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

This guide covers the content point “Globalisation” in the AQA A-level Economics (7136) specification, version 1.3 (29 June 2022). It is numbered 3.2.6.1 on the AQA website and appears as 4.2.6.1 in the combined AS and A-level PDF. It sits within the international economy content, examined in Paper 2 and open to use in Paper 3 as well. The specification labels none of it AS-only or A-level-only, and it gives no additional information beyond the four bullet points covered here.

Related pages: the course hub, the printable checklist, the revision notes, the practice set, the aggregate demand and supply guide, the exam preparation page and the free diagnostics.

Every country, firm and figure below is invented for illustration. None is real data.

What the specification asks for

Content	What you must be able to do
Causes of globalisation	Explain why economies and firms have become more closely linked
Main characteristics	Describe how the process shows up in trade, capital, labour, production and technology
Consequences for less-developed and more-developed countries	Analyse gains and losses for each group and judge who gains more
Role of multinational corporations	Explain how MNCs drive globalisation and what they do to host and home economies

Written answers need chains of reasoning and evaluation, so the sections below point out the “so what” you would need in an essay.

What globalisation is

Globalisation is the growing integration of national economies, so that what happens in one increasingly depends on goods, services, capital, labour, technology and ideas crossing borders. It is a process, not a state. It is not the same as trade liberalisation, which is only one cause.

Causes of globalisation

Trade liberalisation. Lower tariffs and quotas cut the price of imports and widen the market for exporters. Firms then find it worthwhile to build production for several markets.

Falling transport and communication costs. Larger ships, containers, cheaper air freight and digital communication lower the cost of moving goods and of managing distant plants. Production can be split into stages in different countries.

Technology. Information technology lets services be traded across borders and lets firms coordinate supply chains in real time.

Capital market liberalisation. Removing controls on moving money lets funds flow to where returns are highest, which supports investment abroad.

Economic reform and political change. When economies move from central planning towards market systems, or lower barriers to foreign firms, they join world markets. More producers, workers and consumers are added to the world economy.

Multinational corporations (MNCs). Their search for markets and low costs creates trade and investment, and they favour open markets.

Worked example: trade grows faster than output. Over 20 years in an illustrative world economy, a freight cost index falls from 100 to 64, a world trade volume index rises from 100 to 190 and a world output index rises from 100 to 140.

Freight cost:  (64/100)^(1/20) - 1  = -2.2% a year
Trade volume:  (190/100)^(1/20) - 1 = +3.3% a year
World output:  (140/100)^(1/20) - 1 = +1.7% a year
Trade relative to output: 190/140 x 100 = 135.7, a rise of 35.7%

Chain: lower freight and trade barriers, lower delivered prices, more trade, and trade rising faster than output. This is the pattern that gives globalisation its meaning. The numbers show association, not proof that freight costs alone were the cause.

Main characteristics

• Rising trade relative to output, as in the example above.
• More foreign direct investment (FDI), where a firm buys or builds productive assets abroad, and larger flows of financial capital.
• More migration and labour mobility, including workers sending money home.
• Global supply chains, with each country specialising in a stage of production.
• Spread of technology and ideas, and similar goods and brands sold in many countries.
• Greater interdependence, so a shock in one economy is passed on to others.
• A large role for MNCs, much trade being within the same firm.

Worked example: a supply chain and value added. Country X makes chips worth 20 and sells them to Country Y. Country Y makes components worth 50 and sells them to Country Z. Country Z assembles a gadget and exports it for 60. A retailer in Country D sells it for 100.

Stage	Value added in that country	How it is found
Country X	20	20 minus 0 imported inputs
Country Y	30	50 minus 20 of imported chips
Country Z	10	60 minus 50 of imported components
Country D	40	100 minus 60 of the imported gadget
Total	100	Equals the final price

Recorded trade is 20 + 50 + 60 = 130, which is more than the 100 that consumers pay, because inputs are counted each time they cross a border. Country Z’s exports are 60 but only 10 of that (16.7%) is its own value added. So gross export figures overstate how much a country gains, and a country can be deeply involved in global supply chains yet capture little of the value.

Consequences of globalisation

Judge each effect by who gains, how large it is and over what time period.

More-developed countries (MDCs)

Gains: cheaper imports, wider choice, larger markets for exporters, economies of scale, competition that raises efficiency, and inward FDI.

Losses: firms that cannot compete close, and jobs move abroad (offshoring), which raises structural unemployment and regional decline. Wages for lower-skilled workers can fall relative to skilled workers, so inequality may widen.

Worked example: cheaper imports. In Country B, clothing is 8% of household spending and imported clothing prices fall by 25%, with other prices unchanged.

New price level = 0.92 + (0.08 x 0.75) = 0.98, so prices fall 2.0%
Real purchasing power of fixed money income: 1/0.98 - 1 = +2.04%

The gain is small for the average household but spread widely, whereas the losses from factory closures fall on a few workers heavily. That is why the political reaction is often stronger than the size of the net gain suggests.

Worked example: displaced workers. Country B has 8,000 thousand in its labour force and 5% unemployment, which is 400 thousand. Offshoring removes 60 thousand manufacturing jobs, and 35 thousand of those workers move into new service jobs.

Still unemployed: 60 - 35 = 25 thousand. Unemployed = 425 thousand
Unemployment rate = 425/8,000 = 5.3%

The national rate moves little, but the workers affected may have skills that do not match the new jobs. Retraining and mobility determine the outcome.

Less-developed countries (LDCs)

Gains: FDI brings capital, jobs, technology and management skills. Export markets allow specialisation and growth. Workers moving from low-productivity farming to factory work raise output. Tax revenue and foreign exchange earnings rise.

Losses: relying on a few exports leaves a country exposed to falling world prices. Local firms may be undercut by imports or MNCs. Low wages, poor working conditions and environmental damage can follow if regulation is weak. Profits are repatriated, and the benefits may go to cities or a skilled minority, widening inequality.

Worked example: GDP versus national income. Country E has GDP of 200. Foreign MNCs earn profits of 24 in Country E and send 18 abroad. Assume no other income from abroad.

GNI = GDP + net income from abroad = 200 - 18 = 182
Repatriated share of MNC profit = 18/24 = 75%

Output inside the country is 200, but income to its residents is only 182. FDI can raise GDP by more than it raises living standards.

Judging who gains more

Typical evaluation: the gains depend on the size and speed of adjustment, whether governments invest in education and infrastructure, how open the country already was, whether exports are manufactures or primary products, and whether tax revenue is used well. Globalisation has widened some gaps between countries while narrowing others, so avoid stating that it helps all LDCs or harms all MDCs.

The role of multinational corporations

An MNC is a firm with production or service operations, which it owns or controls, in two or more countries. FDI can be greenfield (building new facilities) or by merger or acquisition of an existing firm.

Why firms become multinational: access to large or growing markets; lower labour or input costs; access to raw materials or skills; avoiding trade barriers and transport costs by producing locally; economies of scale; favourable taxes or investment incentives; and spreading risk.

How MNCs drive globalisation: they create FDI flows and trade (much of it between their own subsidiaries), build supply chains, spread technology and management methods, and lobby for open markets.

Benefits and costs for host countries

Benefits	Costs
Jobs and higher wages than local alternatives	Profits repatriated, so GNI rises less than GDP
Capital, technology, training	Local firms may be driven out or kept in low-value roles
Tax revenue and export earnings	Transfer pricing can shift profit and reduce tax
Supply-chain links to local firms	MNCs are footloose and can leave quickly
	Environmental or labour standards may be weaker

Worked example: employment. An MNC opens a plant in Country E with 2,000 direct jobs. Each direct job supports 0.6 further local jobs in suppliers and services.

Indirect jobs = 2,000 x 0.6 = 1,200
Total jobs = 3,200, an employment multiplier of 1.6

Part of the gain may replace jobs lost at local firms, so the net gain is below 3,200.

Worked example: transfer pricing. An MNC has subsidiary A in a country taxing profit at 30% and subsidiary B in a country taxing at 10%. A earns 40 of profit and B earns 10.

Tax before: 0.30 x 40 + 0.10 x 10 = 12 + 1 = 13
Transfer prices shift 15 of profit from A to B: A = 25, B = 25
Tax after: 0.30 x 25 + 0.10 x 25 = 7.5 + 2.5 = 10, a saving of 3

The MNC saves 3 and the high-tax government loses 4.5 of revenue, while the low-tax government gains 1.5. Tax authorities try to check that internal prices resemble market prices.

Home countries

An MNC’s home economy can gain from repatriated profit, but may lose jobs if production moves abroad.

Evaluating MNCs

A sound judgement considers the host’s bargaining power (a large market has more), whether the investment is in manufacturing or extraction, the host’s skills, the tax and regulation regime, and the time frame. An MNC can speed development but is not a substitute for domestic policy.

Common errors

• Treating globalisation as only trade, and leaving out capital, labour and technology.
• Calling every effect good or bad without who gains, how much and when.
• Mixing up GDP and GNI.
• Counting indirect jobs without noting that some replace existing jobs.
• Listing benefits and costs with no ranking or reasoning.

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).