2.2.1 - Globalisation and its effects

Integration and interdependence

Globalisation is the increased integration and interdependence of economies. Integration means that national markets and production become more connected through trade, investment and communication. Interdependence means that events and decisions in one economy increasingly affect others.

Imagine a bicycle designed in one country, assembled in a second from components made in a third, and sold worldwide. Producers rely on foreign suppliers and customers; consumers rely on goods made abroad. A disruption at the component factory can therefore reduce output and employment elsewhere. An export order can have the opposite effect, raising demand for production in several countries.

International trade has existed for centuries. Globalisation describes an increase in the depth and importance of those connections, rather than the first occasion on which two countries exchange goods. It includes services and investment as well as physical goods. A software firm delivering support remotely is part of the same process.

Drivers of globalisation

Globalisation becomes easier when the cost and difficulty of dealing across national borders fall.

Fewer tariffs and quotas reduce restrictions on trade. A tariff adds a tax to imports; a quota limits their quantity. Removing them makes foreign goods easier or cheaper to obtain and gives exporters access to more buyers. This connects product markets more closely.

Lower transport costs reduce the cost of shipping raw materials and finished products over long distances. A manufacturer can source components abroad without delivery costs cancelling the saving. More reliable transport also makes it practical to split production across countries.

Lower communication costs make it cheaper to coordinate that production. Video calls, digital documents and online ordering allow a firm to communicate with suppliers and customers abroad rapidly. A small exporter can reach buyers without opening a sales office in every country. Better technology can reduce communication costs, while expanding international demand for communication services can encourage further investment; cause and consequence can reinforce each other.

The growing significance of multinational corporations (MNCs) also links economies. These businesses operate in more than one country. Their overseas factories, supplier contracts and sales networks transfer goods, investment and knowledge across borders. Lower transport and communication costs encourage their expansion, while their expansion itself deepens globalisation.

Gains for consumers and producers

Wider access to goods, services and production opportunities can raise living standards, but the gains reach people through particular mechanisms.

Consumers gain greater choice when shops can offer foreign varieties alongside domestic products. Competition and access to lower-cost suppliers can bring lower prices. A household can then buy more with the same income, increasing its material living standard. Choice may also improve quality, since producers must persuade customers to choose their products.