative advantage. This enables increased trade
between countries making them more reliant upon each other.

On the other hand, the impacts of increased transport on the environment need to be
considered. The rise in sea and air transport has caused great concern over the negative
externalities of global trade. Current estimates of carbon dioxide emissions reveal that
they could be increasing by over 70% by 2020 has led to calls for green taxes. If they go
ahead then, they will partially offset the fall in transpo rt costs. This will compromise the
process of globalisation.

(c)Ê The UK͛s balance of trade in goods and services has been worsening year on year from
1997 to 2005. Figure 2 shows how it fell from £2bn in 1997 to £ -46bn to 2005. The
impact of globalisation leads to the reduction of trade barriers and formation of trading
blocs. This means that there is increased import expenditure as multinational firms
import raw materials and goods from foreign countries in order to increase innovation
and competition. It results in trade creation as firms can switch from a high cost
producer from the domestic country to a low cost producer within the trading area.
Moreover, consumers have greater access to goods and services from foreign markets
which are often cheaper. As a result, consumers increase expenditure on foreign goods
to raise standards of living. This increased import expenditure will further outweigh
export earnings, resulting in the worsening of the balance of payments.

However, increased globalisation may not be the only factor responsible for the trend in
the UK͛s trade balance. A fall in UK͛s competitiveness may be a more significant factor
and hence, reduces the extent to which globalisation is responsible. The UK may lose
price competitiveness against foreign firms and this means that UK goods and services

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are more expensive. This could result in a fall in consumption of UK goods and services,
therefore leading to a fall in export ea rnings. This would increase the UK͛s trade balance
deficit. Moreover, the recent recession around the world has created a decline in the
world demand for goods and services. This has placed international trade on a downhill
path. As a result, the UK͛s trad e balance has been affected by this recession, resulting in
an increased deficit. But seeing that globalisation leads to formation of trading blocs
and reduction in trade barriers, it could end up being the most responsible factor in
increasing the UK͛s trade balance deficit from 1998 to 2005.

(d) Ê The impact of globalisation will enable the government to achieve a combination of
macroeconomic objectives. Globalisation will allow the multinational companies to
locate in the UK and this will enable a flow of foreign direct investment into the country
as well. This increases real output as the firms are now more productive and their
productive capacity increases. More so, the fall in transport costs means that it is
cheaper to import raw materials. The reduction in trade barriers and formation of
trading blocs leads to trade creation as firms switch from a high cost producer within the
domestic market to a low cost producer within the trading bloc. This leads to a fall in the
cost of production. As a result, the AS curve shifts to the right and increases real output.
More so, the reduction in t rade barriers promotes competition as mentioned in extract
one and provides increased incentives for firms to reduce costs. This boosts productivity
and growth within the economy. This increase in real output reflects economic growth.
Hence, the UK government achieves the macroeconomic policy objective of economic
growth.

However, the increased competition created from globalisation and the

interdependence related with this could lead to increased marketing costs such as
advertising. Since, multinational companies may try to establish their brands on a global
scale. This could potential increases costs in the long run. Therefore, the costs of
production for firms may increase leading to a fall in output. This would prevent the
policy objective of economics growth to be achieved.

The rise in immigration due to globalisation could help the government achieve full
employment. The increased influx of immigrants will increase the quantity and supply of
workers in the market. This will raise the output capacity of the UK economy. In
addition, the new supply of workers will intensify competition in the labour market and
drive down wages thereby reducing costs of production for firms. This will mean that the
AS curve will shift down and to the right. This will inc rease real output. This further
enables the government to achieve economic growth and moreover, full employment
can also be achieved. This is because labour is a derived demand and the increase in real
output means that more workers are required. The fall in wages means that more staff
can be employed by firms with only a small addition to costs.

To evaluate, an influx of foreign labour from the EU especially and other countries may
prevent the UK government achieving its macroeconomic policy objectives. The influx of
workers in the UK may be low skilled. This could lead to a fall in productivity and could
potentially shifts the AS curve to the left in the long run. As a result, real output could
fall and prevent the policy objective of economic growth bei ng achieved. Moreover, only

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workers which are going to fill areas of shortage should be allowed to enter in order to
prevent an increase in unemployment.

The increased competition created by the fall in trade barriers will helps to drive down
prices and thus maintain a low stable rate of inflation. This is because UK firms aim to
remain competitive internationally. This provides an incentive to invest in new
technologies and reduce costs. This boosts productivity and lowers unit labour costs.
Hence, the shift in AS curve to the right lowers price. This maintains a low level of
inflation.

To evaluate, the formation of trading blocs could prevent the UK government from
maintaining a low stable rate of inflation. The formation of trading blocs leads to trade
diversion due to the placing of a common external tariff against non -member states.
This is where firms switch from a low cost producer with in the trading bloc to a high
cost producer in the domestic market. This will increase costs for firms. As a result , there
is a rise in costs of production potentially shifting the AS curve to the left. This means
that there is a rise in the price level. Hence, the UK government may not be able to
achieve low stable inflation.

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