Chapter 01 The International Economy and Globalization

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1
The International Economy
and Globalization
PowerPoint slides prepared by:
Andreea Chiritescu
Eastern Illinois University
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2
The International Economy
• High degree of economic interdependence
• No nation exists in economic isolation
• All aspects of a nation’s economy are linked to
the economies of its trading partners
• Reflects the historical evolution of the world’s
economic and political order
• Complex and its effects uneven
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3
The International Economy
• High degree of economic interdependence
• Steps toward international cooperation
• Mutually advantageous for trading nations
• Specialization, efficiencies of large scale production
• Wider variety of products at lower cost
• Protectionist pressures
• Developing nations
• Liberalized trading system - serves to keep the
developing nations in poverty
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4
Globalization of Economic Activity
• Globalization
• Greater interdependence
• Countries and their citizens
• International flows
• Goods and services
• People
• Investments in equipment, factories, stocks, bonds
• Non-economic elements
• Culture and the environment
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5
Globalization of Economic Activity
• What forces are driving globalization?
• Technological change
• Multilateral trade negotiations
• Continuing liberalization of trade and investment
• Widespread liberalization of investment
transactions
• Development of international financial markets
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6
Waves of Globalization
• First Wave of Globalization: 1870–1914
• Decreases in tariff barriers & new technologies
• Declining transportation costs
• Shift from sail to steamships; Railways
• Driven by European and American businesses
and individuals
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7
Waves of Globalization
• First Wave of Globalization: 1870–1914
• Exports as a share of world income
• Nearly doubled to 8%
• Per capita incomes increased 1.3% per year
• Previous 50 years: 0.5% per year
• Countries that actively participated in
globalization
• Became the richest countries in the world
• Brought to an end by World War I
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Waves of Globalization
• Great Depression of the 1930s
• Governments – protectionism
• Tariffs on imports
• Try to shift demand into domestic markets
• Promote sales for domestic companies
• Promote jobs for domestic workers
• Exports as a share of national income
• Falls to 5%
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Waves of Globalization
• Second Wave of Globalization: 1945–1980
•
•
•
•
Horrors of the retreat into nationalism
Falling transportation costs
Decrease previously established trade barriers
Trade liberalization – discrimination
• Which countries participated
• Which products were included
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10
Waves of Globalization
• Trade liberalization – discrimination
• Developed countries, manufactured goods
• Largely freed of barriers
• Greatly increased the exchange of manufactured goods
• Raise the incomes of developed countries
• Developing countries
• Eliminate barriers only for those agricultural
products that did not compete with agriculture in
developed countries
• Manufactured goods - sizable barriers
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Waves of Globalization
• Second Wave of Globalization: 1945–1980
• New kind of trade
• Rich country specialization in manufacturing niches
• Gained productivity through agglomeration economies
• Firms clustered together
• Some clusters produced the same product
• Others were connected by vertical linkages
• Agglomeration economies
• Benefit those in the clusters
• Bad news for those who are left out
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Waves of Globalization
• Second Wave of Globalization: 1945–1980
• Most developing countries
• Did not participate in the growth of global trade in
manufacturing and services
• Continuing trade barriers in developed countries
• Unfavorable investment climates
• Antitrade policies in developing countries
• Dependence on agricultural and natural-resource
products
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13
Waves of Globalization
• Second Wave of Globalization: 1945–1980
• Increased per capita incomes within the
developed countries
• Developing countries as a group were being left
behind
• World inequality
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14
Waves of Globalization
• Latest Wave of Globalization, began in 1980
• A large number of developing countries
• China, India, and Brazil
• Broke into the world markets for manufacturers
• Other developing countries
• Increasingly marginalized in the world economy
• Decreasing incomes
• Increasing poverty
• Significant international capital movements
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15
Waves of Globalization
• Latest Wave of Globalization, began in 1980
• Some developing countries
• Competitive advantage in labor-intensive
manufacturing
• Bangladesh, Malaysia, Turkey, Mexico, Hungary,
Indonesia, Sri Lanka, Thailand, and the Philippines
• Tariff cuts
• Lower barriers to foreign investment
• Technological progress in transportation and
communications
• Protectionist policies in developed countries
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Waves of Globalization
• Latest Wave of Globalization, began in 1980
• World
• More globalized - international trade, capital flows
• Less globalization - labor flows
• Foreign outsourcing
• Certain aspects of a product’s manufacture are
performed in more than one country
• Manufacturing - moved to wherever costs were the
lowest
• Job losses for blue-collar workers
• Cries for the passage of laws to restrict outsourcing
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TABLE 1.1 Manufacturing an HP Pavilion, ZD8000 laptop computer
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Waves of Globalization
• Latest Wave of Globalization, began in 1980
• By the 2000s, foreign outsourcing of whitecollar work
• Information Age
• Digitization, Internet, and high-speed data networks
around the world
• Sending upscale jobs offshore
• Accounting, chip design, engineering, basic research,
and financial analysis
• Foreign outsourcing
• Reduce costs of a given service: 30 to 50%
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TABLE 1.2
Globalization goes white collar
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The United States as an Open Economy
• Trade patterns
• Openness
• Rough measure of the importance of international
trade in a nation’s economy
• Nation’s exports and imports as a percentage of its
gross domestic product (GDP)
Openness =
Exports + Imports 
GDP
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21
TABLE 1.3
The fruits of free trade: a global fruit basket
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22
The United States as an Open Economy
• Openness
• Large countries – lower measures of openness
• Less reliant on international trade
• Many of their companies can attain an optimal
production size without having to export to foreign
nations
• Small countries – higher measures of openness
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TABLE 1.4
Exports & imports of goods & services, percentage of GDP, 2007
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24
The United States as an Open Economy
• Openness of the U.S. economy, 1890 to 2007
• Less open to international trade, 1890 to 1950
• Relatively high openness in the late 1800s
• Rise in world trade: technological improvements in
transportation and communications
• Two world wars + Great Depression of the 1930s
• Reduced dependence on trade
• National security reasons
• Protect home industries from import competition
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25
The United States as an Open Economy
• Openness of the U.S. economy, 1890 to 2007
• After World War II - negotiated reductions in
trade barriers
• Rising world trade
• Technological improvements in shipping and
communications
• U.S. trade
• In 1890, mostly raw materials and agricultural
products
• Today, manufactured goods and services
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FIGURE 1.1
Openness of the U.S. economy, 1890–2007
The figure shows that for the United States the importance of international trade has
increased by more than 50 percent from 1890 to the early 2000s.
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TABLE 1.5
Leading trade partners of the U.S., 2008
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The United States as an Open Economy
• Labor and Capital
• Movements in factors of production
• Measure of economic interdependence
• Labor mobility in U.S.
• 1900, 14% of U.S. population: foreign born
• 1920s to 1960s
• Sharply curtailed immigration
• Foreign-born U.S. population: 6%
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The United States as an Open Economy
• Labor mobility in U.S.
• 1960s, liberalized restrictions
• By 2009
• 12% the U.S. population was foreign born
• Foreigners: 14% percent of the labor force
• Half – from Latin America
• One quarter – Asians
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30
The United States as an Open Economy
• Capital flows to the U.S.
• Foreign ownership of U.S. financial assets
• Risen since the 1960s
• 1970s, OPEC - investments in U.S. financial
markets
• 1980s, major flows of investment funds to U.S.
• By late 1980s
• U.S. - consuming more than it produced
• Net borrower from the rest of the world
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31
The United States as an Open Economy
• International banking
• Average daily turnover in foreign-exchange
market
• Today: almost $2 trillion
• 1986: $205 billion
• London - the largest center for foreignexchange trading
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The United States as an Open Economy
• Commercial banking
• U.S. banks
• Worldwide branch networks, 1960s and 1970s
• Loans, payments, foreign-exchange trading
• Foreign banks
• Increased presence in U.S., 1980s and 1990s
• Today: 250 foreign banks
• Securities firms - globalized their operations
• By 1980s, U.S. government securities
• Traded on a 24-hour basis
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33
Why Is Globalization Important?
• Law of comparative advantage
• Citizens of each nation can gain
• Spend more of their time and resources doing
those things in which they have a relative
advantage
• If a good or service can be obtained more
economically through trade
• Trade for it instead of producing it domestically
• How the available resources can be used to
obtain each good at the lowest possible cost
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Why Is Globalization Important?
• Open economies
• Produce a larger joint output
• Competition - essential to both innovation and
efficient production
• International competition
• Domestic producers - strong incentive to improve
the quality of their products
• Weakens monopolies
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FIGURE 1.2
Global competition lowers inflation
World imports relative to U.S. consumption have doubled over the past four decades, making more of
what consumers purchase subject to increased competition inherent in international trade. This added
competition tends to hold down the cost of goods and services as seen for the period 1987 to 2003.
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Why Is Globalization Important?
• Open economies
• More competition
• More firm turnover
• Improvements for the industry
• Economic growth rates - close relation to:
• Openness to trade
• Education
• Communications infrastructure
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FIGURE 1.3
Tariff barriers versus economic growth
The figure shows the weighted average tariff rate and per-capita growth rate in GDP for 23 nations
in 2002. According to the figure, there is evidence of an inverse relationship between the level of
tariff barriers and the economic growth of nations.
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Why Is Globalization Important?
• Globalization
• Rapid growth in some countries
• Increased demand for commodities
• Crude oil, cooper, steel - higher prices
• Increased supply of substitutes
• Biodiesel, ethanol
• Domestic economy
• Vulnerable to disturbances initiated overseas
• Increased competition from abroad
• Schwinn Bicycle Company, Dell Computer Corporation
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GLOBALIZATION
The Global Recession of 2007 – 2009
• Immediate cause of the global economic crisis
• Collapse of the U.S. housing market
• Resulting surge in mortgage loan defaults
• Undermined the financial institutions that
originated and invested in them
• Creditors and uninsured depositors
• Pulled their funds and cashed out of securities
issued by risky institutions
• Invested in U.S. Treasury securities
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GLOBALIZATION
The Global Recession of 2007 – 2009
• Immediate cause of the global economic crisis
• Many institutions failed, others struggled to
survive
• Banks - fearful about making loans
• The credit spigot closed
• The global economy withered
• Global stock investors dumped their holdings
• Self-reinforcing adverse economic downturn
• Crisis in confidence
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41
GLOBALIZATION
The Global Recession of 2007 – 2009
• Roots of the problem
• Lack of fear - booming housing market of 2006
• Mortgage-backed securities
• Booming housing market
• Government pressured banks to serve poor
borrowers and poor regions of the country
• Community Reinvestment Act
• Default mortgages
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42
GLOBALIZATION
The Global Recession of 2007 – 2009
• The crisis goes global
• Europe
• Exposure to defaulted mortgages in the U.S.
• Emerging economies
• Lacked resources
• Extremely poor countries
• Decrease in foreign aid
• China - depressed its export markets
• Crisis in confidence
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43
GLOBALIZATION
The Global Recession of 2007 – 2009
• Combating a crisis in confidence
• Pump liquidity into troubled financial
institutions
• Provide increased or unlimited deposit
insurance
• Central banks
• Coordinated interest-rate reductions
• Purchased commercial paper & money market
instruments
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GLOBALIZATION
The Global Recession of 2007 – 2009
• Combating a crisis in confidence
• Governments
• Large fiscal stimulus packages
• Tax cuts
• Increased government spending
• International Monetary Fund
• Financial aid to emerging countries
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45
Common Fallacies of International Trade
• “Trade is a zero-sum activity”
• Both partners gain from trade
• “Imports reduce employment and act as a drag
on the economy, while exports promote
growth and employment”
• Failure to consider the link between imports
and exports
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Common Fallacies of International Trade
• “Tariffs, quotas, and other import restrictions
will save jobs and promote a higher level of
employment”
• Failure to recognize that a reduction in imports
does not occur in isolation
• Free trade
• Increases competition, lowers prices
• Makes better products available to consumers
• Higher consumption
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Does Free Trade Apply to Cigarettes?
• Free cigarettes trade
• Higher consumption
• More smoking, disease, and death
• Globally - 4 million people die each year from:
• Lung cancer, emphysema
• Other smoking-related diseases
• Antismoking activists
• Cigarettes are “bads”
• Require their own set of regulations
• Benefits of free trade do not apply to cigarettes
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Does Free Trade Apply to Cigarettes?
• World Health Organization
• Some nations
• Support provisions to emphasize antismoking
measures over free-trade rules
• United States
• Promoted freer trade in cigarettes
• Challenged rules imposed to aid local cigarette
makers
• Current trade rules
• Countries can enact measures to protect the health
and safety of their citizens
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Is International Trade an Opportunity or a
Threat to Workers?
• International trade benefits many workers
• Cheaper consumption goods
• Employers – better technologies and
equipment
• Workers - more productive
• Exports - generates jobs and income for
domestic workers
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Is International Trade an Opportunity or a
Threat to Workers?
• Not all workers gain from international trade
• Cheap imports
• Rising unemployment and wage inequality
• Threatening to unskilled workers in the importcompeting sectors
• Lobby to restrict imports
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Is International Trade an Opportunity or a
Threat to Workers?
• International trade
• Domestic prices - aligned with international
prices
• Wages increase
• Workers whose skills are scarce
• Wages decrease
• Workers who face increased competition
• Jobs lost in one industry
• Replaced by jobs gained in another industry
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Is International Trade an Opportunity or a
Threat to Workers?
• The long-run effect of trade barriers
• Does not increase total domestic employment
• Reallocates workers
• Away from export industries
• Toward less efficient, import-competing industries
• Leads to a less efficient utilization of resources
• International trade
• Just another kind of technology
• Adds value to its inputs
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Backlash Against Globalization
• Proponents of free trade and globalization
• Countries prosper
• New ideas and technology flow freely around
the world
• Productivity growth
• Increasing living standards
• Lower consumer prices
• Increased variety of goods and services
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Backlash Against Globalization
• Critics of free trade and globalization
• Benefit large corporations
• Rather than average citizens
• Environmentalists
• Elitist trade organizations make undemocratic
decisions
• Undermine national sovereignty on environmental
regulation
• Unions
• Unfettered trade permits unfair competition
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Backlash Against Globalization
• Critics of free trade and globalization
• Human rights activists
• World Bank and International Monetary Fund
support governments that:
• Allow sweatshops
• Pursue policies that bail out governmental officials at
the expense of local economies
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TABLE 1.6
Advantages and disadvantages of globalization
Advantages
Disadvantages
•Productivity increases faster when countries
produce goods and services in which they
have a comparative advantage. Living
standards can increase more rapidly.
•Global competition and cheap imports keep
a constraint on prices, so inflation is less likely
to disrupt economic growth.
•An open economy promotes technological
development and innovation, with fresh ideas
from abroad.
•Jobs in export industries tend to pay about
15 percent more than jobs in importcompeting industries.
•Unfettered capital movements provide the
United States access to foreign investment
and maintain low interest rates.
•Millions of Americans have lost jobs
because of imports or shifts in production
abroad. Most find new jobs that pay less.
•Millions of other Americans fear getting
laid off, especially at those firms operating
in import-competing industries.
•Workers face demands of wage
concessions from their employers, which
often threaten to export jobs abroad if
wage concessions are not accepted.
•Besides blue-collar jobs, service and
white-collar jobs are increasingly
vulnerable to operations being sent
overseas.
•American employees can lose their
competitiveness when companies build
state-of-the-art factories in low-wage
countries, making them as productive as
those in the United States.
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Terrorism Jolts the Global Economy
• Continuing terrorism
• Companies – increased security costs
• Heightened border inspections
• Slow shipments of cargo
• Companies - stock more inventory
• Tighter immigration policies
• Reduce inflows of skilled and blue-collar laborers
• Greater preoccupation with political risk
• Companies – fewer investments
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Terrorism Jolts the Global Economy
• International trade
• Weapon in the war against terrorism in the
long-run
• Increasing living standards in impoverished
regions
• Eliminating an important cause of war and
terror
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59
TRADE
CONFLICTS
Competition in the World Steel
Industry
• 1982, average cost per ton of steel
• U.S. producers: $685 per ton
• 52% higher than for Japanese producers
• Cost differential
• Strong U.S. dollar
• Higher U.S. costs of labor (25% of total cost)
• Higher U.S. cost of raw materials (45% of total cost)
• High fixed costs of production
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distributed with a certain product or service or otherwise on a password‐protected website for classroom use
60
TRADE
CONFLICTS
Competition in the World Steel
Industry
• U.S. steelmakers
• Reduce production costs, regain competitiveness
• Long-term contracts for raw materials (lower prices)
• Labor contracts - 20 to 40 percent improvement in
labor productivity
• Problems
• Large unfunded pension obligations
• Large healthcare costs for retirees
• Shrinking employee base
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distributed with a certain product or service or otherwise on a password‐protected website for classroom use
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TABLE 1.7 World steel cost comparisons: cost per ton of steel, 2009
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password‐protected website for classroom use
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