Globalization Flashcards
What is the globalization trade-off?
Globalization trade-off: Effectiveness vs security
It is efficient to ship the production of some goods to Vietnam, however, it also makes you dependent on Vietnam.
Name the four phases of market integration in history
First phase:
Globalizations first wave (1870-1914)
Second phase:
Collapse and disintegration during the interwar period and The Great Depression.
Third phase:
Re-integration since WW2. Driven by IMF and WB.
Fourth phase:
Globalizations second wave (since 1990s).
After the collapse of the Soviet Union and opening of China and India.
Hyper-globalization since 2000.
What caused the trade boom in the first wave of globalization (end of 19th century)
Rapid decline in transport costs
- Invention of steam boat
- Expanding railway network
- Opening the Suez Canal etc.
Fewer taxes on trade → liberalization of trade
- Started with Anglo-French Cobden Chevalier treaty
Ultimately: Prices start to converge → the ultimate symbol of more trade.
What is the idea in the Hecksher-Ohlin model of comparative advantages
Core idea of the model:
- A country has a comparative advantage relative to other countries in the production of goods that use their relatively abundant factor/resource.
- Therefore, countries specialize in producing goods where they have the comparative advantage → if not, they would be stupid.
What resources did the different parts (New World vs Old World) have in the trade boom in the 19th century?
New World (USA, Canada, Australia)
Abundant land (cheap)
Scarce labour (expensive)
wr → high → they will produce and export land-intensive goods
Old World (Europe)
Abundant labour (cheap)
Scarce land (expensive)
wr → low → they will produce and export labour-intensive goods
What happened when trade was set free between the old and new world in the 19th century?
You start exporting your cheap abundant factor to other parts of the world. The prices on the different goods converge.
Example:
US have very few workers (and therefore high wages due to high demand)
Europe starts exporting labour-heavy goods to the US
That means that the wages of labour relative to rent in the US (that were high before) will start falling, because you you don’t have the same demand for labour anymore, since you get your labour-heavy goods from Europe.
The European workers win (higher wages)
The American workers loose (lower wages)
NB: The reversed picture for land-intensive goods.
Result:
Free trade led to convergence in factor-prices between the New and Old World.
Which were the winners and losers of free trade in the 19th century?
Free trade creates winners and losers (as the above example illustrates)
The Hercksher-Sokoloff model can thus also predict which political conflicts that will emerge in different countries as response to free trade
Winners:
Workers in Europe
Landowners in the New World (Australia, US etc.)
Losers:
Workers in the New World
Landowners in the Old World
Explain the economic trilemma (Mundell-Fleming model)
Every monetary regime would like to obtain 3 goals
1. Fixed exchange rates
2. Free movement of capital
3. Independent monetary policy
However: only two goals can be obtained at once –> you have to make a trade-off
How did different monetary regimes over the 20th century prioritize between the 3 factors in the economic trilemma?
Gold standard:
- Fixed exchange rates: YES
- Free capital movement: YES
- Independent monetary policy: NO
Bretton Woods (1944-1973)
- Fixed exchange rates: YES
- Independent monetary policy: YES
- Free capital movement: NO
1973-today:
- Fixed exchange rates: NO
- Free capital movement: YES
- Independent monetary policy: YES
What was the Gold Standard?
A monetary regime where the price of money is linked to the price of gold.
- You exchange money for a fixed gold rate
Benefits of the system:
- Exchange rate is always the same –> much easier to trade with other countries also on gold
- Gold standard was a system that brought credibility
