1.The essence of globalization. Waves of Globalization
Globalization is the process of greater interdependence among countries and their citizens. It consists of the increased interaction of product and resource markets across nations via trade, immigration, and foreign investment—that is, via international flows of goods and services, of people, and of investments in equipment, factories, stocks, and bonds. It also includes non-economic elements such as culture and the environment. Simply put, globalization is political, technological, and cultural, as well as economic. globalization means that the residents of one country are more likely now than they were 50 years ago to consume the products of another country, to invest in another country, to earn income from other countries, to talk by telephone to people in other countries, to visit other countries, to know that they are being affected by economic developments in other countries, and to know about developments in other countries. The first and perhaps most profound influence is technological change. Since the industrial revolution of the late 1700s, technical innovations have led to an explosion in productivity and slashed transportation costs. The steam engine preceded the arrival of railways and the mechanization of a growing number of activities hitherto reliant on muscle power. Later discoveries and inventions such as electricity, the telephone, the automobile, container ships, and pipelines altered production, communication, and transportation in ways unimagined by earlier generations. More recently, rapid developments in computer information and communications technology have further shrunk the influence of time and geography on the capacity of individuals and enterprises to interact and transact around the world. For services, the rise of the Internet has been a major factor in falling communication costs and increased trade. As technical progress has extended the scope of what can be produced and where it can be produced, and advances in transport technology have continued to bring people and enterprises closer together, the boundary of tradable goods and services has been greatly extended. Also, continuing liberalization of trade and investment has resulted from multilateral trade negotiations. For example, tariffs in industrial countries have come down from high double digits in the 1940s to about five percent in the early 2000s. At the same time, most quotas on trade, except for those imposed for health, safety, or other public policy reasons, have been removed. Globalization has also been promoted through the widespread liberalization of investment transactions and the development of international financial markets. These factors have facilitated international trade through the greater availability and affordability of financing.
Lower trade barriers and financial liberalization have allowed more and more companies to globalize production structures through investment abroad, which in turn has provided a further stimulus to trade. On the technology side, increased
information flows and the greater tradability of goods and services have profoundly influenced production location decisions. Businesses are increasingly able to locate different components of their production processes in various countries and regions and still maintain a single corporate identity. As firms subcontract part of their production processes to their affiliates or other enterprises abroad, they transfer jobs, technologies, capital, and skills around the globe. How significant is production sharing in world trade? Researchers have estimated production sharing levels by calculating the share of components and parts in world trade. They have concluded that global production sharing accounts for about 30 percent of the world trade in manufactured goods. Moreover, the trade in components and parts is growing significantly faster than the trade in finished products, highlighting the increasing interdependence of countries through production and trade.
First Wave of Globalization: 1870–1914
The first wave of global interdependence occurred from 1870 to 1914. It was sparked by decreases in tariff barriers and new technologies that resulted in declining transportation costs, such as the shift from sail to steamships and the advent of railways. The main agent that drove the process of globalization was how much muscle, horsepower, wind power, or later on, steam power a country had and how creatively it could deploy that power. This wave of globalization was largely driven by European and American businesses and individuals. Therefore, exports as a share of world income nearly doubled to about eight percent while per capita incomes, which had risen by 0.5 percent per year in the previous 50 years, rose by an annual average of 1.3 percent. The countries that actively participated in globalization, such as the United States, became the richest countries in the world. However, the first wave of globalization was brought to an end by World War I. Also, during the Great Depression of the 1930s, governments responded by practicing protectionism: a futile attempt to enact tariffs on imports to shift demand into their domestic markets, thus promoting sales for domestic companies and jobs for domestic workers. For the world economy, increasing protectionism caused exports as a share of national income to fall to about five percent, thereby undoing 80 years of technological progress in transportation.
Second Wave of Globalization: 1945–1980 The horrors of the retreat into nationalism provided renewed incentive for internationalism following World War II. The result was a second wave of globalization that took place from 1945 to 1980. Falling transportation costs continued to foster increased trade. Also, nations persuaded governments to cooperate to decrease previously established trade barriers.
However, trade liberalization discriminated both in terms of which countries participated and which products were included. By 1980, trade between developed countries in manufactured goods had been largely freed of barriers. However, bar- riers facing developing countries had been eliminated for only those agricultural products that did not compete with agriculture in developed countries. For manufactured goods, developing countries faced sizable barriers. However, for developed countries, the slashing of trade barriers between them greatly increased the exchange of manufactured goods, thus helping to raise the incomes of developed countries relative to the rest. The second wave of globalization introduced a new kind of trade: rich country specialization in manufacturing niches that gained productivity through agglomeration economies. Increasingly, firms clustered together, some clusters produced the same product, and others were connected by vertical linkages. Japanese auto companies, for example, became famous for insisting that their parts manufacturers locate within a short distance of the main assembly plant. For companies such as Toyota and Honda, this decision decreased the costs of transport, coordination, monitoring, and contracting. Although agglomeration economies benefit those in the clusters, they are bad news for those who are left out. A region can be uncompetitive simply because not enough firms have chosen to locate there. Thus, a divided world can emerge, in which a network of manufacturing firms is clustered in some high-wage region, while wages in the remaining regions stay low. location until the discrepancy in production costs becomes sufficiently large to compensate for the loss of agglomeration economies. During the second wave of globalization, most developing countries did not participate in the growth of global trade in manufacturing and services. The combination of continuing trade barriers in developed countries, and unfavorable investment climates and antitrade policies in developing countries, confined them to dependence on agricultural and natural-resource products. Although the second globalization wave succeeded in increasing per capita incomes within the developed countries, developing countries as a group were being left behind. World inequality fueled the developing countries’ distrust of the existing international trading system, which seemed to favor developed countries. Therefore, developing countries became increasingly vocal in their desire to be granted better
access to developed-country markets for manufactured goods and services, thus fos tering additional jobs and rising incomes for their people.
Latest Wave of Globalization
The latest wave of globalization, which began in about 1980, is distinctive. First, a large number of developing countries, such as China, India, and Brazil, broke into the world markets for manufacturers. Second, other developing countries became increasingly marginalized in the world economy and realized decreasing incomes and increasing poverty. Third, international capital movements, which were modest during the second wave of globalization, again became significant.
Of major significance for this wave of globalization is that some developing countries succeeded for the first time in harnessing their labor abundance to provide them with a competitive advantage in labor-intensive manufacturing. Examples of developing countries that have shifted into manufacturing trade include Bangladesh, Malaysia, Turkey, Mexico, Hungary, Indonesia, Sri Lanka, Thailand, and the Philippines. This shift is partly due to tariff cuts that developed countries have made on imports of manufactured goods. Also, many developing countries liberalized barriers to foreign investment, which encouraged firms such as Ford Motor Company to locate assembly plants within their borders. Moreover, technological progress in transportation and communications permitted developing countries to participate in international production networks. However, the dramatic increase in manufactured exports from developing countries has contributed to protectionist policies in developed countries. With so many developing countries emerging as important trading countries, reaching further agreements on multilateral trade liberalization has become more complicated. Although the world has become more globalized in terms of international trade and capital flows compared to 100 years ago, there is less globalization in the world when it comes to labor flows. The United States, for example, had a very liberal immigration policy in the late 1800s and early 1900s, and large numbers of people flowed into the country, primarily from Europe. As a large country with abundant room to absorb newcomers, the United States also attracted foreign investment throughout much of this period, which meant that high levels of migration went hand in hand with high and rising wages. However, since World War I, immigration has been a disputed topic in the United States, and restrictions on immigration have tightened. In contrast to the largely European immigration in the 1870–1914 globalization wave, contemporary immigration into the United States comes largely from Asia and Latin America.
2 Open economy and ratio of an openness.
An open economy is an economy in which there are economic activities between the domestic community and outside (people, and even businesses, can trade in goods and services with other people and businesses in the international community, and funds can flow as investments across the border). Trade can take the form of managerial exchange, oftechnology transfers, and of all kinds of goods and services. (However, certain exceptions exist that cannot be exchanged - the railway services of a country, for example, cannot be traded with another country to avail this service, a country has to produce its own.) This contrasts with a closed economy in which international trade and financecannot take place.
There are a number of economic advantages for citizens of a country with an open economy. One primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose. Additionally, consumers have an opportunity to invest their savings outside of the country.
If a country has an open economy, that country's spending in any given year need not equal its output of goods and services. A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners. As of 2014 no totally closed economy exists. open economy means economy integrated into
the world economy. Such integration involves a number of dimensions that include the trade of goods and services, financial markets, the labor force, ownership of production facilities, and the dependence
on imported materials.
As a rough measure of the importance of international trade in a nation’s econ-
omy, we can look at the nation’s exports and imports as a percentage of its gross
domestic product (GDP). This ratio is known as openness.
As nations become more interdependent,
labor and capital should move more freely across nations.
Відкрита економіка передбачає:
- цілісність економіки, єдиний економічний комплекс, інтегрований у світове господарство;
- використання різних форм світового господарства;
- ліквідацію державної монополії на зовнішню торгівлю;
- ефективне використання принципу порівняльних переваг країн у МПП.
Переваги "відкритої економіки":
- формуються сприятливі умови для поглиблення спеціалізації і кооперації виробництва;
- здійснюються раціональний розподіл і використання ресурсів;
- більш оперативно відбувається поширення світового досвіду через систему міжнародних економічних відносин;
- формується сприятливе середовище для зростання конкуренції між вітчизняними виробниками, що стимулюється конкуренцією на світовому ринку.
До кількісних індикаторів відкритості можна віднести експортну, імпортну квоту та квоту товарообігу, тобто їх вагові показники у ВВП.
Експортна квота (Екв.) - це співвідношення обсягів експорту і внутрішнього виробництва. Вважається нормальним, якщо Екв.=10%. Досить висока світовому ринку. Тим паче, якщо це стосується готових виробів, висіжотехнологічної продукції. У розвинених країнах експортна квота з продукції високо-технологічних галузей сягає 25-40%. І навпаки, висока квота в сировинних галузях частіше характеризує низьку конкурентну спроможність у наукоємних галузях. Часто такий експорт вимушений.
експортна квота - показник високої насиченості національної економіки високоякісною продукцією, конкурентоспроможності вітчизняних товарів на
Завдання полягає в тому, щоб вдосконалювати галузеву структуру експорту. У той же час задоволення потреб через імпорт можна визначити показником імпортної квоти (Ікв.).
На практиці вказані показники визначаються таким чином.
Експортна квота визначається відношенням експорту конкретного року до ВВП.
Імпортна квота визначається відношенням імпорту в конкретному році до ВВП.
Квота зовнішньоторгового обороту визначається відношенням зовнішньоторгового обороту в конкретному році до ВВП. Цей показник слугує як коефіцієнт відкритості національної економіки. отп
Коефіцієнт відкритості для деяких розвинених країн виглядає наступним чином: Англія - 40-45%; Німеччина - 60-55%; США - 15-20%; Японія - 18-20%.
3. The mercantilists. David Hume's price specie-flow doctrineThe Mercantilists
During the period 1500–1800, a group of writers appeared in Europe, which was
concerned with the process of nation building. According to the mercantilists, the
central question was how a nation could regulate its domestic and international
affairs so as to promote its own interests. The solution lay in a strong foreign-trade
sector. If a country could achieve a favorable trade balance (a surplus of exports over
imports), it would realize net payments received from the rest of the world in the form
of gold and silver. Such revenues would contribute to increased spending and a rise in
domestic output and employment. To promote a favorable trade balance, the mercan-
tilists advocated government regulation of trade. Tariffs, quotas, and other commercial policies were proposed by the mercantilists to minimize imports in order to protect a
nation’s trade position.
By the eighteenth century, the economic policies of the mercantilists were under
strong attack. According to David Hume’s price-specie-flow doctrine, a favorable
trade balance is possible only in the short run, for over time it would automatically
be eliminated. To illustrate, suppose England achieve a trade surplus that results in
an inflow of gold and silver. Because these precious metals constitute part of Eng-
land’s money supply, their inflow increases the amount of money in circulation.
This increase leads to a rise in England’s price level relative to that of its trading
partners. English residents would therefore be encouraged to purchase foreign-
produced goods, while England’s exports would decline. As a result, the country’s
trade surplus would eventually be eliminated. The price-specie-flow mechanism
thus shows that mercantilist policies could provide at best only short-term economic
The mercantilists were also attacked for their static view of the world economy.
To the mercantilists, the world’s wealth was fixed. This view meant that one nation’s
gains from trade came at the expense of its trading partners; not all nations could
simultaneously enjoy the benefits of international trade. This view was challenged
with the publication in 1776 of Adam Smith’s The Wealth of Nations. According to
Smith (1723–1790), the world’s wealth is not a fixed quantity. International trade
permits nations to take advantage of specialization and the division of labor, which
increase the general level of productivity within a country and thus increase world
output (wealth). Smith’s dynamic view of trade suggested that both trading partners
could simultaneously enjoy higher levels of production and consumption with trade.
Smith’s trade theory is further explained in the next section.
Although the foundations of mercantilism have been refuted, mercantilism is
alive today. However, it now emphasizes employment rather than holdings of gold
and silver. Neo-mercantilists contend that exports are beneficial because they result
in jobs for domestic workers, while imports are bad because they take jobs away
from domestic workers and transfer them to foreign workers. Thus, trade is consid-
ered a zero-sum activity in which one country must lose for the other to win. There
is no acknowledgment that trade can provide benefits to all countries, including
mutual benefits in employment as prosperity increases throughout the world.
4 Adam Smith's the absolute advantage theory
Adam Smith, a classical economist, was a leading advocate of free trade (open markets) on the grounds that it promoted the international division of labor. With free trade, nations could concentrate their production on the goods that they could make the most cheaply, with all the consequent benefits from this division of labor.
Accepting the idea that cost differences govern the international movement of goods, Smith sought to explain why costs differ among nations. Smith maintained that productivities of factor inputs represent the major determinant of production cost. Such productivities are based on natural and acquired advantages. The former include factors relating to climate, soil, and mineral wealth, whereas the latter include special skills and techniques. Given a natural or acquired advantage in the production of a good, Smith
reasoned that a nation would produce that good at a lower cost and thus become more competitive than its trading partner. Smith viewed the determination of competitiveness from the supply side of the market. Smith founded his concept of cost on the labor theory of value that assumes that, within each nation, labor is the only factor of production and is homogenesus (of one quality) and the cost or price of a good
depends exclusively on the amount of labor required to produce it. For example, if the United States uses less labor to manufacture a yard of cloth than the United
Kingdom, the U.S. production cost will be lower.
Smith’s trading principle was the principle of absolute advantage: in a two-nation, two-product world, international specialization and trade will be beneficial when one nation has an absolute cost advantage (that is, uses less labor to produce a unit of output) in one good and the other nation has an absolute cost advantage in the other good. For the world to benefit from specialization, each nation must have a good that it is absolutely more efficient in producing than its trading partner. A nation will import those goods in which it has an absolute cost disadvantage; it will export those goods in which it has an absolute cost advantage. An arithmetic example helps illustrate the principle of absolute advantage. Referring to Table 2.1, suppose workers in the United States can produce 5 bottles of wine or 20 yards of cloth in an hour’s time, while workers in the United Kingdom can produce 15 bottles of wine or 10 yards of cloth in an hour’s time. Clearly, the United States has an absolute advantage in cloth production; its cloth workers’ productivity (output per worker hour) is higher than that of the United Kingdom, which leads to lower costs (less labor required to produce a yard of cloth). In like manner, the United Kingdom has an absolute advantage in wine production.
According to Smith, each nation benefits by specializing in the production of the
good that it produces at a lower cost than the other nation, while importing the good
that it produces at a higher cost. Because the world uses its resources more efficiently
as the result of specializing, an increase in world output occurs that is distributed to
the two nations through trade. All nations can benefit from trade, according to Smith.
The writings of Smith established the case for free trade, which is still influential
today. According to Smith, free trade would increase competition in the home mar-
ket and reduce the market power of domestic companies by lessening their ability to
take advantage of consumers by charging high prices and providing poor service.
Also, the country would benefit by exporting goods that are dear on the world mar-
ket for imports of goods that are cheap on the world market. Smith maintained that
the wealth of a nation depends on this division of labor, which is limited by the extent
of the market. Smaller and more isolated economies cannot support the degree of
specialization that is needed to significantly increase productivity and reduce cost,
and thus tend to be relatively poor. Free trade allows countries, especially smaller
countries, to more fully take advantage of the division of labor, thus attaining higher
levels of productivity and real income.
5. David Ricardo s theory of the comparative advantage Production possi schedules
6. Trading constant cost conditions Consumption gains from trade
Basis for Trade and Direction of Trade
Let us now examine trade under constant-cost conditions. Referring to Figure 2.1,
assume that in autarky (the absence of trade) the United States prefers to produce
and consume at point A on its production possibilities schedule, with 40 autos and
40 bushels of wheat. Assume also that Canada produces and consumes at point A
on its production possibilities schedule, with 40 autos and 80 bushels of wheat.
The slopes of the two countries’ production possibilities schedules give the rela-
tive cost of one product in terms of the other. The relative cost of producing an addi-
tional auto is only 0.5 bushels of wheat for the United States but it is 2 bushels of
wheat for Canada. According to the principle of comparative advantage, this situa-
tion provides a basis for mutually favorable specialization and trade owing to the
differences in the countries’ relative costs. As for the direction of trade, we find the
United States specializing in and exporting autos and Canada specializing in and
7. Trading under increasing cost conditions
Trading Under Increasing-Cost Conditions
The preceding section illustrated the comparative-advantage principle under
constant-cost conditions. But in the real world, a good’s opportunity cost may
increase as more of it is produced. Based on studies of many industries, economists think the opportunity costs of production increase with output rather than remain constant for most goods. The principle of comparative advantage must be illustrated in a modified form.
Increasing opportunity costs give rise to a production possibilities schedule
that appears concave, or bowed outward from the diagram’s origin. In Figure 2.4, with movement along the production possibilities schedule from A to B, the opportunity cost of producing autos becomes larger and larger in terms of wheat sacrificed. Increasing costs mean that the MRT of wheat into autos rises as more autos are produced. Remember that the MRT is measured by the absolute slope of the production possibilities schedule at a given point. With movement from produc tion point A to production point B, the respective tangent lines become steeper—their slopes increase in absolute value. The MRT of wheat into autos rises, indicating that each additional auto produced requires the sacrifice of increasing amounts of wheat.
Increasing costs represent the typical case in the real world. In the overall economy, increasing costs result when inputs are imperfect substitutes for each
other. As auto production rises and wheat production falls in Figure 2.4, inputs that are less and less adaptable to autos are introduced into that line of produc-
tion. To produce more autos requires more and more of such resources and thus an increasingly greater sacrifice of wheat. For a particular product, such as autos, increasing-cost is explained by the principle of diminishing marginal productivity. The addition of successive units of labor (variable input) to capital (fixed input) beyond some point results in decreases in the marginal production of autos that is attributable to each additional unit of labor. Unit production costs thus rise as more autos are produced. Under increasing costs, the slope of the concave production possibilities schedule varies as a nation locates at different points on the schedule. Because the MRT equals the production possibilities sche dule’s slope, it will also be different for each point on the schedule. In addition to considering the supply factors underlying the production possibilities schedule’s slope, we must also take into account the
demand factors (tastes and preferences), for they will determine the point along the production possibilities schedule at which a country chooses to consume.
8. Distributing the gains from trade
A shortcoming of Ricardo’s principle of comparative advantage is its inability to
determine the actual terms of trade. The best description that Ricardo could provide
was only the outer limits within which the terms of trade would fall. This is because
the Ricardian theory relied solely on domestic cost ratios (supply conditions) in
explaining trade patterns; it ignored the role of demand. According to Ricardo, the domestic cost ratios set the outer limits for the equilibrium terms of trade. If the United States is to export autos, it should not accept any terms of trade less than a ratio of 0.5:1, indicated by its domestic cost-ratio line. Otherwise, the U.S. post-trade consumption point would lie inside its production possibilities schedule. The United States would clearly be better off without trade than with trade. The U.S. domestic cost-ratio line therefore becomes its no-trade boundary. Similarly, Canada would require a minimum of 1 auto for every 2 bushels of wheat exported, as indicated by its domestic
cost-ratio line; any terms of trade less than this rate would be unacceptable to Canada. Thus, its domestic cost-ratio line defines the no-trade boundary line for Canada. For gainful international trade to exist, a nation must achieve a post-trade consumption location at least equivalent to its point along its domestic production possibilities schedule. Any acceptable international terms of trade has to be more favorable than
or equal to the rate defined by the domestic price line. Thus, the region of mutually beneficial trade is bounded by the cost ratios of the two countries.