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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
 Comparative: able to produce at a lower
marginal opportunity cost
Crystal
1 mil. A
Crystal
B
80,000 A
40,000
0
30,000
Ireland
C
100,000 Rum
0
B
40,000
C
80,000 Rum
Puerto Rico
Comparative Ad using S+D
S
P
Pus
Pworld
D
QSus/trade
Qus
QDus/trade
Q
Everyone and every nation has a comparative
advantage in something (no matter how
nasty) and economists argue that they should
a) specialize in the production of that good and
b) 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
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
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)
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
B. 7 Measures
1.
2.
3.
4.
5.
6.
7.
Per Capita GDP
Energy consumption: NIC > MDC > LDC
Labor force specialization
Consumer goods
Literacy
Life expectancy
Infant mortality
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