# Causes and effects of globalisation

> Edexcel International A-Level Economics · Edexcel IAL Economics U4
> Source: https://www.owlsprep.com/study/edexcel-ial-economics-u4-causes-and-effects-of-globalisation/

This guide covers the core characteristics, 50-year historical causes, and multi-stakeholder effects of globalisation for Edexcel IAL Economics Unit 4, including context for 6, 14 and 20-mark extended response questions.

**Prerequisites:** [Unit 2 Macroeconomic growth and welfare](https://www.owlsprep.com/study/edexcel-ial-economics-u2-macroeconomic-growth/); [Unit 1 Supply, demand and consumer surplus](https://www.owlsprep.com/study/edexcel-ial-economics-u1-consumer-surplus/)

## Learning objectives

- Identify the three core measurable characteristics of globalisation
- Explain the five key causes of globalisation over the past 50 years with real-world context
- Analyse the multi-stakeholder benefits and costs of globalisation using logical reasoning chains
- Structure answers aligned with Edexcel command word requirements for 4, 6, 14 and 20-mark questions
- Evaluate the net impact of globalisation for different national contexts to secure top evaluation marks

## Core Characteristics of Globalisation

**Globalisation** — The increasing integration of national economies through freer cross-border flows of goods, services, capital, labour and information

Edexcel specifies three core measurable characteristics of globalisation you must reference in answers: rising trade as a share of national GDP, growing activity of transnational corporations (TNCs) and foreign direct investment (FDI), and increased cross-border migration of workers.

**Worked example:** A 2024 report shows global trade as a share of world GDP rose from 25% in 1970 to 58% in 2023, while the number of TNCs rose from 7,000 to 82,000 over the same period. Explain how these trends illustrate the characteristics of globalisation.

1. First, link the rising trade/GDP ratio to the first core characteristic of globalisation: growing cross-border exchange of goods and services, as countries produce goods for export and import goods unavailable or more expensive domestically.
2. Second, the 11x increase in TNC numbers directly maps to the second characteristic, as TNCs coordinate production across multiple countries, driving both FDI flows and international trade.
3. Add a brief note on the third characteristic (rising migration) even if not in the data, to show full knowledge of all three required characteristics for full marks.

> **Exam tip:** Always list all three characteristics in 4/6 mark questions asking to define globalisation, even if the prompt only mentions one, to secure full knowledge marks.

## Key Causes of Globalisation (1970s to Present)

Edexcel expects you to be able to explain five key causes of globalisation over the past 50 years, with real-world context for each:

- Trade liberalisation: reduction of tariffs, quotas and non-tariff barriers through GATT/WTO negotiations
- Growth of trading blocs: e.g. EU, ASEAN, USMCA that eliminate barriers between member states
- Political change: collapse of the Soviet Union (1991) and opening of China (post-1978) brought 1.5bn+ workers into the global labour market
- Falling transport and communication costs: container shipping cut sea freight costs by 70% between 1970 and 2020, while high-speed internet enabled remote coordination of global supply chains
- Growth of TNCs: firms seeking low labour costs, access to raw materials and new consumer markets drive FDI flows to low and middle income countries

**Worked example:** Analyse how the growth of container shipping has contributed to globalisation.

1. Start by identifying container shipping as a key driver of reduced transport costs, which lowers the cost of moving goods between countries.
2. Chain of reasoning: lower transport costs → firms can locate production in countries with lowest input costs (e.g. clothing manufacture in Bangladesh) and export goods to high-income consumer markets at competitive prices → increases cross-border trade volumes → raises trade as a share of global GDP, a core characteristic of globalisation.
3. Add context: container shipping reduced the cost of transporting a pair of trainers from Vietnam to the UK from \\$10 in 1990 to \\$0.50 in 2024, making international supply chains financially viable for low-value goods.

> **Exam tip:** For 6-mark analyse questions, always include a three-stage logical chain of reasoning, plus real-world context, to reach level 3 marks.

## Benefits of Globalisation

Edexcel specifies six core benefits of globalisation that you can reference for KAA marks in extended answers, with clear links to stakeholder groups:

- Higher economic growth for low and middle income countries: e.g. Vietnam averaged 6.5% annual GDP growth 2000-2024, driven by FDI and export manufacturing
- Higher tax revenue for host governments: TNCs pay corporate income tax, VAT and employment taxes that can fund public services
- Economies of scale for firms: global markets allow firms to increase output, reducing average costs per unit
- Lower prices and higher consumer surplus for consumers: increased competition between global firms pushes down prices for goods like electronics, clothing and food
- Wider consumer choice: consumers can access goods produced in other countries that are not available domestically
- Higher living standards: rising employment and income in emerging economies lifted 1.1bn people out of extreme poverty between 1990 and 2015, per World Bank data

**Worked example:** Use a supply and demand diagram to explain how globalisation increases consumer surplus for electronic goods in the UK.

1. Draw a standard S&D diagram for the UK electronics market, with price on the y-axis and quantity on the x-axis. Label initial equilibrium (P1, Q1) and initial consumer surplus as the triangle below the demand curve and above P1.
2. Globalisation increases supply of electronics to the UK market, as imports from low-cost producers like China and South Korea increase, shifting the supply curve right to S2.
3. New equilibrium is at lower price P2 and higher quantity Q2. Consumer surplus expands to the larger triangle below the demand curve and above P2, representing higher welfare for UK consumers.
4. Add context: the average price of a 55-inch 4K TV fell from £800 in 2015 to £350 in 2024, driven by increased global competition, increasing consumer surplus by £450 per unit.

> **Exam tip:** You can earn 2 extra marks in extended answers by adding a relevant, fully labelled consumer surplus diagram, even if not required by the question, as long as you explicitly use it in your analysis.

## Costs of Globalisation

Edexcel specifies six core costs of globalisation that form the basis of evaluation marks in extended answers, with links to negative impacts on vulnerable stakeholders:

- Worker displacement in high-income countries: deindustrialisation in the UK and US led to job losses in manufacturing sectors as production moved to low-wage economies
- Worker exploitation in low-income countries: TNCs may pay below living wages, enforce poor working conditions and ban trade unions to cut costs
- Environmental damage: increased global trade raises carbon emissions from transport, while TNCs may locate polluting production in countries with weak environmental regulations
- Lost tax revenue from transfer pricing: TNCs can shift profits to low-tax jurisdictions to avoid paying corporate tax in host countries, e.g. Google paid just £6.7m tax on £6bn UK revenue in 2021
- Higher within-country inequality: high-skilled workers in high-growth sectors gain from globalisation, while low-skilled workers in declining sectors see falling real wages
- Excessive TNC influence on government policy: large TNCs may lobby governments to weaken labour or environmental regulations to benefit their profits, undermining democratic decision-making

**Worked example:** Explain how transfer pricing by TNCs reduces economic welfare in host countries.

1. Transfer pricing is the practice where TNCs sell goods between their subsidiaries in different countries at artificially high or low prices to shift profits to jurisdictions with lower corporate tax rates.
2. Chain of reasoning: TNC shifts profits out of host country → host government receives lower corporate tax revenue → less funding available for public services like healthcare, education and infrastructure → lower welfare for citizens of the host country.
3. Add context: the UN estimates that developing countries lose \\$240bn per year in tax revenue from transfer pricing by TNCs, enough to fund universal primary education for all low-income countries twice over.

## Exam Answer Structure for Globalisation Questions

**Exam command terms**

Edexcel uses specific command words for globalisation questions; match your answer structure to the command word to earn full marks:

- **Explain (4 marks)** — 2 knowledge points + 1 stage of reasoning per point, no evaluation *(Explain two characteristics of globalisation: list both characteristics with 1 short chain for each.)*

- **Analyse (6 marks)** — 1 core point + 3-stage logical chain of reasoning + context, no evaluation *(Analyse how lower transport costs cause globalisation: chain of reasoning + real-world context.)*

- **Discuss (14 marks)** — 4 marks KAA (benefits), 4 marks KAA (costs), 6 marks evaluation (3 points) *(Discuss the impact of globalisation on low-income countries: balanced KAA + evaluation of which impact is larger.)*

- **Evaluate / To what extent (20 marks)** — 6 marks KAA (benefits), 6 marks KAA (costs), 8 marks evaluation (3 points + final judgement) *(Evaluate whether the benefits of globalisation outweigh the costs: balanced analysis + clear judgement supported by evidence.)*

## Common pitfalls

- **Wrong:** Only listing characteristics/causes/effects without linking them in a logical chain of reasoning for analyse/examine questions.
  - Why it fails: Edexcel marks KAA based on logical chains, not just lists of points, so you will be capped at level 2 marks even if you list all correct points.
  - Correct: Use three-stage chains: e.g. trade liberalisation → lower import tariffs → lower prices for consumers → higher consumer surplus.
- **Wrong:** Confusing between-country inequality and within-country inequality when discussing costs of globalisation.
  - Why it fails: Between-country inequality (gap between rich and poor countries) has fallen due to globalisation, while within-country inequality (gap between rich and poor people inside the same country) has risen, which is the required cost for this topic.
  - Correct: Always specify 'within-country inequality' when referencing this cost, and use examples like rising wage gaps between high-skilled tech workers and low-skilled manufacturing workers in the UK.
- **Wrong:** Discussing comparative advantage theory or trade restrictions when answering questions on globalisation.
  - Why it fails: These topics are out of scope for this sub-topic and are assessed in Unit 4 Topic 2, so you will not earn marks for including them, and may waste limited answer time.
  - Correct: Focus only on the specified characteristics, causes, benefits and costs listed in this guide for questions on this topic.
- **Wrong:** Only discussing one side (benefits or costs) in 14 or 20-mark discuss/evaluate questions.
  - Why it fails: Extended answers require balanced KAA covering both benefits and costs, plus evaluation, to reach top levels. Answers that only cover one side are capped at half marks.
  - Correct: Structure extended answers as: 2-3 benefit paragraphs, 2-3 cost paragraphs, then 2-3 evaluation points (e.g. impact depends on level of government regulation, time frame, type of country) plus a final judgement.
- **Wrong:** Forgetting to include real-world context in extended answers.
  - Why it fails: Top level marks require application to real examples, so answers without context are capped at level 3 even if your analysis is correct.
  - Correct: Memorise 2-3 short examples for each benefit and cost (e.g. Vietnam growth for benefits, Bangladesh garment worker exploitation for costs) to include in every extended answer.

## Cheatsheet

| Category | Key Points to Recall |
| --- | --- |
| Characteristics | Rising trade/GDP; TNC/FDI growth; rising migration |
| Causes | Trade liberalisation; trading blocs; political change; lower transport/comm costs; TNC growth |
| Benefits | Higher growth; higher tax revenue; EoS; lower prices/consumer surplus; more choice; higher living standards |
| Costs | Worker displacement; exploitation; environmental damage; transfer pricing tax loss; within-country inequality; TNC policy influence |
| 20-mark Answer Structure | KAA 12 (6 benefits + 6 costs), Evaluation 8 (3 points + judgement) |

## What's next

Now that you have mastered the causes and effects of globalisation, you are ready to move to the next core Unit 4 topics. First, you will learn about patterns of trade and comparative advantage, which explain how specialisation drives the gains from trade that underpin globalisation. Next, you will cover balance of payments and exchange rate systems, which affect the value of exports and imports and the flow of FDI between countries. You will also later explore policies to address the costs of globalisation, such as measures to tackle transfer pricing by TNCs, and how globalisation impacts poverty and inequality measures. This sub-topic is the foundation for all other Unit 4 content, so make sure you can recall all the key benefits and costs, and practice writing 6, 14 and 20-mark answers using the chains of reasoning outlined in this guide to maximise your marks in the exam.

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