Globalization: an Introduction
Lecture 15
Some Simple Facts About the
Global Economy
In 2000:
• World Trade Totaled $7.6 Trillion.
• About 63,000 Multi-National Corporations
(MNCs) Operate in the Global Economy
– Controlling About 690,000 Foreign Affiliates
– Employing About 86 Million People.
• Foreign Direct Investment Totaled $1.3 Trillion.
• About 30 Countries in Western Europe, North
America, and Asia Account for About 75% of this
International Economic Activity.
Causes and Consequences
• The Political and Economic Structure of the
Global Economy
– What Does the Global Economy Look Like?
– How Did We Get Here?
• The Consequences of Economic Globalization
– Who Wins, Who Loses?
• Within the United States; Advanced Industrial Economies
More Broadly: MNCs vs. Labor?
• Within the World Economy: Capitalist Countries vs.
Developing Countries?
International Trade
Growth of World Trade
600
500
400
300
200
Industrial Revolution
100
0
18
50
18
96
19
13
19
24
19
30
19
35
19
48
19
53
19
63
19
68
19
71
Volume
GATT-Based System
World Trade, 1968-1997
6000
$US Billions
5000
4000
3000
2000
1000
0
1968
1973
1978
1983
1988
1993
19
51
19
54
19
57
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
Percent Change
Growth of World Output and Trade
15.0
10.0
5.0
0.0
-5.0
-10.0
GDP Growth
Trade Growth
Distribution of World Trade
EU
21.2%
6.0%
6.3%
17%
Asia/Pacific
North America
9.6%
10.7%
5.3%
6.2%
Rest of the World
4.4%
12.8%
60% of All Trade Among the Advanced Industrialized Countries
The Multilateral Trade System:
GATT and the WTO
• GATT: General Agreement on Tariffs and Trade:
Created in 1947.
– An Agreement (legal text specifying rules)
– An Organization (a body that facilitated trade
negotiations).
• WTO: World Trade Organization: Established in
1994
– An International Organization Charged with:
• Monitoring Compliance with rules (including GATT)
• Resolving Trade Disputes
• Facilitating Trade Negotiations
Why Trade? Comparative
Advantage
• Simple Concept, Widely Misunderstood.
• U.S. Can Make Two Products:
– Computer Chips
– Clothing (Apparel)
• Assume U.S. Has an Absolute Advantage in
Both.
• The U.S. Should Produce and Export Chips
and Clothes, Right?
• David Ricardo asked, How Many Chips Do We Give Up?
• Produce Clothes at Home,
– Give up 10 Chips for Every 1,000 Shirts.
– Thus, 1 Chip “Buys” 100 Shirts.
• Buy Clothes from Foreign Country
– We Give up 5 Chips for Every 1,000 Shirts.
– Thus, 1 Chip “Buys” 200 Foreign Shirts.
• We are Better Off—Can Consume More Chips and
Shirts—if We Produce Only Chips and Exchange these
Chips For Shirts Produced in Other Countries.
• Thus, Even though the US Has an Absolute Advantage in
Both Goods, it Has A Comparative Advantage in
Semiconductor Chips.
• The U.S. Gains By Specializing in Chips and Importing
Shirts.
Factor Endowments: The Basis
of Comparative Advantage
• Factors of Production: Capital and Labor
• Factors Held in Different Amounts in Different Countries.
– Capital Abundant: Lots of Capital and Little Labor
– Labor Abundant: Lots of Labor and Little Capital
• Production of Different Goods Uses Factors in Different
Amounts.
• Capital-intensive Goods
– Production Relies relatively more on Capital than Labor (Autos)
– Comparative Advantage in capital abundant countries.
• Labor-intensive Goods
– Production Relies Relatively more on Labor (Apparel)
– Comparative Advantage in labor abundant Countries.
• Capital-intensive goods traded for labor- intensive goods.
Factor Endowments and the
International Economy
• Capital-Abundant Industrialized “Core”
countries—the U.S., Western Europe, Japan, the
NICs (Newly Industrializing Countries).
• Labor-Abundant “Periphery” Countries—Latin
America, Africa, parts of Asia.
• Global Division of Labor in the International
Economy between North and South
Four Central Points
• Historically Unprecedented Growth of World
Trade in Postwar Period.
• Trade dominated by Industrialized World, and
developing countries play much less important
role.
• Trade Based on Comparative Advantage is
Mutually Beneficial
• Result Has Been Deepening of Economic
Integration Among the Advanced Industrialized
Countries--Globalization
Questions:
•
•
•
•
•
How Did We Get Here?
What are the Implications of Being Here?
Who Wins and Who Loses?
Is Globalization “Good” or “Bad?”
What Role does the World Trade
Organization Play in the System?
• What About Developing Countries?