OxfordAQA International AS and A-level Economics: Globalisation (9640)

This guide teaches globalisation as set out in the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, section 3.4.1.1. Section 3.4 is extra International A2 content, and the specification says it is assessed in Unit 4, where you are expected to use what you learned in Units 1 and 2. Quantitative skills (section 3.5) can be assessed anywhere, so the calculations below are part of the topic. Every country, firm and number here is invented for illustration. Use the OxfordAQA Economics hub and the printable checklist to track progress, the revision notes for quick recall, the practice questions for testing, and the free diagnostics to find weak spots.

What the specification asks for

Specification content	What you must be able to do
Main characteristics of globalisation	Describe the features and measure them
Causes of globalisation	Explain and rank the drivers
Consequences for LEDCs and MEDCs	Analyse winners and losers in each group
Globalisation and the natural environment	Explain environmental gains and harms
Role of TNCs	Assess costs and benefits of TNC growth, including political influence and transfer pricing

1. Main characteristics

Globalisation is the deepening of links between national economies, seen in rising cross-border movement of goods, services, finance, labour, technology and information. Look for these features:

• Rising trade relative to output. One measure of exposure to trade is the openness ratio: (exports + imports) divided by GDP, times 100.
• Larger capital flows. Foreign direct investment (FDI) is investment in physical assets or a lasting stake in a firm abroad. Portfolio flows (shares and bonds) also grow.
• Global supply chains. Different stages of one product are made in different countries.
• Migration and remittances. Workers move, and money flows back home.
• Technology and information flows. Ideas, designs and data cross borders almost instantly.
• Convergence of tastes and brands. Similar products sell in many countries.
• Growth of TNCs. A transnational corporation (TNC) is a business with production units in several countries, run as one group.

Worked example 1: measuring openness. Country A (illustrative) has these figures in billions of currency units (cu).

	Exports	Imports	GDP
Year 1	40	44	120
Year 11	66	69	150

Year 1 openness = (40 + 44) / 120 × 100 = 70%. Year 11 openness = (66 + 69) / 150 × 100 = 90%, a rise of 20 percentage points. Total trade grew from 84 to 135, which is 60.7%, while GDP grew 25%. Trade grew faster than output, which is the pattern globalisation predicts. A high ratio does not prove benefit: a small country always scores high, and the ratio says nothing about who gains.

2. Causes

1. Falling transport and communication costs. Larger ships, containers, air freight and digital communication cut the cost of moving goods and coordinating firms.
2. Trade liberalisation. Lower tariffs and quotas, and trading blocs, widen markets. The specification covers these in the trade topic.
3. Deregulation of capital markets. Fewer controls on moving money make FDI and borrowing abroad easier.
4. Opening up of emerging economies. Countries that join the world market add workers, consumers and resources.
5. TNC strategy. Firms seek lower costs, new customers and scale.
6. Rising incomes and demand for variety. Consumers want overseas goods and services.
7. Political and institutional change. Stable property rights and investment agreements reduce risk for foreign firms.

Evaluation: rank the causes. Technology sets what is possible, and liberalisation decides what is allowed. Both are needed. A firm will not offshore without a gap in costs, but that gap matters only if moving goods is cheap enough. When a question asks for the “main” cause, argue for one and say why it is the necessary condition.

Worked example 2: why firms offshore (illustrative). A clothing firm compares two sites for one shirt.

	Home plant	Overseas plant
Wage per hour	24 cu	5 cu
Output per hour	6 shirts	2 shirts
Labour cost per shirt	24 / 6 = 4.00	5 / 2 = 2.50
Shipping	0.20	0.60
Extra management cost	0	0.30
Total per shirt	4.20	3.40

Offshoring saves 0.80 per shirt, which is 19.0% of the home cost. Low wages alone do not decide this. Labour cost per unit does. If productivity overseas were only 1.25 shirts per hour, the overseas cost would be 5 / 1.25 + 0.90 = 4.90, which is higher than at home. The break-even productivity is 5 / (4.20 − 0.90) = 1.52 shirts per hour. A firm may still choose the dearer site for reliability or market access.

3. Consequences for LEDCs and MEDCs

An LEDC is a less economically developed country and an MEDC a more economically developed one. Gains and losses differ within each group, so avoid treating either as one block.

	Likely benefits	Likely costs
LEDCs	Export markets and foreign exchange; FDI; jobs; technology and skills transfer; lower prices for imports; faster growth	Low pay and poor conditions; profits sent abroad; local firms squeezed; dependence on a few exports or one TNC; exposure to global shocks; widening inequality; loss of skilled workers abroad
MEDCs	Cheaper goods and inputs; larger markets; competition and innovation; returns on overseas investment	Structural unemployment in declining industries; pressure on low-skilled wages; regional inequality; loss of tax base if firms relocate; exposure to shocks abroad

Chain of reasoning (LEDC): a TNC builds a factory → local jobs and tax revenue → higher incomes and demand → more growth. This holds only if the work is paid above local alternatives, if the factory buys inputs locally, and if the government captures some of the profit. If the factory imports parts and pays the minimum, the gain is small.

Chain of reasoning (MEDC): cheaper imports → lower prices and lower costs → higher real incomes. But workers in the import-competing industry lose jobs. Structural unemployment lasts until they retrain or move, so the cost is concentrated and the gain is spread.

Worked example 3: nominal and real gains (illustrative). Workers in a TNC plant in Country B earn 400 cu a month in Year 1 and 460 cu in Year 2. The consumer price index rises from 100 to 118. The nominal rise is 15%. The real wage in Year 1 prices = 460 / 118 × 100 = 389.8 cu, a fall of 2.5%. A headline wage gain can hide a real loss, so deflate before you judge the benefit to workers.

4. Globalisation and the natural environment

Economists split the effect into three parts:

• Scale effect: more output means more resource use and pollution. This is negative.
• Composition effect: the mix of industries changes. Dirty production may move to countries with weak rules, a pollution haven. Or a country may shift towards services.
• Technique effect: richer countries and TNCs adopt cleaner methods and demand tougher standards. This is positive.

Other links: transport emissions rise as trade grows; demand for timber, minerals and farmland threatens forests and habitats; global commons such as the atmosphere are affected by everyone’s emissions, so a free-rider problem arises. A TNC may also spread clean technology, though it may use weaker standards abroad than at home.

Worked example 4: scale against technique. Country D (illustrative) raises output from 100 to 160 (up 60%). Emissions per unit of output fall from 0.50 to 0.375 (down 25%). Emissions before = 100 × 0.50 = 50. Emissions after = 160 × 0.375 = 60. Total emissions rise 20%, even though each unit is cleaner. The scale effect beat the technique effect. A fall in intensity does not prove total pollution fell.

Evaluation: the answer depends on the regulation in force, on whether pollution crosses borders, on how fast the country grows, and on whether prices include the external cost.

5. The role of TNCs

TNCs organise production across borders, move capital and technology, and account for a large share of world trade and investment. They grow for market access, lower costs, scale economies and access to resources, and to avoid trade barriers by producing inside the market.

Benefits to the host country: capital and jobs; new technology and management skills; tax revenue; export earnings; competition that can lower prices; links to local suppliers.

Costs to the host country:

• Repatriated profit. If a TNC earns 30 m cu in a host and sends 60% home, 18 m cu leaves and 12 m cu is retained. Profit outflow appears in the income part of the current account.
• Crowding out of local firms that cannot match scale or brand.
• Footloose behaviour. The TNC can leave if costs rise, so the host bears the unemployment.
• Weak standards on labour, safety and the environment.
• Monopsony power over local suppliers or workers.
• Political influence. A large TNC can lobby for tax concessions, weaker regulation or favourable contracts, and can threaten to relocate. The host government then bargains from weakness. In a home country, the same firm may lobby for policy that suits it, not the public.
• Transfer pricing.

Transfer pricing is the price one part of a TNC charges another for goods, services or ideas. Because the buyer and seller belong to the same group, the price can be set to move profit to a low-tax country.

Worked example 5: transfer pricing (illustrative). A TNC’s subsidiary in Country L (profit tax 10%) makes a component at a cost of 60 cu and sells it to the parent in Country H (profit tax 30%). The parent sells the finished good outside for 200 cu and has other costs of 40 cu per unit.

Transfer price	Subsidiary profit	Parent profit	Tax in L	Tax in H	Total tax
100	40	60	4	18	22
140	80	20	8	6	14

Group profit is 100 cu either way. Raising the price from 100 to 140 cuts the group’s tax by 8 cu per unit, 36.4% less. On 60,000 units that is 480,000 cu. Country H loses 12 cu of tax per unit and Country L gains 4. The effect is a transfer of revenue between governments, plus a loss to the world total.

Assessing TNC growth. Weigh the size of the gains against the share captured locally; how mobile the firm is; the strength of the host government’s tax and competition rules; and whether jobs are better than local alternatives. Governments can respond with minimum local content, tax rules that test prices against market prices, and cooperation between tax authorities.

Common errors

• Defining globalisation as “trade” only. It also covers capital, people, technology and production.
• Treating all LEDCs, or all workers in one country, as alike.
• Quoting a rise in nominal wages as a gain without deflating.
• Saying low wages always attract TNCs, instead of comparing unit labour costs.
• Writing “transfer pricing is illegal”. Setting prices that do not match market prices is the problem, and enforcement varies.
• Stopping at one-sided description when a question says “assess”.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, section 3.4.1.1 Globalisation. First teaching September 2020, first AS exams May/June 2021, first A-level exams May/June 2022.