L1: Measuring Globalisation Flashcards
openness rate
simplest index of globalisation
(X+M)/Y
globalisation
measured by economists as a impressive rise in levels of trade openness
vertical integration
trade in intermediate products as opposed to to final products
3 main sources of globalisation
- fall in transport costs (infrastructures, equipment, logistics)
- fall in communication costs (telephone, internet, planes) - technological progress
- fall in trade barriers (GATT/WTO, regional agreements)
GDP
value-added concept (sum of value added))
exports and imports
gross value concept
value-added exports
import manufactured goods, export it with an added value which is how they export more than they import
gross value concept
value of the good including all the things within the good itself
fragmentation to exports-to-GDP ratios
the more fragmentation of the production process, the more you look at exports that have high value but low value added - the more you increase the exports-to-GDP ratio
the world is flat (Thomas L. Friedman)
globalisation is over, distance and borders don’t matter anymore
gravity empirical analysis
- national borders largely reduce trade
- distance also has a large effect on all sort of flows (goods, services, capital, migrations, air traffic, internet…)
gravity model
T = (A x Yi x Yj)/Dij T as trade between countries i and j A as a constant Yi as the GDP of country i Yj as the GDP of country j Dij as the distance between countries i an dj
why does trade occur?
different countries have different abilities to produce different goods for beneficial exchange
differences across countries in labor, labor skills, physical capital, natural resources, and technology
economies of scale
larger scale of production is more efficient
Ricardian model
theory of comparative advantage
differences in the productivity of labour (due to differences in technology) between countries
Heckscher-Ohlin model
theory of comparative advantage
differences in endowments of factors of production (labor, capital, land, etc.) between countries
gains from opening to trade in Ricardo
- specialisation gains - optimise the use of scarce resources by specialising countries in what they do best , production is more efficient, increase in world production
- exchange gains - increase satisfaction of consumers by separating production structure from structure of consumption in a country, increases world consumption and therefore utility
comparative advantage definition
a country has a comparative advantage in a good when its relative productivity for this good (with respect to other goods) is higher than in the other country
assumptions of Ricardo
2 countries 2 goods/sectors 1 production factor - labour production technology differs across countries labor moves freely across sectors, but not at all across countries identical factor endowments constant returns to scale no distortion, perfect competition identical preferences
a (in an equation)
technical coefficient or unit input coefficient - amount of labour needed to produce one unit of the good
inverse of productivity, which is output divided by the number of people that produce that amount of output
PPF
set of possible production combinations that achieve full employment of factors
slope of the PPF
MRT (marginal rate of transformation)
opportunity cost of producing more X in terms of Y
reflects a country’s comparative advantage
MRT in Ricardo
constant, because productivities are constant - only one factor of production so always the same cost
perfect inter-sectoral mobility with comparative advantage in Ricardo means that …
wages are equalized at w
how to find a country’s absolute advantage on a PPF diagram?
distance between the PPF and the origin of the diagram reflects the country’s absolute advantage
what happens with regards to price and demand when a country opens to trade in Ricardo?
consumers re-allocate their demand towards the country with better relative price: prices tend to converge (perfectly in the ricardian model)
conclusions from Ricardo
- trade based on differences in relative productivities (technology)
- trade is inter-industry: exported good ≠ imported good
- free trade means an increase in world production
- free trade = positive sum game
- no country loses from opening up to trade (pareto optimal) but the gain from trade is not equally shared - small countries gain more (openness affects less adversely their terms of trade)
wages in the Ricardian model
autarkic wages reflect labour productivity
free trade wages reflect productivity in the sector of specialization
wage differences between countries depend on …
difference in productivities between the two countries
world relative price of the good exported by each country
relative productivities determine …
specialisation
absolute productivities determine …
relative purchasing power
absolute advantage comes from …
differences in the stock of human capital in the economy, the technological level, institutions, etc.
RCA
share of sector k in country i’s exports / share of sector k in world exports
absolute advantage definition
a country has absolute advantage in a good if its productivity for the production of that good is higher compared to other countries
