The Nation and the World Economy Flashcards
Globalisation
A process by which the economies of the world become more integrated by the freer flow across national boundaries of goods and services, investment, finance and labour.
How do we measure globalisation?
- International trade of goods and services (trade).
- International integration of capital markets (flows of savings and investment).
- International labour markets (migration).
International Trade
- Trade between two 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 and the Middle East countries.
What is merchandise trade?
- Trade in tangible products that are physically shipped across borders.
- Trade in services is a more recent phenomenon: tourism, financial and legal services, education.
Common measures of globalisation
- Imports or exports or total trade as a share of
GDP. - Reduction in trade costs (price gaps) between countries.
What caused world trade to increase after WWII?
- Reduction in trade costs (price gaps) e.g freight costs (transportation 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 (ICT) revolution.
Deglbalisation
Increasing trade costs during the Depression
* Partly due to tariffs and quotas on imports.
Offshoring
- Previously, trade of merchandise goods was standardised.
- Today, raw materials shipped back and forth between countries during the manufacturing process.
- This new trend or feature of world trade and production is referred to as offshoring or outsourcing.
- Think of the Trump Tax Reform Plan passed by the US Senate in December 2017. What is its effect on offshoring?
Trade Balance
- Although trade has increased among countries, there is a widening gap between imports and exports.
- Trade balance or net exports is the difference between total value of exports and total value of imports (includes both goods & services)
- Trade surplus: exports > imports.
- Trade deficit: exports < imports.
- Balanced trade: exports = imports.
- 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), which include: - 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:
CA = exports − imports + net earnings from assets abroad - CA deficit: country is borrowing (receiving net capital
flows). - CA surplus: country is lending (net capital outflow).
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
- It allows workers to improve their standard of living through working in export industries even when they cannot migrate to earn higher incomes.
Why does trade occur?
- Differences across countries.
- Differences in the productivity of labour (due to differences in technology) used in each country - the Ricardian model.
- Differences in the total amount of resources (labour, labour skills, physical capital, land or other factors of production) between countries - the Heckscher-Ohlin model.
- Differences in the costs of offshoring.
- Economies of scale (larger scale of production is more efficient).
- Economies of agglomeration – cost reductions from locating close to other firms in similar industries.
- Low communication or coordination costs.
- Proximity of countries to one another.
Why does the U.S. trade more heavily with the 3 largest European economies than with the others?
- The size of an economy is directly related to the volume of imports and exports.
Ø Larger economies produce more goods and services
Ø attract large shares of other countries spending in the export market.
Ø generate more income so they buy more imports.
Absolute advantage
- A country has absolute advantage over another in the production of a good if it can produce it with fewer resources than the other country.
- When a country has the best technology for a producing a good.
Comparative advantage
- A 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.