GlobalizationGlobalization

I. TradeI. Trade

A. The Iowa Car CropA. The Iowa Car CropTrade = a form of technologyTrade = a form of technology increases efficiency; increases efficiency;

favoring one technology harms another; trade favoring one technology harms another; trade helps the whole even if hurts the partshelps the whole even if hurts the parts

B. Comparative and Absolute B. Comparative and Absolute AdvantageAdvantage

Absolute: able to produce more of an itemAbsolute: able to produce more of an item Comparative: able to produce at a Comparative: able to produce at a lower lower

marginal opportunity costmarginal opportunity cost

Rum Rum

Crystal Crystal1 mil.

100,00030,000

AB

0

C

80,000

40,000

0 40,000 80,000

Ireland Puerto Rico

A

B

C

Comparative Ad using S+D

Q

P

Pus

Qus

Pworld

QSus/trade QDus/trade

S

D

Everyone and every nation has a comparative Everyone and every nation has a comparative advantage in advantage in something something (no matter how (no matter how nasty) and economists argue that they should nasty) and economists argue that they should

a)a) specialize in the production of that good andspecialize in the production of that good andb)b) trade for what they lacktrade for what they lack

This will: a) increase efficiency, b) benefit This will: a) increase efficiency, b) benefit everyone involved, c) proportionally benefit the everyone involved, c) proportionally benefit the poorer nation morepoorer nation more

This is NOT to say that the poorer nation will This is NOT to say that the poorer nation will benefit as much as they should: benefit as much as they should: dependency dependency theorytheoryGuatemala, Iran, Chile and the Washington Guatemala, Iran, Chile and the Washington ConsensusConsensus

C. TariffsC. TariffsHarm from trade concentrated, benefits diffusedHarm from trade concentrated, benefits diffusedPolicy responses: Policy responses: 1) Tariffs1) Tariffs

Protective, revenue, prohibitive, “beggar-thy-neighbor”Protective, revenue, prohibitive, “beggar-thy-neighbor” trade trade warwar

Act as a tax on international supplyAct as a tax on international supply raise costs of production, raise costs of production, lower supplylower supply raises prices of foreign AND domestic goods raises prices of foreign AND domestic goods (substitution effect): hurts consumers but benefits domestic (substitution effect): hurts consumers but benefits domestic producers (producers (inefficientinefficient) + gov’t revenue) + gov’t revenue

2) Quotas2) Quotas Similar cost effect as tariffs, but benefit foreign producersSimilar cost effect as tariffs, but benefit foreign producers

3) Voluntary export restraint3) Voluntary export restraint Japanese carsJapanese cars

4) Subsidies and currency manipulation4) Subsidies and currency manipulation US/Europe vs. ChinaUS/Europe vs. China

D. MoneyD. Money #1 traded commodity is money#1 traded commodity is money Derived demand: demand for currency determined by Derived demand: demand for currency determined by

demand for products bought with currency (goods and demand for products bought with currency (goods and financial investments)financial investments)

Strong Dollar: Increased demand US goods (or decreased Strong Dollar: Increased demand US goods (or decreased demand foreign goods)demand foreign goods) appreciation appreciation US exports fall US exports fall (more expensive for foreigners to purchase US goods), (more expensive for foreigners to purchase US goods), imports rise (cheaper to buy foreign goods)imports rise (cheaper to buy foreign goods)

Weak Dollar: Decreased demand US goods (or increase Weak Dollar: Decreased demand US goods (or increase demand foreign goods)demand foreign goods) depreciation depreciation exports rise, exports rise, imports fallimports fall

Trade deficit: imports > exportsTrade deficit: imports > exports Current account deficit: more money going out (purchases, Current account deficit: more money going out (purchases,

investment) than coming ininvestment) than coming in economy running on borrowed economy running on borrowed meansmeans

Flexible exchange rate SHOULD balance trade (but, China)Flexible exchange rate SHOULD balance trade (but, China)

II. DevelopmentalismII. Developmentalism

Economic development:Economic development: process to process to improve economic, political, and social improve economic, political, and social well-being of its people. Majority of world well-being of its people. Majority of world = process of industrialization and = process of industrialization and modernization to break free of poverty and modernization to break free of poverty and dependency dependency

MDC: moreMDC: more LDC: lessLDC: less NIC: Newly Industrialized CountriesNIC: Newly Industrialized Countries

B. 7 MeasuresB. 7 Measures

1.1. Per Capita GDPPer Capita GDP

2.2. Energy consumption: NIC > MDC > LDCEnergy consumption: NIC > MDC > LDC

3.3. Labor force specializationLabor force specialization

4.4. Consumer goodsConsumer goods

5.5. LiteracyLiteracy

6.6. Life expectancyLife expectancy

7.7. Infant mortalityInfant mortality

C. Problems for DevelopmentC. Problems for Development

Rapid Population GrowthRapid Population Growth Target aid to womenTarget aid to women

Factors of ProductionFactors of Production Physical capital (resource curse), human capital Physical capital (resource curse), human capital

(health and nutrition, education, “brain drain”)(health and nutrition, education, “brain drain”) Political FactorsPolitical Factors

Civil war, repression, transition central/colonial to free Civil war, repression, transition central/colonial to free market, corruption, Islamofacism, democratization market, corruption, Islamofacism, democratization and populismand populism

DebtDebt debt forgivenessdebt forgiveness