The Nation and the World Economy Flashcards

1
Q

Globalisation

A

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.

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2
Q

How do we measure globalisation?

A
  • International trade of goods and services (trade).
  • International integration of capital markets (flows of savings and investment).
  • International labour markets (migration).
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3
Q

International Trade

A
  • 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.
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4
Q

What is merchandise trade?

A
  • Trade in tangible products that are physically shipped across borders.
  • Trade in services is a more recent phenomenon: tourism, financial and legal services, education.
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5
Q

Common measures of globalisation

A
  • Imports or exports or total trade as a share of
    GDP.
  • Reduction in trade costs (price gaps) between countries.
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6
Q

What caused world trade to increase after WWII?

A
  • 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.
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7
Q

Deglbalisation

A

Increasing trade costs during the Depression
* Partly due to tariffs and quotas on imports.

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8
Q

Offshoring

A
  • 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?
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9
Q

Trade Balance

A
  • 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.
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10
Q

Integration of capital markets

A
  • 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).
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11
Q

International labour markets

A
  • 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.
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12
Q

Why does trade occur?

A
  • 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.
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13
Q

Why does the U.S. trade more heavily with the 3 largest European economies than with the others?

A
  • 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.
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14
Q

Absolute advantage

A
  • 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.
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15
Q

Comparative advantage

A
  • 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.
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16
Q

Comparative advantage Ricardo example

A
  • Introduced by David Ricardo in 18th century.
  • Two countries: Portugal and England.
  • Two goods: wine and cloth.
  • Technology: Portugal better in production of both goods.
  • Portugal has comparative advantage in production of wine.
  • England has comparative advantage in production of cloth.
  • Technology: Portugal better in production of both goods.
  • Trade can occur due to the comparative advantages in both countries.
  • Countries gain from trade by exporting the goods in which they have a comparative advantage.
  • Ricardo shows that countries can benefit from balanced international trade without having tariffs.
17
Q

Steps in developing comparative advantage model

A

Ø Derive the production possibilities frontier.
Ø Establish the autarky (no trade) equilibrium. Ø Determine the export patterns.
Ø Explain how wages are determined.
Ø Determine the international prices for
all countries.
Ø Establish the equilibrium with international trade
Ø Explain the gains from trade in our model.

18
Q

Assumptions of comparative advantage model

A
  • Assumptions of our model:
  • Two countries: Wheatland (home country) and Clothland
    (foreign country).
  • Two goods: wheat (WT) and cloth (C).
  • Labour is the only factor of production used in the production of each good.
  • Labour productivity varies across countries due to differences in technology, but labour productivity in each country is constant.
  • The supply of labour in each country is constant.
  • Perfect competition.
  • Perfect labour markets - but immobile across countries (no migration).
19
Q

No trade

A
  • Imagine both countries can produce both goods which is subject to constant returns to scale.
  • What will production and consumption in each country be if there is no trade?
  • To answer the above question we need to provide some numbers.
  • calculations for Wheatland first and those of Clothland second.
  • Suppose in Wheatland, 1 worker can produce 4 bushels of wheat or 2 yards of cloth.
  • Production is expressed in terms of marginal products of labour (MPL). Thus
    𝑀𝑃𝐿wt = 4 𝑀𝑃𝐿c = 2
  • Suppose there are 25 workers in Wheatland, thus 𝐿bar = 25 (see assumption: supply of L is constant).
  • Let’s derive Wheatland’s production possibilities frontier (PPF) in autarky.
  • The textbook uses feasible production frontier while we are using PPF. The two terms refer to the same thing.
20
Q

LOOK AT SLIDES 40 ONWARDS

A

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