Understanding Globalization

• Issues in global economics are common news stories.
• It can be difficult to understand the true meaning and effects of these stories.
• Those who give the news can lack the knowledge or understanding to explain the full effect of global economics.
• Global economics can affect daily lives.

Globalization

• Globalization is the increasing integration of the world's nations and the process by which that happens.

• Major international trade routes date back to 2,000 BC, making globalization nothing new.

• Technological advancements and cross-border issues have increased the degree to which far-separated locations on Earth have become interconnected.

• Increased globalization is attributed to governments working to coordinate agreements and treaties that facilitate international interactions.

• The reality is that globalization often occurs independent of any government policy.

• Increasing globalization is inevitable and affects all industries and all nations.

• Technology is the root cause, as communication and transportation improvements increase abilities to utilize the benefits of associating with foreign nations.

• Buying and selling goods globally has become faster, cheaper, and more convenient due to efficiency improvements and decreased risks.

• Examples of new technology include the cargo jet, the computer, or the telephone.

• New technology results in lower expenses for buying and selling goods across long distances.

• Advancements like cargo jets, computers, and telephones have reduced costs like insurance to cover the risk of lost shipments.

• Globalization is neither good nor bad in its totality.

• Pollution crosses national boundaries without regard to trade policies.

• Airborne carbon from a Chinese coal power plant is dispersed through the global atmosphere regardless of national trade policies.

• Informal or unofficial information is traded between nations daily.

• Globalization enables greater access to markets for selling goods and purchasing supplies.

• Economists study and try to explain human behavior in their relations with one another.

• Globalization is an inevitable result of attempts to maximize transaction value.

• Technological advances have caused globalization to increase in recent decades.

• National boundaries add complexity to transactions because international trade is no different than trading with someone across the street.

• Technology has made it easier to purchase things from halfway around the globe than it was to purchase things from across a single nation in the eighteenth century.

• People now have access to a wider variety of goods, at varying levels of quality and price, which are not always available within their own nation.

• The Silk Road required caravans to travel from China all the way to Greece, taking months.

• The trade was so profitable that empires were built on the sale of exotic goods.

• Exposure to and integration with other cultures is a normal part of everyday life in the modern era.

• Foreign trade has become more about cost efficiency than the availability of exotic goods.

• Governments are no more successful at truly prohibiting or even restricting foreign trade without self-harm than they were in the eighteenth century.

• Restrictions to trade ultimately cost citizens and businesses more as opposed to allowing them to by cheaper goods from other markets.

• Some think that globalization is created by the government and takes away jobs and want to stop current trends.

• If borders were closed entirely, the world would still be out there, with all its threats and opportunities.

• The best action is to simply be aware and expand attention globally rather than on geographic surroundings in order to benefit.

• The increased trend in globalization is a result of improved technological advances.

• Using the internet to compare cost and availability of potential purchases helps increase profits.

• Numerous online companies specialize in assisting with international transactions.

Production Possibilities Curve

• The production possibilities curve illustrates the potential combinations of the types and quantities of goods that a nation is capable of producing.

• A nation can produce a certain amount of goods in different combinations at any given point.

• When a nation is producing the maximum quantity of goods possible using all its production potential, it is on the production possibilities frontier.

• A nation cannot produce any additional output when they reach the frontier.

• If a nation is producing the maximum amount of any particular good or service, in order to produce more, it must give up resources from something else (Pareto Efficiency).

• Naturally, any nation can produce less than the maximum of which it is capable, but, for trade purposes, nations try to avoid these inefficiencies.

• To achieve simplicity, global economists often discuss the production potential curve using only two different types of goods.

• Nations always produce more than just two types of goods, therefore this model is not real in the global economy.

• Every nation has limited production potential and can only produce a limited amount of specific goods.

• Each nation tends to excel in the production of a few different types of products and services.

• Even if one's nation isn't especially good at producing something, there are other nations that excel in producing those goods and services.

• Opportunity cost is when a nation must give up some part of the production of one good in order to produce more of another.

• If a nation produces only beer and pizza, one is able to produce $100,000 of beer or $50,000 of pizzas.

• Giving up two gallons of beer to produce one additional pizza, while only having to give up one pizza to make two additional gallons of beer implies fewer resources are being used for beer.

• Alternative speaking, a nation can produce twice as much value in beer than pizza using an equal amount of resources.

• The opportunity cost of producing $100,000 in beer would be $50,000 in pizza

• Every nation has its own production possibilities curve.

• National growth can occur when a nation gets rid of inefficiencies or when it expands its production possibilities frontier.

• Increased economic efficiency occurs when a nation produces more with equal resources, equal with fewer resources, or more with fewer resources.

• The tradeoff within the production possibilities curve of a nation determines the prices that a nation pays for its goods relative to other nations.

• The price you'll charge for that good will be higher it takes more resources to produce a single unit.

• A farmer good at growing corn may end up in selling their farm tools for a higher price than a neighbor who is not as good at corn.

• One benefits from buying and selling in situations they preform better than others.

• The total size of a nation's production possibilities curve plays a critical role in determining which nations are large, rich, and powerful.

• The production possibilities curve of the nation you live in has been a large factor in your quality of life.

• Nations that improved over the centuries were those that were able to harness the production potential of its natural resources.

• Domesticated animals, natural minerals, and high yield foods have allowed nations to better preform.

Absolute Advantage

• A nation with an absolute advantage in a particular good can:

  • Produce more goods using fewer resources
  • Produce more goods with the same resources

• Abundant natural resources can give a country an absolute advantage.

• The nation can sell off the surplus of these goods as long as the volume exceeds domestic consumption.

• Suppose Nation A can use 100 pounds of wheat to produce 1,000 bottles of beer, and Nation B can use 100 pounds of wheat to produce 5,000 bottles of beer, Nation B has an absolute advantage over Nation A in beer production.

• This may be due to Nation B having a more efficient production process or having lower labor costs.

• Having an absolute advantage in one good or service isn't as helpful in trade as you might think.

• Nations that don't have an absolute advantage in a product will not export it because some other nation can produce the good more cheaply.

• Nation B may export some of its beer, but this won't last for long.

• As demand for Nation B beer grows, so will its price increase, including labor costs.

• Over time this diminishes Nation B's absolute advantage, and eventually some other nation will be able to produce beer just as cheaply as Nation B.

• Relying on absolute advantage for a nation's economic health is extremely inefficient.

• An absolute advantage is a temporary condition that is eventually eroded by trade.

• Countries should not get too complacent even if they can produce more of a product.

• Free international trade and growing demand creates rising market values in areas once cheap.

Comparative Advantage

• A nation has a comparative advantage over another nation in the production of some good or service when it has less opportunity cost.

• That nation has to give up fewer resources for the production of other goods in order to produce something than another nation does.

• Greater efficient use of resources decreases the costs for the production of that item and to makes the economy more efficient in its allocation of resources.

• Comparative advantage is the primary basis for all sustainable international trade, and the basis for all transactions that take place within a single nation.

• You can focus on making extra of whatever you're able to produce the most of, using the resources available to you and trading that surplus for everything else you need.

• Specialization or the division of labor is when individuals focus on developing an expertise in just a few skills and doing those very well.

• It is called operating within their comparative advantage when functions can do well using as few resources as possible

• Nations benefit by taking advantage of each other's comparative advantage.

• Comparative advantage differs from absolute advantage in that it is more concerned with opportunity cost than financial cost.

• Having a comparative advantage means that the nation is specializing, using its resources more efficiently, keeping costs down, and relying on other nations to produce those things that it may not be as effective at making itself.

• Comparative advantage is one of those issues that the people and companies of a nation are doing.

• The action of sending jobs overseas, what is actually happening is that something the company used to do is a function in which your nation has a comparative disadvantage.

• It's now cheaper for the company to outsource that function to another nation.

• If a country's competitiveness is sustained only through lawsuits and economic protection, then its increased resource use is harming the ability of other people and other companies to be competitive in the global market.

• This throws the entire national economy out of equilibrium.

• Some innovate to reduce costs, improve quality, or alter the product market while others become importers rather than producers.

• You should always be looking for a better, cheaper way to perform your functions from anywhere in the world.

Gains From Trade

• Gains from trade occur when two nations exchange those goods each is capable of producing cheaply; together they produce more than each could ever hope to produce on their own.

• This is possible when nations rely on their relative comparative advantages.

• Each one produces surplus amounts of those things that can be made using fewer resources.

• The countries then sell these surpluses to each other.

• Every nation has more resources available because of this global trade.

• Gains from trade are only possible when the people of each nation focus on producing those things in which they have a comparative advantage while importing goods from another nation that holds a comparative advantage over them.

• Example:

  • Two beers cost one pizza to produce in one nation.
  • One pizza costs two beers to produce in another.
  • Nation A: $10,000 beer and $5,000 pizza
  • Nation B: $2,000 beer and $4,000 pizza

• Nation A has an absolute advantage in both beer and pizza meaning it produces more of both than does Nation B.

• Nation B has a comparative advantage in pizza.

• The maximum those nations could both produce together is $21,000 in goods without trade.

• Nations should specialize in producing what they are good at and allocating resources from its weaker industry to its stronger one and then trading its surplus

• Example:

  • Nation A: $20,000 beer and $0 pizza
  • Nation B: $0 beer and $8,000 pizza

• The two nations are now producing $28,000 in total value demonstrating gains in trade.

• They both benefit and have less of a foot print on national resources.

• Trade in this manner increases total wealth for everyone because there is a much larger total value of resources in each nation compared to the number of people.

• Nations that participate in trade increase in wealth more quickly, and a proportion of that wealth translates into a better quality of life within the nation.

Terms of Trade

• One way to measure the value of trade between nations is with a calculation called the terms of trade.

• The terms of trade compares the value of a nation's exports with its imports, expressed as a percentage

• There are two models for this calculation:

  • Two-nation model
  • Multiple-nation model

• The two-nation model is simpler and is commonly used to explain how the terms of trade calculation works.

• Additional information such as the balance of payments, exchange rate, and relative business cycle fluctuations can also be provided between nations

• To make this calculation, divide the total dollar value of a nation's exports by the total dollar value of its imports, and then multiply the answer by 100.

• The ratio measures the value of a nation's imports and exports.

• Example:

  • Brungaria exports $1,000 worth of goods to Freedonia and imports $500 worth of goods from Freedonia.
  • Brungaria has exports worth 50% more than Freedonia and Freedonia has imports worth 200% of those of Brungaria.

• The reality of a nation's terms of trade is more complex since trade typically occurs between multiple nations, trading multiple goods, with different advantages and currency values.

• The multiple-nation model is actually one of several price-index models for trade that can account for a wider variety of import and export transactions.

• A nation's terms of trade is not a measure of its economic health or the competitiveness of its products in the global market.

• The terms of trade merely measures a ratio of total value of imports to exports.

• A ratio is meaningless without a context.

• The value should be interpreted based on the greater context of trade balance and variations of economic cycles between nations.

• Trends for various areas of economic concern are needed to properly relate context.

• If some trade issue appears to be inexplicable, measuring the terms of trade can help provide context.

• The terms of trade is not a single indicator it should be used as a landmark while your on a long journey.

• Organization’s, individuals, and entire nations use the terms of trade to predict fluctuations in trade, exchange rates, and economic well being.

• It may indicate that the company's industry has a poor comparative advantage globally if your country has extremely high terms of trade but one of your holdings has low value in the market.

• Trade decisions should be guided by knowing what to expect from trade will.

Variety Versus Regionalization

• People desire variety to a certain extent.

• The tradeoff between variety and regionalization lies in peoples desire for something different but not too different.

• Variety is typically considered to be a good thing, since diverse product offerings provide consumers with different options that appeal to many tastes while stimulating competitive innovation.

• Regions able to offer better-quality products than are available domestically provides a level of competition.

• Throughout the ages, people desired the foreign, the new, and the exotic.

• Regions look for ways to gain a new experience, yet will still remain aligned with their current trends.

• There is an informal sliding scale for global products.

• One extreme are those things that are completely familiar.

• The other are those that are completely unfamiliar.

• Anyone involved in foreign trade must find a balance that optimizes personal benefit and company sales.

• The product needs to be tailored enough for the local economy, but not too extreme.

• Offerings should be differentiated without alienating their customers.

• While enticing for a small percentage of customers, goods and services that are in stark contrast with cultural norms, typically will not compete well.

• Example:

  • Traditional Chinese food (e.g., braised chicken feet) have a very difficult time selling for Chinese restaurants in the United States.
  • Instead, things associated and consumed by the American palate are often sold.

• It's important to understand what kind of marker your hopeful that your selling too.

• Is your product variable?

• Does your product line offer traits that the potential customer market will want?

• Whether or not your applying assumptions of your own nation to people from other nations is important.

• Your expectations about the product may differ significantly from those of consumers in the product's country of origin.

• Westerners assumed Chinese-made products were of poor quality for years.

• The expectations for cheep manufacturing were different is China with some companies not properly caring for the goods they were out putting.

Economics of Scale

• We say it's creating economies of scale when a company can produce something more cheaply per unit by increasing quantities.

• When a company sells more of a product it's able to charge a lower price for it.

• This happens for two primary reasons:

  • Increased efficiency in the usage of available resources (internal economies of scale)
  • Lower per-unit cost of supplies when purchased in large volume (external economies of scale)

• Internal economies of scale: a company is more efficiently using its assets

• External economics of scale: a company has the option to purchase supplies in larger volumes

• Diseconomies of scale: Ability to produce more units increases the average cost.

• Going global greatly improves an organization's potential to achieve economies of scale because it facilitates desire to expand internationally.

• As price of an individual product increase, will result in lowering of demand

• Production capacity may be expanded in order to have a greater production rate.

• Economies of scale sometimes result in a "natural monopoly," whereby a single company gains control of a particular market by making its goods cheaper.

• Operations increase with the global expansion of an organizations ability to grow and establish costal volume.

• This results in drawing new customers and being able to better compete with smaller foreign organizations.

Economies of Agglomeration

• Called economics of agglomeration, when a company's operations are geographically closer to its:

  • Suppliers
  • Customers
  • Partners
  • Even unrelated organizations and competitors

• People move to be near their jobs, while organizations move to be near their customers, suppliers, and partners.

• Everyone benefits from the group's ability to efficiently specialize its operations, create synergy, and even stimulate bargaining between competitors.

• Being near suppliers and customers also allows organizations to more effectively respond to changes in the demand for their products.

• Mutual suppliers reduces the costs of distribution.

• Organizations can attract a wider number of competing suppliers by being near their location.

• You need to pay attention to trends.

• It's very key where the people were selling for, what organizations are setting up shop for, what people are buying.

Localization

• Although it's counterintuitive, dramatically increasing levels of globalization are actually bringing about a new form of localization.

• Global companies treat every nation in which they have customers as their home country, in other to integrate and improve in foreign markets.

• Today there are four categories of companies:

  • Domestic
    • These companies' source for supplies from within and sell to customers only within one country.
    • This includes companies that purchase goods from local companies that were manufactured abroad.
  • International
    • An international company is headquartered in a single nation.
    • Possessions of import or export operations that give it a presence in other nations are common.
  • Multinational
    • A multinational corporation has a physical presence in multiple nations.
    • Arrangement example of Foreign branch, might have a foreign partnership, may have foreign investments or could have any number of other forms of arrangements in place that give it full or partial ownership over international functions.
  • Global/Transnational
    • Global companies lack a home nation.
    • Keeps multiple points of control at different locations to stay responsive to the local market.
    • Has geographically diverse management, often offer stock in several different nations, and sometimes even lack a single formal headquarters.

• As a company progresses from a domestic firm to a global one, it expands to goods of the world that were meant to attract domestic customers.

• Organizations tend to gradually integrate themselves into foreign markets by the pinnacle of organizational global reach becoming total market integration rather than merely global reach of sales.

• The phrase "Think globally, act locally," perfectly captures the idea of localization as organization should treat every location like they live there.

• Even the largest of international companies can remain successful by maintaining a cohesive, coordinated organization that is as diverse as its customers.

• Manages the varying needs of local communities better, both in its production portfolio and its ability to maintain a local presence.

• Organizations try to be as responsive as possible to local tastes and trends, which also contributes to localization.

• Each region is often given a certain degree of autonomy to respond to localized needs to manage a product portfolio that is diverse enough to remain competitive.

• Local individuals and organizations should be hired to disperse locations internationally to limit mis allocation.

• There can be instances of certain governmental regulations for this to be legally facilitated.

• As a result of globalization, many organizations are changing to better reflect the culture and ideas of the world's population rather than those of their home nation.

• The core of global economics involves small business.

• All components and scales of business can adapt and profit.