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The International Economy
Globalization of Economic Activity

Elements of Interdependence


Trade: goods, services, raw materials, energy
...




Business: multinational corporations, global production
...




Today’s global economy requires cooperation on an international level to cope with the myriad
issues and problems
...

 Technical progress has extended the scope of what can be produced and
where it can be produced
...


 Liberalization of trade & investment:

a) Tariff, non-tariff barrier reductions
b) Liberalized financial transactions
c) International financial markets
 Facilitates international trade through the more ready availability
and affordability of financing
...

1

Waves of Globalization
st

 1 wave: 1870-1914
 Falling tariff barriers
 improved transportation
nd

 2 wave: 1945-1980
 Agreements to lower barriers again
 Rich country trade specialization
 Poor nations left behind
rd

 3 wave: 1980-present
 Growth of emerging markets
 international capital movements regain importance

The Open Economy
 There is an increasingly integration in the world economy, which including trade of
goods and services, financial markets, the labor force, ownership of production facilities,
and dependence on imported materials
...
1
...
1?

Exports of goods and services as percent of Gross Domestic
Product, 2001
Country

Exports (% of GDP)

Netherlands
Norway
South Korea
Canada
Germany
France
United Kingdom
Mexico
United States
Japan

68%
48
46
45
35
29
28
28
11
11

United States

Japan

Imports (% of GDP)
62%
30
41
39
34
27
30
30
14
10

14

11

11

10

2

 Many nations with limited resource endowments and limited domestic markets
cannot produce with reasonable efficiency the variety of products they desire to
consume
...

 As a result, exports may constitute 30% or more of their domestic outputs (see
Table 1
...

 For countries that endowed with rich and diverse resources bases and immense
domestic markets, such as US and Japan, they are less dependent on world
trade
...
)

Value of US
imports ($ bill
...
4
125
...
4
45
...
6
16
...
9
17
...
0
17
...
1
147
...
3
74
...
6
31
...
0
12
...
2
9
...

 Access to goods & components made less expensively elsewhere
...

 International competition encourages efficiency
...


3

 Comparative Advantage Means:
 If goods or services can be obtained more economically through trade, it make
sense to trade for it instead of producing it domestically
...

 Trading partners can produce a larger joint output and achieve a higher standard
of living than otherwise be possible
...

 Limits domestic wage increases
...

 Limits impact of domestic fiscal policy on economy
...

 If countries specialize in what there are comparatively best at
producing, they must import goods and services that other countries
produce best
...

 "Tariffs and quotas save jobs"
 Cutting imports makes it harder to export, so other jobs are lost
...

 No nation can efficiently make everything itself
...

 Inefficient sectors will be squeezed out
...


4

Threat of Opportunity?
 Are Workers Better Off as a Result of
Globalization?
 International trade benefits most workers
...

 Export generates jobs and income for domestic workers
...

 However, not all workers gain from international trade
...

 Trade with low-wage developing countries is particularly threatening
to unskilled workers in the import-competing sectors of industrial
countries
...

Global competition and cheap imports keep prices low and inflation
at bay
...

Jobs in export industries pay more than those in import-competing
industries
...


 Disadvantages


Millions of US jobs lost to imports or production abroad; those
displaced find lower-paying jobs
...

 Workers face pressure for wage concessions under threat of having
the jobs move abroad
...

US workers can lose their competitiveness when firms build state-of-the-art factories in lowwage countries, making them as productive as plants in the US

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