Relationship between globalisation and trade

BBC Bitesize - National 5 Geography - Trade and globalisation - Revision 1

relationship between globalisation and trade

The aim of this paper is to show the relationship between economic theory and practice of international trade in the context of the environment of global value. International trade has an important share in GDP in different countries. Also, globalization refers to the interdependence between countries arising from the. The conceptual link between trade and household welfare . values as a share of GDP tells us the importance of trade in relation to the size of economic activity.

The main purpose of this study is to investigate the relationship between globalization and income inequality by developing a new globalization index based on economic growth. Two existing indices of globalization, the Kearney and principal component analysis, are used as benchmarks to compare the results.

The proposed globalization index is decomposed into four sub-components suggested by the Kearney index. The new index is estimated in different forms separated by different economic growth variables. The main feature of this model is the estimation of the globalization index and examination of its relationship with economic development, which is conducted in one single step procedure.

OCR - F585 Economics - Extract 1 - Globalisation and World Trade

To examine the sensitivity of the relationship between globalization and inequality, we employed different inequality variables in the different models. All indices including the newly suggested index are compared in respect to their level and development.

Various variables employed in the models provide sufficient flexibility to assess the measure and impacts of globalization. It is expected that the indices provide useful tools to compare the globalization process among countries and the evaluation of the globalization effects on the economies.

This study can also be useful in the construction of a new index of globalization considering the multidimensional nature of the issue and different weights attached to the determinant factors.

The Relationship between Globalization, Economic Growth and Income Inequality

The empirical analysis is based on a small panel data consisting of 61 developed and developing countries observed during the period — Regression analysis is used to estimate the relationship between income inequality and globalization intensity. This paper is organized as follows. The literature review on the links between globalization, economic growth and inequality follows in section 2.

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  • Trade and globalisation
  • Relationship between Globalisation and Free Trade – Explained!

In section 3 the used data is described. In section 4 previous indices including composite Kearney and principal component-based indices are described. The development of the indices over time and regions is also illustrated and discussed.

In section 5, the new index of globalization, based on different component system and its relationship with different economic growth variables, is introduced. Section 6 includes not only index values, but also the rankings of countries, the regional differences of globalization, and the development of globalization over time. The impacts of globalization on income inequality estimated through regression analyses with various inequality variables are discussed in section 7.

Finally, section 8 summarizes the results and concludes this study. The Literature on Globalization, Growth and Inequality Relationships The interest in and amount of research on the relationships between globalization, economic growth and income inequality has been increasing in recent years.

The growing interest is a result of the rapid development of international relations and the speed at which the recent wave of globalization is proceeding. The theoretical literature on each component is vast but the empirical evidence on the nature and causal relationship between the different interrelated factors of interest remains poor. Thus, there is an urgent need for further research and methodological development at different levels and aspects to shed light on the issues.

Relationship between Globalisation and Free Trade – Explained!

Recently, there have been a limited number of studies on different combinations of the links between key factors of interest such as inequality, poverty, growth, trade and globalization. Aghion and Williamson study the links between globalization, growth and inequality, while Collier and Dollar examine the relationships between globalization, growth and poverty.

Mahler shows little evidence of a relationship between economic globalization and the disposable income or earnings of households in the case of developed countries. Mayer mentioned that globalization gives benefits even to the poor countries for instance in the form of access to new technologies and opportunities, while countries show different technology, skill absorption and development abilities. Manasse and Turrini examined the impacts of globalization on inequality through trade integration, while Miller argues that globalization leads to a significant increase in income inequality.

Lindert and Williamson state that globalization has very different implications for inequality in a country. The authors classify the effects of globalization on inequality into five categories within and between countries. Among the effects, one is that a greater degree of globalization has reduced inequality. Talbot argues that a new international inequality has been derived through the old style of international inequality, which explains the increasing global inequality.

The nineteenth century globalization was one of the most important reasons of increasing international inequality in the study of Bata and Bergesen a, b. Ajayi concludes that integration combined with other factors, like the maintenance of macroeconomic stability, the development of human capital, high investment ratios, infrastructure and institutions, can enhance economic growth.

Mussa examined issues related to the distribution of benefits from increasing globalization activity. In general the focus on economic growth has changed from identification of factors generating growth and convergence to how growth is distributed in an economy.

Heshmati c reviews the economic literature on the world distribution of income and income inequality. The exiting research supports increased awareness of the problem, its measurement and quantification, the identification of causal factors and policy measures that affect global income inequality.

relationship between globalisation and trade

Concerning the measurement of globalization, Heshmati a and b introduces two composite indices of globalization. They indicate the level of globalization and show how globalization has developed over time for different countries. The indices are composed of four components: A breakdown of the index provides possibilities for identifying the sources of globalization at the country level and associating it with their economic policy measures.

The empirical results show that a low rank in the globalization process is due to conflicts, economic and technology factors with limited possibility for the developing countries to affect. The high ranked developed countries share similar patterns in distribution of various components. The indices were also used in a regression analysis framework to study the causal relationships between income inequality, poverty and globalization.

The results show evidence of a weak and negative relationship between globalization and income inequality and poverty. Regional location explains most of the variations in income inequality and poverty among the sample countries.

Dreher ; see also Dreher et al. The rest of this paper will in part be an analysis of the literature on the different measures of development and their relation to the different measures of globalisation. Development is taken to include social, political and economic forms of progressive growth, something rarely accounted for in single studies on the subject. It will then look into data on different and more recent variables to further explore the relationship between globalisation and development.

By taking into account both broad, macroeconomic research and analysis of more specific, domestic variables, one trend that is discernable is that of the uncertainty and contradictions in the wide body of research in this area.

Theoretical Expectations and Previous Empirical Research 2.

relationship between globalisation and trade

Economic growth and globalisation Assumptions can be made about the positive relationship between globalisation and economic growth bases on the Heckscher-Ohlin framework. The trade liberalisation associated with globalisation would lead to greater economic efficiency from the reallocation of productive resources towards sectors and markets with comparative advantages7.

However, as economic data has become more readily available across the globe, studies can be conducted with relative ease using numerous variables. Rather than relying on broad assumptions, they attempt to show actual empirical relationships between the forces at play. In the index, globalisation is split into economic integration, political engagement, and social globalisation. Inequality and globalisation Models based on neoclassical growth theory argue that due to factor mobility, and diminishing returns to scale of the factors of productionnations will tend to converge in terms of their per capita income These models were based on many assumptions rarely found in reality, including the idea that technological progress is exogenous.

Newer models however showed that technological process was instead endogenous. Contemporary studies tend to find a robust relationship between increasing globalisation and increasing inequality but mostly for richer countries Work on developing countries however has yielded less convincing results. Factors studied in the research included how protectionist the policy was prior to liberalisation and its subsequent reaction to external shocks.

However, there were problems in gauging what time scale the effects of these factors would be felt Due to the uneven geographical distribution of the factors of production, it was found that regional inequality was exacerbated by globalisation within larger developing countries Domestic policy and labour rights There is relative consensus in the view that globalisation restricts to some extent the autonomy of domestic policy.

This in tern may effect the development of a nation, as economic and social policy will be different and as factors become more mobile they become more difficult to apply domestic policy to. Some claiming it increases tax burden 17, some saying is decreases tax revenue18 and some finding no significance in the 13 14 Goldberg and Pavcnik 15 e. More recent research suggests tax rates rise with globalisation but only for taxes on capital Other domestic factors such as more globalised legal systems show negative correlation with inequality and so represents a way in which globalisation can promote better development Purely economic measures of growth and income may not take into account the more social aspects relevant to development.

Looking at the relationship between globalisation and labour rights, some suggest that flows of FDI associated with globalisation positively influence the rights of workers.

Multi-national corporations and direct investors may demand certain labour standards of a country before investing A recent study using more diverse measurements of globalisation suggests that the effect on labour rights is dependant on how that nation has globalised in the past. It finds increased FDI leads to better collective labour rights, yet a more liberal trade policy worsens rights Human health and globalisation 19 Heinemann 20 Dreher b 21 Bergh and Nilsson a 22 Richards et al.

Although his use of HDI seems appropriate to a rounded measurement of human development, the use of only 3 time periods gave the data an almost cross-sectional nature, one that does not lend itself well to globalisation data, whose relevance is largely in its changing over time.

Data sets and variables Due to unfortunate limitations in annual HDI data sets fromI have used a cross-sectional data set from simply for illustrative purposes in the first part of the analysis.