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Advantages and Disadvantages of Globalisation

By ksay7lsl Nov 03, 2008 702 Words
One advantage of economic globalisation comes from the free trade. “Two nations can benefit from free trade by specializing in producing those products in which they enjoy a comparative advantage” (Case & Fair 2004, p.716). A country enjoys a comparative advantage in the manufacturing of a good if the production has a lower opportunity cost than it would have if produced in other country. When specialization takes place in a production, the production will become more efficient. It is due to research and development which aids in improving the production and minimizing the cost of production. This will thus stimulate the domestic economy (Case & Fair 2004, p.716).

Another advantage of economic globalisation is world output will increase due to free immigration of labours. Immigration of labours happens because of the high wages offered and the job opportunities in a local country. When local firms hire these labours, their cost of production reduces, assuming that each labour has the same efficiency. This leads to an increase in productivity in the country and thus, there will be more total output which leads to expansion in world output (Case & Fair 2004, p.720). For example, a firm in Malaysia uses 5 workers to produce 10 shoes and their total wages are RM1000. If that firm hires 10 immigrants to produce the same amount of shoes with the same amount of wages, the production of shoes actually increases without any extra cost, assuming all workers has the same efficiency. When this happens to all firms, the world output for shoes will increase.

Besides that, economic globalization allows the flowing of capital freely among countries. Local producers or firms can invest into foreign bonds and stocks. When these firms do so, those foreign countries can now buy more assets such as buildings, factories and machines to increase their production of goods and also to create jobs directly. Currencies in those countries will then increase and this will result in the booming of economic growth in those countries (Case & Fair 2004, p.722).

In contrast, economic globalisation has disadvantages. When there are international trades, there will surely have competitions. A local government will try to protect an industry as it might not be able to compete with the world market. However, trying to protect it will lead the industry to inefficiency as the industry has no incentive to improve its productivity. The industry will then lose plenty of world business to strong foreign producers and eventually fall behind. This will slow down the domestic economy (Case & Fair 2004, p.717).

Another disadvantage is that immigrants, who are usually willing to work for very low wages, will increase the unemployment rate. This is because local firms would rather hire a low wage foreign worker than a higher wage local worker. When this happens, foreign workers tend to steal jobs away from local workers. As a result, unemployment rate rises. In addition, immigrants always end up on welfare rolls and this burdens taxpayers (Case & Fair 2004, p.722).

The last disadvantage is that capital markets may “overshoot”. There is sometimes overinvestment as no one coordinates the investments being made by individual investors. Examples of countries that underwent this case in 1997 are Thailand, Korea and Indonesia. When things began to unwind in those countries, mutual funds, banks and others who were holding assets tried to liquidate their holdings all at the same time. The outcome was a dramatic plunge in the value of currencies of those three countries, which then pushed up import prices and hurt consumption expenditure. Stock markets crashed, business investment dried up, aggregate spending fell and eventually severe recessions occurred (Case & Fair 2004, p.723). In my opinion, I think that globalisation is essential in helping us to improve our economy. Without it, we cannot have goods that we cannot produce in our own country and our economy might not have grown so fast. Factors of production will not be used at its full potential and therefore we will not be able to maximize production. However, there will also be the negative sides of it such as higher rate of unemployment, inefficiency and rapid financial flows. Hence, I support globalisation only to a certain extend.

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