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Global Interdependence

Jamie Z 2024-05-23

Learning Goals

  • Define and explain the term interdependence
  • Explain 3 reasons for interdependence: Factor endowments, Absolute advantage and Competitive advantage

Economic Interdependence

Interdependence refers to the reliance that exists between participants in the economy on each other to use limited resources to produce goods and services that satisfy unlimited needs and wants

  • International trade allows participants to achieve the object of efficient allocation and distribution of scarce resources in order to satisfy needs and wants
  • International trade is mutually beneficial

Factor Endowments

The quantity and types of resources or factors of production that a country can exploit for the production of goods and services

Land Labour Capital Enterprise
Size Workforce Availability of funds for investments Political Stability
Climate Labour cost Economic Freedom
Natural Resources Skill levels

Absolute Advantage

A country has absolute advantage when it can make a product more efficiently with the same set of resources than another country

  • E.g. China can produce more T-shirts than Australia

Comparative Advantage

  • Given a choice of producing two products, a country is said to have a comparative advantage in producing whichever it sacrifices the least to produce ( Lowest opportunity cost)

Effects of Global Interdependence

The effects of globalisation has led to:

  • An explosion of international business and trade
  • Greater interdependence between the world’s economies
  • positive and negative consequences for economic participants

Effect on Individuals

  1. Job Opportunities:

    • Positive: Access to a broader range of job opportunities due to the global market. Skilled professionals can work for companies worldwide, often with higher salaries and better conditions.
    • Negative: Increased competition for jobs. In some industries, workers in developed countries face job insecurity due to outsourcing to regions with cheaper labor.

  2. Income Inequality:

    • Positive: Emerging markets often see significant economic growth, lifting many out of poverty.
    • Negative: The wealth gap can widen, with the benefits of globalization accruing disproportionately to those with higher skills and education, while low-skilled workers may suffer wage stagnation or job loss.

    Market Expansion and Competition

    1. Access to New Markets:
      • Positive: Businesses can expand their reach beyond domestic borders, tapping into new customer bases and increasing sales.
      • Negative: Entering new markets can be challenging due to differences in regulations, consumer preferences, and competition from local firms.
    2. Increased Competition:
      • Positive: Competition can drive innovation and efficiency, prompting businesses to improve products and services.
      • Negative: Smaller or less competitive firms may struggle to survive against larger multinational corporations with more resources.

    Supply Chain and Production

    1. Global Supply Chains:
      • Positive: Businesses can source materials and components from around the world, often at lower costs, enhancing profitability.
      • Negative: Dependence on global supply chains can lead to vulnerabilities, such as disruptions due to political instability, natural disasters, or pandemics.