It Has Been Argued That Globalisation and Free Trade Are Responsible for Increasing Job Losses and Inequality Among All Countries in Recent Decades. Critically Discuss the Validity of This Statement in the Context of

Topics: Economics, International trade, Trade Pages: 5 (1646 words) Published: March 29, 2013
Globalisation, also referred to as global integration is an important economic concept used to understand the economic, structural, political and cultural changes that have occurred in the world today. Globalisation is argued to have shaped the post-war world. Globalisation can be defined as the increase of interconnectedness between countries through international trade. The reduced policy barriers to trade and investment in the public sector and the reduced communication and transportation costs in the private sector are believed to be the main driving force behind globalisation (Frankel, 2006). Due to globalisation, the concept of free trade operates. Free trade is a policy where countries are able to trade freely with each other as there are no tariffs applied to imports and no quotas or subsidies applied to exports. According to the law of comparative advantage, the free trade policy allows both countries to gain mutually from trade – increasing economic growth.

The increase in inequality and job losses which is occurring around the world is argued to be as a result of global logic of competitive profit-making management techniques of outsourcing and corporate migrations, atomisation, downsizing and widespread technological progress which all came about as a result of globalisation and free trade (Ukpere and Slabbert, 2007)

Due to some consequences of globalisation, movements were formed against it (Krugman et al, 2012). The anti-globalisation movements argue that although globalisation increases the overall income of a country however the benefits are not equally distributed between the citizens. This widens income disparities which brings up social and welfare issues and could also limit the forces which drive economic growth as opportunities brought about as a result of globalisation may not be fully taken advantage of. Maintaining citizens support is important in order to sustain globalisation, however support shown by citizens could largely be influenced by the rising level of inequality (Subir Lall et al, 2012).

The Ricardian Model of comparative advantage states that goods are produced competitively using one factor of production; labour, utilising constant-returns-to-scale technologies that vary across countries and goods (Deardorff,2007) .The Ricardian model puts forward that countries would export the good in which they have comparative advantage which is determined by opportunity cost, labour cost and labour productivity. A country has a comparative advantage in the production of a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries (Krugman et al, 2012). The Ricardian model illustrates a world with two countries, A and B which both utilise a single factor of production - labour in producing good X and Y respectively. Assuming country A has comparative advantage in producing good X, then country A should specialise in the production of good X and would export it to country B. Since it is more cost effective for country B to import good X , Production of good X would decline in country B leading to a reduction in the demand for labour. As a result workers would lose their jobs leaving them with less disposable income – increasing inequality.

As a result of globalisation, the cost of communication between countries is low, reducing the cost of controlling the geographically dispersed parts of an organisation. This allows organisations identify countries which have low production costs and set up branches in such countries in order to exploit the low production costs. This is referred to as outsourcing. Through this fragmentation of industry, the host countries are able to pursue their comparative advantage and maximise the use of their resources. However due to outsourcing, the movement of production to the host country causes people in the foreign country to be laid off their jobs as there is a decline in the demand...
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