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Principles of International Economics Prof. Dr. Hans H. Bass, Bremen University of Applied Sciences, International Degree Programme in Economics Summer Term 2010 Principles of International Economics Topic 1: Basic Concepts International Economics Agenda 1. International Division of Labor 2. Classification of Economies 3. Modes of Integration March 08, 2010 3 International Economics Agenda 1. International Division of Labor 2. Classification of Economies 3. Modes of Integration March 08, 2010 4 1. International Division of Labor The division of labor principle 1. Enterprise level Smith: pin-making productivity gains, co-operation, alienation (Marx, Taylorism!) 2. Economy-wide level social productivity gains, national trade, national interdependence 3. Global level March 08, 2010 5 1. International Division of Labor 3. The division of labor principle Global level: integration into the world economy autonomous economic areas - autonomous currency areas degree of integration depends on factor endowment, geography, history ... degree of integration influenced by international economic policies / monetary policies International welfare gains, international trade and factor movements, international interdependence (policy interdependence / IFOs / world economic order) March 08, 2010 6 1. International Division of Labor Globalization Globalization cultural social linguistic ethic economic March 08, 2010 7 1. International Division of Labor Definitions of globalisation “the increasing inter-dependence of markets and production in different countries through trade in goods and services, cross border flows of capital and exchange of technology” (Nunnenkamp/Gundlach/Agarwal, 1994) “process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies” (Anninat 2002) „die fortschreitende Internationalisierung der Wirtschaft, die einen weltweiten Abbau der Grenzen zwischen den nationalen und regionalen Märkten für Güter und Dienstleistungen, Kapital und technischen Know-how voraussetzt und vorantreibt“ (ZEW 2006) March 08, 2010 8 1. International Division of Labor Causes of globalisation transport and communication revolution March 08, 2010 9 1. International Division of Labor Causes of globalisation: reduction of transport costs 120 100 80 60 Seefracht 40 Lufttransport 20 Telekommunikation 0 1930 March 08, 2010 1940 1950 1960 1970 1980 1990 2000 2005 10 1. International Division of Labor Causes of globalisation transport and communication revolution, new key technologies increasing R&D costs and shortening of product life cycles worldwide liberalisation of commodity and capital markets chances to exploit price differences (global sourcing, global marketing) reshaping of the economic geography of the world (NIEs, China ending its autarky, new trading blocs) March 08, 2010 11 The extent of globalisation 1. International Division of Labor 60 EXPORTE ADI BONDS 25 26 17 12 7 1 1 1980 March 08, 2010 1 1 1 2 1985 4 2 1990 6 3 5 3 1995 2000 2005 12 1. International Division of Labor The extent of globalisation Present Level Low Medium High Low Speed Medium High March 08, 2010 Source: adopted from Wohlmuth in Bass/Melchers 2004 13 The extent of globalisation 1. International Division of Labor Present Level Low Medium • Shift of Low Speed Mediu m • Trade in commodities production sites (cost driven or market-driven) • Migraton of lowqualified workforce • Production of public goods • Long-term capital flows • Commercial technology transfer • Migraton of high-qualified workforce ("brain drain") • Trade in Services High • Short-term capital flows • Direct investment & intl enterprise co-op March 08, 2010 High • Transfer of knowledge & technology (public goods characteristics) Source: adopted from Wohlmuth in Bass/Melchers 2004 14 1. International Division of Labor Consequences of globalisation 1. Increasing relevance of TNCs ! FDI, trade-induced and trade-inducing / intra-firmtrade, global value chains (“from sheep to shelf”) 2. Reduced scope of action for states? March 08, 2010 15 International Economics Agenda 1. International Division of Labor 2. Classification of Economies 3. Modes of Integration March 08, 2010 16 2. Classification of economies Modes of classification 1. according to per-capita income: LIC, MIC, HICs 2. ... 3. ... March 08, 2010 17 2. Classification of economies 1. 2. 3. 4. Income criterion HICs: $ 11,906+ UMICs: $3,856 – $11,905 LMICs: $976 – $3,855 LICs: < $975 March 08, 2010 18 2. Classification of economies March 08, 2010 One-dimensional, incomeoriented classification 19 2. Classification of economies (3*) (22) (56) (75) (82) (130) (163) (179) (210) Norway Germany Saudi Arabia Russian Fed. Brazil China India Ghana Burundi GNI p.c. $ 87,070 $ 42,440 $ 15,500 $ 9,620 $ 7,350 $ 2,770 $ 1,070 $ 670 $ 140 HIC HIC HIC UMIC UMIC LMIC LMIC LIC LIC http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf * # 1 and 2 only approximations: Liechtenstein, Bermuda March 08, 2010 20 2. Classification of economies Modes of classification 1. according to per-capita income: LICs, MICs, HICs 2. according to uni-dimensional structural characteristics: oil-exporting countries, heavily indebted poor countries ... 3. according to multi-dimensional structural characteristics March 08, 2010 21 2. Classification of economies Structural criteria 1. Industrial economies (≈ HICs), post-industrial economies, “triade”, “OECD”-countries 2. Developing countries 3. NIEs 4. LDCs 5. Transformation Economies March 08, 2010 22 2. Classification of economies Characteristics of OECD countries large service sector (60 %+ Fourastié model), medium-sized industrial sector moderate inequalities in income and property distribution balanced current account, low level of foreign debts high investment rates (20%+) low population growth high standards in education and health political stability different economic orders possible: “varieties of capitalism” (Anglo-American, German Social Market Economy, Japanese model, Scandinavian-type welfare state) March 08, 2010 23 2. Classification of economies Characteristics of developing countries Low levels of living, characterized by low incomes, high (income) inequality, poor health, and inadequate education (incl. Illiteracy) High rates of population growth and dependency burdens Substantial dependence on agricultural production and primary-product exports, high export concentration ratios Low levels of productivity (lack of complementary capital); scarcity of jobs in the urban “formal” sector, “informal” employment (sponge function) Lack of “good governance” March 08, 2010 24 2. Classification of economies 1. 2. 3. A comprehensive indicator: the HDI Longevity as measured by life expectancy at birth Knowledge: by a weighted average of adult literacy (2/3) and mean years of schooling (1/3) Standard of living: GNI p.c. at Purchasing Power Parity* and adjusted for diminishing marginal utility of income *number of units of the countries’ currency required to buy the same amount of goods + services in the domestic market as a dollar in the US • • Standardized from 0 to 1 Index = (actual value – minimum value) / (maximum value – minimum value) GNI rank may differ from HDI rank March 08, 2010 25 2. Classification of economies HDI-Rank (3) Iceland (13) United States (22) Germany (59) Saudi Arabia (71) Russian Fed. (75) Brazil (92) China (152) Ghana (174) Burundi The Human Development Index 0.969 0.956 0.947 0.843 0.817 0.813 0.772 0.526 0.394 GNI-Rank 28 14 22 56 75 82 130 179 210 # UNDP 2009 hdr.undp.org/en/media/HDR_2009_EN_Complete.pdf, World Bank 2008 March 08, 2010 26 2. Classification of economies Diversification: catching up ... Newly Industrializing Economies rapid economic growth high investment into education rapid changes in sector composition subtle combination of opening up to world markets and protection of „infant industries“ strong influence of government on the economy relatively equal distribution of wealth (IBRD, inofficial) March 08, 2010 27 2. Classification of economies Diversification: ... and falling behind ... Least Developed Countries Extremely low per capita income (< $ 750) Low level of human development as measured by the Human Assets Index (HAI), based on nutrition, health, education, and literacy High vulnerability by economic shocks as measured by Economic Vulnerability Index (EVI), based on agricultural output, export earnings, disadvantages from population size, natural disasters ECOSOC 2003 March 08, 2010 28 2. Classification of economies Diversification: and dramatic changes Transformation economies Transformation from centrally planned economy with predominance of collective property to decentrally planned economy (coordinated by markets) with a predominance of private property of producer goods Low or lower-middle income p.c., (relatively) high HDI Comparatively high importance of industry, albeit obsolete technologies posing high stress on the environment Dualistic structure of foreign trade (West/East) Budget deficits and current account deficits March 08, 2010 29 International Economics Agenda 1. International Division of Labor 2. Classification of Economies 3. Modes of Integration March 08, 2010 30 3. Modes of integration Modes of intergration Trade in commodities and services Factor movement: capital (FDI, portfolio investment) Factor movement: labor migration March 08, 2010 31