The Global Economy

The study of the behavior and decisions of entire economies. Macroeconomics The study of the behavior and decisions of entire economies.

Globalization A modern term used to describe the changes in societies and the world economy that result from dramatically increased international trade and cultural exchange.

Why do nations trade? “Countries engage in international trade for two basic reasons, each of which contributes to their gain from trade. First, countries trade because they are different from each other. Nations, like individuals, can benefit from their differences by reaching an arrangement in which each does the things it does relatively well. Second, countries trade to achieve economies of scale in production. That is, if each country produces only a limited range of goods, it can produce each of these goods at a larger scale and hence more efficiently than if it tried to produce everything. In the real world, patterns of international trade reflect the interaction of both these motives.” ~Paul Krugman, International Economics

Trade Barriers Definition~ Preventing a foreign product from freely entering into a nation’s territory.

Types of Trade Barriers Import Quota Voluntary Export Restraint Tariff Informal Barriers Government Licensing Restrictions Government Health and Safety Requirements

Effects of Trade Barriers The overall impact of trade barriers is that they limit supply. This results in two common consequences: Increased price of foreign goods Trade wars

Protectionism Definition~ The use of trade barriers to protect industries from foreign competition. Positives Protect jobs Protect infant industries Enhance national security Negatives Limits LDC’s ability to compete on a global scale Reduces global living standard Limits attempts for international peace

International Agreements World Trade Organization (1995)~ The only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible. European Union (1951/1999)~ A regional economic agreement among 27 countries across the European continent. NAFTA (1994)~ This agreement removed most barriers to trade and investment among the United States, Canada, and Mexico. Under the NAFTA, all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. The agreement was phased in from 1994-2008 and has increased trade by over 200% since it was enacted.

Key Content: Development- Process by which a nation improves the economic, political and social well being of its people. Developed-High level of material well being (US) Less Developed- Low level of material well being (Ethiopia) Newly Industrializing- Better performing LDC’s (Mexico) Indicators of Development Per capita GDP Energy Consumption Labor Force Literacy Infant Mortality Life Expectancy Consumer Goods

Three Levels of Development Developed Countries South America Central America Caribbean United States Canada Southern Africa Middle Africa Eastern Africa Western Africa Northern Africa Southern Europe Western Europe Eastern Europe Northern Europe Western Asia South Central Asia East Asia Southeast Asia Oceania Tropic of Cancer Tropic of Capricorn Equator Three Levels of Development Developed Countries Less Developed Countries Newly Industrialized Countries

**ISSUES IN DEVELOPMENT** Rapid population growth Resource distribution Lack of physical capital Lack of human capital Health/Nutrition Education/Training “Brain Drain” Political Factors Colonial Dependency to Independent Planning Government Corruption Political Instability (civil wars, social unrest, lack of government infrastructure) Debt

Rapid population growth Many countries of the world are experiencing rapid population growth and although every case is different one consistent similarity is that these nations are most often less developed countries. Examples: Sudan, Ethiopia and Kenya Why is population growing in these countries? ~At the core it is simple math - many more people are being born than are dying.

Population…continued Why are there more babies being born? Children may be needed to help earn money Lack of contraceptive devices may lead to unwanted pregnancies and babies. The local or national culture or government may encourage large families Parents may be fearful of infant mortality (children dying very young) Better medical facilities could be increasing the lives of mothers and therefore increasing their chances of having larger families Why are there fewer deaths now? Better birthing facilities More widely available medicines and medical expertise A general improvement in diet and nutrition in many countries

Resource Distribution In parts of Africa, Asia, and Latin America, physical geography makes development more difficult. Only about 10 percent of the world’s land is arable, or suitable for producing crops.

Lack of Physical Capital The lack of economic activity typical of LDCs is due in part to a lack of physical capital. Subsistence agriculture provides little opportunity for individuals or families to save.

Lack of Human Capital Health and Nutrition Proper food and nutrition are necessary for physical and mental growth and development. Inadequate nutrition is called malnutrition. Education and Training To be able to use technology and move beyond mere subsistence, a nation must have an educated work force. Brain Drain The scientists, engineers, teachers, and entrepreneurs of LDCs are often enticed to the benefits of living in a developed nation. The loss of educated citizens to the developed world is called “brain drain.”

Political Factors shifting from colonial dependency Find out more... political instability Find out more... Corruption Find out more... Debt Find out more...

Shifting from colonial dependency > Many nations, specifically on the African continent, were under colonial domination until recent times. This domination created an economic structure that was “export” heavy and “import” light. This unequal balance of trade made nations dependent on the colonial power for manufactured products. In addition to hyper-dependency for manufactured goods, colonies often lacked infrastructure and internal leadership. But independence is a good thing… RIGHT?!!?!?

Political Instability > Political instability plagues less developed nations with civil wars and social unrest acting to prevent the necessary social stability required for sustained development.

Corruption > “Corruption is a major cause of poverty as well as a barrier to overcoming it. The two scourges feed off each other, locking their populations in a cycle of misery. Corruption must be vigorously addressed if aid is to make a real difference in freeing people from poverty.” ~ Peter Eigen “Corruption isn’t a natural disaster: it is the cold, calculated theft of opportunity from the men, women and children who are least able to protect themselves. Leaders must go beyond lip service and make good on their promises to provide the commitment and resources to improve governance, transparency and accountability.” ~ David Nussbaum

Issue Focus: Debt “Debt is an efficient tool. It ensures access to other peoples' raw materials and infrastructure on the cheapest possible terms. Dozens of countries must compete for shrinking export markets and can export only a limited range of products because of Northern protectionism and their lack of cash to invest in diversification. Market saturation ensues, reducing exporters' income to a bare minimum while the North enjoys huge savings. The IMF cannot seem to understand that investing in ... [a] healthy, well-fed, literate population ... is the most intelligent economic choice a country can make.” --  Susan George, A Fate Worse Than Debt, (New York: Grove Weidenfeld, 1990), pp. 143, 187, 235

The Unholy Trinity?!?!?! World Bank International Monetary Fund World Trade Organization

World Bank The World Bank is a vital source of financial and technical assistance to developing countries around the world. Their mission is to fight poverty with passion and professionalism for lasting results and to help people help themselves. It is not a bank in the common sense; it is made up of 186 member countries. They provide low-interest loans, interest-free credits and grants to developing countries. The World Bank, established in 1944, is headquartered in Washington, D.C. The three pillars of the World Bank: Results Reform Resources

International Monetary Fund Started in 1944 at the Bretton Woods Conference. The IMF is an organization of 186 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Creates structural adjustment programs (SAP) in less developed nations across the globe.

World Trade Organization The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. Established on January 1, 1995 and is headquartered Geneva, Switzerland It is made up of 153 countries Functions: • Administering WTO trade agreements • Forum for trade negotiations • Handling trade disputes • Monitoring national trade policies • Technical assistance and training for developing countries • Cooperation with other international organizations