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International Economy
and Globalization
Chapter 1
Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.
Globalization
1) greater interdependence among nations
2) increased integration of product and resource
markets through trade, immigration, and
foreign investment
3) includes noneconomic elements such as
cultural and environmental factors
4) occurs on political, technological, cultural and
economic levels
First Wave of Globalization
1870-1914
o triggered by technological developments in
transportation – steam engine and railroads
o dominated by European and American
businesses
o brought to an end by World War One
o Great Depression prompted further
limitations on trade and protectionism
Second Wave of Globalization
1945-1980
o result of reaction against nationalism
following WWII as well as lower
transportation costs
o dominated by developed nations with
developing nations largely excluded
o lead to greater increase in per capita
income for developed countries than for less
developed countries
Latest Wave of Globalization
1980-present
o included some but not all developing
countries
o featured increased capital movement
o decline in mobility of labor
o outsourcing became more prevalent with
both blue collar and white collar jobs moving
from the U.S. into lower cost areas
Openness - rough measure of the importance
of international trade
(Exports + Imports)
Openness =
GDP
Labor and Capital
Greater interdependence typically leads to
more movement of the factors of production
between nations.
o mobility of labor into the U.S. declined
from the 1920s to the 1960s due to more
stringent immigration policies
o capital flows have increased substantially
as other nations invested in U.S. assets
Importance of Globalization
1) law of comparative advantage – countries
can benefit by producing goods for which
they have lower opportunity costs
2) increased competition leads to lower
prices for consumers
3) open economies lead to increased
technological development and innovation
Fallacies of International Trade
1) zero sum game – untrue – both countries
can gain by specializing
2) reduced domestic employment – untrue –
specific industries may suffer but overall
employment increases
3) trade restrictions as beneficial – untrue –
restrictions reduce purchasing power of
other nations and lead to retaliatory actions
Threat to Workers
1) significant threat to unskilled workers in the
U.S.
2) companies may move production to other
countries which exploit labor or
environmental resources
3) similar to threat created by technological
improvements which increase efficiency
Criticisms of Globalization
1) free trade benefits U.S. corporations rather
than citizens
2) environmental exploitation
3) human rights issues
4) reduction in domestic wages
5) lower domestic competitiveness as a result
of developing facilities elsewhere