Pearson Edexcel IAL Economics: Causes and effects of globalisation (YEC11) – Revision Notes

These notes condense section 4.3.1, Causes and effects of globalisation, items 1 to 3, of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11) specification, Issue 2, June 2018. Unit 4 is an International Advanced Level compulsory unit, part of the additional International A2 content. For full explanations use the study guide, then test yourself with the practice questions. See also the course hub, the checklist, exam preparation and the free diagnostics. All figures are invented for illustration.

Definitions

Term	Meaning
Globalisation	Growing integration of national economies through flows of goods, services, capital, labour and ideas
TNC	A firm that produces in more than one country
FDI	Investment in productive assets, such as a factory, in another country
Trade liberalisation	Cutting tariffs, quotas and other barriers to trade
Trading bloc	A group of countries reducing trade barriers between themselves
Transfer pricing	Setting the internal prices charged between parts of the same TNC
Remittances	Money sent home by migrants

Formulas and a worked reminder for each

Measure	Formula	Reminder
Openness ratio	(X + M) / GDP x 100	Country P: X 45, M 55, GDP 250: 100/250 = 40%
FDI inflow share	FDI inflow / GDP x 100	9 / 150 = 6%
Net migration rate	(in - out) / population x 1,000	Population 5 million, in 42,000, out 12,000: 30,000 / 5 million = 6.0 per 1,000
Output per head growth	(1 + g output) / (1 + g population) - 1	3.2% and 1.0%: 1.032 / 1.010 - 1 = 2.18%
Average cost	Total cost / output	Output 2,000, cost 30,000: 15. Output 8,000, cost 84,000: 10.5, a 30% fall
Consumer surplus (linear demand)	half x quantity x (intercept - price)	See below
Profit shifted by transfer pricing	(charged price - arm’s-length price) x units	See below

Consumer surplus reminder: demand P = 60 - Q. Price falls from 30 to 20 after liberalisation, so quantity rises from 30 to 40. Surplus before: 0.5 x 30 x 30 = 450. After: 0.5 x 40 x 40 = 800. Gain: 350.

Transfer pricing reminder: tax rates 28% in the high-tax country and 12% in the low-tax country. The subsidiary is charged 5 per unit above the arm’s-length price on 40,000 units. Profit shifted: 5 x 40,000 = 200,000. High-tax country loses 56,000, low-tax country gains 24,000, and the group saves 32,000.

Spec point 1: characteristics

• 1a. Trade is growing faster than GDP, so the openness ratio rises.
• 1b. TNCs and FDI have become more important: more TNC sales, more FDI relative to GDP.
• 1c. More migration, with matching remittances and brain drain or gain.

Spec point 2: causes

Five causes in the specification. Each should be written as a short chain.

1. Trade liberalisation: lower barriers, so cheaper imports and wider export markets, so more specialisation.
2. More and bigger trading blocs: free internal trade, so intra-bloc trade rises. Beware trade diversion.
3. Political change: the breakdown of the Soviet system and the opening up of China brought more countries into world markets.
4. Lower transport and communications costs: firms can split production across countries and manage it at a distance.
5. More significant TNCs: they move capital, technology and goods inside their own networks and press for open markets.

Method: explaining a cause in steps

1. Name the cause.
2. State what it changes (cost, price, access, risk).
3. Say what firms or governments then do (export more, invest abroad).
4. Link to the sign of globalisation (trade/GDP, FDI, migration).

Reasons for FDI

• Large or growing market, or avoiding tariffs.
• Lower unit costs: labour, land, transport.
• Raw materials or skilled labour.
• Tax breaks and investment incentives.
• Scale across a bigger market and less exchange-rate risk.

Impact on recipients

Gains	Losses
Capital, jobs, skills, technology	Profit repatriation
Tax revenue and export earnings	Crowding out of local firms
Competition and lower prices	Enclave with few spill-overs
Higher AD, then higher LRAS	Transfer pricing, footloose behaviour

Spec point 3: effects

Benefits (3a)

Benefit	Mechanism in one line
Growth	Exports raise AD; technology and competition raise productivity and LRAS
Tax revenue	Larger output, profits and incomes widen the tax base
Economies of scale	Bigger market spreads fixed costs, so average cost falls
Lower prices, higher consumer surplus	Imports and competition cut price; surplus triangle widens
More choice	More varieties and better inputs
Higher living standards	Higher real income per head

Costs (3b)

Cost	Mechanism in one line
Displaced workers	Uncompetitive industries shrink; skills and regions do not match new jobs
Exploitation	Weak laws, low pay, long hours, poor safety
Environment	More transport and production; external costs not in the price
Transfer pricing	Profit shown in low-tax country; host loses revenue
Inequality	Skilled workers and capital owners gain more than unskilled workers
TNC influence	Threat to leave pushes governments to cut taxes or standards

Chains of reasoning to learn

Write each as a sequence, with a final link to the specification point.

1. Lower transport costs to more trade: freight falls, so delivered price falls, so demand for imports and the profit from exporting rise, so trade grows faster than GDP.
2. Liberalisation to consumer surplus: tariff cut, so price falls and quantity demanded rises, so the area under demand and above price widens. Domestic producers lose some surplus, so the net gain is smaller than the consumer gain.
3. FDI to growth in the host: capital inflow raises investment and AD in the short run. Training and technology raise productivity, so LRAS shifts right. The size depends on local sourcing and on how much profit leaves.
4. Transfer pricing to lost revenue: the TNC sets internal prices so that profit appears where tax is low, so the high-tax host collects less and may cut public spending or raise other taxes.

Worked reminder: landed price

Ex-factory price 60, freight 15, tariff 20% on the sum. Landed price = 75 x 1.20 = 90. If the tariff falls to 10% and freight to 9, landed price = 69 x 1.10 = 75.90. The fall is 14.10, or 15.7%. Tariffs and freight both matter, so name both when explaining why trade grew.

Must-know distinctions

• Trade versus FDI: trade moves goods and services; FDI moves capital into productive assets.
• GDP versus GNI: profit sent abroad reduces GNI, not GDP.
• Trade creation versus trade diversion inside a bloc.
• Absolute gain versus distribution: average income can rise while inequality widens.
• Short run versus long run: job losses come first, benefits take longer.

Evaluation prompts

• Who gains and who loses?
• Are there institutions, such as tax rules and labour law, to spread the gains?
• Is the economy diversified, or dependent on one export or one TNC?
• How long does the effect last?

Quick self-test

1. Exports 70, imports 90, GDP 400. Calculate the openness ratio.
2. FDI inflow 15 and GDP 250. Calculate FDI as a share of GDP.
3. Population 10 million, 25,000 arrivals, 65,000 departures. Calculate the net migration rate per 1,000.
4. State two causes of globalisation from the specification list.
5. Give two reasons a TNC might choose FDI.
6. A good costs 40 ex-factory plus 10 freight, and a 10% tariff applies to the sum. Calculate the landed price.
7. Output rises from 20,000 to 50,000 and total cost from 100,000 to 200,000. Calculate the average cost before and after.
8. Demand is P = 80 - Q and price falls from 50 to 30. Calculate the gain in consumer surplus.
9. Explain one way transfer pricing reduces tax revenue.
10. Give one reason globalisation might raise inequality within a country.

Answers

1. (70 + 90) / 400 x 100 = 40%.
2. 15 / 250 x 100 = 6%.
3. (25,000 - 65,000) / 10 million x 1,000 = -4.0 per 1,000.
4. Any two of: trade liberalisation, more trading blocs, political change, lower transport and communications costs, more significant TNCs.
5. Any two of: market access, lower costs, tariff avoidance, resources or skills, incentives.
6. (40 + 10) x 1.10 = 55.
7. Before 100,000 / 20,000 = 5. After 200,000 / 50,000 = 4.
8. Before: quantity 30, surplus 0.5 x 30 x 30 = 450. After: quantity 50, surplus 0.5 x 50 x 50 = 1,250. Gain 800.
9. The TNC charges its subsidiary a price that moves profit to a low-tax country, so the high-tax host collects less.
10. Skilled workers and capital owners gain more than unskilled workers, who face competition and job loss.

Where marks are usually lost

• Writing “trade as a share of GDP” but using exports only.
• Naming a benefit with no mechanism.
• Treating FDI as always good for the host. Weigh repatriation, crowding out and footloose behaviour.
• Treating transfer pricing as illegal by definition. It is a pricing practice that can also be used within the rules.
• Forgetting the winners and losers when judging consumer surplus gains.
• Giving only benefits or only costs.
• Stopping at a list instead of a final judgement with a reason.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2, June 2018, first assessment June 2020, published by Pearson Education Limited: section 4.3.1, Causes and effects of globalisation.