Lectures 5&6 Flashcards
What does ICT stand for?
Information and Communication Technology
What lowered the cost of moving ideas?
Revolution in ICT (Information and Communication Technology) lowered the cost of moving ideas
This cost went from very expensive to nearly cost less in 20 years, which allowed continuous confirmed exchange of information:
- Emails, editable files for cooperative work
- Web-based coordination software packages (logistics, inventory control, quality control, etc.)
- Solved coordination problems and help with decision making regardless of distance
What is ICT?
- “I” for information (computing and data storage costs)
- “C” for communication (transmission costs and reliability)
- “T” for technology (new working methods and workplace organization)
Name the 3 laws driving the ICT revolution
- Moore’s law
- Gilder’s law
- Metcalfe’s law
Moore’s law
Computing power grows exponentially (computer chip performance doubles) -> drives the “I”
Gilder’s law
Bandwidth grows 3 times faster than computing power -> drives the “C”
Metcalfe’s law
Usefulness of a network rises with the square of the number of users
What are network effects?
- Network effects are equivalent to internal economies of scale: the average cost gets lower with more users
- Also, the willingness to pay for a network of each consumer increases with the density of the network (So the firm’s profit per user is higher for a dense network than for a less dense one)
What do network effects lead to?
Leads to monopoly power by firms in specific market segments subject to strong network effects (Eg. YouTube, Twitter)
ICT revolution is much _________ than earlier economic revolutions
Faster
The steam revolutions took decades, whereas the ICT revolution only took years
What is the impact of ICT revolution?
Reorganization of work and production
The ability to send ideas almost anywhere for almost nothing changed:
- Work and management practises
- Relationships among firms, with their suppliers and with customers
Why has the ability to send ideas almost anywhere for almost nothing changed?
- Production is easier to coordinate at distance
- Information-management innovations -> Easier, cheaper, faster, safer to coordinate separate complex activities spatially
For the unbundling of G7 factories, the ICT revolution made __________ feasible (possible to do easily or conventionally).
Large wage differences make it profitable
Offshoring
Define offshoring
Work getting done by a firm in a different country, typically to take advantage of cost differences
Define outsourcing
Contracting work to a third party
A firm outsources without offshoring when it _____________.
Hires a close-by law firm to review contracts instead of having an in-house staff of lawyers
A Canadian firm offshores without outsourcing when it _____________.
Establishes a customer service center in India to serve its Canadian clients
Apple offshores and outsources when it ___________.
Hires Foxconn to assemble its products in China
What are the benefits of offshoring?
- Lower costs
- Getting work done faster through a global talent pool
What are the risks of offshoring?
- Criticized for transferring jobs to other countries
- Language
- Communication problems
- Geopolitical risks
What are the benefits of outsourcing?
- Take advantage of specialized skills
- Cost efficiencies and labor flexibility
What are the risks of outsourcing?
- Misaligned interests along firms
- Increased reliance on third parties
- Lack of in-house knowledge of important business operations
With the 1st unbundling, _____ the work was done at ____________ and by ____________ (in-house production)
- all
- the same location
- the same firm
With the 2nd unbundling, __________ come from _______________ located _____________ with respect to the “nationality” of the final product
- many parts
- independent firms
- in the same or different countries
In 2011, ________ iPhones were sold, and ____________ were made in the US
- 70 million
- none of them
_______ is a key reason why the iPhone is assembled in China by Foxconn
Cheap labor
What are 2 reasons the iPhone is assembled in China by Foxconn?
- Cheap labor
- Fast labor (it takes 15 days to hire 8700 engineers to supervise production against 9 months in the US)
What does crossing borders drive?
Crossing borders drives “knowledge offshoring”
What do G7 firms do to ensure offshores production happens smoothly?
G7 firms offshore know-how along with jobs
Know-how moves across national borders within GVC (Global Value Chain) boundaries
What does GVC stand for?
Global Value Chain
Define the value chain
The value chain describes the full range of activities that firms and workers do to bring a product or service from its conception to its end use and beyond. This includes design, production, marketing, distribution, and support to the final customer
Define the supply chain
The supply chain emphasizes the manufacturing and distribution-related steps
Define the global value chain
The global value chain is a worldwide network of units involved in the design, production, handling, and distribution of materials, finished products and/or services (These units may operate under the same ownership or be independent firms)
What does FDI stand for?
Foreign Direct Investments
What do FDI (Foreign Direct Investments) refer to?
It refers to investments made to acquire a lasting interest in enterprises operating outside of the investor’s own country. The purpose is to gain an effective voice in the management of the enterprise
Define Greenfield FDI
Where a parent company builds its operations in a foreign country from scratch (new production facilities, new administration/research units, new distribution or sales units)
Define Brownfield FDI
When a company purchases or leases existing production facilities to launch a new production company
Define Horizontal FDI
The investment is in the same “business” abroad as the investor operates domestically
Define Vertical FDI
The investment is made in a foreign business that plays the role of a supplier or a distributor with respect to the domestic main activity
What is new in this phase of Globalization?
- ICT enables G7 firms to precisely control what goes on inside developing nations factories
- Global Value Chains (GVCs) are “pipes” for new knowledge flows
- Know-how is complex and lumpy, so new knowledge flows happen mostly within GVCs
- ICT Revolution leads to a “GVC Revolution” mostly for large G7 firms
- Massive North-to-South knowledge flows transform globalization’ s impact
- ICT literally “liberated” G7-firms’ know-how from G7 labor
New North-to-South knowledge flows
- The nature of things crossing borders changed
- Fundamentally changed the nature of globalization and its impact on:
—— The global economic landscape
—— Rich nation economies
—— Poor nations who got the factories/know-how
—— Poor nations who did not get the factories/know-how - The relevant border of knowledge no longer matches nations borders, but also GVCs
GVC revolution transforms _____________ worldwide.
Manufacturing
The income growth due to __________ implied an __________ in ___________: “commodity super cycle”
- industrialization
- increase
- commodity demand
Which countries have been beneficiaries of the commodity boom (“Commodity super cycle”)
- Canada
- Australia
- Russia
Terms of trade formula
(Price of exports)/(Price of imports)
Evaluated by looking how (real) prices change over time
Commodity super cycle: commodity prices tend to go through ________ periods of boom and bust, known as __________.
- extended
- super cycles
In general, why are commodity price movements important for Canada?
They help determine the country’s terms of trade, exchange rate, employment, income, and inflation
How many broad-based commodity priced super cycles were there since the early 1900s?
4
The most recent super-cycle started in __________ and has been (at least until recently) ______________.
- the mid-1990s
- in its downsizing phase
Super-cycles are the result of the interaction of _________________, unexpected demand surges and slow-moving responses
- large and long
Define Value Added (VA)
The value added of an industry, also referred to as gross domestic product (GDP)-by-industry, is the contribution of an industry to overall GDP
Value added is equal to ___________________.
The difference between an industry’s gross output (sales plus other operating income) and the cost of its intermediate inputs (including energy, raw materials, semi-finished goods, and services) that are purchased from other industries
Value added can be computed _______________ or at the ______________.
- at the firm (or GVC level)
- industry level
Value added _________ profits
Value added does NOT equal profits!
(At the firm level, VA is the difference between the value of its gross output and the value of what the firm buys from other firms. To obtain profits, one has to deduct wages, loans, etc.)
GDP shares change; the loss in the G7’s GDP share was won by just ________________ (the R11)
Eleven rising economies
i.e. by nations that gained at least 3/10th of a percentage point of world GDP share from 1990 to 2010
Who are the R11?
- China, India, Brazil, Indonesia, Nigeria, Korea, Australia, Mexico, Venezuela, Poland, and Turkey
Aside from the R11, the Rest of the World (RoW)’s share is ____________
Fairly flat
Impact on global poverty
- Post 1993: hi-middle poverty plummets -> 650 million fewer poor!
- Other’s poverty’s keep rising
- The 2nd unbundling has helped many but not all in developing countries
Define IIT (Intra-Industry Trade)
IIT: Exports and imports from products belonging to the same industry
(These products are differentiated finished products (BMW vis Toyota) or intermediate products belonging to the same class of products (car seats vs car engines))
IIT is ________ between Germany and France because of _______, and _______ between Mexico and the US because of ___________.
- high
- EU
- high
- NAFTA
IIT is _______ between Japan/Thailand or Germany/Poland because of ___________.
The 2nd unbundling
What does BIT stand for?
Bilateral Investment Treaty
What does IIT stand for?
Intra-Industry Trade
Define BIT (Bilateral Investment Treaty)
An agreement between 2 countries regarding the promotion, the protection and the liberalization of investments made by investors from respective countries in each other’s territory
BIT provides a number of guarantees such as _______________.
- fair and equitable treatment (equivalent to non-discrimination for investments)
- protection from expropriation
- free transfer of means, etc.
A controversial aspect of BIT is that they typically allow for _____________ whereby _______________________. This has led to ___________ and ____________, especially for ______________ countries.
- a separate dispute resolution mechanism
- an investor whose rights under the BIT have been violated has recourse to binding international rather than suing the host state in its own courts
- greater liability risks
- uncertain net gains from BITs
- less developed
What year were new BITs signed?
1987
Before 1995, tariffs in the ______ are low (tariffs decreased gradually in GATT rounds), and tariffs in the ________ are _________.
- North
- South
- high
After 1995, developing nations unilaterally ________ tariffs massively: protectionism becomes ______________ (not even in GATT/WTO rounds!)
- lowered
- destructionism
Before the 1990s, ______ RTAs (Regional Trade Agreements) are signed, and they are mostly __________ (i.e. only tariff preferences).
- few
- “shallow”
In the mid-1990s, the ___________ of RTAs ______ (as does their depth)
- number
- soars
Deep trade agreements include a wide range of issues beyond tariffs, such as _________________. These policy areas involve ______________ (or behind-the-border measures). The effects of these measures are _______ to assess than border agreements (trade creation and trade diversion) because ______________.
- Services, investment, intellectual property protection, competition policy
- domestic regulations
- more difficult
- changes to domestic regulations are difficult to tailor so that they favour only selected trade partners
Why does deep integration occur?
Because as trade becomes more open, countries’ policies increasingly depend on each other (collective decision is better than unilateral decision-making)
Deep integration agreements may be necessary to _____________.
Promote trade in certain sectors and economic integration more broadly
Rapid growth in _________ and _______ G7 growth produced ___________.
- developing nations
- stagnate
- the Great Convergence
Implication 1: changes in the competition among nations
- De-nationalized comparative advantage
2. Changed nature of trade
- Comparative advantage de-nationalized
- In the 1st unbundling, exports are a “bundle” of national know-how, labor, capital, institutions
- In the 2nd unbundling, exports are a mixture of several national comparative advantages
- Global Value Chains (GVCs) redraw international borders of comparative advantage -> Ricardo loses relevanvance
Globalization is not about exploiting existing comparative advantage anymore, it is ______ comparative advantage
Changing
What does the principle of comparative advantage explain?
- Why nations trade
- Who gains from trade
- What do changes in one nation’s competitiveness mean for other nations
- Who makes (and exports) what
Who gains from trade?
Trade allows each nation to use its resources more efficiently
If technology flows make foreign nations better at producing goods the G7 used to export, the change ___________ G7 nation.
May harm
Gains from trade _______ automatically hold when the sources of comparative advantage cross borders as well as good
Does not
If you help others get good at things you are really good at, the new competition _____________.
May harm you
Offshoring ______ the competitiveness of the ____________ doing it.
- improves
- Northern firms
Most countries/firms ________ to participate in the GVCs. This pushes countries to _______________.
- want
- implement policies facilitating their participation
(High-tech) + (Low-wages) ______ (Low-tech) + (Low-wages)
Beat
A country’s exports now depend on _____________ in global value chains rather than underlying comparative advantage as with the 1st unbundling
Its “position”
Observed trade flows can be _________.
Misleading
“21st century trade” is more _________.
Complex
Flows of goods, services, intellectual property, capital, and people generated by the 2nd unbundling are _________ to measure.
More difficult
There is an ____________ of the change for Northern-developed countries vs Southern-developing countries
Asymmetric nature
There is nothing fundamentally new about 2nd unbundling trade among ________ (North-North)
Rich nations
What was a big change in the North-South asymmetry of the change?
A big change is factories crossing North-South borders
Why asymmetric?
- At the start of the 2nd unbundling, the knowledge-labour ratio was radically higher in the North than in the South
- Ability to coordinate internationally was a revolutionary boost in developing nations’ abilities to export parts, but only mild stimulus G7 parts exporters
- The 2nd unbundling acted like an asymmetric trade opening (like Northern “tariffs” on parts falling much more than Southern tariffs)
Until the 2nd unbundling, mostly _________ parts going to __________.
- Northern
- South
Implication 2: changes at the product level
- Smile curve
2. Servicification of manufacturing
Input activities
- Primary (copper, rare earth, petroleum, etc.)
- Manufactures (pressing, welding, assembling, etc.)
- Services (design, software, retail, transport, etc.)
The smile curve comes from dividing value added between ______________, ______________ and ______________.
- pre-fabrication services (R&D)
- fabrication (manufacturing, assembly)
- post-fabrication services (marketing, after-sales services)
The smile curve can be extended at the _________ level (i.e. at the level of the sectors: primary, manufacturing and services)
Aggregate
Why servicification?
- More services embedded in the good itself -> More deign and technology
- More services in production process -> Domestic and foreign outsourcing -> More coordination and transportation services
- Commoditization of fabrication -> Hi-tech + low wages radically reduce cost of fabrication, but not service inputs
Implication 3
- Labor market hollowing
- Rising equity premiums
- Globalization impact with finer resolution
2nd unbundling’s 2 key aspects of labor market hollowing
- North-South production unbundling (fractionalization of production and offshoring)
- North to South knowledge flows
(Both tend to change impact of deeper globalization on winners and losers within a nation)
(Start with labor)
Labor’s slice of GDP “pie” has _________.
Decreased
Define GDP
GDP (Gross Domestic Product) is a measure of the market value of all final goods and services produced in a period of time (Eg. Annual)
Name 3 ways to measure GDP
- Expenditure approach
- Production approach
- Income approach
Expenditure approach formula
GDP = C + I + G + X - M, where C = Consumption I = Investment G = Government spending X = Exports M = Imports
Define production approach
The sum across all industries of their Value-added (VA), where VA = Value of Output - Value of Intermediate Consumption
Define income approach
Adding incomes that firms pay households for factors of production they hire: wages for labor, interest for capital, rent for land and profits for entrepreneurship. This gives the GNI (Gross National Income)
What does GNI stand for?
Gross National Income
GDP = ______.
GDP = GNI
In practice, does GDP = GNI?
No, because of errors of measurement
Traditionally, labor earns about _______ of national income, but over the past 20 years or so, the share of labor income has ____________.
- 60%
- decreased below 60%
Know-how from North gets to be applied in ______________, so it ______ in value.
- both North and South
- gains
Capital wedge: _____________.
Gap between return-to-capital and the safe real rate if return
What do capital knowledge gains contribute to?
- Increasing income inequalities within G7-type countries
- Decreasing the share of national income going to labor
What are the 3 main causes of increased income inequality and lower labor share of national income?
- Globalization triggered by the 2nd unbundling
- Technological changes triggered by the ICT revolution
- Increased firm monopoly power and concentration
(There are reasons to think that technological changes have had a greater impact on the share of labor than globalization)
(Increased firm monopoly power is a more recent explanation gaining credence)
Labor share falling is linked to _________.
Increased income inequalities
There is a push to develop tools to measure __________ to better address inequality issues.
GDP per income groups
International competition is no longer at the _________ level, but more and more at the __________ level and at the _______ level.
- product
- production
- job
Globalization impact with 2nd unbundling
- More individual
- More sudden
- More unpredictable
- More uncontrollable
Globalization impact with 2nd unbundling: More individual
- 1st unbundling impact was sector-by-sector
- The 2nd unbundling impact is stage-by-stage, or even job-by-job -> Thus, its impact is more individual
- The 2nd unbundling breaks up the “national team” of technology and labor
Globalization impact with 2nd unbundling: More sudden
- The 1st unbundling required firms and nations to build most of the supply chain to be competitive in the final good
- Under the 2nd unbundling, GVC brings everything a firm does not have -> “Powered industry” just add labor and stir
- Shift in comparative advantage can be faster
Globalization impact with 2nd unbundling: More unpredictable
- 1st unbundling globalization was somewhat predictable -> Sectors you would lose next looked very much like the ones you recently lost; sectors where you would gain export competitiveness in looked very much like those that gained it in recent past
- 2nd unbundling globalization by stages is not like this -> Complex interaction of factors used (Eg. Low-skill labor), importance of timelines, quality, connection to other stages
- It is increasingly more difficult to know what will get offshored next
Globalization impact with 2nd unbundling: More uncontrollable
- The 1st unbundling’s pace was determined by gradual technical advances in shipping, and gradual trade liberalization (the former is slow and the latter is controlled by governments through tariffs, etc.)
- The 2nd unbundling’s pace is determined by advances in ICT (Recall: Moore’s laws, Metcalfe’s law, etc.)
- Governments have a hard time controlling advances and disruptive implications of ICT
The unbundlings led to?
The Great Convergence
The 1st unbundling led to?
The Great Divergence
The 2nd unbundling led to?
The Great Stagnation
The 1st unbundling led to _______ growth in the North, _______ growth in the South
- high
- low
Why can RTA (Regional Trade Agreement) be costly to its members, too?
There can be trade diversion or no trade creation, possibly harming countries that are part of a regional trade agreement.
