Chapter #1: The International Economy and Globalization

What was the openness of the U.S. economy after 1950?

After WWII, the U.S. economy negotiated reductions in trade barriers

What is agglomeration economies composed of?

Agglomeration economies are composed of: • Firms clustered together • Some clusters produced same product, others connect by vertical linkages • Benefits only those in clusters

How do you calculate openness?

Calculate openness by (exports + imports) / GDP

Characteristics of the U.S. as an Open Economy

Characteristics of the U.S. as an Open Economy are: • U.S. increasingly tied to the rest of world through investment flows • Foreign ownership increasing • Concerns over rising cost of debt • International branches of U.S. banks • U.S. securities are increasingly globalized

What are common fallacies of international trade?

Common fallacies of international trade: • "Trade is a zero-sum activity" - False both partners gain from trade • "Imports result in unemployment and burden economy, while exports promote growth and jobs" - False, source of fallacy is failure to consider connection between imports and exports • "Tariffs, quotas, and other imports result in more jobs for domestic workers" - False, fails to recognize that a reduction in imports doesn't occur in isolation

Why is competition essential?

Competition is essential to innovation, efficiency

What has spillover effects on other economies?

Domestic policies have spillover effects on other economies.

What kind of gov't was practiced during the Great Depression of 1930s?

During the Great Depression of 1930s, the gov't practiced protectionism

Examples of attempts to solve spillover effects on other economies

Examples of attempts to solve the spillover effects on economies • Quantitative easing by Fed intended to stimulate U.S. economy during Great Recession • Criticized by U.S. trading partners attempt to improve American competitiveness through depreciation of dollar

What does exporting industries require?

Exporting industries require more educated workforce

What forces are driving globalization?

Forces that are driving globalization are: • Technological change • Advances in transport technology • Widespread liberalization of investment transactions • Development of international financial markets

What can global competition result in?

Global competition can result in high-cost domestic producers exiting market

What did globalization cause?

Globalization caused increased international flows of • Goods, services, people • Investments in equipment, factories, stocks, bonds

Why is Globalization important?

Globalization is important: • Law of Comparative Advantage • Open economies • Economic growth rates closely related to openness, education, communications, infrastructure • International trade can provide stability for producers via exports • Rapid growth increases demand for commodities

What is political, technological, cultural and economic?

Globalization is political, technological, cultural and economic

Globalization

Globalization is the process of greater interdependence between countries and their citizens.

What is the history of globalization tied to?

History of globalization is tied to evolution of trade

What does international trade increase?

International trade increases total productivity

Why is international trade a threat to workers?

International trade is a threat to workers because: • Not all workers gain from international trade • Some places lose jobs to cheap imports • Concern over mass immigration for low-wage work • Particular threat to unskilled workers in developed countries • Hurts unskilled workers in import-competing industries • Wages increase for skilled workers • Workers -- more productive • Imports do not decrease total jobs in nation

What has happened to the U.S.'s labor mobility in past 100 years?

Labor mobility in U.S. has not risen in past 100 years

What level of openness do large countries have?

Large countries have lower measures of openness

Why do large countries have lower measures of openness?

Large countries have lower measures of openness because • Less reliant on international trade • Firms can attain optimal production size without having to export due to the population and economic size

Law of Comparative Advantage

Law of Comparative advantage states that each nation gains by producing goods in which it has relative advantage - If a good or service can be obtained more economically through trade, it makes sense to trade for it, not produce it

What are nation's exports and imports a percentage from in terms of openness?

Nation's exports and imports as a percentage of its GDP

What is openness?

Openness is the rough measure of he importance of international trade in a nation's economy

What are qualities of open economies?

Qualities of open economies are: • More competition lowers prices • Strong incentive for highest quality • Weakens monopolies • More firm turnover • Less productive firms exit • Improvement for industry

What level of openness do small countries have?

Small countries have higher measures of openness

Why was the U.S. less open to trade during 1890-1950?

The U.S. was less open to international trade during 1890-1950 because of two world wars & great depression of the 1930s

What was the openness of the U.S. economy during 1890-1950?

The U.S. was less open to international trade in 1890-1950

What are the benefits to law of comparative advantage?

The benefits of law of comparative advantage: • International trade gains from competitive process

What were the differential impacts of second wave?

The differentials impacts of second wave • Developed countries largely freed of barriers - Greatly increased the exchange of manufactured goods - Raised incomes • Developing countries - Only agricultural exports that do not compete with agriculture in developed country free of barriers • New kind of trade - Rich country specialization in manufacturing niches - Gained productivity through agglomeration economies • Developing countries as group left behind - Continuing trade barriers, unfavorable investment climates, antitrade policies, dependence on agricultural and natural resource products

When did the first wave of globalization occur?

The first wave of globalization occurred between 1870-1914

What ended the first wave of globalization?

The first wave of globalization was ended by WWI

What did the gov't as protectionist do with the economy?

The gov't as protectionist: • Raised tariffs on imports • Tried to shift demand into domestic markets to promote domestic sales and jobs • Exports as share of national income fell from 8% to 5%

What did lack of openness from U.S. during 1890-1950 cause?

The lack of openness from U.S. during 1890-1950 cause: • Reduced dependence on trade - national security reasons - protect home industries from import competition

When did the latest wave of globalization occur?

The latest wave of globalization occurred from 1980-present

What did openness from U.S. after 1950 cause?

The openness from the U.S. after 1950 caused rising world trade; technological improvements in shipping and communications

When did the second wave of globalization occur?

The second wave of globalization occurred between 1945-1980

What are trade patterns of the U.S. as an Open Economy?

The trade patterns of the U.S. as a open economy are: • Openness • Large countries • Small countries • Relative importance of international trade increasing

What happened during the first wave of globalization?

What happened during the first wave of globalization: • Exports as share of world income nearly doubled to 8% • Per capita incomes increased 1.3% per year (previous 50yrs: 0.5% per year) • Nations that actively participated in globalization became richest countries in world

What happened during the latest wave of globalization?

What happened during the latest wave of globalization: • Some developing countries (e.g. China, India, Brazil) broke into world manufacturing markets • Other developing countries marginalized, causing incomes to decrease and poverty to rise • Significant international capital movements • Some developing countries have competitive advantage in labor-intensive manufacturing (e.g. Bangladesh) • Protectionist policies in developed countries • Foreign outsourcing - Products manufactured in more than one country - Manufacturing moved to wherever costs were lowest • By 2000s, foreign foreign outsourcing of professionalized work • Integrated factory of floor increasingly replaced by network of individual, specialized suppliers • Countries tend to specialize in specific stages of production (e.g. Boeing 787 Dreamliner)

What happened during the second wave of globalization?

What happened during the second wave of globalization: • Renewed incentive for globalization • Falling transportation costs fostered increased trade • Trade liberalization not uniform

What made international trade easier in the late 1700s and 1800s?

• In late 1700s and 1800s, mass production and improved transportation made international trade easier; most goods tradeable • Rise of global manufacturing in 1990s characterized by geographical fragmentation of productive processes and offshoring of industrial tasks • Decreases in tariff barriers • Technological developments - Declining transportation costs; shift from sail to steamships; railways - Driven by European and American businesses and individuals

Qualities of high degree of economic interdependence

• No nation exists in economic isolation • All aspects of a nation's economy linked to economies of trading partners • Reflects historical evolution of the world's economic and political order. (Smaller nations are more reliant on trade). • Economic interdependence is complex and its effect are uneven • Steps toward international cooperation • Mutually advantageous for trading nations • Protectionist pressures. (Some developing nations argue that liberalized trading system serves to keep them in poverty).