GLOBALIZATION

Joe Smith started the day early having set his alarm clock
(MADE IN JAPAN) for 6 a.m. While his coffeepot (MADE IN
CHINA) was perking, he shaved with his electric razor
(MADE IN HONG KONG). He put on a dress shirt (MADE
IN SRI LANKA), designer jeans (MADE IN SINGAPORE)
and tennis shoes (MADE IN KOREA). After cooking his
breakfast in his new electric skillet (MADE IN INDIA) he sat
down with his calculator (MADE IN MEXICO) to see how
much he could spend today. After setting his watch (MADE
IN TAIWAN ) to the radio (MADE IN INDIA) he got in his car
(MADE IN GERMANY) filled it with GAS from Saudi Arabia
and continued his search for a good paying AMERICAN
JOB. At the end of yet another discouraging and fruitless
day checking his computer (MADE IN MALAYASIA), Joe
decide to relax for a while. He put on his sandals (MADE
IN BRAZIL) poured himself a glass of wine (MADE IN
FRANCE) and turned on his TV (MADE IN INDONESIA),
and then wondered why he can't find a good paying job
in America.....
Actually this is a good thing. We get more choices, lower
prices, & because more is bought, more jobs are created.
APPARENTLY, SOME PEOPLE THINK SO!!
SWEATSHOP LABOR AND BELOW SUBSISTENCE
WAGES ARE WHAT MOST PEOPLE ENVISION
Globalization can be defined as:
•Widening and deepening of international flows of trade, finance and information in a single,
integrated local market.
•Increasing linkages between the world's people as natural and artificial barriers fall.
•Transformation of the world into a global village, as borders disappear, distances shrink and
time shortens.
Impact of Globalization
The Good News…
•Increased market access e.g. trade flows increased 12-fold in the past 50 years as a result
of the removal of natural and artificial barriers.
•Increased access to capital.
•The General Agreements on Tariff and Trade (GATT) is expected to increase global income by
an estimated US $ 212 - US $ 510 billion - from trade and efficiency gains and higher rates of
return on capital.
•Increased movement of people due to tourism and migration.
•Greater access to information and increased long distance communication
The Disturbing News…
•Gains are not equally distributed between countries.
•Gains are not equally distributed within countries.
•Financial volatility because of a globally integrated market.
•Contagion and threat of worldwide recession.
•More human insecurity such as crime (trafficking in drugs, weapons, women, international
syndicates), spread of diseases such as HIV/AIDS, and loss of cultural identity.
The world is becoming a smaller place. What happens in Tokyo affects what
happens in New York and Dallas, Texas.
There is over $12 trillion in world trade.
Volume of Trade
The importance of trade has grown.
Exports as % of GDP
Panama
80%
Belgium
87%
Netherlands
71%
Kuwait
55%
Norway
45%
Canada
38%
[If we sneeze, Canada catches a cold]
South Korea
44%
Germany
40%
China
35%[1/3 bought by U.S.]
United Kingdom 26%
Spain
25%
Italy
27%
France
26%
Mexico
25%
[80% of Mexico’s exports are sold to U.S.]
Japan
13%
United States
11%
[$1.6 trillion in 2007]
World
25%
2008
In 2007, we had a trade deficit
in goods of $815 billion.
We had a trade surplus in
services of $104 billion. ($711)
16%
322
313
200
249
211
180
180
160
160
140
140
120
120
100
137
148
95
80
100
60
80
66
60
40
20
Deficit
0
Canada
60
of
20
0
57
40
$256
Canada
Mexico
China
Japan
Germany
Mexico
China
50
50
Germany
UK
Japan
32
Korea
EXPORTS
UK
45
38
Korea
Taiwan
42
France
IMPORTS
26
Taiwan
25
33
27
Singapore
Netherlands
France
After a series of product recalls, from
pet food to tires, American regulators
are paying more attention to goods
exported to the U.S. from China.
10 million toys including “Big Bird”
were recalled because of “lead”
or magnets that tear the intestines
when swallowed by children.
Who Buys Chinese Goods?
The U.S. accounts for 1/5 of all
Chinese export destinations, 2007.
1.5 mil imported toy
trains were made
using lead paint.
450,000 tires were
recalled because of
tire separation
problems.
$56
billion
In goods
from
U.S. to
China
More than 60 billion cans of cat
and dog food were recalled.
FDA ordered recall after a poisonous
ingredient was found in toothpaste.
675,000 Barbie
doll accessories
KEEP THE MONEY AT HOME
Point: When I buy a
coat in England, I have the coat
and England has the money. But when I buy a coat in
America, I have the coat and America has the money.
America is more wealthy because it has both the coat
and the money.
Abe Lincoln
Counterpoint:
Money is not wealth in and of itself,
it merely facilitates trade. If America sends dollars to
England, England will eventually use those dollars to
buy American goods. If we don’t buy goods from
other countries, then other countries will not be able
to buy goods from us.
Point: Protecting businesses from
foreign competition preserves
American jobs.
Counterpoint: Few are helped by protective
policies, but they are more visible and more vocal
than the many who are hurt. Protecting jobs in import
competing industries raises prices to consumers and
costs jobs in industries that use imported inputs.
America and consumers pay dearly each time
protectionist measures “save” jobs.
Industry
Textiles
Dairy Products
Sugar
Peanuts
Meat
Non-rubber
footwear
Orange Juice
Canned Tuna
Yearly Loss
To Economy
From Barriers
$15,850 billion
1,630 million
Employment
Loss If Barriers
Were Removed
71,639
2,378
657 million
74 million
2,040
397
322,059
187,223
928
1,377
190,733
123,456
609
390
635,103
257,640
177 million
170 million
307 million
100 million
Annual Cost
Per Job
Saved
$221,258
685,233
Point: If we trade freely with low wage countries,
U.S. businesses will flee to those countries and U.S.
wages will plummet.
Counterpoint: Low wages, combined with low
productivity, will result in high unit costs. High wages in
the U.S. result from the high productivity of American
workers, aided by the availability of raw materials,
massive capital equipment, sophisticated management,
and elaborate infrastructure.
GLOBALIZATION LEADS TO LOWER FERTILITY RATES WHICH LEADS TO MORE
OPPORTUNITY FOR GROWTH AND DEVELOPMENT, ESPECIALLY FOR WOMEN
WHAT IS THE GLOBAL ECONOMY?
AN INTERNATIONAL MARKETPLACE (IN A VERY
BROAD SENSE)

Trade in Goods


Trade in Services



Outsourcing
Vacation
Trade in Labor


Final and intermediate goods
Immigration …
… legal and illegal
Trade in Capital


Foreign direct investment
Financial flows: stocks, bonds,
currencies
ECONOMIC BACKGROUND: WHY ARE
ECONOMISTS IN FAVOR OF FREE TRADE?
Should Wisconsin grow oranges? Should
Florida make cheese?
 No and No!

 Wisconsin
should specialize in cheese
 Florida should specialize in orange production
 Then trade cheese for oranges
ECON LINGO: OPPORTUNITY COST


How much orange production does WI give up to produce
one more unit of cheese? Very little, because oranges
don’t grow well in WI.
How much cheese production does WI give up to produce
one more unit of oranges? A lot!
Wisconsin
Florida
Cheese
production
Low
opportunity
cost
High
opportunity
cost
Orange
production
High
opportunity
cost
Low
opportunity
cost
MORE ECON LINGO: COMPARATIVE ADVANTAGE

The country with the lower opportunity cost in
producing one good has a comparative advantage in
that good.
• Wisconsin has a comparative advantage in cheese production =>
specialize in cheese
• Florida in orange production => specialize in oranges
Wisconsin
Florida
Cheese
production
Low
Comparative
opportunity
advantage
cost
High
opportunity
cost
Orange
production
High
opportunity
cost
Low
Comparative
opportunity
advantage
cost
U.S. TRADE FLOWS (EXPORTS + IMPORTS OF
GOODS AND SERVICES) AS % OF GDP
Recessions in yellow
More trade is associated
with economic expansion
Trade expanded 3 times faster than GDP, since
1950
DOES THE TRADE DEFICIT CAUSE
UNEMPLOYMENT?
Most of the expansion in the trade deficit occurred during the roaring 1990s!
Unemployment
drops
Since
2000
Trade deficit
expands
Before
2000
U.S. MANUFACTURING OUTPUT HURT BY IMPORTS?
Manufacturing output expands
despite imports
1990s: Surge in
imports and
manufacturing
output
Since 2000: Both
recovering
2000-2002:
Manufacturing drops,
imports slow
LOSS OF MANUFACTURING JOBS:
ONLY IN THE U.S.?
Manufacturing jobs: 1993 normalized to 100
3m jobs lost in
the U.S.
It’s a worldwide
phenomenon!
THE U.S. FINANCIAL SECTOR
IN A GLOBAL ECONOMY. SOME FACTS:
Int’l financial flows are the flip side of the
trade deficit: Countries that have a trade
surplus with the U.S. are net purchasers of
our assets.
 There is a trend toward more international
financial integration.

 This
has coincided with less volatility in U.S.
GDP.
1980: U.S. is a net creditor
800
16000
700
$365b more
assets
600
100
0
4000
112% of GDP
200
6000
92% of GDP
300
12000
(IN $B) 8000
14% of GDP
400
14000
$2,546b more
liabilities:
accumulated
trade deficits!
10000
U.S. INTERNATIONAL INVESTMENT
POSITION
27% of GDP
500
Notice the difference in scale!
2005: U.S. is a net debtor
2000
0
Assets
Direct Investment
Banks
Liabilities
Portfolio
Other Sectors
Assets
Direct Investment
Banks
Liabilities
Portfolio
Other Sectors
GDP
GDP
has growth
become (quarterly
less volatilerates,
sinceannualized)
the mid 1980s.
Some economists argue that international
has
2 timesdiversification
standard deviation
20%
been a contributing factor
around the mean
15%
10%
5%
0%
-5%
-10%
-15%
1950
1960
1970
1980
1990
2000
LABOR MOVEMENTS: IMMIGRATION
Historical perspective of immigration
 Who are the immigrants?
 Why does immigration work?

History of (legal) immigrantion:
Percent
of total
population
Immigration
is high
compared
to mid-1900s,
(10Y moving average)
but low compared to pre WW-I era!!!
1.2%
A lot of immigrants came in
the late 1800s, early 1900s
1.0%
Currently about 1m
immigrants per year
(0.3% of total
population)
Drops after 1914
0.8%
0.6%
Peak demand for IT
workers in the mid 1990s
0.4%
Drops again during
the Great Depression
0.2%
0.0%
1860
1880
1900
1920
1940
1960
1980
2000




Do immigrants assimilate or do they present a burden
on society and the economy for generations?
Who are the immigrants?
What’s their age?
What's their education?
How much money do they
make?
Age Distribution of Working Age Population
by Citizenship Status
(2004)
Immigrants are young
compared to the overall
population!
70%
60%
50%
40%
30%
20%
10%
0%
All
Citizens
15-39
40-64
Non-citizens
65+
Educational Attainment by Citizenship Status
(2004)
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Native
Naturalized
Less than HS
Some college or associate degree
Advanced degree
Non-Citizens
High school graduate
Bachelor's degree
Educational Attainment by Citizenship Status
(2004)
Large fraction of uneducated
individuals among immigrants
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Native
Naturalized
Less than HS
Some college or associate degree
Advanced degree
Non-Citizens
High school graduate
Bachelor's degree
Income Distribution of Immigrants by Generation
(2004)
First generation immigrants have low income
(they are younger, less educated), …
… but consequent
generations catch up!
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
first generation
$24,999 and less
second generation
25,000 to 49,999
third generation and
higher
All native
50,000 to 74,999
75,000 and above
SUMMARY ON IMMIGRATION




Large flow of immigrants, though not as large as in
the 1800s and early 1900s
Immigrants tend to be young: They help alleviate
impending problems of baby boomer’s retirement
(but can’t solve the problem either)
Immigrants become more economically like the
native population over time
Immigration helps the economy balance growth in
labor demand with supply
POST-TEST
Since 1975 U.S. exports and imports have
A. declined as a percentage of U.S. GDP.
B. more than doubled as a percentage of U.S. GDP.
C. have increased as a percentage of overall world trade.
D. remained virtually constant as a percentage of U.S. GDP.
Which statement is true about the distribution of income among
immigrants throughout the generations?
A. Second generation immigrants remain less affluent than the native
population.
B. The longer immigrants are here the more likely they are in higher
income brackets.
C. The percentage of the immigrant population mired in the lowest
quartile tends not to change while the other quartiles rebalance.
D. Immigrants never catch up to the income levels of native citizens no
matter how many generations are measured.
According to the law of comparative advantage, a country should
A. specialize and export goods with the highest opportunity cost.
B. specialize and export goods with the lowest opportunity cost.
C. specialize and export goods with the highest production cost.
D. specialize and export goods with the lowest production cost.
In the last twenty years, the global trend has been greater financial integration and
an increase in international financial transactions. As a result,
A. there has been greater instability in the U.S. economy during that time.
B. U.S. private investors now hold almost half of their investment portfolios in foreign
stocks.
C. foreign investors have significantly reduced their buying of U.S. assets.
D. the U.S. GDP has experienced far less volatility compared to the preceding
twenty-five years.
The number of legal immigrants as a percentage of the total U.S.
population
A. is currently at its highest level since the beginning of the 20th century.
B. has continually increased since the economy began to recover in
2001.
C. experienced its lowest level after the Great Depression.
D. declined in the 1990s as the U.S. labor market approached full
employment.