Contents
Practice question
In 1966 manufacturing represented 30% of all UK employment but this is down to 7.7% as of 2019. Over the same period, the share of UK employment in the services sector increased significantly.
Question: Evaluate the effects of globalisation on developed economies.
The following model answer is split into subheadings for easier reading. You do not need to use subheadings in the exam.
Model answer
Analysis paragraph 1
Consumers in developed economies see a reduction in prices as a result of globalisation. Because of reduced tariffs between nations under globalisation, there is increased international competition. This allows cheaper imports to be imported. For example, consider the market for clothing. The UK-India trade deal agreed reduced tariffs on clothing imports into the UK. So the world supply of clothing shifted down from World Supply + Tariff to World Supply. The world price falls from world price + tariff to world price, because tariff rates fall. Imports rise from Q2-Q1 to Q3-Q. This increases consumer surplus by area A + B + C + D and so total welfare increases by area B + D. Consumers are benefitting from lower clothing prices and increased quantity consumed. Also with greater competition, consumers may benefit from more variety, for example fruits that can be grown at certain times of year in certain countries or new clothing styles. This further increases consumer welfare beyond the price reduction. Another example of tariff reduction is the formation of trading blocs such as the European Union, whose members can trade with each other with zero tariffs and no non-tariff barriers.
Evaluation paragraph 1
However, globalisation may have contributed to deindustrialisation. Reduced trade barriers may lead to multinationals offshoring production to lower cost countries, leading to a loss of jobs in manufacturing in advanced economies. Moreover, domestic firms may struggle to compete with lower prices of imports, leading to a fall in producer surplus of area A. This may lead to lower labour demand, increasing the rate of unemployment. This rise in structural unemployment may reduce household incomes for some groups such as US and UK steelworkers. Higher unemployment could lead to higher absolute poverty rates, as fewer people can afford necessities such as food and energy.
Analysis paragraph 2
Globalisation may result in higher economic growth rates due to specialisation. There has been a fall in transport costs over time, because of technological advancements making flights travel further for cheaper and in shipping through containerisation. In addition to the fall in tariffs, this makes it easier for countries to trade and specialise. Therefore, countries can specialise in goods where they have a comparative advantage with more ease. In the diagram below, the UK has a comparative advantage in apples, as it must give up fewer oranges than Spain to produce 1 apple. So the UK should specialise in apples, such as Bramley apples, producing at point A. Similarly Spain has a comparative advantage in oranges. So Spain should specialise in oranges, such as Seville oranges, producing at point B. The UK and Spain can then trade some apples for some oranges, allowing the countries to move beyond their domestic PPFs to the point C. Thus globalisation may lead to “gains from trade”, increasing potential output and generating economic growth for developed economies. As a result the UK could export apples, financial services and pharmaceuticals and import oranges, cars and clothing where other countries have comparative advantages.
Evaluation paragraph 2
However, there is a risk of a developed economy becoming dependent on another country’s goods due to specialisation. Supply chain issues, such as during Covid-19, or global conflict could leave a country without imports for key necessities, such as how Europe faced rising gas prices in 2022, resulting in inflation reaching 11.1% in 2022 in the UK. Especially as such commodities may have volatile prices, by relying on other countries, if energy prices rise, this could significantly increase business costs. This could shift SRAS left and hence globalisation could slow the economic growth rates for developed countries.
Conclusion
Overall, globalisation is likely to increase consumer surplus in developed economies, owing to increased competition and falling prices. Yet globalisation is also likely to make some others worse off, for instance due to offshoring and deindustrialisation. To mitigate this problem, governments could use the tax revenue raised from higher economic growth (due to gains from trade) to retrain workers at risk of structural unemployment in sectors where the country has a comparative advantage. This could address the occupational immobility of labour. Globalisation is likely to increase economic growth rates through gains from trade from specialisation. However this may not be permanent if it is reversed through tariff rises and a return to protectionism more generally. For example the 2025 US tariffs on nearly all imports into the US could undermine globalisation and reduce the extent of economic growth in developed economies.
Commentary on the answer
This answer meets all the criteria for a top level answer. Key features of the answer include:
- Effective use of examples on globalisation.
- Extended chains of reasoning. This includes the use of tariff reduction and comparative advantage diagrams.
- Evaluation points that link to the question.
- A conclusion that weighs up the evidence and considers what the answer may depend on.
As a result it is likely to score full marks or close to this.
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