16 Mechanisms Continued

16 Mechanisms Continued - Mechanisms of the Global Economy,...

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Unformatted text preview: Mechanisms of the Global Economy, continued 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 (15 min) • 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 Countries). 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 net exports • 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, but investment Consists of Foreign Direct Investment (FDI) • 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 Global Economy • What Does the Global Economy Look Like? • How Did We Get Here? The Consequences of Economic Globalization • 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 4000 3000 2000 1000 0 1968 1973 1978 1983 1988 1993 19 51 19 54 19 57 19 60 19 63 19 66 19 69 19 72 19 75 19 78 19 81 19 84 19 87 19 90 19 93 19 96 19 99 Percent Change Growth of World Output and Trade 15.0 10.0 5.0 0.0 -5.0 -10.0 GDP Growth Trade Growth Distribution of World Trade EU 21.2% 6.0% 6.3% 17% 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 nation 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 change • 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.

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