Globalization

I. Trade A. The Iowa Car Crop Trade = a form of technology  increases efficiency; favoring one technology harms another; trade helps the whole even if hurts the parts

B. Comparative and Absolute Advantage  Absolute: able to produce more of an item  Comparative: able to produce at a lower marginal opportunity cost Rum Crystal 1 mil. 100,000 30,000 A B 0 C 80,000 40, ,000 IrelandPuerto Rico A B C

Comparative Ad using S+D Q P Pus Qus Pworld QSus/trade QDus/trade S D

Everyone and every nation has a comparative advantage in something (no matter how nasty) and economists argue that they should a)specialize in the production of that good and b)trade for what they lack This will: a) increase efficiency, b) benefit everyone involved, c) proportionally benefit the poorer nation more This is NOT to say that the poorer nation will benefit as much as they should: dependency theory Guatemala, Iran, Chile and the Washington Consensus

C. Tariffs Harm from trade concentrated, benefits diffused Policy responses: 1) Tariffs  Protective, revenue, prohibitive, “beggar-thy-neighbor”  trade war  Act as a tax on international supply  raise costs of production, lower supply  raises prices of foreign AND domestic goods (substitution effect): hurts consumers but benefits domestic producers (inefficient) + gov’t revenue 2) Quotas  Similar cost effect as tariffs, but benefit foreign producers 3) Voluntary export restraint  Japanese cars 4) Subsidies and currency manipulation  US/Europe vs. China

D. Money  #1 traded commodity is money  Derived demand: demand for currency determined by demand for products bought with currency (goods and financial investments)  Strong Dollar: Increased demand US goods (or decreased demand foreign goods)  appreciation  US exports fall (more expensive for foreigners to purchase US goods), imports rise (cheaper to buy foreign goods)  Weak Dollar: Decreased demand US goods (or increase demand foreign goods)  depreciation  exports rise, imports fall  Trade deficit: imports > exports  Current account deficit: more money going out (purchases, investment) than coming in  economy running on borrowed means  Flexible exchange rate SHOULD balance trade (but, China)

II. Developmentalism Economic development: process to improve economic, political, and social well-being of its people. Majority of world = process of industrialization and modernization to break free of poverty and dependency  MDC: more  LDC: less  NIC: Newly Industrialized Countries

B. 7 Measures 1. Per Capita GDP 2. Energy consumption: NIC > MDC > LDC 3. Labor force specialization 4. Consumer goods 5. Literacy 6. Life expectancy 7. Infant mortality

C. Problems for Development  Rapid Population Growth  Target aid to women  Factors of Production  Physical capital (resource curse), human capital (health and nutrition, education, “brain drain”)  Political Factors  Civil war, repression, transition central/colonial to free market, corruption, Islamofacism, democratization and populism  Debt  debt forgiveness