yr10 economics part 1 of chapter 3 national & global economy

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Section 3 National and Global Economy At the end of this section you will Understand international trade and its importance to the UK economy Understand factors influencing international trade, including exchange rates and their impact on consumer’s choices Understand how global economies are influenced by consumer choice and government action Understand how labour markets are affected by globalisation and migration

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Section 3.1 Learning Objectives At the end of this first section you will Learn the main types of UK export and import Appreciate the importance of trade to the UK economy Understand advantages and disadvantages of global trade and the UK’s exports and imports

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Understanding international trade The UK trades a high value of goods and services with other countries each year Exports means money coming into the country e.g. a UK company such as Jaguar selling cars to other countries Imports means money going out of the country e.g. the UK buying Volkswagen cars from Germany Goods are things that can be physically touched like a camera or a television – often called ‘visibles’ Services are things that cannot be handled or seen such as tourism or finance – often called ‘invisibles’ Exports – goods and services sold to another country Imports – goods and services that are bought from another country

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Understanding international trade Exports minus Imports = the balance of payments Have a look at these tables What do you see? Imports tend to be more than exports overall particularly where goods are concerned The only item we export more than we import is financial services and insurance Balance of Payments – a record of the value of a country’s exports, imports and financial transactions with the rest of the world over the year

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Understanding international trade The UK’s balance of payments is normally in deficit It is negative because the UK’s total imports have a higher value than the total exports

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Importance of trade to the UK economy What does this graph show? In 2007 the UK had the second largest share of the world’s trade in commercial services They had the 6 th largest share of world trade in goods (3.8%) Commercial services – services which are used and supplied by businesses e.g. banking, training and transport

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Importance of trade to the UK economy International trade is very important to the UK - It provides a large number of jobs Each country has different raw materials, climates, cultures, and labour skills These give it advantages in producing certain types of goods and services This is known as a comparative advantage (an advantage compared to other countries) Germany is the world’s largest producer of wind turbines and solar power Research Homework : Find out what goods and services that the UK exports. What is their comparative advantage?

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Advantages of trade to the UK economy Globalisation has made it easier to buy products produced around the world and for the UK to sell in other countries This brings many benefits Income – increased production means more workers which means more jobs Growth – increasing production means making more goods and services which means more GDP (higher economic growth) Choice and product differentiation – UK consumers can choose from goods that might not be available in the UK Globalisation : the process of increasing international trade and economic interdependence between countries Create a mind map GDP : Gross Domestic Product – the total value of all goods and services produced by an economy in one year

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Advantages of trade to the UK economy Lower prices – many of the goods that we buy in the UK are imported from places like China and India They have lower labour costs than the UK and good levels of technology They can produce much more cheaply Competition and innovation – companies have to work harder because there is more competition they may lower their prices and develop more attractive and better quality products Raw materials – the UK is relatively poor in raw materials it is essential that they import materials (metals, gems, energy, etc) Complete case study P48

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Disadvantages of trade to the UK economy Competition – UK companies might find it difficult to compete; many countries have much lower labour costs and can offer lower prices Economic dependency – the UK imports a large variety of foods; interruption of this might threaten survival Unstable commodity prices – the prices of foodstuffs can change by large amounts and very quickly; this affects production costs and therefore prices Although the UK has some oil it is not enough It is very dependent on imported oil The diagram shows the changes in oil prices Power of MNCs – Multinational Corporations are becoming very powerful and governments are finding them harder to control Environment and sustainability – next section! Insert diag F p48

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Social and environmental impact of trade Although we might enjoy cheaper goods and more choice there is a high price in terms of environmental damage This is called the carbon footprint Many products now carry a measurement of their carbon footprint Carbon footprint : the total greenhouse gas (CO 2 equivalent) emissions caused by an individual, event, or organisation

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Social and environmental impact of trade The full carbon footprint comes from a wide range of emission sources Direct emissions of CO 2 from activities that the organisation controls e.g. using energy for production or running a fleet of vehicles Indirect emissions – the carbon that is emitted in the preparation and transport of the raw materials used, employees travelling to work etc Goods bought from other countries require more energy to transport them often over vast distances This increases the CO 2 equivalent Complete case study P49 Examiners Tip : when you are explaining the carbon footprint of a product, be sure to include all the products and services that a firm uses, and transport of the finished goods.

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Did we achieve the Learning Objectives? Learn the main types of UK export and import Appreciate the importance of trade to the UK economy Understand advantages and disadvantages of global trade and the UK’s exports and imports

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Section 3.2 Learning Objectives At the end of this first section you will Understand how exchange rates influence demand for imports and exports of goods and raw materials Understand non-price factors affecting demand for imports to and exports from the UK

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Exchange Rates Every time a UK citizen or business wants to buy something from abroad they need to pay for that product in the currency of the country where it is produced They will need to exchange £s for that currency The amount they pay for the currency depends on the exchange rate If the exchange rate was £1:$2 the person would have to pay 50p for every dollar For a product that cost $10 they would pay £5 If it was £1:$1 each dollar would cost £1 For a product that cost $10 they would pay £10 This is the same if a foreign citizen or business wants to buy a UK product/service They have to buy pounds Exchange Rate : the rate at which one currency exchanges for another

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Exchange Rates The exchange rate is the price for money Just as with any other good the market creates the price If there is strong demand for the pound the price goes up the exchange rate gets stronger you can get more foreign currency for your money This means that imports will be cheaper Exports will be more expensive If there is low demand for a currency the price goes down The exchange rate weakens You get less foreign currency for your money Imports will be expensive Exports will be cheaper What is best for the UK (as an economy)? A strong or weak pound? Strong Pound; Imports Cheap; Exports Expensive SPICEE

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Effects of Exchange Rates on Exports When the pound is weak a foreign country that wants to buy a UK good/service will get more pounds for their money This means that the price of their good will be cheaper in comparison to other countries That foreign country will buy the good from UK rather than elsewhere A weak pound makes the UK more competitive and so it is good for exports It will help to move towards a positive balance of payments When the pound is strong exports will suffer Weak Pound; Imports Dear (expensive); Exports Cheap (WIDEC) WIDEC

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Effects of Exchange Rates on Exports If the pound is weak travel from foreign countries to the UK will be cheaper (remember that travel from a foreign country to the UK is an export of a service) This means that more foreigners/tourists will travel to the UK Whilst they are in the UK they will spend more because they are getting more for their money All of this helps the UK economy; more jobs, income and growth Weak Pound; Imports Dear (expensive); Exports Cheap (WIDEC) WIDEC

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Effects of Exchange Rates on Imports When the pound is weak the UK will get less foreign currency for their money The price of these imported goods will be more expensive This may encourage UK consumers to buy more British goods For businesses that use foreign raw materials this is not good because their costs will increase If their costs increase they will pass this cost increase onto the consumer in the form of a higher price When the pound is weak this is good for the balance of payments because there may be less imports exports minus imports will move towards a surplus/positive – there will be more exports than imports Weak Pound; Imports Dear (expensive); Exports Cheap (WIDEC) WIDEC

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Effects of Exchange Rates on Imports What is happening here? The falling pound (getting weaker) means that import prices are higher and export prices are lower The farmers may be able to export their produce abroad Imported foods will be more expensive so UK produced meat, fruit and vegetable should be relatively cheaper to buy The farmers gain from more exports and more domestic sales Weak Pound; Imports Dear (expensive); Exports Cheap (WIDEC)

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Effects of Exchange Rates on Imports Two formulae that you need to remember Let’s say you are asked to calculate the price in Euros of something that is priced in pounds Price in Pounds divided by the number of pounds to the euro If the number of pounds to the euro is 0.88 and the price is £100 £100/0.88 = €113.63 If you are asked to calculate the price in pounds of something priced in euros Price in euros divided by the number of euros to the pound If the number of euros to the pound is 1.36 and the price is €100 €100/1.36 = £73.53

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Effects of Exchange Rates In October 2000 the number of euros to the £ was 1.75. In December 2008 the number of euros to the £ was 1.36 If I need to import raw materials from Europe would this be good or bad for me? Using a price of €100 calculate how much better/worse off I am. By what % am I better or worse off? In October 2000 €100 would have cost me £57.14 (100/1.75) In December 2008 €100 would have cost me £73.53 (100/1.36) €100 is costing me £16.39 more My original price was £57.14 The price has gone up 16.39/57.14 x100 = 29% (rounded up) If my costs go up 29% this could be very bad for me as a business because I will need to put my prices up and customers may stop buying for me. Otherwise I could make less profit which again is not good for me!

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Exchange Rates and the individual consumer Individual consumers are affected by changes in the exchange rate in the same way If the pound is strong they get more foreign currency for their money (SPICEE) If the pound is weak they get less foreign currency for their money The types of goods that are affected by changes in the exchange rate are Foreign holidays Withdrawing cash from cash machines abroad Food in supermarkets Imported consumer goods Direct imports of big ticket items like cars and furniture Anything that is made from raw materials that are imported

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Exchange Rates and the individual consumer The exchange rate, via its effect on prices, is not the only influence on demand for imports and exports What other things will affect demand? Style and image Quality Reliability BMWs are a prime example of a good that is expensive but people still want to buy it because of its quality and style Other examples Champagne from France Caviar from Russia Gemstones High fashion Oil is something on which the UK depends and demands – price makes little difference to the amount the UK imports in the short term Complete activities 1, 2 and 3 on P53 and then 4, 5 and 6 on P53 Examiner’s tip : Remember that exchange rates (price) are not the only thing that determines whether or not we buy imported products or whether foreigners buy UK exports

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Did we achieve the Learning Objectives? Understand how exchange rates influence demand for imports and exports of goods and raw materials Understand non-price factors affecting demand for imports to and exports from the UK

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Section 3.3 Learning Objectives At the end of this first section you will Understand that consumers have buying power and that this can be used to influence businesses to supply goods that are ethically sound

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The power of the consumer Complete the case studies for homework p54/55 (see next slide) Boycott: to stop buying or using a product as a protest, to force a company to do, or stop doing a particular action

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Page 54 Activities 1, 2 and 3 P54 Case Study – A wide-range of British industries (including textiles, electronics and toys) have all moved their manufacturing bases outside of the UK. Marks and Spencer, for example, was one of the last British clothing companies to shift the bulk of its manufacturing abroad. ‘Globalisation was a fact of life that wasn’t going away’, said a Marks & Spencer spokeswoman Research one or more companies that have decided to start manufacturing in cheaper countries than the UK in recent years Explain why a company might want to do this Why might M&S or Hornby find it easier to move their production to a low labour cost country than say Rolls Royce or Aviva insurance? Page 55 Activities 4, 5 and 6 Case Study – A study by media agency MPG UK found 70% of UK families would support boycotting companies that don’t take real steps to reduce their environmental impact Explain what you understand by the term boycott Outline the steps that a car company might take in the light of this case study Research on the internet to find a selection of products that have been recently boycotted

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Page 55 continued Activities 7 and 8 Case Study – The environmental group, WWF, has called on global supermarket chains to take bluefin tuna off their shelves, saying overfishing, driven by the craze for sushi, threatens to wipe out the species. The French supermarket giant, Auchan, has already stopped selling bluefin tuna List the types of action that consumers could take to show supermarkets that they do not want them to stock environmentally irresponsible products like bluefin tuna How significant do you think consumers’ opinions were in Auchan’s decision to withdraw bluefin tuna from its shelves?

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The power of the consumer to influence producers and their products Consumers can have a big influence over producers This is called consumer empowerment They can use their buying choices to force producers to adapt their products Consumer boycotts are becoming more common Consumers also demand cheaper products so several UK manufacturers have moved their production facilities abroad to low labour cost countries so that they can compete with cheap imports This is another example of producers responding to consumer demand Consumer empowerment: consumers demonstrating their needs, wants and demands through their purchase decisions in the marketplace Boycott: to stop buying or using a product as a protest, to force a company to do, or stop doing a particular action

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The power of the consumer to influence producers and their products Many people now read online reviews 69% pass on the information to friends and family The consumer is becoming increasingly influential Firms can influence and shape consumer demands using persuasive advertising However, there are both physical and financial limits on what firms can produce profitably so the consumer will never have total control

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The power of the consumer to influence producers and their products Many businesses are adopting Fairtrade products because consumers demand them The Fairtrade movement aims to help poorer producers in developing countries gain economic self sufficiency by encouraging the payment of fair prices Coffee, cocoa and fresh fruit are typical examples Tesco and Marks & Spencer now stock Fairtrade due to consumer pressure Consumers will pay a premium to make sure the suppliers get a fair deal Marks & Spencer is now looking to stock an even bigger range because they have received such positive feedback from their customers

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The power of the consumer to influence producers and their products As consumers we have buying power Our buying habits influence what producers supply We can even refuse to buy environmentally irresponsible products (those with excessive packaging) Companies fear mass consumer boycotts because it causes bad publicity and decreases sales

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The power of the consumer to influence producers and their products Consumers can make a real difference to the environmental sustainability of food production both globally and in the UK by choosing what they buy in the supermarket The main supermarkets in the UK all say that they are committed to sourcing foods locally wherever possible This cuts down on the transport needed reducing pollution (reducing carbon footprint) It also helps support the local economy by supporting local jobs See the Sainsbury statement below Complete activities 9 and 10 on P56 (not yet!)

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The power of the consumer to influence producers and their products Companies operate to generate profit Multinational corporations (MNCs) sometimes set up sweatshop factories in developing countries These have low operating costs Often they pay low wages, have poor working conditions, long working hours and hire young children Many consumers question whether it is right that we should be able to wear cheap clothes while the person that made them cannot afford to pay their children Consumers can protest by refusing to buy products that are made in sweatshops It is a way to make the large corporations to sit up and listen and maybe change