AQA A-Level Economics (7136)

## Learning Outcomes

- Define **globalisation** accurately and explain why it is broader than trade alone
- Identify the main characteristics and causes of globalisation
- Explain how **FDI**, **MNCs**, labour mobility and global supply chains increase economic integration
- Analyse the benefits of globalisation for consumers, firms and whole economies
- Evaluate the costs of globalisation, including inequality, structural unemployment and external shocks
- Apply globalisation ideas to data and essay questions in AQA A-Level Economics

## AQA A-Level Economics (7136) Syllabus

For the AQA A-Level Economics (7136), you are expected to understand globalisation, with a focus on the following syllabus points:

- Know that **globalisation** means increasing economic integration and interdependence between national economies
- Identify the main characteristics of globalisation, including rising trade, capital flows, labour mobility and the growth of MNCs
- Explain the causes of globalisation, such as lower transport costs, improved ICT, trade liberalisation and fewer capital controls
- Understand the role of **foreign direct investment (FDI)** and **multinational corporations (MNCs)** in spreading production across countries
- Analyse the benefits of globalisation, including lower prices, greater competition, economies of scale and technology transfer
- Assess the costs of globalisation, including structural unemployment, inequality, environmental damage and greater exposure to global shocks
- Explain why the effects of globalisation differ between developed and developing economies, and between different groups within a country

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What is the difference between globalisation and international trade?
2. Name three causes of globalisation.
3. How can inward FDI raise productivity in a host country?
4. Why might globalisation create structural unemployment in some regions or industries?
5. Give two reasons why the benefits of globalisation may not be shared equally.

## Introduction

Globalisation is one of the main themes in the international economy. It helps explain why countries are now more connected through trade, finance, migration, technology and business activity. For AQA Economics, you need to know not just what globalisation is, but also what causes it and why economists disagree about whether its effects are mostly positive.

A strong exam answer goes beyond saying that countries “trade more”. Globalisation is wider than that. It includes cross-border investment, the spread of production across many countries, rising labour mobility and the faster transmission of economic shocks from one country to another.

> **Key Term: globalisation**
> The increasing integration and interdependence of national economies through trade, capital flows, labour movement, and the spread of technology and information.

### The meaning and characteristics of globalisation

Globalisation describes a world economy in which countries are more closely linked. A product may be designed in one country, use components from several others, be assembled elsewhere, and then sold globally. This shows that production itself has become international.

The main characteristics of globalisation are visible features of this more integrated world economy.

First, there is greater **trade openness**. Countries import and export a larger share of output than before. A common measure is:

Trade openness = (exports + imports) / GDP × 100

A rise in this ratio usually suggests that an economy is becoming more integrated into world markets. However, it is only one measure. A country may also be highly globalised through finance or migration.

> **Key Term: trade openness**
> A measure of how strongly an economy is linked to world trade, often shown by exports plus imports as a percentage of GDP.

Second, there is greater international mobility of capital. Firms and investors move money across borders more easily. This includes portfolio flows, but in exams the most important type is **FDI**.

> **Key Term: foreign direct investment (FDI)**
> Cross-border investment that gives a firm a lasting interest and some control in a business in another country.

Third, labour mobility has increased in many parts of the world. Workers move between countries to find higher wages, better opportunities or specific jobs. This can help host countries fill labour shortages, but it can also create concern about wage pressure in some sectors.

Fourth, globalisation is linked to the growth of **multinational corporations**. These firms organise production internationally and often make decisions about where to locate factories, offices and service centres according to costs, tax, regulation and market access.

> **Key Term: multinational corporation (MNC)**
> A firm with production or operations in more than one country.

Fifth, global supply chains have expanded. Rather than producing everything in one country, firms break production into stages and locate each stage where costs or skills are most suitable. This supports specialisation, but it also means disruption in one country can affect output elsewhere.

> **Key Term: global supply chains**
> International production networks in which different stages of making a good or service take place in different countries.

A final characteristic is faster transmission of shocks. If shipping routes are disrupted, energy prices rise, or a major economy slows down, the effects can spread quickly across countries through trade and finance.

> **Test Tip:** Students often confuse characteristics with causes. Characteristics are what globalisation looks like, such as more trade and more FDI. Causes are the reasons it has happened, such as cheaper transport and fewer trade barriers.

### The causes of globalisation

Globalisation did not happen by chance. It was driven by clear economic and political changes.

One major cause is lower transport costs. Improvements in shipping, air freight and logistics have reduced the cost of moving goods internationally. **Containerisation** has been especially important because standard containers make loading, unloading and transfer much faster and cheaper. Lower costs make long-distance trade more profitable.

> **Key Term: containerisation**
> The use of standard shipping containers to move goods more efficiently and at lower cost between countries.

A second cause is better information and communication technology. The internet, mobile communication and digital systems allow firms to manage operations across borders in real time. This makes it easier to coordinate production, communicate with suppliers and serve customers in different countries. Service industries have been affected as much as manufacturing. For example, call centres, accounting functions and software support can be based overseas.

A third cause is trade liberalisation. Governments have reduced tariffs, quotas and other barriers, making foreign trade easier and cheaper. This raises contestability in domestic markets because local firms face stronger overseas competition.

> **Key Term: trade liberalisation**
> The reduction or removal of tariffs, quotas and other barriers to international trade.

Another cause is financial liberalisation. Many governments reduced capital controls, allowing money to move more freely across borders. This helped expand FDI and other capital flows. Firms could then invest where labour was cheaper, markets were expanding, or taxes were lower.

Political change has mattered too. Closer relations between countries, especially after the Cold War, opened more economies to world trade and investment. China’s opening to trade and foreign investment is a major example of how policy changes can speed up global integration.

MNCs themselves are also a cause, not just a feature. As they seek lower costs, access to resources and entry into new markets, they spread production internationally. Their decisions create more trade in intermediate goods, more FDI and stronger links between national economies.

> **Test Tip:** If a question asks for causes of globalisation, avoid giving effects such as “greater competition” or “lower prices”. Those are consequences, not causes.

### The benefits of globalisation

Globalisation can bring gains to consumers, firms and governments.

For consumers, it often means lower prices and more choice. Imports from lower-cost producers reduce the price of many goods. More foreign competition can also force domestic firms to cut costs, improve quality and innovate. This raises consumer welfare.

For firms, globalisation gives access to larger markets. Selling to a world market makes it easier to achieve economies of scale. A bigger scale of production can reduce average costs, increase profit margins and improve competitiveness.

Globalisation can also improve efficiency through comparative advantage. If countries specialise in goods and services they produce relatively efficiently, world output rises. In theory, this can increase real incomes and living standards.

FDI is a major channel through which these gains may appear. Inward FDI can increase the capital stock, create jobs and raise productivity. A foreign firm may bring better management, new technology and training. Local firms may copy these methods or become suppliers, spreading the benefits further.

For developing economies, globalisation may support industrialisation and export growth. MNC investment can provide employment, foreign exchange earnings and improved infrastructure. For developed economies, gains may be strongest in high-value sectors such as finance, research, design and advanced business services.

Here is a simple chain of analysis:

Trade openness rises -> firms face more competition and gain access to cheaper inputs -> costs fall and productivity improves -> non-price competitiveness strengthens -> exports and growth may rise.

A similar chain applies to FDI:

Inward FDI rises -> more capital and new technology enter the economy -> labour productivity increases -> output and employment may rise -> tax revenue and living standards may improve.

However, these gains are not automatic. Their size depends on workforce skills, infrastructure, regulation and whether domestic firms can benefit from spillover effects.

### The costs of globalisation and how to evaluate them

Globalisation also creates losers as well as winners. This is where evaluation matters most.

One important cost is **structural unemployment**. When industries face import competition or move production overseas, workers in declining sectors may lose jobs. If their skills do not match growing sectors, unemployment can persist for a long time.

> **Key Term: structural unemployment**
> Unemployment caused by a mismatch between workers’ skills or location and the jobs available in the economy.

This helps explain deindustrialisation in some developed economies. Manufacturing may shrink as a share of employment, while services expand. Some workers move successfully into new sectors, but others do not. As a result, the overall economy may gain while particular regions lose heavily.

Globalisation can also increase inequality. Highly skilled workers and owners of capital may gain from larger markets and international investment. Lower-skilled workers in exposed industries may face weaker wage growth or job losses. National income may rise, but median incomes or regional incomes may not rise by much.

Another cost is vulnerability to external shocks. When economies are strongly connected, problems in one place spread quickly. A disruption to shipping, a financial crisis, or a fall in demand in a major trading partner can reduce output elsewhere. Global supply chains improve efficiency, but they can reduce resilience.

Environmental damage is another concern. More transport raises emissions, and firms may shift production to countries with weaker environmental rules. Some critics argue that globalisation can create a “race to the bottom” in regulation, though this does not always happen.

There are also concerns about labour exploitation. In some countries, weak labour laws or poor enforcement may allow unsafe conditions or very low wages. From an economics point of view, this means lower production costs, but from a welfare point of view the outcome may be unacceptable.

MNC activity needs balanced evaluation. MNCs may create jobs and raise productivity, but profits may be repatriated abroad rather than remaining in the host economy. They may also use market power, avoid tax, or leave quickly if costs change.

> **Key Term: profit repatriation**
> The transfer of profits earned by a foreign-owned firm back to its home country.

For exam essays, the best judgement is usually conditional. Globalisation tends to bring larger net benefits when governments have strong institutions, effective regulation, good education and infrastructure, and policies that help workers adjust. Without these, the gains may be concentrated while the costs are spread across vulnerable groups.

A developed economy like the UK may gain from global finance, high-skilled services and inward investment, but still suffer from regional inequality and loss of manufacturing jobs. A developing economy may gain employment and export revenue, but may also become dependent on low-value assembly work unless it improves skills and moves up the value chain.

### How to structure an evaluative answer

In a 25-mark essay, start with a precise definition of globalisation. Then separate causes, benefits and costs clearly. Use chains of analysis rather than short points.

When discussing benefits, cite evidence such as lower prices, more competition, FDI, productivity growth, technology transfer, export capacity and economies of scale. When discussing costs, include structural unemployment, inequality, labour exploitation, environmental harm and external shocks.

Your evaluation should use an “on the one hand / on the other hand / it depends” structure. Good “it depends” factors include:

- whether the country has skilled labour and infrastructure
- whether FDI is greenfield investment or just a takeover
- whether gains are measured by GDP, GDP per capita or broader living standards
- whether effects are short run or long run
- whether you are judging consumers, workers, firms or governments

If data is provided, use it precisely. Compare over time or between countries. Then add a limitation. For example, a rise in trade as a percentage of GDP suggests greater openness, but it does not prove that living standards have risen because averages can hide inequality.

> **Test Tip:** Strong AO4 evaluation does not mean saying “there are advantages and disadvantages”. It means deciding which effects matter most, for whom, and under what conditions.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Globalisation means increasing integration and interdependence between national economies
- Globalisation is broader than trade alone because it also includes capital flows, labour mobility, technology transfer and MNC activity
- Main characteristics include greater trade openness, more FDI, rising labour mobility, global supply chains and faster transmission of shocks
- Main causes include lower transport costs, better ICT, containerisation, trade liberalisation, fewer capital controls and policy changes opening markets
- MNCs drive globalisation by spreading production across countries and increasing trade and investment flows
- FDI can bring jobs, capital, export capacity, management skills and technology transfer
- Benefits of globalisation include lower prices, greater choice, stronger competition, economies of scale and higher productivity
- Globalisation may support growth through specialisation, comparative advantage and increased efficiency
- Costs include structural unemployment, deindustrialisation, inequality, labour exploitation and environmental damage
- More integrated economies are often more exposed to external shocks and supply chain disruption
- The overall impact of globalisation depends on institutions, regulation, skills, infrastructure and the type of investment received
- Strong exam answers distinguish short-run from long-run effects and recognise that different groups gain or lose in different ways

## Key Terms and Concepts

- globalisation
- trade openness
- foreign direct investment (FDI)
- multinational corporation (MNC)
- global supply chains
- containerisation
- trade liberalisation
- structural unemployment
- profit repatriation


The International Economy - Globalisation