Globalisation Flashcards
what is globalisation
a process by which the economies of the world become more integrated by the free flow across national boundaries of goods and services, investment, finance and labour
how to measure globalisation
- international trade of goods and services (trade)
- International integration of capital markets (flows of savings and investments)
- International labour markets (migration)
Trade
- trade between 2 countries is an extension of trade within a country
- international trade affects both firms and countries
- due to trade, countries such as the UK can import coffee and bananas and export Rolls-Royce
- countries can become richer as a result of an open trading environment e.g china
what is merchandise trade?
trade is tangible products that are physically shipped across borders
common measures of globalisation
- imports/exports or total trade as a share of GDP
- Reduction in trade costs (price gaps) between countries
Globalisation before 1870-1914
highly integrated, large trade and rapid growth
Globalisation after WWII
- Reduction of trade costs e.g freight costs, of goods and services between countries
- Decline in man-made barriers to trade (e.g tariffs and quotas). Instead replaced by multilateral agreements e.g WTO
- Information and communication technologies revolution
Deglobalisation
increasing trade costs during the depression
- partly due to tariffs and quotas on imports
International trade of goods and services
trade used to be standardised
- now, raw materials shipped back and forth between countries during the manufacturing process
- this new feature of world trade and production is referred to as offshoring or outsourcing
- offshoring is the relocation of part of a firms activities outsourcing national boundaries in which it operates
- we can expect increased trade in services in the future
WTO report 2019 on services
- services account for the majority of trade in many developed economies
and are growing rapidly in developing economies
- although trade has increased among countries, there is a widening gap between imports and exports
- the world is closed and trade must balance
Integration of capital markets
- countries lend to and borrow from each other to finance investment
- the sources and uses of foreign exchange are recorded in the balance of payments (BOP)
Balance of payments
includes:
- Foreign portfolio investment - buying foreign stocks or bonds
- foreign direct investment (FDI) - ownership of foreign physical assets
BOP = current account + capital and financial account
Current account (CA)
consists of:
exports - imports + net earnings from assets abroad
- CA deficit: if country is borrowing, ie receiving net capital flow from countries
- CA surplus: country is lending (net capital outflow)
Measuring globalisation: International Labour markets
- fewer advances in labour market integration than goods or financial market integration due to immigration barriers
- wages still differ across countries due to migration costs
- international trade in goods and services acts as a substitute for migration and allows workers to improve their living standards through working in export industries even when they cannot migrate to earn higher incomes
Why does trade occur?
- Differences across countries
- Economies of scale
- Economies of agglomeration
- Low coordination or communication costs
- Proximity of countries to another
Differences across countries
- in productivity of labour and technologies
- in total amount of resources (labour, labour skills, physical capital, land)
- differences in costs of offshoring
Economies of scale
larger scale of production more efficient
Economies of agglomeration
cost reductions from locating close to other firms in similar industries
Proximity of countries to another
- distance matters and can also be impediment to trade as transportation costs effect costs of imports/exports
Size of economies
- are directly related to the volume of imports and exports
- larger economies produce more goods and services, have more to sell in the export market so they attract large shares of countries spending
- larger economies generate more income from the goods sold so are able to buy more imports
Absolute advantage
country has absolute advantage over another in the production of a good if it can produce it with fewer resources and when a country has the best technology for producing a good
Comparative advantage
country has a comparative advantage in producing a good if the opportunity cost of producing the good in that country is lower than it is in other countries
Ricardo’s comparative advantage and free trade
Portugal has absolute advantage in both cloth and wine over England
Portugal has comparative advantage in production of wine due to its climate
England as comparative in cloth
trade can occur
gain from trade in exporting goods they have comparative advantage in
illustrates a benefit from balanced international trade without having tariffs
Assumptions of comparative advantage and specialisation model
- 2 countries, home that produced wheat and foreign which produces cloth
- labour is the only factor of production used in production of each good
- labour productivity varies across countries due to differences in technology, but labour productivity in each country is constant (ie no diminishing marginal returns to labour)
- supply of labour in each country is constant
- there’s perfect competition - price = marginal cost
- perfect labour markets - competition allows workers to be paid a ‘competitive’ wage equal to the value of what they produce, and allows them to work in the industry that pays the highest wage
- but immobile across countries (no migration)
- both countries produce both goods which is subject too constant returns to scale (increase in input, increase in output)
home production
1 worker can produce 4 wheat, or 2 cloth
so MPL wheat = 4, and = 2 for cloth
there are 25 workers
if all produced wheat = 100 wheat
if all produced cloth = 50 cloth
production function is a straight line
the slope of the possible production frontier (the marginal rate of transformation) is the opportunity cost of obtaining 1 more wheat in cloth
demand side of home production
- what production it will produce will depend on the demand for the goods
will produce at autarky equilibrium (where MRS = MRT)
wages at home production
wages for wheat = price of wheat x marginal product of labour for wheat
same with cloth
in autarky equilibrium, the relative price of wheat = opportunity cost of wheat
as wages the same across countries:
Price(wheat) x MPL(wheat) = Price(cloth) x MPL(cloth)
therefore relative price of cloth = 2
looking at foreign production
assume it has inferior technology to home
1 worker produces 1 wheat or 1 cloth, 100 workers
MPL(wheat) & MPL(cloth) = 1
PPF steeper as foreign has absolute disadvantage
opening both countries to trade
before: relative price of wheat was 1/2 at home, 1 at foreign
and relative price of cloth: 2 at home and 1 at foreign
to make money you would buy wheat at home and sell abroad, and buy cloth abroad and sell at home
home producers will want to export wheat abroad
and foreign producers will want to export cloth
relative price of wheat in trade equilibrium
will range between 1/2 and 1
when both countries specialise and trade
before: in each country consumption = production
with specialisation and trade world production increases
how can we justify that workers will only want to work in their country
after trade the relative price of wheat is Price (wheat)/Price(cloth)
which implies relative price of wheat is the same in each country
using the relative world prices of wheat in both countries
i.e wage(wheat)/wage(cloth)
= Price(wheat)/Price(cloth) x (MPLwheat/MPLcloth)
it turns out there is higher wages in the wheat industry in the home country
and higher wages in the cloth industry in foreign so workers move there
How consumption changes when both countries open up to free trade
consumption expands
PPF moves up and is steeper
exports = production - consumption = 100 - 40 = 60
at home, can trade 60 wheat for 40 cloth so imports = 40
summary of free trade example
- each country is exporting the good for which it has a comparative advantage
- there’s gains from trade for both countries
- ie export of wheat by home = import of wheat by abroad
- wages don’t converge with trade in our model
wages are determined by absolute advantage and no comparative advantage
Gains from trade - specialisation in production
- countries can specialise in production and be more efficient due to larger scale production
- countries use their resources to produce what they’re most productive at and can trade those for what they want to consume
Gains from trade 2
trade allows countries to export goods made with relatively abundant resources and imports goods made with relatively scarce resources
e.g Norwegian consumers import oranges that they would have a hard time producing
Gains from trade 3
almost always generates mutual benefits to both countries
when a buyer and seller engage in voluntary transactions both can be made better off
- free trade allows firms and industries to take advantage of economies of scale
- can gain by trading current resources for future resources
Losers from trade 1
international trade can harm the owners of resources that are used relatively intensively in industries that compete with imports
benefits of international trade not distributed evenly across individuals in countries
trade in the short run
opening trade increases countries consumption possibility sets but conflicts of interest emerge between and within countries
- relatively abundant factors within a country are relatively cheap, and gain when trade raises their price towards the world average
- conversely, the price of relatively scare factors falls towards the world average due to trade
Trade in the long run
- specialisation according to comparative advantage has similar labour market affects as technological progress
increased productivity shifts the PS curve upwards
- in short run, jobs are destroyed
- in the medium run, growth in export industries creates new jobs
- in long run, real wages higher and long run adjustment process depends on how much WS curve shifts
Trade and unemployment
in 2 country model, we assume workers immediately finds new jobs in other sectors
trade shifts jobs from import comporting sector to export sector
- process isn’t instantaneous: some workers will be unemployed as they look for new jobs
- there are costs associated with switching jobs
- skills across different industries differ (new training may be costly)
- significant changes in way of life
how much unemployment can be traced back to trade?
Data would say its not positively correlated
- shows that unemployment is primarily a macroeconomic problem that rises during recessions
way to reduce is through macroeconomic policies and not trade reduction policies
Trade and income distribution
- trade has strong effects on distribution of income
- trade benefits factors that are specific to the export sector in a country but hurts factors specific to the import-competing sectors
- however, trade benefits a country by expanding choices
- relative to the rest of the world the US is abundantly endowed with high skilled labour and low skilled is correspondingly scarce
- thus International trade has the potential to make low skilled workers in the US worse off on a sustained basis
thus is international trade the major cause of increasing income inequality in the US?
other causes are responsible:
- skill of the labour force
- labour income share has been declining since the 2000’s so implies technological progress in sectors increases income inequality
as displaces unskilled workers but requires skilled workers
Political bias in trade politics
- potential losers from trade are better politically organised than the winners
- typically, those who gain from trade are a much less concentrated, informed, and organised group than those who lose
- for instance, consumers and producers in the US (in the sugar industry) and EU (farmers)
e. g the common Agriculture Policy in the EU
summary of winners and losers from trade
- benefits a country by expanding choices
- possible to redistribute income so that everyone gains from trade
- those who gain from trade could compensate those who lose and still be better off themselves
- redistribution however very hard to implement
- optimal trade policy must weigh one groups gains against another losses
How governments can influence trade
- using instruments of trade:
- tariffs as taxes on imports
temporary tariffs to protect an infant industry
if a country is large a tariff may improve its terms of trade
- quotas - limits on quantity of imports
- immigration policies - regulate the movement of people between nation that isn’t possible within nations
- capital controls - gov puts limits on the ability of individuals or firms to transfer financial assests among countries
- monetary policy
Globalisation trillema
Rodrik stated that it’s impossible for countries to achieve simultaneously:
- hyperglobalisation : no political or cultural barriers to the flow of goods and investment
- sovereignty: pursue the policies that it creates
- Democracy: liberty and equality
trying to get all 3 leaves us in ‘an unstable no-mans land’
if we have national sovereignty and democracy
then effective national economic policies of stabilisation, environmental protection and redistribution require limits on labour and capital mobility: no hyper globalisation
if we have hyper globalisation and national sovereignty
hyper globalisation policies are unpopular with voters as they increase economic insecurity and weaken labour rights and environmental protection and can only curve if democracy doesn’t
if we have hyper globalisation and democracy
demands for global governance (e.g labour standards, environmental protection, tax treaties) that compromise nationally differentiated policies mean that effective global governance is inconsistent with complete national sovereignty
examples of push back against globalisation
- UK leaves EU changing its relationship to the bloc on trade, security and migration
- election of Trump, a protectionist, in 2016
recent shocks to global trade also include:
- COVID-19 outbreak
- trade wars and tariff retaliations in major economies such as:
US vs Chins and ES vs EU 2018-19
Saudi Arabia and Russia oil price war 2020
Global financial crisis 2007-9
Trade and performance
- globalisation can promote growth:
- competition with foreign firms accelerates rate of technological progress
- economies of scale due to foreign demand allows for lower cost of production
- globalisation can also prevent growth:
- disadvantageous specialisation: specialising in low innovation sectors can slow growth
- leading by doing in infant industries may need temporary tariff protection
some countries benefit more from globalisation
Brexit and the Global Economy
shows the political economy of international economic policy remains difficult
shouldn’t take the historical downward tend in barriers in economic migration as irreversible
ways of taking into account the effects of Brexit on the global economy
- use data on trade flows between different countries over long periods of time to estimate how trade and investment are related to tariff and non-tariff barriers
- use models that can capture the many industrial sectors, countries and regions of the global economy
Effects of Brexit
- changes of trade barriers affects the price of imported and exported goods
- affects the costs of production and consumer prices
- households consumption, UK businesses production and purchasing decisions and overseas demand for UK products are affected - new immigration rules, affects labour supply and how responsive this is to change in wages
- capital mobility - depends on the restrictions the UK, EU & other countries have imposed on capital movements
- Trade with the EU has declined:
- Dec 2020 - Jan 2021 exports of goods to the EU fell by 40%. Imports dropped by almost 30%
won’t be permanent as companies stockpiled goods before Brexit
Factors affecting full trade
- 71 pages of paperwork needed for 1 lorry of fish
- ‘Derbyshire cheese maker upset at £180 post-Brexit Stilton fee’ - trade costs between EU and UK
- falling imports that are largely seen in the machinery and transports and chemical for the EU
Estimated long term effects of Brexit
- the trade channel: significant decline in trade between UK and EU due to higher trade costs
- FDI: higher restrictions on capital movement and FDI costs between the EU and UK
Percent share of FDI of GNP:
- before Brexit EU investment in UK was 1.2%
- before Brexit UK investment in UK was 1.7%
study by McGrattem and Wraddle in 2020 estimates both investments will fall but rise to around 1.2% in the long run
- total business outputs in both economies expected to fall
