Copyright ©2005, Thomson/South-Western International Economics By Robert J. Carbaugh 10th Edition Chapter 1: The International Economy and Globalization

Carbaugh, Chap. 1 2 Elements of interdependence  Trade: goods, services, raw materials, energy  Finance: foreign debt, foreign investment, exchange rates  Business: multinational corporations, global production Economic interdependence

Carbaugh, Chap. 1 3 Globalization  The process of greater interdependence between countries and their citizens  Involves increased integration of product and resource markets  Trade  Labor (immigration)  Investment  Globalization is political, economic technological and cultural Economic interdependence

Carbaugh, Chap. 1 4 Forces driving globalization  Technological change:  Production  Communication & information  Transport  Liberalization of trade & investment:  Tariff, non-tariff barrier reductions  Liberalized financial transactions  International financial markets Economic interdependence

Carbaugh, Chap. 1 5 Waves of Globalization  1 st wave:  Falling tariff barriers  Improved transportation  2 nd wave:  Agreements to lower barriers again  Rich country trade specialization; growth of “agglomeration economies”  Poor nations left behind  3 rd wave: 1980-present  Growth of emerging markets  International capital movements regain importance  Less immigration, more foreign outsourcing Economic interdependence

Carbaugh, Chap. 1 6 Globalization goes white collar Economic interdependence U.S. CompanyNo. of Workers & CountryType of Work Moving Accenture 5,000 in the Philippines Accounting, software, office work Conseco 1,700 in India Insurance claim processing Delta Air Lines 6,000 in India, Philippines Airline reservations, customer service Fluor 700 in Philippines Architectural blueprints General Electric 20,000 in India Finance, information technology Intel 3,000 in India Chip design, tech support Microsoft 500 in China, India Software design Philips 700 in China Consumer electronics, R&D Procter & Gamble 800 in Philippines, China Accounting, tech support Source: Drawn from “Is Your Job Next?” Business Week, February 3, 2003, pp. 50–60.

Carbaugh, Chap. 1 7 Trade in goods and services as percent of Gross Domestic Product, 2002 Economic interdependence CountryExports (% of GDP)Imports (% of GDP) Netherlands53%46% Canada3733 Germany3125 South Korea2726 Norway3118 France2221 United Kingdom1821 United States913 Japan108

Carbaugh, Chap. 1 8 Openness of the US economy, Economic interdependence Source: U.S. Census Bureau, Foreign Trade Division, U.S. Trade in Goods and Services, 1960–2002 at and Economic Report of the President, 2002.

Carbaugh, Chap. 1 9 Leading trading partners of the United States, 2002 Economic interdependence Value of US Countryexports ($ bill.)imports ($ bill.) Canada$160.8$213.9 Mexico Japan China Germany France Italy Netherlands Venezuela Australia Belgium/Luxembourg

Carbaugh, Chap Interdependence: Impact  Overall standard of living is higher  Access to raw materials & energy not available at home  Access to goods & components made less expensively elsewhere  Access to financing and investment not available at home  International competition encourages efficiency Economic interdependence

Carbaugh, Chap Interdependence: Impact (cont’d)  Other impacts - good & bad  Curtails inflationary pressures at home  Limits domestic wage increases  Makes economy vulnerable to external disturbances  Limits impact of domestic fiscal policy on economy Economic interdependence

Carbaugh, Chap Comparative advantage means:  If the relative cost of making two items is different in two countries, each can gain by specializing in the one it makes most cheaply - each has a comparative advantage in that product  Even countries that make nothing cheaply can benefit from specialization Comparative advantage

Carbaugh, Chap Common fallacies of international trade  "Trade is zero-sum" - trade can bring benefits to both partners  "Imports bad, exports good" - if you buy nothing from other countries, they have no income to buy from you  "Tariffs and quotas save jobs" - cutting imports makes it harder to export, so other jobs are lost Economic interdependence

Carbaugh, Chap Competitiveness & trade  Competitiveness can be assessed at the level of a firm, an industry, or a whole nation  Main objective of any nation is to generate high and rising standard of living  No nation can efficiently make everything itself  International trade allows countries to focus on producing what they make efficiently  Inefficient sectors will be squeezed out  Sectors open to competition become more efficient and productive Comparative advantage

Carbaugh, Chap Ups and downs of globalization  Advantages  Productivity increases faster when countries produce according to comparative advantage  Global competition and cheap imports keep prices low and inflation at bay  An open economy encourages technological development and innovation with ideas from abroad  Jobs in export industries pay more than those in import-competing industries  Free movement of capital gives the US access to foreign investment and keeps interest rates low Economic interdependence: globalization

Carbaugh, Chap Ups and downs of globalization  Disadvantages  Millions of US jobs lost to imports or production abroad; those displaced find lower-paying jobs  Millions of other Americans fear getting laid off  Workers face pressure for wage concessions under threat of having the jobs move abroad  Service and white-collar jobs are joining blue-collar ones in being vulnerable to moving overseas  US workers can lose their competitiveness when firms build state-of-the-art factories in low-wage countries, making them as productive as plants in the US Economic interdependence: globalization