Trade in the Global EconomyReadings: Chapter 1

1 International

Trade

2Migration and

Foreign Direct

3Conclusion

1

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Outline

• Globalization Trade: Flow of goods and services across borders

What do countries trade? Who trade with whom? How does trade compare with GDP? What are the key events in world trade in the past 150

years?

Migration: Movement of people Foreign Direct Investment (FDI): Flow of capital

between countries

U.S. International Trade 2010Millions of Dollars

Exports ImportsTotal 1,827,141 2,316,208

Goods 1,278,263 1,913,160Manufactured Goods 1,183,191 1,584,580

Agricultural Commodities 68,333 42,674Mineral Fuels 26,739 285,906

Services 548,878 403,048Travel 103,505 75,507

Passenger Fares 30,931 27,279Other Transportation 39,936 51,202

Royalties and License Fees 105,583 33,450Other Private Services 250,320 180,598

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Map of World Trade. Fig. 1-2

• Figure 1.2

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Breakdown of World Trade

• Table 1.1

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Trade Compared to GDP. Table 1.2

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Questions we ask and answer

• Why do countries trade with each other? South Africa has diamonds and we don’t

Why does U.S. import cars from Germany?

Germany is better in making cars than we do Why does U.S. import textile from China?

Comparative advantage

• How does trade affect the U.S.? Specific factors model (short-run perspective) Heckscher-Ohlin model (long-run perspective)

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What types of mfg. goods are traded?

• Figure 1-1

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What types of mfg. goods are traded?

• Figure 1-1

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Trade in Intermediate Goods

• the iPhone

Bilateral TradeSurplus or deficitIs a slippery concept!

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offshoring

Wipro remotely accesses Microsoft computers for regular maintenance.

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offshoring

What’s next? Whose jobs go overseas? Lou Dobbs

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Questions we ask and answer

• What kinds of jobs get outsourced/offshored? Blue collar or white collar? College degree or non-college degree? What kinds of college degree?

• How does offshoring affect wage and transition? Heckscher-Ohlin model (resourced-based trade) Specific topic for offshoring

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History of World Trade

• Figure 1.3

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Questions we ask and answer

• Why do policy makers put trade barriers in use? Import tariffs Export subsidies Free trade agreements

• Are they “good” or “bad”? i.e. how do they affect consumers and producers?

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Summary: Movement of Goods and Services

• Most trade is for goods, especially mfg. goods, and highly processed capital and consumer goods

• Most trade takes place between developed (industrialized) countries

• Trade/GDP can exceed 1. This ratio is low for the countries with large GDP.

• There is a lot of trade in intermediate goods (parts and components). Bilateral trade deficit/surplus is a slippery concept!

• Trade was as prominent in early 20th century as it is today.

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Map of Migration. Figure 1-6

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Migration

• Unlike trade, there are much more significant regulations on migration Flow of people between countries is much less

free than the flow of goods. Wealthier countries typically have greater

immigration restrictions In 2005 it was estimated that 12 million Mexicans

were living in the US This is more than 10 percent of Mexico’s population

• Policy makers fear that immigrants from low-wage countries will drive down wages

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Foreign Direct Investment Fig. 1-7

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Horizontal and Vertical FDI

• Horizontal FDI occurs when a firm from one country owns a company in another industrial country Purchase of Rockefeller Center in New York by

Japanese investor

• Vertical FDI occurs when a firm from an industrial country owns a plant in a developing country When Intel opens a chips factory in Ireland

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Questions we ask and answer

• Why do immigration and FDI take place? Why do so many immigrate to the U.S.?

• Does the U.S. benefit from immigration?• Who in the U.S. benefit the most from

immigration?• How about FDI?

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Summary: Migration and FDI

• Most of migration happens among developing countries

• There is horizontal FDI (between developed countries) and vertical FDI (from developed to developing countries).

• Most of FDI is horizontal; i.e. between developed countries (industrialized) countries.

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