W01: Globalization of Product Markets

Question 1

Economic Arguments for free trade

Answer 1

1. Trade as similar to technological progress
2. Adam Smith Wealth of Nations & absolute advantage
3. Comparative Advantage
4. Long-term productivity gains and competetiveness

Question 2

Trade as similar to technological progress

Answer 2

It would be a waste a nation’s resources not to import more efficient international resources.

Sawmill example

Question 3

Adam Smith Wealth of Nations & absolute advantage

Answer 3

National wealth is maximized with free trade.

Absolute advantage:

• Capability of one country to produce more of a product with the same amount of input than another country
• Produce only goods where you are most efficient, trade those where you are not efficient
• Assumes there is absolute advantage balance among nations - all countries are best at something

Question 4

Comparative Advantage

Answer 4

Countries should specialized in good and services for which they have a relative advantage, and thus a lower opportunity cost and trade.
Produce and export goods and services for which country is relatively more productive than other countries

Import goods and services for which other countries are relatively more productive

Question 5

Long-term productivity gains and competitiveness

Answer 5

• Trade improves economic performance by allocating a country’s resources to their most efficient use and making those resources more productive in what they are doing
• Trade and investment increase competition allowing productivity maximization
• Trade serves as a conduit for foreign technologies transfer

Question 6

Going beyond the economic benefits of trades - Dilemmas

Answer 6

1. Values Dilemma - what is fair?
2. Distributional Dilemma - who wins and who loses?
3. Sovereignty Dilemma - should we allow others to make and enforce rules over us?

Question 7

Values Dilemma

Answer 7

What is fair?
Free markets - eonomic considerations may dominate ethical considerations such as human rights and labor standards

i.e. Rana Plaza
Globalization of the supply chain

Solution:
Multinationals could create internal codes of conduct, create industry associations or create market-based credentialing programs (e.g. fair trade)

Question 8

Distributional Dilemma

Answer 8

Who wins and who loses?
–>emerges from the propensity of trade to alter the distribution of income and wealth within a country.

Some indivduals gain from trade while others lose
i.e. job loss

Solution: States could protect or support those most hurt from global trade while still allowing some jobs to compete in the open market.

Question 9

Sovereignty Dilemma

Answer 9

Should we allow others to make and enforce rules over us?

Countries have to give up sovereignty to participate in multinational agreements or organizations

States and people who live there do not make their own rules
i.e. WTO

Solution: State could give up sovereignty on some issues to create global rules while maintaining sovereignty on others.

Question 10

Multipolarity without Multilaterism

Answer 10

overarching, comprehensive, unitary approach to global regulation unlikely.
–>Global governance will likely be a patchwork of overlapping, ad hoc, and fragmented efforts

Globalization has been defined as increasing integration of the rest of the world with western countries.
–>The familiar model of a single economic pole, a dominating technology, and a single system of governance is being replaced by a multipolar, diverse world

• The market, and the opportunities, remain global, but the challenges are vastly more complex
• ->Winners will be those who understand the forces of change and build businesses that can prosper in a multipolar world.