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Unformatted text preview: Mechanisms of the Global
Wednesday, November 01,
2006 Comparative Advantage (again) Bill and Amy have 1 hour before the
Jimmy Buffet Thanksgiving Special,
starts on FOX. They need to prepare.
If they each do their own thing,
spending 30 min. on each:
• Bill: 0.5 Margaritas, 1 Burrito
Amy: 4 Margaritas, 2 Burritos
Total: 4.5 M’s + 3 B’s = 7.5 Goods Burritos Bill 1 2 Amy 8 4 If They Specialize Completely: • Bill: 2 Burritos
• Amy: 8 Margaritas
• Total: 8 M’s + 2 B’s = 10 Goods Margaritas Or, if Amy wants 2 Burritos: • Bill: 2 Burritos
• Amy: 6 Margaritas (45 min), 1 Burrito
• Total: 6 M’s + 3 B’s = 9 Goods Factor Endowments and the
International Economy Capital-Abundant Industrialized “Core”
countries—the U.S., Western Europe,
Japan, the NICs (Newly Industrializing
Labor-Abundant “Periphery” Countries—
Latin America, Africa, parts of Asia.
Emerging Global Division of Labor in the
International Economy between North
and South. Theories of Factor Endowments Heckscher-Ohlin model
• Comparative advantage depends upon the
relative abundance land, labor, & capital
• U.S. is land, capital-abundant, labor-poor
• Mexico: labor-abundant, capital-poor
• Nations should produce products which
require those endowments in which they are
abundant Stolper-Samuelson Extension
• Over time, with no trade restrictions, prices
of resources will equalize across all nations Balance of Payments Balance of Payments reflects the
total balance of net imports and
• A current account surplus means a
state exports more than it imports
• A current account deficit means a
state imports more than it exports When someone in the U.S.
purchases a BMW, Germany’s
account is credited and the U.S.
account is debited Capital Account Capital Account is the other type of
balance of payment, reflecting not
current goods or services purchased,
Consists of Foreign Direct Investment
• Overseas investment in physical capital,
such as building a plant, factory, or other
facility Portfolio Investment
• Doesn’t actually create a physical plant, just
investment in stocks and bonds Exchange Rate Mechanism Balances out Balance of Payment surpluses
and deficits in the long-term
• Creates a tendency toward equilibrium As U.S. consumers owe BMW money for cars,
it creates a demand for Euros
Increases money supply in Europe, decreases
money supply in U.S. . . .
Costs of goods in U.S. go down, costs of goods
in Europe go up . . .
So Buyers want more U.S. goods and less
German goods, bringing balance to payment
surplus/deficit Causes and Consequences The Political and Economic Structure of the
• What Does the Global Economy Look Like?
• How Did We Get Here? The Consequences of Economic
• Who Wins, Who Loses? Within the United States; Advanced Industrial
Economies More Broadly: MNCs vs. Labor?
Within the World Economy: Capitalist Countries vs.
Developing Countries? Some Simple Facts About the
Global Economy In 2002:
World Trade Almost $6.8 Trillion.
About 63,000 Multi-National Corporations
(MNCs) Operate in the Global Economy
• Controlling About 690,000 Foreign Affiliates
• Employing About 86 Million People. Foreign Direct Investment (inflows) Totaled
$651 Billion (down 21% from 2001, after a
41% drop from 2000).
About 30 Countries in Western Europe, North
America, and Asia Account for About 75% of
this International Economic Activity. Treaties on the Rise BITs: Bilateral Investment Treaties
DTTs: Double Taxation Treaties International Trade
World Trade, 1968-1997
6000 $US Billions 5000
1968 1973 1978 1983 1988 1993 19
99 Percent Change Growth of World Output and Trade 15.0 10.0 5.0 0.0 -5.0 -10.0
Trade Growth Distribution of World Trade
Asia/Pacific North America 9.6% 10.7% 5.3% 6.2% Rest of the World 4.4% 12.8% 60% of All Trade Among the Advanced Industrialized Countries The Multilateral Trade
System: GATT and the WTO GATT: General Agreement on Tariffs and
Trade: Created in 1947.
• An Agreement (legal text specifying rules)
• An Organization (a body that facilitated trade
negotiations). WTO: World Trade Organization:
Established in 1994
• An International Organization Charged with: Monitoring Compliance with rules (including GATT)
Resolving Trade Disputes
Facilitating Trade Negotiations Politics of Anti-Globalization Anti-trade and anti-globalization ideas
remain valid because they are politically
useful to some, to capitalize on fear of
foreigners and the costs of globalization
Trade is beneficial to each nation overall
– it will not suck away wealth from a
But individuals within each nation may
suffer as they lose jobs as industries shift
to nations with a comparative advantage
there Coping with Globalization Comparative Advantage means that
industries will shift to other countries,
but new ones are created
• Nations change which goods they produce
• Individuals must be helped to cope with
• U.S. manufacturers and farmers lost jobs in
the 90s, but more jobs were opened in
technology, where the U.S. has a
comparative advantage Individuals need education and job
training to cope with the costs of
transition to new industries Four Central Points Historically Unprecedented Growth
of World Trade in Postwar Period.
Trade dominated by Industrialized
World, and developing countries
play much less important role.
Trade Based on Comparative
Advantage is Mutually Beneficial
Result Has Been Deepening of
Economic Integration Among the
Advanced Industrialized Countries-Globalization ...
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This note was uploaded on 03/31/2008 for the course POLI 150 taught by Professor Mosley during the Spring '08 term at UNC.
- Spring '08