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Theme 3: The Global Economy - Coggle Diagram
Theme 3: The Global Economy
3.1 Globalisation
3.1.1 Growing economies
Growing power of emerging markets
BRIC economies have become significant global players in terms of all aspects of trade
collapse of communism in Russia and the Eastern Bloc has opened up global markets
significant economic growth
used their abundant natural resources to help develop their economies
used their abundant human resources to help increase the supply of goods and services
Asia (China and India)
Africa
Rising incomes
main measure used is GDP
national income/population
as GDP per capita rises, it is assumed that the standard of living also rises
Nominal vs Real values
nominal value is expressed in monetary terms
real value takes into account inflation
real national output = nominal national output / average price level
can make GDP appear higher than it actually is as inflation not accounted for
Index Numbers
used for making comparisons over time
a base year is used with an index number of 100
this is compared to other years eg a 2% increase has a value of 102
Implications of economic growth for individuals and firms
Consumers
Costs
those on low and fixed incomes might feel worse off if there is high inflation - inequality increases
higher demand-pull inflation as more consumer spending
Benefits
the average consumer income increases as more people are employed and wages increase
Consumers feel more confident in the economy - increases consumption and leads to higher living standards
Firms
Trade opportunities for firms
opens up new markets
3.1.2 Trade and Growth
3.1.3 Trading Blocs
3.1.4 Trade policy and trade negotation
3.1.5 Exchange rate changes
3.1.6 China country profile
3.2 Economic Factors in Business Expansion
3.2.1 Conditions that prompt trade
Push Factors
these force a firm out of the market they are in
saturated markets
occurs when it is not possible to expand sales any further
hard to establish a business and remain competitive
competition
other businesses may have a competitive advantage - every firm is trying to stay competitive
businesses may try to differentiate or undertake new market development
suggests they think they will struggle
By expanding into a new market and trading, firms can take advantage of lower production costs and a whole new market of customers.
Pull Factors
these attract firms to a new market
lots of potential for business growth in new, emerging markets
potential to earn higher profits
Economies of Scale
potential to increase sales and profits
lower AC of production as the scale of the firm grows
may be through purchasing economies as its buying power increases and it negotiates cheaper unit costs through bulk buying
can pass lower costs to consumers - more competitive
Risk Spreading
a firm diversifies into another market so it is less reliant
if one market loses sales there is another to fall back on
the business becomes safer and more stable
Possibility of offshoring and outsourcing
Off-shoring occurs when a business relocates production to another country
main reason for this is cost minimisation as the production process can be cheaper in comparison to the domestic economy
labour costs may be cheaper - call centres were offshored for this reason
may be to use resources unavailable in the domestic country
or to overcome regulations which may be limiting the firm
Outsourcing occurs when a business contracts out production to another business
loss of quality control
outsource business might be a specialist
extending product life cycles
as a good or service reaches the decline stage in a mature market, the firm can increase its life by introducing it into another, less mature market
a new market can increase profitability and provide potential for increased sales
may require adapting to suit local tastes - requiring local knowledge
raising capacity utilisation
if a firm has spare capacity they can use this to increase production volume
increased demand in the new market is created by:
closeness to markets eg better transportation
lower capital costs with reduced demand costs = lower prices
better understanding of local markets
cheaper wage costs
spare capacity is used - making the firm more competitive and AC of production falls
3.2.2 Assessing the potential of different economies
Factors influencing expansion into a market:
levels and growth of disposable income
ease of doing business
how accessible markets are for a firm
influenced by government policy, corruption, political stability, conflicts and the stability of the economy
The easier it is to do business in a market, the more likely it is that a firm will expand into the market
will keep production costs lower and encourage firms to increase production
government policy could make doing business difficult - excessive red tape can increase production costs
infrastructure
political stability
exchange rate
Factors influencing the location of production sites:
costs of production
skills and availability of labour force
Infrastructure
location in trade bloc
government incentives
ease of doing business
political stability
natural resources
likely return on investment
3.3 Impact of Globalisation on Global Companies
3.3.1 Responding to Global Demand
3.3.2 Demand-side factors in global markets
3.4 Impact of Globalisation on Local and National Economies
3.4.1 The Impact of MNCs
3.4.2 Ethical issues
3.4.3 Controlling MNCs
3.5 Global Labour Markets
3.5.1 Employment patterns
3.5.2 Wage rates
3.5.3 Minimum Wage legislation
Skills shortages and their impact on international competitiveness
international competitiveness is the ability of a nation to
compete successfully
overseas and
sustain improvements
in real output and living standards
human capital is important for economic development
developing human capital
fills
skill shortages
and the economy can become more productive
incentives for workers to provide their labour can be an increasing minimum wage
This will be more problematic in the short term; in the long term it will see workers being
trained and educated
minimum wages will attract more skilled workers from lower wage economies
developing human capital can move a country up the supply chain
economies with higher minimum wages have a
greater supply of skilled workers
this increases
productivity
, lowering unit labour costs, improving quality and becoming more internationally competitive
Migration
within economies
Workforces show greater flexibility within economies e.g. movement between regions in the UK
In emerging economies such as China minimum wages are set by local governments e.g. Shanghai
This creates migration from region to region
between economies
Workers are more willing to move across national borders in search of employment at higher wage rates. Free movement of labour has made this much easier
Globalisation allows the best talent to move quickly and easily across borders, creating a ‘brain drain’
Less skilled workers can undercut wages in developed economies as the workforce of poorer countries seek to better their standard of living
Migrants are usually of working age, so the supply of labour at all wage rates tends to increase.
Migration particularly affects the supply of labour at the lower wage rates
There could be more competition to get a job due to the rise in the size of the working population
Inequality and Incentives
Minimum wage legislation can help to reduce inequality in society by reducing wage differentials
It can help to provide a wage closer to one required for a sustainable standard of living but only if it is effectively implemented
However, the minimum wage is often below the level required to maintain decent living standards
In London, high demand for labour has meant that the wage rate in most jobs is higher than the minimum wage, making in superfluous to requirements
As wages rise there is a greater incentive to work for low paid workers
In the UK, reductions in welfare payments have increased the incentive even more, as the differential between the minimum wage and welfare benefits increase
3.6 Inequality and Redistribution
3.6.1 Poverty and inequality
Absolute poverty
when individuals or households are deprived of basic human needs
eg food, shelter, energy
less than $1.25 a day
Relative Poverty
when individuals or households are poor in comparison to the rest of the population
in the UK this is is when your income is below 60% of the median income
causes of poverty
low wages and unwaged
average earnings growth has outstripped that of unemployment benefit payments
low skilled workers cannot afford basic things such as heating
gap between high and low pay, "wage differentials" too high
unfair tax systems
some argue taxation should be heavier for higher earners to redistribute incomes
poor healthcare and education
measures of poverty
the international poverty line
The World Bank uses PPP to take into account the cost of living in different countries
below this line is considered to be 'extreme poverty'
Households Below Average Income
poverty line is said to be where household income is below 60% of the median household incomes
Minimum income standards
measurement of what is required to achieve an acceptable standard of living
consumption
material deprivation
HPI
life expectancy, education and the ability of citizens to meet basic needs
HPI-1 is for developing countries
HPI-2 is for developed countries
effects of poverty
income will be redistributed back to higher earners with increased saving and wealth
may be increased investment as returns for entrepreneurs improve eg lower taxes
capitalism can increase inequality levels as the capitalist owns the means of production
ownerships of assets such as property and shares leads to higher incomes and even greater inequality
measuring inequality
Lorenz curve
the closer the curve is to the line of equality, the more equally cumulative income is shared
Gini coefficient
gives a mathematical measure of what the Lorenz curve shows
0= perfect equality
1= perfect inequality
Gini Index
gini coefficient x100
A / A + B
3.6.2 Reducing poverty
3.6.3 the impact of inequality on economic agents
3.6.4 Redistribution of income and wealth