10 Mark Exemplars:
Discuss the likely microeconomic and macroeconomic effects of the reversal of globalisation on the world economy (10 Marks)A microeconomic effect of deglobalisation could be the reduction in a firm's supernormal profits. Due to globalisation, firms based in developed countries like the United States, have been able to offshore production using the spatial division of labour to countries like China, where there is a cheap and large labour pool as well as low corporate taxation. Consequently, transnational corporations like Apple, operate manufacturing in China and are able to decrease their average costs so they can earn a supernormal profit of P¹ABC.
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However, due to deglobalisation, China could theoretically increase protectionism through tariffs and quotas (as seen by the ongoing trade war between the countries), forcing Apple to reshore production or outsource to countries with higher labour costs and taxes. As a result, supernormal profit will fall to P²DEF and could lead to Apple being competed away by competitors with lower prices.
A macroeconomic effect of deglobalisation could be an increase in unemployment. Using the example above, if foreign multinational corporations were to reshore production from developing countries, this would leave large masses unemployed with Apple alone employing approximately 100,000 people in China. Therefore, a negative multiplier effect would occur in the world economy since the disposable incomes of workers would fall, thus decreasing their marginal propensity to consume. This means there would be less injections into the global circular flow of income and could possibly cause a demand deficient recession which would reverse the positive effects that globalisation has had in reducing worldwide absolute poverty by 21% in 18 years, henceforth increasing mortality rates, reducing the supply of labour, causing a leftward shift in the long-run aggregate supply and global real output to fall.
Total word count: 278
Marks: 10/10
Discuss the likely microeconomic and macroeconomic effects of the reversal of globalisation on the world economy (10 Marks)
If deglobalisation were to occur, it would have a variety of impacts on the world economy. This is because deglobalisation would mean a reduction in world trade and fewer goods and services being transported. Consequently, the productive potential of firms would fall, leading to an increase in average costs and a reduction in the availability of economies of scale due to increased protectionist measures because of the fear of globalisation. This is evident, as the trade war between the United States and China shows the negative impact of increased tariffs and higher barriers to entry which would likely lead to higher prices for goods and services /////. With increased protectionist measures, this would cause the cost of production to rise and thus the average cost would shift upwards from AC to AC¹.
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Despite this, deglobalisation may allow the demand for domestic products to increase and thus, AC to fall to AC³ if resources are available in the country.
Another effect of deglobalisation would be the reindustrialisation of developed countries to boost their domestic economies. This is apparent in the United States as Trump wants to bring back jobs to the US manufacturing industry to boost its economy. This would likely reduce the number of structurally unemployed workers and increase tax revenue for the government to invest in the economy including increased investment in infrastructure and healthcare. Through increasing government spending on supply-side policies, this would cause aggregate demand to shift from AD to AD¹. This, in turn, would result in economic growth as government spending is an injection and could furthermore lead to a positive multiplier effect.
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However, deglobalisation with the intent to become more independent may be difficult, as evident in the United States as bringing back factories is costly and would increase the national budget deficit which could require contractionary fiscal policies to rectify the issue. This may have a negative impact and cause AD to shift to AD¹ and real output to fall.
Total word count: 326
Marks: 10/10
12 Mark Exemplars:
Assess the view that the benefits of globalisation outweigh the costs (12 Marks)One benefit to globalisation could be increased employment in developing countries which is evident as FDI inflows to developing economies increased by 7.5% from 2011 to 2012. FDI is when a firm or transnational corporation invests in production in another country; this has been caused by globalisation due to a lack of protectionism in countries such as China who implemented an open-door policy during the 1970s. FDI means that firms in developing countries have greater investment to increase their scale of production of efficiency. Consequently, when firms expand, they demand more labour which is evident in China as employment has increased massively and has lifted more than 500 million people out of poverty between 1990 and 2008. If there is an increase in employment, a positive multiplier effect will occur since workers have a larger marginal propensity to consume and therefore will cause injections into the circular flow of income - increasing AD¹ to AD² and real output to Y² - as a result creating economic growth due to globalisation.
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On the other hand, this economic growth can cause negative externalities due to increased export production in developing countries like China, incentivised by FDI, there has been a lack of government intervention regarding the negative externalities of pollution produced by increased production and economic growth. In the long term, this means the productive workers would face health issues making them unemployable, decreasing the amount of labour supplied. This is especially applicable in China where 36% of pollution is as a result of exports. This would cause AS to shift to AS¹, decreasing long term supply and reducing future economic growth due to the negative externalities of globalisation.
However, another positive impact of economic growth could be increased government tax revenue Whereas transnational corporations which utilise the spatial division of labour have managerial positions and headquarters in their home countries (for example Apple based in California) Hence when they benefit from economies of scale from offshoring manual labour to China, their average cost decreases due to lower regulations and labour costs. Henceforth supernormal profits increase. Consequently, the US government receives high corporate taxation receipts from larger transnational companies like Apple. This can improve the fiscal deficit that the US carries and used for the implementations of supply-side policies in encouraging future economic growth.
However, this has also cause deindustrialisation in the United States as seen by the Rust Belt in the midwest due to Chinese and Mexican outsourcing hence American and other workers in developed countries are subject to structural unemployment causing a demand deficient recession as a consequence to globalisation.
Total word count: 278
Marks: 12/12
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