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Global Economics
Eco 6367
Dr. Vera Adamchik
Chapter 1
The
International
Economy and
Globalization
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Textbook
• Robert J. Carbaugh
International
Economics, 12th
Edition © 2009
• Publisher: SouthWestern, Cengage
Learning
• ISBN-10: 0-324-58148-3
ISBN-13: 978-0-32458148-5
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Online Learning Center &
Other Supplements
• http://websites.swlearning.com/cgiwadsworth/course_products_wp.pl?fid=M20b
&flag=student&product_isbn_issn=97803245
81485&discipline_number=413
• http://academic.cengage.com/economics/car
baugh
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The purpose of
Eco 6367 Global Economics
The purpose of Eco 6367 Global Economics is to
introduce students to the forces, processes, and actors
that shape economic globalization.
Eco 6351 Economics for Managers covered the basic
ideas underlying the economic behavior of individuals,
individual firms and businesses, and markets; Eco 6367
Global Economics will expand the scope of inquiry to
cover the economics of the nation in a global economy.
Students will study the larger economic forces that
shape production, trade flows, capital flows, exchange
rates, international labor migration and other variables
that create the global economic landscape.
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What is globalization?
The world is moving away from self-contained
national economies toward an
interdependent, integrated global economic
system.
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What is economic globalization?
• Economic globalization is a historical process
of an increasing integration of economies
around the world, particularly through trade
and financial flows. The term also refers to the
movement of people (labor) and knowledge
(technology) across international borders.
• In other words, globalization is merely the
extension of markets across frontiers.
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What is economic globalization?
Economic globalization is the process that
expands international trade, international
investment, and immigration relative to
national output, investment, and population
growth. In short, globalization is the increase
in international economic activity relative to
overall world economic activity.
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Other dimensions of globalization
In addition to economic globalization, there
are also broader cultural, political and
environmental dimensions of globalization.
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Major aspects of globalization
The economic literature usually identifies
the following major aspects of economic
globalization:
– globalization of consumption,
– globalization of production and ownership,
– globalization of labor.
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Globalization of consumption
Globalization of consumption implies that the
nation in which a product was made becomes
independent of the nationality of the
consumer. It typically refers to the growing
volume of international trade and the speed
and ease with which goods and services move
across national borders
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Globalization of production
and ownership
Globalization of production
and ownership implies that the nationality of
the owner and controller of productive assets
becomes independent of the nation housing
them. It typically refers to the phenomenon of
rising cross-border financial flows (financial
globalization).
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Globalization of production
and ownership (cont.)
• A closely related, often overlooked, aspect of
globalization is spread of knowledge and
technology. For instance, direct foreign
investment brings not only an expansion of
the physical capital stock, but also technical
innovation, knowledge about production
methods and management techniques.
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Globalization of labor
Globalization of labor implies an increasing
number of workers who make products and
services for export or cross borders for work.
The development of technology, combined
with the progressive removal of restrictions
on cross-border trade and capital flows, has
made it possible for production processes to
be unbundled and located further from
target markets for a growing universe of
goods and services.
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Globalization of labor (cont.)
The location of production has become much
more responsive to relative labor costs across
countries (the global labor market). There
have also been increasing flows of migrants
across borders (international labor
migration), through both legal and informal
routes. Workers move from one country to
another partly to find better employment
opportunities.
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A complete view of globalization
Most discussions of globalization tend to
focus on one of these three components, but
the process really consists of all three. The
international movement of goods and
services, the cross-border sales and purchases
of assets, and the international movement of
people are related in many ways. All three
components of globalization have been
growing rapidly in recent decades.
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The structure of the course
I. Introduction
II. International Trade
III. International Factor Movements
(International Investment and International
Labor Migration)
IV. Payments among Nations: A Summary of
International Transactions
V. Globalization and Macroeconomic Policy
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Waves of globalization
• First wave (1870-1914)
• Second wave (1945-1980)
• Third wave (1980-present)
Source: Globalization, Growth, and Poverty:
Building an Inclusive World Economy. A World
Bank Policy Research Report, 2001.
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The first wave (1870-1914)
• The first wave of globalization lasted from 1870 to the start of
World War I. It was sparked by advances in transport and
reductions in trade barriers. The level of exports to world income
doubled to 8 percent as international trade boomed.
• It sparked massive migration as people sought better jobs. About 10
percent of the world's population moved to new countries. Sixty
million people migrated from Europe to North America and other
parts of the New World. The same thing happened in densely
populated China and India where people moved to less densely
populated countries like Sri Lanka, Burma, Thailand, the Philippines
and Vietnam.
• The end of the First World War ushered in an era of protectionism.
Trade barriers such as tariffs were erected. World economic growth
stagnated and exports as a percentage of world income fell back to
the 1870 level.
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The second wave (1950-1980)
• Following World War II, a second wave of globalization
emerged, lasting from about 1950 to 1980. It focused
on integration between rich countries as Europe, North
America and Japan restored trade relations through a
series of multilateral trade liberalizations.
• During this period there was a surge in the economies
of the countries in the Organization for Co-operation
and Development that participated in this trading
boom. Developing countries were largely isolated from
this wave of integration, remaining stuck in primary
commodity exports.
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The third wave (1980-present)
• The most recent wave of globalization started in 1980 and
was spurred by a combination of advances in transport and
communications technologies and the choice of large
developing countries to seek foreign investment and open
themselves up to international trade.
• Countries that strongly increased their foreign trade
included Brazil, China, Hungary, India, Uganda, Vietnam and
Mexico. The more globalized developing countries saw
their aggregate per capita growth rate rise from 1 percent
in the 1960s, to 3 percent in the 1970s, 4 percent in the
1980s and 5 percent in the 1990s. Other developing
countries, home to about two billion people, actually
experienced negative growth in the 1990s.
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Driving forces of globalization
Three macro factors underlie the recent trend
toward greater globalization:
• the decline in barriers to the free flow of
goods, services, and capital that has occurred
since the end of World War II;
• technological changes -- falling costs of
transport and communications;
• policy changes -- greater reliance on market
forces.
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Declining trade and
investment barriers
After World War II, advanced countries made
a commitment to lower barriers to trade and
investment.
Since 1950, average tariffs have fallen
significantly and are now at about 4%.
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Declining trade and
investment barriers
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Declining trade and
investment barriers
Table: Average Tariff Rates on Manufactured
Products as Percent of Value
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Declining trade and
investment barriers
• Countries have also been opening markets to
FDI.
• A favorable investment climate gives investors
confidence in the market and encourages
them to invest more capital. It also
encourages businesses to improve efficiency
and productivity in order to increase revenues
and capital available for investment.
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Declining trade and
investment barriers
Lower barriers to trade and investment mean:
• that firms can view the world, rather than a
single country, as their market;
• that firms can base production in the optimal
location for that activity.
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The changing world output
and world trade picture
•In 1960, the United States accounted for over 40%
of world economic activity.
•By 2006, the United States accounted for less than
20% of world economic activity.
•A similar trend occurred in other developed
countries.
•The share of world output accounted for by
developing nations is rising and is expected to
account for more than 60% of world economic
activity by 2020.
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The changing world output
and world trade picture
• Table: The Changing Demographics of World
GDP and Trade
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The changing foreign direct
investment picture
•In the 1960s, U.S. firms accounted for about twothirds of worldwide FDI flows.
•Today, the United States accounts for less than
one-fifth of worldwide FDI flows.
•Other developed countries have followed a similar
pattern.
•In contrast, the share of FDI accounted for by
developing countries has risen from less than 2% in
1980 to almost 12% in 2005.
•Developing countries, especially China, have also
become popular destinations for FDI.
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The changing foreign direct
investment picture
• Figure: Percentage Share of Total FDI Stock 1980-2005
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The changing foreign direct
investment picture
• Figure: FDI Inflows 1988-2006
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The role of technological change
Technological change has made the globalization
of markets a reality. Important advances have
occurred in:
• microprocessors and telecommunications
• the Internet and World Wide Web
• transportation technology
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The role of technological change
Implications of technological change for the
globalization of production include:
• lower transportation costs that enable firms to
disperse production to economical,
geographically separate locations;
• lower information processing and
communication costs that enable firms to create
and manage globally dispersed production
systems;
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The role of technological change
Implications of technological change for the
globalization of markets include:
•low cost global communications networks help
create electronic global marketplace;
•low-cost transportation help create global
markets;
•global communication networks and global
media are creating a worldwide culture, and a
global market for consumer products.
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Policies and market forces
The speed of the globalization process is
closely related to the ability of the state to
supply the conditions of a successful market
economy. Globalization appears as the new
ideology of capitalism.
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Policies and market forces
Newly empowered neo-liberal and neoconservative regimes in the advanced capitalist
world championed a new discourse of free trade,
deregulation, marketization, and privatization.
These governments pushed to (re)negotiate
regional and global trade agreements (NAFTA,
GATT, EEC) and gave new life and power to
international regulatory agencies (WTO) and
transnational economic institutions (The World
Bank and the IMF).
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The globalization debate
The term “globalization” has acquired
considerable emotive force. Some view it as a
process that is beneficial—a key to future
world economic development—and also
inevitable and irreversible. Others regard it
with hostility, even fear, believing that it
increases inequality within and between
nations, threatens employment and living
standards and thwarts social progress.
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The globalization debate
Is the shift toward a more integrated and
interdependent global economy a good thing?
• Supporters believe that increased trade and
cross-border investment mean lower prices for
goods and services, greater economic growth,
higher consumer income, and more jobs.
• Critics worry that globalization will cause job
losses, environmental degradation, and the
cultural imperialism of global media and MNEs.
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The globalization debate
• Globalization critics argue that falling barriers
to trade are destroying manufacturing jobs in
advanced countries.
• Supporters of globalization contend that the
benefits of this trend outweigh the costs—that
countries will specialize in what they do most
efficiently and trade for other goods—and all
countries will benefit.
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The globalization debate
• Globalization critics argue that firms avoid costly
efforts to adhere to labor and environmental
regulations by moving production to countries
where such regulations do not exist, or are not
enforced.
• Globalization supporters claim that tougher
environmental and labor standards are associated
with economic progress, so as countries get richer
from free trade, they get tougher environmental
and labor regulations.
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The globalization debate
• Critics of globalization worry that today’s
interdependent global economy is shifting
economic power away from national governments
toward supranational organizations like the WTO,
the EU, and the UN.
• Supporters of globalization contend that the
power of these organizations is limited to what
nation-states agree to grant, and that the power of
the organizations lies in their ability to get countries
to agree to follow certain actions.
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The globalization debate
• Critics of globalization argue that the gap between
rich nations and poor nations is getting wider.
• Supporters of globalization claim that the best
way for the poor nations to improve their situation
is to reduce barriers to trade and investment and
implement economic policies based on free market
economies, and to receive debt forgiveness for
debts incurred under totalitarian regimes.
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Why some people fear globalization?
Some resistance to further globalization is
understandable and probably inevitable. The
growth of international trade, foreign investment,
and immigration implies many changes in the
way a national economy functions. An open
economy is very different from a closed economy.
Globalization causes change, and change can
cause hardship.
“I’m all for progress; it’s change I don’t like.”
(Mark Twain)
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Why some people fear globalization?
Globalization offers marvelous opportunities to
increase standards of living and raise human
welfare. But globalization and economic growth
imply change, and people do not always like
change. International trade, foreign investment,
and immigration may cause some people to lose
their current jobs or their established businesses.
Some people’s incomes may fall in the short run.
Globalization causes some people to experience
failure, and no one likes that.
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Why some people fear globalization?
The changes and failures that accompany
globalization and economic growth can be
especially problematic when the gains and
losses are not equally shared. Unfortunately,
the many changes that accompany
globalization are never uniformly distributed
throughout the economy.
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Judging the whole by
just a few of its parts
People’s negative views of globalization are often
the result of their tendency to focus on only a
small part of the complex process of
globalization. That is, people view individual
events, but they miss the broader picture. An
accurate assessment of globalization requires
that we look at all the changes, direct and
indirect, that the growth of international trade,
international investment, and immigration causes
throughout all economies of the world. Any
partial view of globalization will tend to leave the
wrong impression.
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Global economics provides a
complete picture
Global Economics seeks to provide a complete picture. The
complexity of the process of globalization implies that such
a complete understanding of globalization is not easily
acquired. The complexities of international trade, foreign
investment, foreign competition, and immigration are
sometimes difficult to understand. A course such as this
one would not be necessary if international economics was
easy and obvious. The material covered in this course
provides the underlying explanation for global economic
activity. This should be standard knowledge for anyone
expecting to live and work in the increasingly global
economy. Your improved understanding of globalization will
let you be a more informed, active participant in the
process.
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Globalization is still far from complete
Less than 2 percent of the world’s population
lives outside their country of birth. That is a
historically high percentage, but it is still very low
if you consider how much people move around
within countries. Political borders are still
formidable barriers to the movement of goods as
well. International trade is still a small percentage
of most economies’ aggregate activity. Major
economies such as Japan and the United States
export only about 10 percent of their production.
This means that 90 percent of everything
produced is for the domestic markets.
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Continued globalization is not
inevitable
It is clear, therefore, that globalization can
continue to progress for quite some time before
reaching levels compatible with a truly integrated
world economy. But that does not make the
continued expansion of international trade,
international investment, and immigration
inevitable. Some people do not want to see
further expansion of international trade,
international investment, or immigration. It is not
clear whether those who favor continued
globalization will continue to win over those who
oppose globalization.
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Continued globalization is not
inevitable
Globalization has in fact been stopped or
reversed many times throughout history. Trade
liberalization inevitable creates new
competition for domestic producers, which
generates opposition to trade. Depending on
domestic producers’ political connections and
clout, trade liberalization often generates new
protectionist trade policies. The immigration of
foreigners into a country sometimes results in
ethnic strife and the closing of borders to
foreigners.
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Continued globalization is not
inevitable
Cycles of liberalization and isolation can last
for centuries, and they can be easily
distinguished from even a casual reading of
history. The arguments for and against
globalization will no doubt be part of political
discussions in most countries in the near
future, as they have been in the recent past.
The course of future globalization therefore
remains uncertain.
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In-class exercise
How would you define globalization in your own words? How
does your textbook define globalization?
What factors should be taken into account while assessing the
degree of globalization? Compare and contrast the
methodologies of calculating the A. T. Kearney Globalization
Index (http://www.atkearney.com/main.taf?p=5,4,1,127 ) and
the KOF Index of Globalization
(http://globalization.kof.ethz.ch/ ). Are these methodologies
similar or different? Do they produce similar or different
results/rankings?
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In-class exercise
• What are the most globalized economies in the world? Try to
name 5-10 countries that you believe are most globalized.
Then download the 2006 A. T. Kearney Globalization Index file
(http://www.atkearney.com/main.taf?p=5,4,1,116 ), the 2007
A. T. Kearney Globalization Index
(http://www.foreignpolicy.com/story/cms.php?story_id=3995
), and the 2009 KOF Index of Globalization
(http://globalization.kof.ethz.ch/static/pdf/rankings_2009.pdf
). Find out who is up, who is down, and how they got there.
What countries are the top ones in the rankings? What
countries are the last ones in the rankings? What is the
position of the U.S.? Are you surprised?
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In-class exercise
• Download the 2006 A. T. Kearney Globalization Index file
(http://www.atkearney.com/main.taf?p=5,4,1,116 ), the 2007
A. T. Kearney Globalization Index
(http://www.foreignpolicy.com/story/cms.php?story_id=3995
), and the 2009 KOF Index of Globalization
(http://globalization.kof.ethz.ch/static/pdf/rankings_2009.pdf
).
Choose any country of your interest (other than the U.S.) and
comment on its position in the rankings and the factors
determining this position.
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