2000 word report (international trade)
ibrhim4
3001ibalecturenotes1_sem1-15.pptx© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use
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3001IBA Lecture Notes Week 1 Text: Carbaugh R J (2013), International Economics, 14th Edition The International Economy and Globalization
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LECTURE NOTES – INTRODUCTION - WEEK 1 CONTENTS
Discussion of course details from Course Profile including aims, content, & assessment
The International Economy and Globalization
Global Financial Crisis and Recovery
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Course Content
Course examines how nations and companies promote and retain competitiveness in a globalized world economy.
National level focus on international trade and national competitiveness.
Company level focus on company operations, participating strategies and competitiveness.
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Learning Objectives
Explain globalization
Discuss the importance of globalization
Discuss criticisms of globalization
Briefly describe the Global Financial Crisis and Recovery
Discuss history of international trade – Mercantilists, David Hume, Adam Smith and Absolute Advantage
Define the principle of Comparative Advantage (CA)
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The International Economy
High degree of economic interdependence
Steps toward international cooperation
Mutually advantageous for trading nations
Specialization, efficiencies of large scale production
Wider variety of products at lower cost
Protectionist pressures
Financial flows and exchange rates
Developing nations
Liberalized trading system - serves to keep the developing nations in poverty?
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Globalization of Economic Activity
Globalization
A (continuing) process of greater interdependence among nations (countries and their citizens)
International flows
Goods and services
People
Investments in equipment, factories, etc.; financial investments in stocks, bonds, etc.
Non-economic elements
Culture and the environment
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Globalization of Economic Activity
What forces are driving globalization?
Technological change
Multilateral trade negotiations
Continuing liberalization of trade and investment
Widespread liberalization of investment transactions
Development of international financial markets
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Why Is Globalization Important?
Law of comparative advantage [Week 2 Notes]
Citizens of each nation can gain
Spend more of their time and resources doing those things in which they have a relative advantage
If a good or service can be obtained more economically through trade
Trade for it instead of producing it domestically
How the available resources can be used to obtain each good at the lowest possible cost
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Why Is Globalization Important?
Open Economies
Produce a larger joint output
Competition - essential to both innovation and efficient production
International competition
Domestic producers - strong incentive to improve the quality of their products
Weakens monopolies
More competition
More firm turnover and Improvements for the industry
Economic Growth Rates - close relation to:
Openness to trade (and to Education, Communications infrastructure)
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Why Is Globalization Important?
Economic Globalization
Rapid growth in some countries
Increased demand for commodities
Crude oil, copper, steel - higher prices
Increased supply of substitutes
Biodiesel, ethanol
Domestic economy
Vulnerable to disturbances initiated overseas
Increased competition from abroad
For example, US MNEs Schwinn Bicycle Company, Dell Computer Corporation face international competition
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Common Fallacies of International Trade
“Trade is a zero-sum activity”
Both partners gain from trade
“Imports reduce employment and act as a drag on the economy, while exports promote growth and employment”
Failure to consider the link between imports and exports
“Tariffs, quotas, and other import restrictions will save jobs and promote a higher level of employment” i.e. restricted trade
Failure to recognize that a reduction in imports does not occur in isolation
Free trade
Increases competition, lowers prices
Makes better products available to consumers
Higher consumption
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Is International Trade an Opportunity or a Threat to Workers/Jobs?
International trade benefits many workers
Cheaper consumption goods
Employers – better technologies and equipment
Workers - more productive
Exports - generates jobs and income for domestic workers
Not all workers gain from international trade
Cheap imports
Rising unemployment and wage inequality
Threat to unskilled workers in the import-competing sectors
Lobbying to restrict imports
International trade
Domestic prices - aligned with international prices
Wages increase - workers whose skills are scarce
Wages decrease - workers who face increased competition
Jobs lost in one industry – may be offset by jobs gained in other industries
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Benefits of Globalization
Proponents of free trade and globalization
Countries prosper
New ideas and technology flow freely around the world
Productivity growth
Higher wages – e.g. in U.S., jobs in export industries tend to pay about 15% more than jobs in import-competing industries.
Increasing living standards
Lower consumer prices
Increased variety of goods and services
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Criticisms of Globalization
Critics of free trade and globalization
Benefit large corporations
Rather than average citizens
Environmentalists
Elitist trade organizations make undemocratic decisions
Undermine national sovereignty on environmental regulation
Unions
Unfettered trade permits unfair competition
Employees can lose their competitiveness when companies build state-of-the-art factories in low-wage countries, making them as productive as those at home.
Human rights activists
World Bank and International Monetary Fund support governments that, for example:
Allow sweatshops
Pursue policies favouring government officials against of local economies
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The Global Financial Crisis of 2007 – 2009
Immediate causes of the global financial & economic crisis
Collapse of the U.S. housing market
Resulting surge in mortgage loan defaults
Undermined originating & investing financial institutions
Creditors and uninsured depositors
Pulled their funds and cashed out of securities issued by risky institutions
Invested in U.S. Treasury securities
Many institutions failed, others struggled to survive
Banks - fearful about making loans so credit and loan availability dried up
Global stock investors dumped their holdings – sharemarket downturn
Self-reinforcing adverse economic downturn
Crisis in confidence
Roots of the problem
Lack of fear - booming housing market of 2006, but with (poor quality, overpriced) mortgage-backed securities
Government pressured banks to service poor borrowers/regions of the country
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GLOBALIZATION
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The Global Financial Crisis of 2007 – 2009
Some effects:
Many economies are (or have been) in recession, technically defined as 2 or more quarters of negative growth or contraction of real GDP, for example the economies of the US, Japan, the Euro area, UK, and New Zealand (but not Australia).
Many other effects such as rising unemployment, rising domestic and international debt levels, housing and mortgage crises, failure of key businesses (e.g.s automotive industry in the US, various banks and housing lenders), sharemarket downturns, and declines in consumer wealth.
Declining volumes of international trade and investment.
An international crisis in confidence.
Has been some recovery of the global economy, with governments’ actions to assist this economic recovery, such as stimulatory spending (but often financed by further debt), financial institution guarantees and buyouts, and assistance to industries (but needed to be within the framework of WTO rules and agreements).
GLOBALIZATION
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The Global Financial Crisis of 2007 – 2009
Combating a crisis in confidence
Pump liquidity into troubled financial institutions
Provide increased or unlimited deposit insurance
Central banks
Coordinated interest-rate reductions
Purchased commercial paper & money market instruments
Governments
Large fiscal stimulus packages
Tax cuts
Increased government spending
International Monetary Fund
Financial aid to emerging countries
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GLOBALIZATION
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Trade Theories: Mercantilists; David Hume;Adam Smith
Mercantilists
1500-1800 in Europe
assumed that a trade surplus (exports > imports) would lead to a nation obtaining more gold which would lead to increased domestic production and employment
policy implication was for domestic government to limit trade through tariffs, import quotas, and other methods
David Hume
countered mercantilism
trade surplus possible only in short run
inflow of gold or other form of wealth will lead to an increase in the price of
domestic goods
higher prices for domestic goods will eventually lead to increased imports and
decreased exports
Absolute Advantage
Adam Smith – Wealth of Nations 1776
cost differences determine the patterns of international trade based on natural and acquired resources
labor theory of value – amount of labor required determines the cost of any good
principle of absolute advantage – trade is beneficial when each country is a least cost producer of one of the goods being traded
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Historical Development of Modern Trade Theory
Why Nations Trade: Comparative Advantage
1800, David Ricardo (1772–1823)
- Free trade
- Mutually beneficial trade can occur whether or not countries have any absolute advantage
- Principle of comparative advantage
-- Emphasized comparative (relative) cost differences
If a good or service can be obtained more economically through trade
- Trade for it instead of producing it domestically
How the available resources can be used to obtain each good at the lowest possible cost
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