Lectures 1&2 Flashcards
The world economy: an overview of globalization (definition)
In a general sense, the increasing worldwide integration of ______, _______, _______, _______, and ________.
Economic Cultural Political Religious Social systems
Economic globalization is the process by which the whole world becomes a _______.
Single market
Who laid out the conventional view of trade?
David Ricardo laid out the basic framework in 1817
What did Adam Smith state?
That countries should specialize in the production of the good for which they have an absolute advantage in terms of productivity
Who came up with the idea of absolute advantage?
Adam Smith
What if a country has no absolute advantage?
David Ricardo introduces the notion of comparative advantage
What is comparative advantage
The idea that a country should specialize in the production of a good for which the opportunity cost (what is given up to produce one unit of that good) is the lowest
A country ________ has a comparative advantage
Always
Ricardo uses the principle of comparative advantage to explain: ________, ________, _________.
Why nations trade
Why they do the way they do (the “patterns of trade”)
Why nations can gain from trade
What does gains from trade mean?
When trade leads to a higher surplus for society as a whole (surplus = utility)
Gain 1 from trade
Higher consumption:
Consumers in each nation get something from abroad for less than they would pay at home = lower prices, wider variety of goods
Gain 2 from trade
Increased productivity:
Scarce productive resources are shifted into the comparative advantage good industry
Name the amplifiers of trade
- Greater scale economics (higher production volume tends to lower per-unit production costs) and agglomeration of activities (can boost productivity - eg. Automobiles in Detroit)
- Upgrading (improving production processes, skills, quality, etc.)
- Trade creates new investment opportunities which drives investment-led growth
- Trade may induce innovation which drives productivity and growth
Diplomatic gains from trade
Diplomatic gains: trade fosters cooperation
“_________ is a _________________ of trade” - Montesquieu
Peace is a natural effect of trade
Pain 1 of trade
Relative prices (price of one good over the price of another) change:
- Within a sector: if prices increase from exporting, domestic consumers lose but domestic producers win
- Within an economy: inputs used intensively for export sectors increase in values (wages, profits) but inputs used intensively for import sectors decrease in value (as demand for them decreases)
Pain 2 of trade
Restructuring:
Workers/firms in import-competing sectors tend to suffer, those in sectors that export tend to benefit
Pain amplifiers
The static effects are amplified by dynamic effects:
- Trade can lock nations into slow innovation industries, little to no economies of scale (mining, agricultural products)
- Exporting natural resources may foster corruption and poor governance: the “natural resource curse” (although many countries like Canada and Norway export resources that have low corruption and good governance)
Globalization’s aftermath
- No pain, no gain: the size of pie increases (= gains from trade), but the share each gets does not necessarily (and the winners don’t typically compensate the losers unless forced to)
- Dynamic gains can be large enough for all to gain, but not in the same way: inequalities can increase, some sectors develop more than others
- Theory can’t answer the net-gain question
Pareto efficient allocation (the classical liberal perspective) (definition)
An allocation (description of who gets what) is Pareto optimal or Pareto efficient if it is impossible to find an allocation that makes somebody better off without making somebody else worse off
First welfare theorem (the classical liberal perspective) (definition)
Under certain conditions, every competitive equilibrium allocation is Pareto optimal, or efficient
Name the “old” critical views’ people
Karl Marx
Karl Polanyi
Name the “modern” critical views’ people
Naomi Klein
Joseph Stiglitz and Dani Rodrik
“Old” critical views: Polanyi
Polanyi ties the development of a market economy to machinery-based production
- Operating a machine is costly, so large amounts of the good must be produced
- In order to work without interruption, inputs needed to operate them (workers, necessary materials) must be available at any point = markets for any inputs)
- That feature is not natural as it has to be created
- That transformation of the production process implies a change in production motives, from subsistence to gain-seeking
- “Double movement”: as the economy is more and more “marketized” (everything becomes a commodity), social protectionism (labor laws, consumers protection) is society’s natural response
“Old” critical views: Marx
Marx’s theory of over-accumulation (roughly)
- Workers didn’t earn any of the value added to the goods they produce (the owners of the means of production, the capitalists, do)
- The profits are reinvested to increase the capital to labor input ratio
- Accumulating capital can no longer sustain itself as demand doesn’t follow = socialism (“production for use”) succeeds capitalism (“production for profit”)
- Opening economies to other countries open investment opportunities, but the same process is expected to happen
Socialism
“Production for use”
Capitalism
“Production for profit”
Socialism ________ Capitalism
Succeeds (came after and took the place of)
“Modern” critical views: Klein
- This view differs from Polanyi’s on the driving forces
- Describes globalization as a conspiracy in her book, “The Shock Doctrine”
- Lori Wallach loots at WTO (World Trade Organization) as a conspiracy: corporate interests have captured the globalization agenda = “When elephants mate, many ants get crushed” (African proverb)
“When elephants mate, __________________.” (African proverb)
When elephants mate, many ants get crushed
Who describes globalization as a conspiracy?
Naomi Klein
Who describes WTO as a conspiracy?
Lori Wallach
(Without effective WTO) “When the elephants __________________.”
When the elephants fight, the ants perish.
(With effective WTO) “When the elephants __________________.”
When the elephants are peaceful, the ants work.
“Modern” critical views: Stiglitz and Rodrik
- They embrace traditional views on globalization and agree that their are gains to globalization, but focus more on the pains (globalization is not criticized, per se, the way it is handled is)
- Stiglitz proposes policies to make globalization beneficial to all
- Rodrik is worried by the pressure put on nations and how to maintain sovereignty as much as possible
- He opposes the globalization dynamic: economic globalization => global community => global governance => … to the nation-state dynamic: heterogeneity of communities and geography => divided governance => limited globalization => heterogeneity
Three costs that matter for globalization
- Trade costs (cost of moving goods)
- Communication costs (cost of moving ideas)
- Face-to-face costs (cost of moving people)
