Effects of changes in globalisation on income distribution

6.1 Specialisation, Free Trade and Trade Restrictions – IGCSE Economics (0455)

6.1.1 Specialisation by Country

• Specialisation: a country concentrates production on the goods and services for which it has a comparative advantage – i.e. the lowest opportunity cost.
• Comparative advantage arises because countries differ in the relative abundance of factors of production (labour, capital, land) and in technology.

6.1.2 Free Trade – Advantages & Disadvantages

Advantages (gains from specialisation and trade)

• Lower prices for consumers → higher consumer surplus and real incomes.
• Higher total output – resources are used where they are most productive.
• Access to a wider variety of goods and services.
• Potential economies of scale for export‑oriented firms.
• Increased competition can stimulate innovation and efficiency.

Disadvantages (distributional and other costs)

• Dependence on imports for essential goods (e.g., food, energy) can create vulnerability.
• Job losses in industries that cannot compete with cheaper imports.
• Loss of domestic skills and knowledge in protected sectors.
• Regional inequalities – coastal or export‑oriented regions may grow faster than inland areas.
• Short‑run adjustment costs (re‑training, unemployment benefits).

6.2 Globalisation – Definition, Causes, Consequences and the Role of Multinational Companies

6.2.1 Definition of Globalisation

Globalisation is the increasing integration of world economies through the growth of international trade, investment, migration, the spread of technology and the inter‑dependence of markets.

6.2.2 Causes of Changes in Globalisation

• Transport & communication costs – containerisation, cheap air freight, the internet.
• Liberalisation of trade policies – reduction/removal of tariffs, quotas and other barriers; creation of WTO and regional free‑trade agreements.
• Growth of multinational companies (MNCs) – firms locate production where factor costs are lowest.
• Technological advances – automation, off‑shoring, remote work platforms.
• Financial liberalisation – easier cross‑border capital flows and foreign direct investment (FDI).
• Migration flows – movement of labour to where wages are higher.

6.2.3 Consequences of Changes in Globalisation

Cambridge syllabus expects discussion of the following areas:

• Competition – increased market size and rivalry can improve product quality and lower prices, but may also force weaker firms out of business.
• Environment – global supply chains can raise pollution (transport, production) but also spread greener technologies.
• Migration – workers move to countries with higher wages, affecting labour markets in both sending and receiving economies.
• Income distribution – see detailed section 6.2.4 below.
• Economic growth – openness usually raises long‑run growth, though short‑run adjustment may be painful.

6.2.4 Role of Multinational Companies (MNCs)

• Definition: firms that own or control production facilities in more than one country.
• Benefits to host (developing) country
  • Foreign Direct Investment (FDI) → capital inflow.
  • Job creation, often in export‑oriented sectors.
  • Transfer of technology and managerial know‑how.
  • Higher tax revenues (corporate tax, employee income tax).
• Benefits to home (developed) country
  • Profits repatriated to shareholders.
  • Access to new markets for home‑based products.
  • Outsourcing of low‑skill production frees up domestic resources for higher‑value activities.
• Potential drawbacks
  • Profit repatriation can reduce domestic national income.
  • Crowding‑out of local firms, especially small‑scale enterprises.
  • Labour exploitation or poor working conditions in host countries.
  • Risk of “race to the bottom” in environmental and labour standards.

6.3 Effects of Changes in Globalisation on Income Distribution

Key Mechanisms

1. Factor‑price equalisation – as countries specialise, the price of each factor (labour, capital, land) tends to move toward a common world level. Abundant factors in a country (e.g., labour in a labour‑rich country) usually see their real incomes rise, while scarce factors may lose.
2. Skill‑premium effect – demand for skilled workers rises because they can operate new technologies and produce higher‑value goods. This widens the wage gap between skilled and unskilled workers.
3. Consumer‑surplus gain – cheaper imports increase real incomes, especially for low‑income households that spend a larger share of their budget on goods such as food and clothing.
4. Profit redistribution – owners of capital and land in export‑oriented sectors enjoy higher returns; owners in sectors that lose protection or face import competition may see profits fall.
5. Regional disparities – coastal or special‑economic zones with export‑oriented industries grow faster than inland or protected‑industry regions, creating geographical income gaps.
6. Migration‑induced income effects – workers moving abroad send remittances home (raising household income) but may also create labour shortages in the sending country.

Illustrative Real‑World Examples

• Bangladesh’s garment industry – low‑skill jobs shifted from Europe to Bangladesh, raising wages there but reducing employment in UK textile factories.
• UK tech firms expanding into India – high‑skill engineers benefit from new overseas projects, while low‑skill call‑centre jobs move abroad.
• Car plants in Mexico (e.g., Volkswagen) – capital owners profit from lower production costs; Mexican unskilled workers gain jobs, but US auto workers lose some factory positions.
• Remittances from Filipino overseas workers – increase household incomes in the Philippines, contributing to poverty reduction.

Summary Table – Who Gains and Who Loses?

Diagram – Factor‑Price Equalisation (Suggested)

6.4 Key Points to Remember for Exam Answers

• Always state whether a particular group’s income is likely to rise or fall when globalisation increases.
• Link the change to one of the mechanisms listed in section 6.3 (skill‑premium, factor‑price equalisation, consumer surplus, profit redistribution, regional disparity, migration).
• Use specific, relevant examples – e.g., Bangladesh garments, Mexican car plants, UK‑India tech outsourcing, remittances from the Philippines.
• Distinguish short‑run effects (e.g., temporary job losses, need for re‑training) from long‑run adjustments (re‑allocation of resources, higher productivity).
• When answering, comment on both the benefits and the drawbacks for the group in question, and consider any possible government policy responses (e.g., training programmes, regional development funds).