Macroeconomics

These model answers should give students a basic idea of the style of writing that is expected of them in an exam:

What is globalisation? [2-4 marks] - The processes that have resulted in ever-closer links between the world s economies resulting in greater economic interdependence (1). It is brought about by trade which has been increasing as a percentage of GDP due to a fall in trade barriers (1) (ref. examples of trade barriers and why they have reduced e.g. reference to trade blocs such as the EU and NAFTA) (1) It is an objective of the world trade organisation (1) refer back to indicators mentioned in stimulus material briefly explaining how each factor has contributed to globalisation (1)

What is FDI? [2-4 marks] Investment by multinational corporations in physical capital goods (1) examples of physical capital goods e.g. new plant and equipment in their overseas operation and physical capital expenditure (1) Part of FDI is the purchase of controlling interests in domestic firms (1) possible real world example e.g. Foreign countries such as China investing into mineral extraction in Malawi (1) FDI is a component of the capital account of the balance of payments (1) many countries facing a current account deficit are able to prevent balance of payments imbalances because they receive a lot of FDI due to speculator confidence (1)

State and explain two indicators of globalisation other than those mentioned in the extract [4 marks]-

Answer this question in separated bullet points:

1) State the indicator 2) explain what it is 3) explain why it is an indicator always linking back to the idea of integration and economic interdependence

The number of global brands (1) this is because the same product sold under the same brand name across the world represents global economic integration (1) [possibly include examples such as coca cola. Worth no marks but show understanding of concept]

The transfer of technology (1) technology developed in one country is quickly made available in another country due to investment from multinational corporations. (1)

Growth in the size of the internet (1) it has improved the efficiency of communication and the buying and selling of goods and services (1)

What does specialisation by comparative advantage mean? [2-4 marks] Ricardo s theory of comparative advantage is defined as a situation where one country produces a good or service at a lower opportunity cost relative to others (1) A country will therefore specialise in those forms of production where its comparative advantage is most marked or its disadvantage is least marked (1). This can be mutually beneficial for the countries involved (1) if both the efficient and inefficient countries trade at an exchange rate that is mid-way between their domestic opportunity cost (1) Use PPC curves to demonstrate (1)

As a country develops, it can produce a wider range of closely linked goods and services (diversification)

Developed countries (ref. Australia) have a highly diversified pattern of exports

Zambia and Malawi have a fewer capabilities and so export a narrower range of products (which is probably why most exports are in primary commodities)

Analyse how globalisation has increased balance of payments imbalances in the world [6 marks]

Para 1 basic introduction, define balance of payments imbalances, define globalisation etc. (1)

Para 2 globalisation has made it easier for countries to exploit their comparative advantages, specialise and trade (1) This is because of a fall in trade barriers and increased communications technology allowing for better integration and increasing access to international markets (1) As a consequence, countries with high comparative advantage are able to export more, and the demand for their exports rises leading to high current account surpluses in such countries (1) As countries such as the USA develop, disposable income and confidence rises, so demand for imports increases and demand for their domestic product falls (1) This means these countries start importing more than they are exporting, which leads to a current account deficit (1)

Para 3 globalisation has made it easier to sustain and finance balance of payments imbalances (1) Most developed countries such as the USA face current account deficits because consumers have a lot of disposable income and therefore they import more (1) Businesses are likely to be more successful in developed economies and they will import capital goods (1) However, a current account deficit in developed countries is sustainable because they receive a lot of FDI from speculators in developing countries (1) These speculators are more likely to invest in developed countries because they are likely to have more confidence in such countries as there is less uncertainty and developed countries have more successful businesses. (1)

Analyse two possible ways that multinational corporations might contribute to an improvement in living standards (10)

Para 1 INTRODUCTION

Definitions. Multinational corporations: a country that has facilities and other assets in at least one country other than its home country. Living standards: the level of wealth, comfort, material goods and necessities available to a particular group of people.

Para 2 FIRST WAY

Multinational corporations allow new technologies developed in one country to be quickly made available in another country, as well as increase investment in research and development leading to an increased development in technology. (1) This increases the productive efficiency of the economy as it allows for more specialisation as well as lower costs of production (1) If a country has access to more specialised capital, it s potential output rises, this means the country faces long run economic growth (1) This can be illustrated by a shift to the right in LRAS: analysis of AD/AS diagram to show the effects of a shift in LRAS (1) This reduces inflationary pressures, depending on whether AD was close to the productive capacity initially. (1) As the economy s productive potential rises, it will also receive more FDI due to increased speculator confidence (1) FDI is a part of the capital account of the balance of payments, which means the country s deficit will fall or a positive output gap will form, which leaves the government with more money to invest in infrastructure public service, leading to an increased standard of living (1)

Para 2 SECOND WAY

Multinational corporations lower unemployment. (1) Firstly, by increasing the availability of technology in an economy and thereby increasing it s productive efficiency, they lower the unit labour costs of many firms (1) This allows firms to invest more into their labour, either by hiring more workers or by investing in education and training, making their workers worth more to potential future employers. (1) Secondly, they also increase the market for jobs by setting up in foreign countries and opening new firms. (1) They increase the availability of jobs and many large, specialised companies such as banks will invest a lot of money into educating and training their employees (1). A fall in unemployment lowers the levels of both relative and absolute poverty within the economy, and also puts less strain on the government. (1) It lowers the government s opportunity cost as it means the government has to spend less on welfare benefits and can therefore invest more in infrastructure (1). It also encourages consumerism, as the public is likely to have more disposable income. (1) As consumption, investment and government spending are all components of aggregate demand, multinational corporations lead to AD shifting to the right, which is short run economic growth. (1)

Para 3 CONCLUSION

Overall, it is clear that multinational corporations can benefit an economy in both the short run and the long run. (1) They not only lead to increased efficiency but they lead to an increased standard of living, which has many positive externalities such as a fall in crime rate. (1) Multinational corporations clearly encourage trade between countries, e.g. for capital goods, this is a sign of interdependence and integration, meaning MNCs encourage globalisation (1) This allows for the country to use it s resources and comparative advantage to grow quickly without inflationary pressures (1)