Markets In The Global Economy

Overview How Markets Operate ◦ Simple Market Economy Global Economy Why Trade? ◦ International Specialization Class Activity: Trade Policies ◦ Mini-Presentations Global Interdependence

How do Markets Operate? Comparative advantages lead to specialization, allowing one party to trade this product for other needs ◦ page 43: Brenda (bread) & Sam (shirts) BUT, direct trade between individuals is rare We need markets to organize the buying and selling of goods & services, involving many different firms

Simple Market Economy Exchange of goods/services occurs in two markets: ◦ Factor Market (Inputs) ◦ Product Market (Outputs)

Simple Market Economy

Factor Market (Inputs) Households trade inputs for money ◦ Labor ◦ Natural Resources ◦ Investments Firms provide the money in order to receive inputs

Product Market (Outputs) Firms provide products in exchange for money Households pay money to receive the products made by the firms

Market Economy Firms = have the necessary physical/human capital necessary to turn inputs into outputs (products) This model of a market economy is oversimplified and incomplete: 1.Ignores the role of Government 2.Ignores the influence of international trade

Global Economy Remember: differences in opportunity costs result in comparative advantages that result in specialization ◦ This is also true for entire countries Nations can differ according to the factors of production ◦ Natural resources (& climate), public infrastructure (physical capital), labor forces, etc Therefore, some nations will have a comparative advantage in producing certain goods and services ◦ Results in specialization on an international scale

EU Imports from Ghana Agricultural Products Machinery and Transport Equipment

EU Exports to Ghana Agricultural Products Machinery and Transport Equipment

Global Economy In many instances, one country will have an absolute advantage in the production of goods and services over another ◦ Example: the U.S. has an absolute advantage over India in the production of computers and clothing. So why would these nations want to trade?

Why Trade? We need to look at comparative advantage (not absolute) ◦ India has a comparative advantage in producing clothing over computers ◦ the U.S. has a comparative advantage in producing computers over clothing

International Specialization U.S.India Computers produced per fixed input254 Items of Clothing produced per fixed input54 Opportunity cost of one computer1/5 item clothing1 item clothing Opportunity cost of one item of clothing5 computers1 computer Therefore, both countries would benefit from specialization and trade i.e. comparative advantage drives trade

Trade Policy Remember: governments have an influence on markets Policies exist that aim to increase trade between nations ◦ e.g. Free Trade Agreements Many national governments use barriers to restrict trade ◦ Why? ◦ Protect own firms from foreign competition ◦ Protect jobs of their workers These are known as Protectionist Policies

Trade Policies Class Activity ◦ In pairs, research one of the following well-known trade policies: GATTNAFTAEU ◦ Your research should provide an overview of the policy that includes:  Who, what, where, when, why, how  Impact on global markets  Your opinion on the overall success/failure of this policy 1. 1 Page Summary of your research 2. A short (5minute) presentation of your research for the class

Global Interdependence Specialization and international trade can greatly benefit a nation’s economy ◦ Allows efficient use of resources BUT, can also create vulnerabilities ◦ Example: Belgium economy relies heavily on exporting products to Germany

Global Interdependence Germany suffers a severe economic collapse Unemployment in Germany increases, and so consumers have less money to buy things Consumption of goods/services decreases, including imports from Belgium Belgium firms produce less, and reduce labor force Unemployment in Belgium rises, economy suffers a collapse Helps explain global economic crisis