Definition of globalisation

International Trade and Globalisation (Cambridge IGCSE 0455)

6.1.1 Definition of Globalisation

Globalisation is the process by which the world’s economies, societies and cultures become increasingly inter‑connected and inter‑dependent through the rapid expansion of cross‑border flows of:

  • Goods and services

  • Capital (FDI, portfolio investment)

  • People (migration, tourism, skilled labour)

  • Ideas, technology and information

These flows create new markets, spread innovations and shape cultural preferences worldwide.

6.2.1‑6.2.2 Key Features of Globalisation

FeatureWhat it meansIllustrative example
Expansion of international trade & investmentGrowth in exports, imports and foreign‑direct investment (FDI)Chinese electronics exported to Europe; Japanese car factories in the US
Greater mobility of labourMigration of workers, students and professionalsIndian software engineers moving to Silicon Valley
Rapid diffusion of technology & informationWorldwide use of smartphones, internet platforms and cloud servicesStreaming services (Netflix, Spotify) available in >190 countries
Integration of financial marketsCross‑border buying and selling of currencies, stocks and bondsForeign‑exchange trading linking New York, London and Tokyo
Spread of cultural influences & consumer preferencesAdoption of food, fashion, music and media from other countriesMcDonald’s, K‑pop, and Bollywood films enjoyed globally
Rise of multinational corporations (MNCs)Firms operating production, sales or R&D in several countriesApple, Toyota, Unilever, and Nestlé

6.1.2 Specialisation & Free Trade

  • Specialisation: concentrating production on a limited range of goods where a country has a comparative advantage.

  • Comparative advantage: ability to produce a good at a lower opportunity cost than another country.

  • Free trade: removal of barriers (tariffs, quotas, licences) so that each country can export the goods in which it specialises and import the rest.

Illustrative example (wine vs. cloth):

  1. Country A can produce 10 units of wine or 5 units of cloth per labour hour (opportunity cost of 1 wine = 0.5 cloth).

  2. Country B can produce 6 units of wine or 6 units of cloth per labour hour (opportunity cost of 1 wine = 1 cloth).

  3. Country A has a comparative advantage in wine; Country B in cloth.

  4. With free trade both countries specialise, export their advantage and can each consume a combination of wine and cloth that lies outside their individual PPFs – a clear gain from trade.

6.2.5‑6.2.6 Trade Restrictions – Types, Reasons & Consequences

RestrictionWhy a government may use itEconomic effectTypical example
Tariff (import duty)Raise revenue; protect domestic producers from cheaper importsHigher domestic price, reduced import quantity, loss of consumer surplus; possible retaliation5 % duty on imported steel
Quota (import limit)Limit quantity of a specific good to protect local industrySupply curve shifts left; price rises; creates rents for quota holders10 million tonnes of sugar per year
Import licenceControl quality, protect strategic sectors, raise revenueAdministrative cost; can create shortages if licences are scarceLicence required for pharmaceuticals
Embargo / sanctionPolitical pressure, security concernsComplete halt of trade in targeted goods; can damage both economiesUS embargo on Cuban goods

6.3.1‑6.3.4 Foreign‑Exchange (FX) Markets

  • Exchange rate: price of one currency in terms of another (e.g., £1 = $1.30).

  • Spot market: immediate delivery of currency.

  • Forward market: agreement to exchange at a predetermined rate on a future date – used to hedge against exchange‑rate risk.

  • FX regimes:

    • Floating – rates determined by market forces (e.g., US $).

    • Fixed (pegged) – government or central bank maintains a set rate (e.g., Hong Kong \$ to US \$).

    • Managed float – authorities intervene occasionally to smooth volatility.

  • Impact on trade: a depreciation of the domestic currency makes exports cheaper and imports more expensive, potentially improving the trade balance.

6.4.1‑6.4.4 Current‑Account Balance

The current account records a country’s net trade in goods and services plus net income and transfers.

ComponentWhat it includes
Trade in goodsExports – imports of tangible products
Trade in servicesTourism, transport, financial services, royalties
Net primary incomeEarned abroad (e.g., dividends, interest) minus payments to foreign investors
Net secondary income (transfers)Remittances, foreign aid, gifts

A current‑account surplus means the country is a net lender to the world; a deficit means it is a net borrower.

Suggested Diagrams (AO2 – drawing & interpretation)

  1. PPF & Gains from Trade: Draw two PPFs (Country A – wine, Country B – cloth). Show:

    • Specialisation points (A on wine, B on cloth).

    • World PPF (combined production possibility).

    • Consumption point after trade lying outside each country’s original PPF – illustrate increase in welfare.

  2. Supply‑and‑Demand – Effect of Removing a Tariff:

    • Initial supply curve (S₁) with tariff → higher price P₁.

    • After tariff removal, supply shifts right to S₂, price falls to P₂, quantity rises to Q₂.

    • Shade the increase in consumer surplus and the loss of tariff revenue.

  3. FX Market – Floating Rate:

    • Demand for domestic currency (D) vs. supply (S).

    • Show a depreciation (shift of supply right) and explain impact on export competitiveness.

Key Economic Terms (Syllabus reference)

  • Trade liberalisation – removal or reduction of tariffs, quotas, licences or other barriers.

  • Multinational corporation (MNC) – a firm operating in several countries, producing and/or selling abroad.

  • Foreign direct investment (FDI) – investment in physical assets (e.g., factories) or ownership stakes in another country.

  • Outsourcing – contracting a business process to a third party, often overseas, to cut costs.

  • Specialisation – concentrating production on a limited range of goods where a country has a comparative advantage.

  • Comparative advantage – ability to produce a good at a lower opportunity cost than another country.

  • Exchange rate – price of one currency expressed in another currency.

  • Current‑account balance – net of trade in goods & services, primary income and secondary transfers.

Brief Quantitative Illustration (AO2 – calculation)

Assume the price of imported smartphones falls from £100 to £90 (a 10 % fall) and quantity demanded rises from 1 000 to 1 200 units.

Price elasticity of demand (PED):

PED = (%ΔQ) / (%ΔP) = (20 %)/(–10 %) = –2.0

Interpretation:

  • A PED of –2.0 indicates the good is price‑elastic.

  • The 10 % price reduction generates a relatively large increase in quantity, expanding consumer surplus considerably.

Summary

Globalisation links economies, societies and cultures through the accelerated movement of goods, services, capital, people, ideas and technology. It drives specialisation, free trade, the rise of MNCs and the integration of financial markets. Understanding the definition, the key features, the mechanisms of comparative advantage, the role of trade restrictions, foreign‑exchange dynamics and the current‑account framework equips students to meet the Cambridge IGCSE 0455 requirements and to analyse both the benefits and challenges of a globalised world.