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Globalization
Globalization is the spread of
businesses, technologies, or
philosophies throughout the
world. The global economy is
characterized by a totally
interconnected marketplace,
unhampered by time zones or
national boundaries.
Trace the Life of a T-Shirt
Developed and Developing
There are over 200 nations in the world today at different stages of economic
development. The industrialized nations of the world are classified as developed
nations and have high levels of industrial and technical expertise. Developing nations
are characterized by low Gross Domestic Product (GDP), limited resources, agricultural
focus and rapid population growth.
Developed
United States
Canada
Japan
Most of Europe
Developing
Many South American Nations
Many African Nations
India
Developing nations
Most developing nations have to make a choice of how to develop. The two main
economic development models are Market or Command.
Remember from Chapter 1:
Market System- economic questions are answered by individuals and businesses
according to Supply and Demand (What to produce, who to produce for,
how to produce)
Command System- All economic questions are answered by the government. Also
called Socialism, these systems typically fail because individuals do not have
an incentive to seek out better and more efficient uses of resources.
1st, 2nd and 3rd world nations
The map shows the status of the nations around the world in their developing
process. 1st world nations are industrialized and developed. 3rd world nations are
poor, lack infrastructure and have not developed. 2nd world nations are in between
and are taking steps to develop.
Benefits to developing
Developing nations generally have higher
standards of living, and more economic and
political freedom. These nations also have
better health standards and education. So why
haven’t all nations developed?
Challenges to Developing
Developing nations face many challenges and lack the essential resources
needed in terms of natural resources, human resources and capital resources.
Without these resources the developing world struggles to modernize and
industrialize. Many of their citizens live in poverty, lack nutrition and basic
education. These qualities make it difficult to create a successful workforce.
Natural Resources
Natural Resources- developing nations have scarce resources or ineffectively use
resources. These nations are usually reliant on one crop. This is dangerous because
the economy is dependent on the world price of that crop.
For example, if Guatemala is dependent on coffee and the price of coffee doubles
then Guatemala's economy is expanding. If the price drops to half then Guatemala's
economy will stall or recess.
Human Resources
One characteristic of developing nations is rapid population growth. The quick
growing population means that the developing nations have a large labor force.
However, these laborers often lack education, healthcare and nutrition.
Despite having a large labor force developing nations often have unskilled and
unhealthy labor.
Capital Resources
Developing nations lack infrastructure, or the basic facilities and services that
an economy needs to function. This means they lack factories, machines,
equipment and even transportation systems.
Often developing nations struggle to provide basic infrastructure needs such as
clean water, transportation, and health services.
Helping Developing Nations
Many international developed nations want to help these developing nations so they
can create new trade partners and markets. There are several ways the international
community helps developing nations with Foreign Aid, loans and investment leading
the way.
International organizations like the International Monetary Fund (IMF) and World
Bank allow developing nations to take loans at low interest rates to help them create
needed infrastructure.
Humanitarian efforts also donate millions of dollars every year to help nations
develop education and medical services.
World Health Organization
The WHO monitors disease and infection around the world. When an outbreak
of highly contagious diseases occurs, the WHO sends in support including
doctors, medicines and medical supplies. Most recently the WHO had to deal
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International Investment
Many international companies will invest in developing nations by establishing
factories, transportation systems and basic training programs. They are often enticed
by the large labor forces and cheap labor.
In exchange for cheap labor, access to natural resources and large labor forces these
international investors bring education, investment capital, infrastructure and
development.
Outsourcing
Many American companies take advantage of the cheap labor in foreign nations to
set up factories producing their goods. In addition to factories many customer
service positions are sent to places like India and China.
International Trade
Since the establishment of the Columbian exchange in the 1500s trade has been
occurring on a global level. International trade has become essential to grow
economies. Without international trade a nation can only consume what it can
produce from its own natural resources.
For instance, in the United States we do not have the ability to grow vast quantities of
bananas. In order to provide bananas to Watertown in the middle of winter we must
rely on international trade with nations such as Guatemala.
Specialization
Many nations specialize in certain goods and services. This is known as specialization,
or focusing on a small variety of products. Guatemala focuses on growing bananas and
coffee in order to sell on the international market. In return Guatemala buys products
like chocolate from Sweden. Both nations benefit from this specialized trade.
Therefore, specialization offers each nation the opportunity to become efficient in
certain production of goods and services to trade them for goods and services they
cannot produce.
Resource Specialization
Once a country decides to specialize in certain goods they will put as many
resources as possible to that industry. Even if the resources could be more
efficiently used elsewhere, specialization takes precedence.
The Production Possibility Frontier
shows the relationship between making
two goods, lets say Bread and Cloth. If
you choose to specialize in Bread, you
must use the resources from the cloth,
even if it isn’t as efficient.
Advantages
Nations determine what to produce based on their Absolute and Comparative
advantages. If advantages exist then nations tend to specialize.
Absolute Advantage- When a nation can produce a certain good with greater
efficiency than others. For example Costa Rica can produce coffee and lumber
cheaper than Panama.
Comparative Advantage- When a nation has an
absolute advantage in several products, they do
not necessarily want to produce both. They want
to determine which product has a comparative
advantage.
Comparative Advantage
Guatemala has a primarily agricultural based economy. The country can easily
grow both coffee and bananas, however, using the same amount of resources
such as land, water, and labor Guatemala can produce 25 million pounds of
coffee a year, and only 5 million pounds of bananas. The comparative advantage
is 5:1. For every one million pounds of bananas produced they produce they are
giving up, or trading off, 5 million pounds of coffee. Therefore Guatemala would
specialize in coffee, not bananas.
US And Saudi Oil
The US has vast reserves of crude oil, however, Saudi Arabia and other Middle Eastern
nations have a comparative advantage in collecting and producing oil. Therefore, the
US chooses to buy its oil instead of producing our own. Instead, we allocate our
human resources to other industries.
International trade
When nations partake in trade they have many of the same requirements and
limitations as an individual. This means that each nation must:
-produce goods and services for income
-spend income to buy goods and services
-if they earn > spend then they can save. If they earn < spend then they
are in debt.
-can borrow money up to a limit, but must pay interest on credit
Nations trade with other
nations because they benefit
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Like an individual, nations
attempting to way!
keep their economy growing and avoid
significant debt.
Balancing Trade
The balance of trade is the difference between the amount imported and exported.
Trade surplus- when a nation exports more than it imports; sells more than buys
Trade deficit- when a nation imports more than it exports; buys more than sells
The goal of each nation is to maintain a trade surplus. In order to maintain these
surpluses nations often impose trade barriers. Currently the US is in a trade deficit.
Trade Barriers
Trade barriers are actions to protect domestic industry and
jobs. These actions are typically in tariffs, quotas and
embargoes.
Tariff- a tax on imports. Revenue tariffs raise money for
governments. Protective tariffs restrict the number of
foreign goods allowed into the nation. Tariffs work by
increasing the price of foreign goods resulting in
consumers purchasing American made goods.
Quota- sets a fixed amount of an item that can be
imported. Once the Quota is reached no more of that item
may enter.
Embargo- a law that cuts off imports from or exports to a
specific country. In 1985 Ronald Reagan placed an
embargo on military and computer goods to South
Africa in protest of Apartheid. This is a punishment, or
sanction, to change behavior of other nations.
Cuba Embargo
During the Cold War the United States made foreign and economic policies based
around preventing Communism. When the Cuban revolution turned the nation into
a Communist nation, the US stopped all trade.
Economic Sanctions
Embargos are a system of trade sanctions meant to influence foreign policy
without resorting to war. The Cuban embargo is just one example of current
economic sanctions the US is imposing around the world. Other examples
include sanctions and embargoes against Iran, North Korea and Russia.
Iran’s economic sanctions have recently been modified, in reaction to the
nuclear deal.
Protectionism
The purpose of these trade barriers is to protect domestic, or home, industry. For
example, the Japanese and Americans both create comparable motorcycles. The
Japanese motorcycle sells for $5,000 and the American cycle for $7,000. At these prices
most consumers will purchase the Japanese motorcycle.
However, a 50% protective tariff is put on imported bikes. This means the price of the
Japanese bike is now $7500. Compared to the $7,000 for the American bike, most
consumers will chose the American made motorcycle.
Even though protectionism is practiced by most nations in the world, there are many
proponents of Free Trade. Free trade means that trade is in no way regulated by the
government.
Free Trade vs. Protectionism
Free TradeNo government regulation
ProtectionismUse protective tariffs
-Protects new companies by forcing them
to be efficient in order to compete
-If we limit foreign goods they will limit
our goods
-American workers are worth the higher
wages because they are more trained
and efficient
-competition guarantees the best price
(either foreign or domestic)
-Be the example for free trade
-Tariffs would protect new companies
from large international corporations
-If we don’t limit foreign goods we will
lose many jobs
-Foreign labor is cheap, which drops
wages in America
-Free trade leads to overspecializing,
making companies dependent on one or
two products
-no truly free trade in the world so we
should match other nations’ protective
tariffs
Despite the major differences, both sides believe that some industries must be
protected. These industries, such as steel, heavy industry, energy and advanced
technology, must be safe guarded so we are not negatively impacted during times
of war and will be able to produce military supplies.
Trade Organizations
No nations in the world practice entirely free trade. However, several organizations
have been developed to help reduce trade barriers.
North Atlantic Free Trade Agreement (NAFTA)- an agreement between the United
States, Mexico and Canada to reduce and eventually eliminate all tariffs between these
nations.
European Union- Creates a common currency and limited trade barriers between
member nations
ASEAN- Agreement between many ASEAN nations to limit trade barriers
Interdependence
Nearly all nations trade together to get the things they want and need. While some
nations are more developed than others, all the nations try to work together to
improve the world economy. When first world nations give loans to developing are
providing a way to industrialize, take care of the people and create new trade
partners.
TASK
1) Explain the difference between developed and developing nations.
2) What are some obstacles for developing nations?
3) Why do international economies try to help developing nations?
4) What is the Comparative Advantage for each of the following
1) Costa Rica 15 million pounds of Coffee and 5 million pounds of bananas
2) Sweden 22 million pounds of Chocolate and 4 million pounds of gum
3) China 50 million computers and 100 million IPods
5) In your opinion should the United States focus on Protectionism or Free Trade for
our international trade? Provide your opinion and justify it in 4-5 sentences.
6) The US and other nations often use embargoes as a way to sanction, or punish,
foreign nations. For instance, America currently has economic sanctions in place
against North Korea and Iran to stop their Nuke development. How do sanctions
like these work to promote change?
7) Why do some American companies prefer to manufacture their goods in far away
nations?