AQA A-level Economics: Globalisation and multinational corporations (7136) – Revision Notes

These notes condense the “Globalisation” content point of the AQA A-level Economics (7136) specification, version 1.3: section 3.2.6.1 on the AQA website and 4.2.6.1 in the combined PDF. Full explanations are in the study guide. Test yourself with the practice set, then check the course hub, the printable checklist, the exam preparation page and the free diagnostics. All figures are invented.

The four things to cover

Specification point	One-line summary
Causes	Lower trade barriers, cheaper transport and communication, technology, capital market liberalisation, economic reform, MNC strategy
Characteristics	Trade rising faster than output, FDI and capital flows, migration, supply chains, technology spread, interdependence
Consequences	Gains and losses for less-developed countries (LDCs) and more-developed countries (MDCs)
MNCs	Drivers of FDI, trade and supply chains, with costs and benefits for host and home economies

Definitions

Term	Meaning
Globalisation	The growing integration of national economies as goods, services, capital, labour, technology and ideas cross borders
Trade liberalisation	Cutting tariffs, quotas and other barriers. One cause, not the whole process
Multinational corporation (MNC)	A firm with production or service operations, owned or controlled by it, in two or more countries
Foreign direct investment (FDI)	Money put into owning or building productive assets in another country, giving lasting control
Greenfield FDI	Building new facilities abroad
Merger or acquisition FDI	Buying an existing foreign firm
Offshoring	Moving a business activity to another country
Value added	Output value minus the value of inputs bought in
Repatriated profit	Profit sent from the host country back to the owners abroad
Transfer pricing	Prices charged between parts of the same firm
Footloose	Free to move production when costs change

Causes: chains to remember

1. Trade liberalisation: barriers fall, so import prices fall and export markets widen, so trade rises.
2. Transport and communication costs fall: delivered cost falls, production splits into stages, so supply chains lengthen.
3. Technology: services can be traded, supply chains can be managed live, and information spreads.
4. Capital market liberalisation: funds move to the highest return, so FDI and financial flows grow.
5. Economic reform and political change: more economies open up and join world markets.
6. MNC strategy: firms seek markets and low costs, and push for open markets.

Trade growing faster than output: index method

Average annual change = (end index / start index)^(1/years) - 1
Trade relative to output = trade index / output index x 100

Illustrative example: trade index 100 to 190 and output index 100 to 140 over 20 years. Trade grows 3.3% a year, output 1.7% a year, and trade relative to output is 135.7.

Characteristics checklist

• Trade rising relative to output.
• More FDI and financial capital flows.
• More migration and labour mobility.
• Global supply chains and specialisation in stages.
• Spread of technology, ideas and brands.
• Greater interdependence and faster transmission of shocks.
• A large role for MNCs, including trade inside firms.

Value added method (steps)

1. List each stage and the price at which its output is sold.
2. Value added = selling price minus cost of inputs bought in.
3. Check that the total of value added equals the final price.
4. Compare a country’s value added with its gross exports.

Illustrative: output sold for 60 using 50 of imported inputs gives value added of 10, or 16.7% of gross exports.

Consequences

	Gains	Losses
MDCs	Cheaper goods, choice, larger markets, efficiency from competition, inward FDI	Job losses in some industries, structural unemployment, regional decline, wider wage inequality
LDCs	FDI, jobs, technology, export growth, tax revenue, higher productivity as labour leaves farming	Dependence on few exports, price swings, weak labour or environmental standards, profit repatriation, local firms undercut, wider inequality

Formulas to use

Price level effect = sum of (budget share x new price relative)
GNI = GDP + net income from abroad
Employment multiplier = total jobs / direct jobs
Percentage change = (new - old) / old x 100

Small reminders (illustrative):

• Imported goods are 8% of spending and fall 25% in price: new price level 0.92 + 0.08 x 0.75 = 0.98, a fall of 2.0%.
• GDP 200, MNC profits repatriated 18, no other income from abroad: GNI = 182.
• 2,000 direct jobs and 0.6 indirect per direct job: 3,200 jobs, multiplier 1.6.
• Tax of 30% on 40 profit and 10% on 10 profit gives 13. After moving 15 of profit: 0.30 x 25 + 0.10 x 25 = 10.

MNC role: reasons and effects

Why firms go multinational: markets, lower costs, resources and skills, avoiding trade barriers, economies of scale, taxes and incentives, and spreading risk.

How MNCs drive globalisation: FDI flows, intra-firm trade, supply chains, technology and management spread, and lobbying for open markets.

Host benefits	Host costs
Jobs, wages, training	Profit repatriated
Capital and technology	Local firms crowded out
Tax and export earnings	Transfer pricing and tax loss
Supplier links	Footloose behaviour
	Weaker standards possible

Two chains to learn in full

Offshoring in an MDC. A firm moves assembly abroad, so domestic manufacturing jobs fall. Displaced workers whose skills do not fit new vacancies stay unemployed, which is structural unemployment. It is concentrated in particular regions, so local demand and tax revenue fall there. Meanwhile consumers pay lower prices and exporters gain markets. Judgement: the net effect depends on how quickly workers retrain and move, and on whether new jobs appear.

FDI in an LDC. A foreign firm builds a plant, so jobs, wages and tax revenue rise and technology transfers. Local suppliers may gain orders, which raises income further through the multiplier. But if profits are repatriated, GNI rises by less than GDP, and if the plant uses imported inputs, few local links form. Judgement: the gain is larger where the host has skilled workers, bargaining power and rules that keep value in the country.

Must-know distinctions

• Globalisation versus trade liberalisation: one is the process, the other a policy cause.
• FDI versus portfolio investment: FDI gives lasting control of productive assets, portfolio investment is buying shares or bonds without control.
• GDP versus GNI: output inside the country versus income of its residents.
• Gross exports versus value added: gross figures count inputs again each time they cross a border.
• Offshoring versus outsourcing: moving an activity abroad versus handing it to another firm, which may be at home or abroad.
• Greenfield versus merger or acquisition: new capacity versus a change of ownership.

Evaluation toolkit

Use these to move from description to judgement:

• Who gains or loses? Consumers, skilled workers, low-skilled workers, governments, owners.
• How big, and over what period? Short-run job losses may be followed by long-run gains.
• Type of country and type of FDI: manufacturing or extraction, high or low skills, large or small market.
• Policy response: education, retraining, infrastructure, tax and regulation change the outcome.
• Evidence: a rising trade share shows integration but not who benefits.

Quick self-test

1. Define globalisation.
2. Name two reasons why falling transport costs raise trade.
3. Trade volume rises from 100 to 130 and output from 100 to 115. What is trade relative to output?
4. A country assembles a product sold for 80 using inputs worth 68 bought abroad. State its value added.
5. Country G has GDP of 300 and net income from abroad of minus 21. Find GNI.
6. An MNC creates 500 direct jobs with 0.4 indirect jobs for each. How many jobs in total?
7. Distinguish greenfield FDI from acquisition.
8. State two costs of MNC activity for a host country.
9. Why may globalisation widen inequality in an MDC?
10. Why does a rise in the trade share of GDP not prove that all citizens gain?

Answers

1. The growing integration of national economies as goods, services, capital, labour, technology and ideas cross borders.
2. Delivered prices of imports fall, so demand rises. Production can be split between countries, which expands trade in parts.
3. 130 / 115 x 100 = 113.0.
4. 80 - 68 = 12.
5. 300 - 21 = 279.
6. Indirect = 500 x 0.4 = 200. Total = 700.
7. Greenfield builds new facilities. Acquisition buys an existing firm, so no new capacity is created at first.
8. Any two from: repatriated profit, crowding out of local firms, transfer pricing, footloose behaviour, weaker labour or environmental standards.
9. Competition from low-wage producers and offshoring can reduce demand and pay for lower-skilled workers, while skilled workers and owners may gain.
10. A higher share measures integration, not how gains are shared. Some workers or regions may lose.

Where marks are usually lost

• Describing globalisation as only trade, with nothing on capital, labour, technology or supply chains.
• Writing “globalisation is good” or “bad” with no reference to which country, which group and which period.
• Stating a benefit or cost without the chain of reasoning that links cause to effect.
• Mixing up GDP and GNI, or treating all of an MNC’s profit as staying in the host country.
• Forgetting that some jobs created by an MNC may replace jobs lost at local firms.
• Not applying to the context in the data, so that an answer reads as generic.
• Listing points for and against with no final judgement or conclusion that follows from the argument.
• Misquoting a calculation, for example leaving out the base year in an index comparison.

Official syllabus

AQA, AS and A-level Economics specification (7135 and 7136), version 1.3, 29 June 2022, for first teaching from September 2015. Section 4.2.6.1 Globalisation (site-map number 3.2.6.1).