Effects of globalisation: benefits and costs

Possible benefits

• Economic growth: specialisation by comparative advantage and access to bigger markets raise output.
• Tax revenue from TNCs and higher incomes.
• Economies of scale: firms selling worldwide spread fixed costs, lowering average costs.
• Lower prices and higher consumer surplus: cheaper imports and more competition.
• More choice of goods and services.
• Higher living standards: real incomes rise; many emerging economies grew rapidly as they integrated.

Possible costs

• Displaced workers: structural unemployment in industries that lose out to imports.
• Exploitation of workers: low pay, long hours and poor safety in some supply chains.
• Environmental impact of trade: emissions from transport and from production moving to countries with weaker rules.
• Lost tax revenue from transfer pricing: TNCs set internal prices so profits appear in low-tax countries.
• Higher income inequality within countries: skilled workers and owners of capital gain more than unskilled workers.
• TNC influence on domestic policy: governments compete with tax cuts and weaker regulation to attract or keep TNCs.

Transfer pricing explained

A TNC's subsidiaries trade with each other. If a subsidiary in a high-tax country buys inputs from a subsidiary in a low-tax country at an inflated price, profits fall in the high-tax country and rise in the low-tax one, reducing the total tax paid.

A simple example of transfer pricing

Evaluating

Ask: who gains and who loses (consumers, workers, firms, governments)? Short run or long run (displaced workers may retrain)? Which country (emerging economies with strong institutions have arguably gained most)? Is the problem globalisation itself or weak domestic policy (education, welfare, regulation)?

Worked example

A TNC subsidiary in Country H (tax 30%) sells goods for $100 each. It buys parts from a sister company in Country L (tax 10%). The parts cost $50 to make. Compare the total tax paid per unit if the transfer price is $60 or $90 (ignore other costs).

1. At $60: profit in H = 40, tax 12; profit in L = 10, tax 1; total tax = $13
2. At $90: profit in H = 10, tax 3; profit in L = 40, tax 4; total tax = $7

Answer: Raising the transfer price cuts total tax from $13 to $7 per unit.

Check yourself

1. A subsidiary in a country with 25% profit tax sells goods at $200 each and buys inputs from a sister company at a transfer price of $150. Calculate the tax paid per unit in that country (ignore other costs).
   Show answer

   $12.50. Profit = 200 - 150 = 50; tax = 25% x 50 = $12.50.

2. Same firm: the transfer price is raised to $185. By how much does the tax paid per unit in that country fall?
   Show answer

   $8.75. New tax = 0.25 x 15 = 3.75. Fall = 12.50 - 3.75 = $8.75.

3. Cheaper imports due to globalisation increase consumer surplus because
   • producers' costs rise
   • consumers pay a lower price for each unit they buy
   • the demand curve shifts left
   • governments collect more tariffs
   Show answer

   consumers pay a lower price for each unit they buy. A lower price widens the area between the demand curve and the price.

4. Why might globalisation increase income inequality within a developed country?
   • Every worker gains equally from trade
   • Imports raise the wages of unskilled workers
   • Unskilled workers face competition from low-wage imports while skilled workers gain
   • TNCs pay more tax in developed countries
   Show answer

   Unskilled workers face competition from low-wage imports while skilled workers gain. Trade raises the returns to skills and capital relative to unskilled labour in developed countries.

5. Explain why workers displaced by globalisation may suffer long-term structural unemployment.
   Show answer

   Their skills are specific to the declining industry and they may live far from new jobs, so there is occupational and geographical immobility and they cannot easily move to growing industries.. Occupational and geographical immobility turn job losses into structural unemployment.

6. Which is an environmental cost of globalisation?
   • Economies of scale
   • Lower prices for consumers
   • Emissions from shipping and air freight
   • Wider consumer choice
   Show answer

   Emissions from shipping and air freight. Moving goods long distances uses fuel and produces emissions.

7. Give one factor that determines whether a developing country gains from globalisation, and explain why.
   Show answer

   The quality of its institutions and education: a country with a skilled workforce and good governance can attract higher-value FDI and spread the gains, while weak institutions let gains be captured by a few.. Good answers name a condition and explain how it changes the outcome.

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Sources

• Pearson Edexcel International Advanced Level in Economics specification (issue 2)

Last updated 8 November 2026. Spotted a mistake? Tell us.