Causes of changes in globalisation: changes in communication costs

International Trade & Globalisation – Topic 6 (IGCSE Economics 0455)

Objective

Explain how changes in communication costs have caused changes in the level of globalisation, and relate this to the wider concepts of specialisation, free trade and trade restrictions.

1. What is Globalisation?

Globalisation is the increasing integration of national economies through the growth of international trade, investment, and the movement of people, ideas and technology.

2. Specialisation & Free Trade (Syllabus 6.1)

2.1 What is Specialisation?

• Countries concentrate on producing the goods and services for which they have the lowest opportunity cost – i.e. where they are relatively most efficient.
• Driven by the theory of comparative advantage (or factor‑endowment theory).

2.2 Gains from Trade

When two countries specialise and then trade, the world can produce more than if each tried to be self‑sufficient. This is illustrated with a PPF diagram:

• Each country’s PPF shows the maximum output of two goods it can produce using all its resources.
• After specialisation, the combined production point lies outside the individual PPFs, showing a net gain.

2.3 Advantages of Free Trade

• Lower prices for consumers (greater consumer surplus).
• Access to a larger variety of goods and services.
• Higher efficiency and productivity as resources are used where they are most productive.
• Potential for economies of scale and increased innovation.

2.4 Disadvantages / Criticisms of Free Trade

• Domestic industries may shrink, leading to job losses in certain sectors.
• Dependence on foreign suppliers can create vulnerability to external shocks.
• Unequal gains – benefits may accrue mainly to owners of capital or more skilled workers.
• Environmental and social standards may be undermined if production moves to countries with weaker regulations.

3. Trade Restrictions (Syllabus 6.2)

3.1 Types of Trade Restrictions (with IGCSE‑style examples)

3.2 Why Governments Impose Restrictions

• Infant‑industry protection – give new domestic firms time to become competitive.
• Strategic / security reasons – protect defence‑related industries.
• Anti‑dumping – prevent foreign producers from selling below cost.
• Revenue raising – tariffs generate fiscal income.
• Environmental or health standards – limit imports that do not meet domestic rules (e.g., carbon border tax).
• Political motives – sanctions, retaliation, or to support allied nations.

3.3 Economic Effects of a Tariff (Illustrative Diagram)

• Supply shifts upward by the amount of the tariff.
• Domestic price rises (consumer pays more).
• Consumer surplus falls; producer surplus rises.
• Government collects revenue = tariff × imported quantity.
• Two dead‑weight‑loss triangles appear – one from reduced consumption, one from reduced domestic production.

4. Foreign‑Exchange (Syllabus 6.3)

4.1 Key Definitions

• Foreign‑exchange market – where currencies are bought and sold.
• Exchange rate – the price of one currency in terms of another (e.g., £1 = $1.30).
• Floating exchange rate – the rate is determined by market forces of supply and demand.
• Appreciation – a rise in the value of the domestic currency relative to foreign currencies.
• Depreciation – a fall in the value of the domestic currency relative to foreign currencies.

4.2 How Exchange‑Rate Changes Affect Trade

• Appreciation makes imports cheaper and exports more expensive → import volume ↑, export volume ↓.
• Depreciation makes imports more expensive and exports cheaper → import volume ↓, export volume ↑.
• Changes in exchange rates therefore influence the balance of trade and the current account.

4.3 Diagram Suggestion

Supply‑and‑demand diagram for a foreign currency showing a rightward shift in demand (appreciation) or supply (depreciation) and the resulting change in the equilibrium exchange rate.

5. Balance of Payments – Current Account (Syllabus 6.4)

5.1 Components of the Current Account

• Goods (merchandise) trade – exports and imports of physical products.
• Services trade – tourism, transport, financial services, ICT, etc.
• Primary income – earnings on investments (interest, dividends, profits).
• Secondary income – transfers such as remittances, foreign aid, and gifts.

5.2 Causes of Current‑Account Deficits and Surpluses

• Deficit – high import demand, weak export competitiveness, strong domestic currency, low foreign investment income.
• Surplus – strong export sector, weak domestic currency, high foreign investment income, low import demand.

5.3 Policy Options for Balance‑of‑Payments Stability

• Adjust exchange rates (devaluation or depreciation) to make exports cheaper.
• Impose or raise tariffs/quotas to reduce import volumes (short‑term).
• Promote export‑oriented industries (subsidies, tax incentives).
• Encourage foreign direct investment that brings in primary income.
• Implement fiscal and monetary policies that affect domestic demand (e.g., higher interest rates to curb import‑driven consumption).

6. Why Communication Costs Matter (Link to 6.3)

Communication costs are the expenses incurred when transmitting information across distances – e.g., telephone calls, internet data, and electronic transfer of documents. Lower communication costs reduce the “friction of distance”, making it cheaper and faster for firms and consumers to interact internationally.

6.1 Historical Trends in Communication Costs

6.2 Simple Transaction‑Cost Illustration

In international trade the total cost of a transaction can be shown as:

Transaction Cost = Price of the good + Transport cost + Information‑search cost + Communication cost

• When the communication cost falls, the overall transaction cost falls, making cross‑border trade more profitable.

6.3 How Lower Communication Costs Drive Globalisation

1. Better market information – firms instantly access foreign price data, consumer preferences and regulatory changes.
2. Coordination of complex supply chains – real‑time data sharing enables “just‑in‑time” production and reduces inventory costs.
3. Expansion of services trade – services that rely on information exchange (consulting, software, finance) can be delivered remotely.
4. Growth of multinational enterprises (MNEs) – subsidiaries across continents can be managed with minimal overhead.
5. Facilitation of outsourcing and offshoring – tasks can be transferred to lower‑cost locations without loss of control.

7. Real‑World Examples

• e‑Bay & Amazon Marketplace – Chinese sellers list products for UK buyers with virtually no communication cost.
• Software development outsourcing – US firms hire Indian programmers via platforms such as Upwork, coordinating through video calls and shared code repositories.
• Financial services – Real‑time trading platforms let investors execute transactions on foreign exchanges instantly.
• Cloud‑based supply‑chain platforms – Companies use systems like SAP Ariba to share inventory data with overseas suppliers in real time.

8. Implications for Trade Restrictions

Even when tariff or non‑tariff barriers exist, low communication costs can mitigate their impact by:

• Enabling firms to locate alternative markets quickly.
• Supporting “digital trade” that bypasses physical borders (e‑services, data flows).
• Providing up‑to‑date information for lobbying governments to reduce unnecessary restrictions.

9. Summary – Key Points to Remember

• Specialisation based on comparative advantage creates the fundamental gains from trade.
• Free trade delivers lower prices and greater variety, but can generate distributional concerns.
• Governments impose tariffs, quotas, subsidies and embargoes for economic, political or environmental reasons; these create welfare losses illustrated by dead‑weight‑loss triangles.
• Communication costs have fallen dramatically thanks to telecommunications and the internet.
• A fall in communication cost reduces overall transaction costs, encouraging more international trade, especially in services and digital goods.
• Cheap communication helps firms adapt to, and sometimes circumvent, trade restrictions.
• Exchange‑rate movements (appreciation/depreciation) directly affect export and import volumes.
• The current account records trade in goods, services, primary and secondary income; deficits or surpluses signal the need for policy action.

10. Potential Exam Questions

1. Explain how a fall in communication costs can lead to an increase in the volume of international trade.
2. Using the transaction‑cost framework, discuss why firms might choose to outsource production to another country when communication costs decline.
3. Assess the extent to which lower communication costs can offset the effects of tariff barriers on a developing country’s exports.
4. Explain the economic rationale for a government imposing a tariff and illustrate its impact on consumer surplus, producer surplus, government revenue and dead‑weight loss with a diagram.
5. Discuss the advantages and disadvantages of free trade for a small open economy.
6. Explain how a depreciation of the domestic currency affects the current account.
7. Identify two policy measures a government could use to correct a persistent current‑account deficit.

11. Suggested Diagrams for Revision

• PPF diagram showing specialisation and the gain from trade.
• Supply‑and‑demand diagram with an upward‑shifting supply curve to illustrate a tariff (price rise, quantity fall, CS, PS, government revenue, DWL).
• Vertical supply line to illustrate a quota.
• Downward‑shifting supply curve to illustrate a production subsidy.
• Foreign‑exchange market diagram showing appreciation and depreciation.
• Line graph: “Communication Cost per Unit” (vertical) vs. “Year” (horizontal) showing the rapid decline, with a second line showing “World Trade Volume” rising in parallel.
• Current‑account flow diagram (exports, imports, primary and secondary income).