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Globalisation - Coggle Diagram
Globalisation
causes
TOCA (theory of comparative advantage)
law of comparative advantage: if countries specialise in the products in which they have comparative advantage, then trade could be mutually beneficial to all countries
comparative advantage: country can produce the good at a lower opp cost than its trading partner
conclusion: countries can expand consumption possibilities beyond their production possibilities
sources of comparative advantage
differences in factor endowments
natural resources
static CA: amount of arable land, land size
dynamic CA:
gain due to tech advancements: increased efficiency of capital inputs > opp cost of production decrease
loss due to resource depletion: resources exhausted/harder to retrieve/of lower quality > extraction less economically viable since other countries have cheaper and more accessible coal
human resources
static CA:
developing countries > relative abundance of low skilled labour to high skilled labour > cheaper labour costs > lower opp cost > CA in producing labour-intensive goods
dynamic CA:
gain due to increased quality of workforce: focus on education and retraining > increase in high skilled labour > gain CA in higher value added and knowledge intensive goods
*or greater inflow of foreign talents
loss due to fall in qty and quality of workforce: shrinking population + declining labour productivity > loss of CA in labour-intensive and low value manufacturing
capital stock
static CA:
developed vs developing: eg advanced machinery, well developed infrastructure > CA in producing capital intensive goods
dynamic CA:
gain due to capital accumulation
differences in rate of tech advancement
diff intensities of R&D and diff speeds of absorption of new tech > affects relative qualities of fops (labour/capital)
economies of scale
countries specialise and produce at large o/p levels > gain IEOS > falling UCOP
*small countries can gain CA when focusing on specialising a limited range of goods at high enough levels of o/p to reap IEOS and benefit from trade
limitations
theory vs reality:
assumption 1: no transport costs
reality: transport costs raises COP > lower relative efficiency and may offset gains from trade
assumption 2: constant opp cost
reality: increasing opp cost since to increase o/p, producers employ fops that are less suited for the production of that good
technological innovations