INTERNATIONAL ECONOMICS

the study of economic interactions between

independent nations

The International
Economy and
Globalization

Globalization
Globalization is the trend for people, firms and governments
around the world to become increasingly dependent on and
integrated with each other

Trade
Goods (cars, computers, textiles, etc)
Services (banking, tourism, telecommunications, etc)
Commodities: raw materials, energy

Labor
immigration, outsourcing

Capital Investment
Portfolio investment: government debt, stock
Foreign Direct Investment (FDI) by multinational corporations

Technology and information

Joint ventures, international scientific research and education

Political and cultural aspects

The Extent of Globalization

Exports as a Percentage
of the Worlds Production
Domestic
Production
Consumed at
Home

Trade is 18% of
world GDP

82%

18%

Exports
4

World Trade
World trade grows faster than world production

How dependent are we on trade with other countries?

Trade in goods and services

Country

Exports (% of GDP)

Netherlands
Canada
Germany
South Korea
Norway
France
United Kingdom
United States
Japan

53%
37
31
27
31
22
18
9
10

Imports (% of GDP)
46%
33
25
26
18
21
21
14
8
6

Open Economy
Measure of openness: exports and imports

What Drives Globalization?

Per capita income converging
Convergence of lifestyles and tastes

Lower transportation costs

Increasing travel creates global consumers

Advances in communication technology, internet

Movement to free trade
Reduction of tariff and non-tariff barriers

Creation of trading blocs

EU, NAFTA, etc.

Movement to market in state-dominated economies

Emergence of countries with high productive
capabilities and low labor costs
China, India, Eastern Europe

Search for higher profits, lower costs of production

Economies of scale: large-scale production is cheaper per unit
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than small-scale

Multi-National
Corporations (MNCs)
MNCs businesses with a
headquarters in one
country but with business
operations in others
63,000 multinational
corporations in the world
Responsible for 2/3 of
global trade and 80% of
investment
9

Comparison of the 10 largest multinational corporations

(by gross revenue) : 2009

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TRADE LIBERALIZATION
Freeing up' of movement across national borders for
trade, investment and finance
removal of rules 'restrictions', 'barriers' and 'obstacles'
which national governments have traditionally held in
place to regulate the activity of foreign firms and to
protect their own local economies

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Consequences of Trade
Increased specialization between
countries
Countries specialize in goods they
produce relatively cheaper than
trading partners
Major factors that determine
specialization:
Climate
Resources:
Land and raw materials
Labor (quantity and quality)
Capital
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Consequences of Trade
Greater employment opportunities
Indirect employment serving multinational industries
can bring many more jobs than the companies
themselves

Free movement of capital gives a

country access to foreign investment
Lower interest rates

Higher overall standard of living

Variety of products
Lower prices
Low inflation
Nike is Vietnam's single largest private
employer with 45,000 workers

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Consequences of Trade
Exposure to competition with
foreign producers
Better quality of products
Technological development and innovation with ideas
from abroad
Higher productivity of domestic workers
Higher domestic and world output
Higher or lower companies profits:
Higher:
due to economies of scale- cheaper per unit production costs
Lower:
Pressure to keep prices low

Lower wages for workers

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15

16

17

World Economies 20 Years From Now

US 2006:
>29% of world GDP
<5% population

18

Top International Traders

19

Exports Imports = Trade

MerchandiseBalance
Imports and Exports,(U.S. and China)
Negative balance means TRADE
DEFICIT
Positive balance means TRADE
SURPLUS

20

Exports and Imports as % of National Income

Imports: cars, computers, crude oil, refined petroleum,
clothing, household appliances, semiconductors, chemicals,
food and beverages
Exports: capital goods, industrial supplies, cars, computers,
chemicals, agriculture products

21

US Trading Partners
Country
Canada
Mexico
Japan
China
Germany
France
Italy
Netherlands
Venezuela
Australia
Belgium/Luxembourg

Value of US
exports ($ bill.)
$160.8
97.5
51.4
22.1
26.6
19.3
10.1
18.3
4.5
13.1
13.8

Value of US
imports ($ bill.)
$213.9
136.1
124.6
133.5
63.9
29.0
25.4
10.3
15.8
6.8
4.4
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Interdependence: Good or Bad?

Globalisation

Globalisation
could involve
all these
things!

Controversial impacts of
globalization

Outsourcing of production to low cost countries

Limits domestic US wage increases
Lowers US government tax revenue
Government unable to provide more public goods

Leads to job losses,

Mexico:
hundreds of thousands of farmers went bankrupt due to
competition with US farmers after opening markets under
NAFTA provisions in 1994
Africa:
Cattle farmers forced out of business as a result of cheaply
produced (and heavily subsidized) meat from the European
Union dumped on African markets.
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Controversial impacts of
globalization

As countries focus on producing what they make

efficiently, inefficient sectors are squeezed out
Job losses in import-competing industries
US: Ford and GM

Local workers lose competitiveness

state of the art factories built overseas and foreign
workers become as productive

Unfair competition:
Rich countries complain they can not compete with
low wage economies
Poor countries complain they can not compete with
subsidies and tariff-protected rich economies

Environmental damage

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Controversial Impacts of
3/4Globalization
of world foreign investment is shared
between world's richest nations.
Within the developing world, stronger
economies receive most foreign investment
top 10 recipients:
China, Brazil, Argentina, Mexico, Republic of Korea, Chile,
Singapore, Thailand, Saudi Arabia and Malaysia.
48 least developed countries received next to nothing

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Controversial Impacts of
Globalization
Increase in world poverty continues
Half of world's population live on < $2/day
Poorest nations liberalized their economies the
most, and were driven deeper into poverty

Increase in world inequality continues

gap between richest and the poorest 20% of the
world's population doubled in the past 40 years.
assets of the world's three richest billionaires
exceed GNP of all 48 least developed countries
and their 600 million people.

Rising inequality within countries

USA: 15.8% of population live in poverty

Globalization to blame?
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Controversial Impacts of
Globalization
Poverty
in commodity-dependent nations
Export earnings of developing countries heavily
dependent on a handful of primary commodities
In sub-Saharan Africa: coffee, tea, cocoa

Liberalization policies drove farmers to grow these

'cash crops' for export instead of food for local
consumption
Markets for them flooded and their value plummeted
Prices for primary commodities (excluding oil) have fallen by
50% in real terms over the past 20 years

Results in:
Falling share of developing countries in world trade
Economic decline
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Controversial Impacts of
Makes
economy vulnerable to external shocks
Globalization
and financial crisis
Asian Financial Crisis 1990s:
As a result of extensive liberalization of the financial
sector across the region, foreign capital poured into
the newly industrialized countries of East and SouthEast Asia peaking in 1996
As turmoil hit markets, foreign capital departed quickly
The crisis hit hardest in Indonesia
Real wages fell by 60% across the country
In Surabaya, Indonesia's largest industrial city, the daily minimum
wage collapsed from $2 to $0.30.
40 million people - a fifth of the entire population - fell into poverty.
Economy shrank by 13% in 1998
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Support of International
Development

IMF headquarters
in Washington DC

International Monetary Fund

Pushes for economic reforms

Lends to countries with balance of payments problems

World Bank
Advising and lending for development under many conditions
Criticism:
Loans depend on countries agreeing to Structural Adjustment
Programs cut social spending, lift import and export barriers, cut
subsidies, privatize, remove price controls little evidence that these
programs work, but they increase poverty

World Trade Organization

Goal: globalization, liberalization of trade, remove barriers to trade
Prime target of anti-globalization protestors
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The
End
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