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Globalization

Globalization. I. Trade. A. The Iowa Car Crop Trade = a form of technology  increases efficiency; favoring one technology harms another; trade helps the whole even if hurts the parts. B. Comparative and Absolute Advantage. Absolute: able to produce more of an item

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Globalization

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  1. Globalization

  2. I. Trade A. The Iowa Car Crop Trade = a form of technology increases efficiency; favoring one technology harms another; trade helps the whole even if hurts the parts

  3. B. Comparative and Absolute Advantage • Absolute: able to produce more of an item • Comparative: able to produce at a lower marginal opportunity cost Crystal Crystal A 1 mil. B A 80,000 B 40,000 C C 0 100,000 Rum 0 40,000 80,000 Rum 30,000 Ireland Puerto Rico

  4. Comparative Ad using S+D S P Pus Pworld D Qus QDus/trade Q QSus/trade

  5. Everyone and every nation has a comparative advantage in something (no matter how nasty) and economists argue that they should • specialize in the production of that good and • trade for what they lack This will: a) increase efficiency, b) benefit everyone involved, c) proportionally benefit the poorer nation more This is NOT to say that the poorer nation will benefit as much as they should: dependency theory Guatemala, Iran, Chile and the Washington Consensus

  6. C. Tariffs Harm from trade concentrated, benefits diffused Policy responses: 1) Tariffs • Protective, revenue, prohibitive, “beggar-thy-neighbor” trade war • Act as a tax on international supply raise costs of production, lower supply raises prices of foreign AND domestic goods (substitution effect): hurts consumers but benefits domestic producers (inefficient) + gov’t revenue 2) Quotas • Similar cost effect as tariffs, but benefit foreign producers 3) Voluntary export restraint • Japanese cars 4) Subsidies and currency manipulation • US/Europe vs. China

  7. D. Money • #1 traded commodity is money • Derived demand: demand for currency determined by demand for products bought with currency (goods and financial investments) • Strong Dollar: Increased demand US goods (or decreased demand foreign goods) appreciation US exports fall (more expensive for foreigners to purchase US goods), imports rise (cheaper to buy foreign goods) • Weak Dollar: Decreased demand US goods (or increase demand foreign goods) depreciation exports rise, imports fall • Trade deficit: imports > exports • Current account deficit: more money going out (purchases, investment) than coming in economy running on borrowed means • Flexible exchange rate SHOULD balance trade (but, China)

  8. II. Developmentalism Economic development: process to improve economic, political, and social well-being of its people. Majority of world = process of industrialization and modernization to break free of poverty and dependency • MDC: more • LDC: less • NIC: Newly Industrialized Countries

  9. B. 7 Measures • Per Capita GDP • Energy consumption: NIC > MDC > LDC • Labor force specialization • Consumer goods • Literacy • Life expectancy • Infant mortality

  10. C. Problems for Development • Rapid Population Growth • Target aid to women • Factors of Production • Physical capital (resource curse), human capital (health and nutrition, education, “brain drain”) • Political Factors • Civil war, repression, transition central/colonial to free market, corruption, Islamofacism, democratization and populism • Debt • debt forgiveness

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