Economics and Development International Economics 2 Lecture 1& 2 Giorgia Giovannetti Professor of Economics, University of Firenze

Introduction The timetable Course presentation, slides in Moodle after the lecture What about this course? lectures, students’ involvement, choice of specific topics. Important part of work is reading articles, commenting data, with the objective to understand, synthesize, discuss and judge articles, to get insights from data and link data and theory.

Plan of the course/lectures Lectures (tentative) 14/9 Introduction: globalization 15/9 Introduction, 2 21/9 Measuring globalization, 1 22/9 Measuring Globalization, 2, Indicators 28/9 Overview trade models (Bernard et al 2007; 2011) 29/9 The concept of Comparative advantage 5/10 Trade models: Ricardo and comparative advantage 6/10 Ricardo and comparative advantage, 2 /H-O, intro 12/10 Trade models: H-O 13/10 Trade models: H-O,2/exercises 19/10 Trade and Imperfect competition 20/10 Trade and imperfect competition 26/10 Geography models/gravity 27/10 Hysteresis, Heterogeneous firms 2/11 Trade policy: TTIP 3/11 EU development Policy 9/11 EU development Policy 10/11 FDI and Multinationals: OLI theory 16/11 FDI and Multinationals Offshoring/trade in tasks 17/11 China and India (BRICS) 23/11 Granularity and aggregate shocks 24/11 30/11 1/12 212

The first two weeks Introduction to topics and issues (today). Data on globalization, world GDP and trade, answers to some basic Q, China and India (sketch) Data & history; introduction to statistical indicators used to measure international integration, specialization and competitiveness Overview of trade models

Main References (first two weeks) FT chapter 1 Slides GG (in Moodle) Further readings (if interested) –Badwin, 2006, the great unbundling(s) –Havik and Morrow, 2006, global trade integration and outsourcing, how well is EU coping with these challenges –OECD (2005)Handbook of Economic Globalisation Indicators –Love P. and Lattimore R. (2009) International Trade: Free, fair, open? OECD –Bernard A. J Bradford Jensen, Redding SA & P. Schott, 2007, Firms in International Trade, Journal of Economic Perspectives, vol 21 n.3 –Andrew B. Bernard, J. Bradford Jensen, Stephen J. Redding and Peter K. Schott (2011) The Empirics of Firm Heterogeneity and International Trade, CEP Discussion Paper No 1084, October

Objectives Provide –a picture of historical trends –some conceptual basis for understanding the major international economic questions We deal with both theory and empirics For data: IMF, Worldbank, WTO, ITC, Unctad, OECD, ILO i.e. international Organisations

Examples of questions we address Are existing trade models (developed for the “North”) able to explain trade in the “South”? Is globalization a new phenomenon? How do we measure it? Is rising North-South trade responsible for rising inequalities in the North? What are the causes and consequences of changes in terms of trade for developing countries? What are the effects of quotas on textiles? Or other tariffs? What is the EU development policy? Has it changed in the last 20 years? if so, how? Where are we in the negotiation at WTO? And TTIP? What is the effect of offshoring on employment? How does migration fit into this picture?

Info, exams, participation etc etc Exam: written exam (three random tests? Or final?) Your role: ppt on two articles of your choice in a list that I provide or group work with theory and empirics? Participation: important….you can volunteer to lead discussion on «hot topics» (EU crisis, TTIP etc)

Globalization: definition (economists): increase in international trade of both financial assets and goods that comes from a decrease in transaction costs, increase of movement of workers and ideas Two main point: Globalization is non an (entirely) new phenomenon and is not irreversible Last 15 years (India): unbundling of the production process: production is split and diced into separate fragment, spread around the world IMPORTANT: also services and high skill jobs Trade of tasks rather than goods

Recap: Trade in the Global Economy Imports are the purchase of goods or services from another country. Exports are the sale of goods or services to other countries. –Germany had the largest exports of goods in 2008 with the U.S. and China coming in second and third. In 2009 China became first, Germany 2 nd, US 3 rd. In 2010, China first (10.4), US 2 nd (8.4), Germany 3 rd (8.3)

Recap: Trade in the Global Economy Merchandise goods: includes manufacturing, mining, and agricultural products. Service exports: includes business services like eBay, travel, insurance, and transportation. –In combining all goods and services, the U.S. is the world’s largest exporter followed by Germany and China.

13 Last ten years: world trade and GDP 2012 and 2013 well below 10 years average GDP TRADE

Annual Growth of Merchandise Exports

Recap: Trade in the Global Economy Migration is the flow of people across borders as they move from one country to another. Foreign Direct Investment is the flow of capital across borders when a firm owns a company in another country (above 10%, a priori threshold).

16 Population Population in millions, 2011 EU-27 Population Pyramid, 2008, 2060

Foreign Direct Investments

Recap: Trade in the Global Economy Why do countries trade? –They can get products from abroad cheaper or of higher-quality than those obtained domestically. The fact that Germany was the largest exporter of goods in 2008 shows its technology for producing high-quality manufactured goods. China produces goods more cheaply than most industrialized countries.

Why countries trade Ricardo observed that trade was driven by comparative rather than absolute costs (of producing a good). One country may be more productive than others in all goods: it can produce any good using fewer inputs (such as capital and labor) than other countries require to produce the same good. Ricardo’s insight was that such a country would still benefit from trading according to its comparative advantage—exporting products in which its absolute advantage was greatest, and importing products in which its absolute advantage was comparatively less (even if still positive). The notion of comparative advantage also extends beyond physical goods to trade in services—such as writing computer code or providing financial products.

Comparative advantage Because of CA, trade raises the living standards of both countries. Douglas Irwin (2009) : CA are “good news” for economic development. “Even if a developing country lacks an absolute advantage in any field, it will always have a CA in the production of some goods,” and will trade profitably with advanced economies Differences in comparative advantage may arise for several reasons. Heckscher and Ohlin identified the role of labor and capital, so-called factor endowments, as a determinant of advantage. Economists today think that factor endowments matter, but that there are also other important influences on trade patterns (Baldwin, 2008).

Comparative advantage Episodes of trade opening are followed by adjustment not only across industries, but within them as well. The increase in competition coming from foreign firms puts pressure on profits, forcing less efficient firms to contract and making room for more efficient firms. Expansion and new entry bring with them better technologies and new product varieties. Trade enables greater selection across different types of goods.This explains why there is a lot of intra-industry trade something that the factor endowment approach does not encompass.

How do we measure comparative advantage? A simple way: normalized trade balance X-M/X+M

Normalized trade balance for manufacturing (X-M)/X+M

What do country trade? Final products Intermediate products

Intermediate goods dominate world non-fuel merchandise exports Source: UNSD & WTO Billions of US$

… Confirming that: Asia is the “World manufacturer” Asian supply chains boost the regional markets Key facts on Asia trade in intermediate goods … Asia’s share in world exports of intermediate goods increases : 35% in 2009 Intra-Asian trade is predominant Asia imports more intermediate goods than it exports Intermediate goods traded by Asian economies are more and more sophisticated More and more concentrated trade on few components Intermediate goods dominate world non-fuel merchandise exports

World growth, areas and countries Source: IMF April 2014 WEO.

Per capita GDP growth, at PPP

Summary Globalization is NOT a new phenomenon Globalization is NOT irreversible Comparative advantages are behind trade Comparative advantages depend on technology (Ricardo), endowmens (H-O) There are several (6) forms of separation, pushing against globalization

Faith and Skepticism about Trade, Foreign Investment

Changes in business practices/strategies led to the development of international outsourcing of input goods or services Offshoring Outsourcing affiliate non-affiliate at home domestic production within the firm domestic outsourcing abroad FDI intra-firm trade international outsourcing arms' length trade

FDI