meaning of globalisation and its causes and consequences

Cambridge AS & A‑Level Economics – Complete Revision Notes

1. AS‑Level Topics (Syllabus Topics 1‑6)

1.1 Basic Economic Ideas (Topic 1)

Key concepts: scarcity, choice, opportunity cost, factors of production, economic problem, efficiency, equity.

• Scarcity & choice: limited resources → need to decide what to produce, how and for whom.
• Opportunity cost: value of the next best alternative foregone (e.g., choosing to build a hospital instead of a school).
• Factors of production: land, labour, capital, entrepreneurship.
• Economic systems: market, command, mixed economies – degree of government intervention.

1.2 Microeconomics – Markets (Topic 2)

Key concepts: demand, supply, equilibrium, price elasticity, income elasticity, cross‑price elasticity, consumer surplus, producer surplus, efficiency.

• Demand: inverse relationship between price and quantity demanded; determinants – income, tastes, prices of related goods, expectations, number of buyers.
• Supply: direct relationship between price and quantity supplied; determinants – input prices, technology, expectations, number of sellers.
• Market equilibrium: where D = S; surplus/shortage forces movement toward equilibrium.
• Elasticities:
  • Price elasticity of demand (PED) = %ΔQd / %ΔP.
  • Price elasticity of supply (PES) = %ΔQs / %ΔP.
  • Income elasticity of demand (YED) = %ΔQd / %ΔY.
  • Cross‑price elasticity of demand (XED) = %ΔQd of good A / %ΔP of good B.
• Consumer & producer surplus: graphical measures of welfare; policy impact (taxes, subsidies) can be shown by changes in surplus.

1.3 Government Intervention in Markets (Topic 3)

Key concepts: market failure, externalities, public goods, merit & demerit goods, taxes, subsidies, price controls, regulation, objectives of intervention.

• Taxes: shift supply curve leftward; incidence depends on relative elasticities; generates government revenue and dead‑weight loss.
• Subsidies: shift supply/rightward; reduce price to consumers, increase producer revenue; also create dead‑weight loss.
• Price ceilings: set maximum price below equilibrium → shortage, rationing, black markets.
• Price floors: set minimum price above equilibrium → surplus, government purchase or waste.
• Regulation: standards, licensing, safety requirements – aim to correct externalities or protect consumers.
• Objectives: equity, efficiency, stability, growth, environmental protection.

1.4 Macroeconomics – National Income (Topic 4)

Key concepts: GDP, GNP, NDP, real vs. nominal, AD/AS, economic growth, unemployment, inflation, business cycles.

Measure	Definition
Real GDP	GDP adjusted for inflation; reflects true output.
GNI (GNP)	GDP + net factor income from abroad.
Unemployment rate	(Number of unemployed ÷ Labour force) × 100.
Inflation rate	Percentage change in the consumer price index (CPI) or RPI.

• Aggregate Demand (AD): C + I + G + (X‑M). Downward‑sloping because of wealth, interest‑rate, and exchange‑rate effects.
• Aggregate Supply (AS): Short‑run upward‑sloping (price‑wage rigidity); long‑run vertical at potential output.
• Economic growth: rightward shift of LR‑AS; measured by increase in real GDP per capita.
• Unemployment types: frictional, structural, cyclical.
• Inflation types: demand‑pull, cost‑push, built‑in.

1.5 Macro‑policy (Topic 5)

Key concepts: fiscal policy, monetary policy, supply‑side policy, policy objectives, policy lags, crowding‑out, effectiveness.

• Fiscal policy: government spending (G) and taxation (T). Expansionary (↑G, ↓T) → AD ↑; contractionary (↓G, ↑T) → AD ↓.
• Monetary policy: central‑bank tools – open‑market operations, reserve requirements, policy interest rates. Expansionary (↓interest rates) → investment ↑, AD ↑.
• Supply‑side policies: improve productivity – education & training, R&D subsidies, deregulation, tax incentives.
• Policy mix & coordination: combination of fiscal & monetary tools to achieve multiple objectives (growth, low inflation, low unemployment).
• Policy lags: recognition, decision, implementation, impact.

1.6 International Trade & Globalisation (Topic 6)

Key concepts: comparative advantage, gains from trade, terms of trade, protectionism, balance of payments, exchange rates, globalisation.

1.6.1 Why Countries Trade

• Differences in resource endowments → comparative advantage.
• Economies of scale – lower average costs when producing for larger markets.
• Variety and consumer preference for foreign goods.

1.6.2 Protectionist Measures

• Tariffs – specific or ad‑valorem duties; raise import price, generate revenue, protect domestic industry.
• Quotas – limit quantity; can create rents for licence holders.
• Non‑tariff barriers – standards, subsidies to domestic producers.

1.6.3 Balance of Payments (BOP)

Key concepts: current account, capital & financial account, official reserves, BOP equilibrium.

Account	Main components
Current account	Goods (exports – imports) Services (tourism, transport, financial services) Primary income (investment income, wages) Secondary income (remittances, gifts, aid)
Capital & financial account	Direct investment (FDI) Portfolio investment (stocks, bonds) Other investment (loans, deposits) Reserve assets
Official reserves	Changes in foreign‑exchange reserves held by the central bank.

1.6.4 Policies to Correct Current‑Account Disequilibrium

Expenditure‑switching policies (affect relative prices):

• Fiscal: Reduce indirect taxes on exports or increase them on imports.
• Monetary: Lower interest rates → currency depreciation.
• Supply‑side: Improve productivity, reduce production costs.
• Exchange‑rate: Depreciation (or devaluation) makes exports cheaper, imports more expensive.

Expenditure‑reducing policies (affect overall demand):

• Fiscal contraction – higher taxes or lower government spending.
• Monetary tightening – higher interest rates.

1.6.5 Exchange‑Rate Systems

Nominal exchange rate (e): e = Domestic currency units / Foreign currency unit.

Real exchange rate (R): R = e × (P / P*), where P = domestic price level, P* = foreign price level.

Regime	Key features
Fixed (pegged)	Official rate set by government; central bank intervenes to maintain it.
Managed (dirty‑float)	Market determines rate but authorities intervene occasionally to smooth volatility.
Floating (free‑float)	Rate determined entirely by supply and demand in the foreign‑exchange market.

Depreciation vs. Appreciation

• Depreciation (or devaluation): domestic currency loses value → exports become cheaper, imports more expensive.
  • Short‑run: J‑curve – trade balance may initially worsen because import volumes are price‑inelastic.
  • Medium‑run: If the Marshall‑Lerner condition (|ε_X + ε_M| > 1) holds, the trade balance improves.
• Appreciation (or revaluation): opposite effect – can worsen a deficit.

1.6.6 Globalisation – Meaning, Causes & Consequences

Meaning: The increasing integration of national economies, societies and cultures through cross‑border trade, investment, migration and the rapid spread of information and ideas.

Causes (grouped into four categories)

• Technological advances
  • Transport – container shipping, low‑cost airlines, logistics hubs.
  • Communication – Internet, mobile networks, satellite systems.
  • Production – automation, just‑in‑time (JIT) manufacturing, 3‑D printing.
• Economic factors
  • Trade liberalisation – WTO rules, regional trade agreements (EU, NAFTA, CPTPP).
  • Growth of multinational enterprises (MNEs) seeking larger markets and cheaper inputs.
  • Financial liberalisation – deregulation of capital markets, easier cross‑border flows.
• Political & institutional factors
  • Policy reforms favouring open markets (privatisation, deregulation).
  • International institutions promoting standardisation (ISO, WTO, IMF, World Bank).
  • Political stability in many developing regions encourages foreign investment.
• Social & cultural factors
  • Changing consumer preferences for foreign goods and services.
  • Migration and diffusion of ideas, lifestyles and values.
  • Education and the rise of a globally aware workforce.

Consequences

Economic Consequences

Positive effects	Negative effects
Expanded market size → economies of scale. Greater competition → lower prices and more innovation. Access to cheaper inputs and technology transfer. Higher foreign direct investment (FDI) inflows.	Domestic firms may be out‑competed. Wage pressure in low‑skill sectors; possible job losses. Profit repatriation by MNEs reduces domestic capital accumulation. Increased exposure to external economic shocks.

Social Consequences

• Higher living standards in many developing countries through income growth.
• Cultural exchange and diffusion of ideas.
• Risk of cultural homogenisation and loss of local traditions.
• Migration can generate social tensions in host societies.

Environmental Consequences

• Scale economies can improve resource efficiency.
• Global supply chains increase carbon emissions from transport.
• “Race to the bottom” in environmental regulation in some jurisdictions.
• International cooperation (e.g., Paris Agreement) becomes essential.

Political Consequences

• Greater interdependence can lower the likelihood of armed conflict.
• National sovereignty may be constrained by supranational institutions.
• Policy‑coordination challenges (tax competition, regulatory standards).
• Rise of populist movements reacting against perceived loss of control.

2. A‑Level Topics (Syllabus Topics 7‑11)

2.1 Microeconomic Theory (Topic 7)

Key concepts: utility, marginal utility, indifference curves, budget constraint, consumer equilibrium, production function, returns to scale, market structures, externalities, public goods, market failure.

• Utility & indifference curves: ordinal ranking of bundles; higher indifference curves represent higher satisfaction.
• Consumer equilibrium: highest attainable indifference curve subject to budget constraint (MRS = price ratio).
• Production theory: short‑run total product, average product, marginal product; long‑run iso‑quant & iso‑cost curves; returns to scale.
• Market structures:
  • Perfect competition – many firms, price takers, zero economic profit in LR.
  • Monopoly – single seller, price maker, MR < MC, possible dead‑weight loss.
  • Monopolistic competition – many firms, product differentiation, excess capacity.
  • Oligopoly – few large firms, strategic interaction (Kinked‑demand, Cournot, Stackelberg).
• Externalities: positive (e.g., education) and negative (e.g., pollution); government can intervene with taxes, subsidies, regulation, tradable permits.
• Public goods: non‑rival, non‑excludable; market failure leads to free‑rider problem – government provision justified.

2.2 Labour Markets and Income Distribution (Topic 8)

Key concepts: labour demand & supply, wage determination, marginal productivity of labour, trade unions, minimum wage, equity, redistribution, Gini coefficient.

• Labour demand: derived from firms’ marginal revenue product of labour (MRP = MR × MPL).
• Labour supply: upward‑sloping; influenced by wages, alternative employment, demographics.
• Equilibrium wage: where labour demand = labour supply; can be above or below market‑clearing if institutions intervene.
• Trade unions: collective bargaining can raise wages above equilibrium; may cause unemployment if wage exceeds marginal productivity.
• Minimum wage: price floor in labour market – intended to raise low‑pay workers’ income; possible unemployment if set above equilibrium.
• Equity & redistribution: progressive taxation, welfare benefits, public services; aim to reduce income inequality measured by the Gini coefficient.

2.3 Advanced Macroeconomic Analysis (Topic 9)

Key concepts: AD/AS with expectations, multiplier effect, Phillips curve, stagflation, open‑economy macro (Mundell‑Fleming), exchange‑rate impact on AD.

• Multiplier: ΔY = 1/(1‑MPC) × ΔG (or ΔI, ΔX). Demonstrates fiscal policy potency.
• Phillips curve: inverse short‑run relationship between inflation and unemployment; long‑run vertical at natural rate of unemployment.
• Stagflation: simultaneous high inflation and high unemployment – often caused by negative supply shock (e.g., oil price rise).
• Mundell‑Fleming model (small open economy):
  • Fixed exchange rate → monetary policy ineffective; fiscal policy effective.
  • Floating exchange rate → monetary policy effective; fiscal policy less potent.
• Expectations‑augmented AD/AS: adaptive or rational expectations shift SR‑AS and AD, affecting inflation‑output dynamics.

2.4 Government Macro‑policy (Topic 10)

Key concepts: policy objectives, policy mix, coordination, effectiveness, crowding‑out, supply‑side measures, policy lags, fiscal sustainability.

• Policy mix: combination of fiscal, monetary and supply‑side policies to achieve multiple objectives (growth, low inflation, low unemployment).
• Coordination issues: conflicting objectives (e.g., expansionary fiscal policy may raise inflation); need for policy sequencing.
• Effectiveness: depends on elasticity of AD, openness of the economy, credibility of policy, and timing of lags.
• Crowding‑out: expansionary fiscal policy can raise interest rates, reducing private investment.
• Supply‑side policies: education & training, R&D, deregulation, tax incentives – aim to shift LR‑AS rightward.
• Fiscal sustainability: debt‑to‑GDP ratio, primary balance, intergenerational equity.

2.5 Development and Globalisation (Topic 11)

Key concepts: development indicators, Kuznets curve, role of globalisation, sustainable development, inequality.

2.5.1 Classification of Economies

• Developed (high‑income) – e.g., United Kingdom, Japan.
• Developing (middle‑income) – e.g., Brazil, Malaysia.
• Least‑developed (low‑income) – e.g., Haiti, Mozambique.

2.5.2 Development Indicators

Indicator	What it measures
GDP per capita (real)	Average income; does not capture distribution or non‑market activities.
Human Development Index (HDI)	Composite of life expectancy, education (mean/expected years of schooling) and GNI per capita.
Multidimensional Poverty Index (MPI)	Acute deprivation in health, education and living standards.
Gini coefficient	Degree of income inequality (0 = perfect equality, 100 = perfect inequality).

2.5.3 Kuznets Curve (brief)

Hypothesised inverted‑U relationship between income growth and inequality: inequality rises in early development, peaks, then falls as a country becomes richer.

2.5.4 Role of Globalisation in Development

• Positive aspects: technology transfer, FDI, access to larger markets, higher growth rates in many low‑income countries, poverty reduction.
• Negative aspects: “race to the bottom” on wages and standards, possible widening of income gaps, dependence on volatile commodity exports, loss of policy autonomy.

2.5.5 Sustainable Development

• Balancing economic growth, social inclusion and environmental protection (the three‑pillar model).
• United Nations Sustainable Development Goals (SDGs) – e.g., No Poverty, Quality Education, Climate Action.

3. Suggested Diagrams for Revision

• Demand‑supply diagram showing equilibrium, shifts and surplus/shortage.
• Tax incidence diagram (supply & demand curves) illustrating dead‑weight loss.
• AD/AS diagram with LR‑AS vertical, SR‑AS upward, and shifts for fiscal/monetary policy.
• Phillips curve (short‑run and long‑run).
• Mundell‑Fleming diagram for fixed vs. floating exchange rates.
• J‑curve illustration of short‑run deterioration then improvement after depreciation.
• Current‑account vs. exchange‑rate diagram (showing effect of depreciation on CA).
• Kuznets curve (income vs. inequality).
• HDI radar chart comparing a developed and a developing country.
• Supply‑side policy impact on LR‑AS (rightward shift).

4. Quick Summary

Globalisation is a multifaceted process driven by technological, economic, political and cultural forces. It expands markets, lowers prices and spreads technology, but also creates challenges such as job displacement, environmental pressures and political tensions. Mastery of the related concepts – from basic scarcity to advanced macro‑policy, from market structures to development indicators – equips students to tackle the full Cambridge AS & A‑Level Economics syllabus and to apply economic reasoning to real‑world issues.