IEB Chapter 1 2024-2025 PDF

INTERNATIONAL ECONOMICS & BUSINESS (IEB) AURELIUS RAPOZO International Economics & Business Module Focus Putting into perspective “International Economy and Globalization” Appreciating the challenges of “International Trade Relations” Gaining grips of “Internat...

INTERNATIONAL ECONOMICS & BUSINESS (IEB) AURELIUS RAPOZO International Economics & Business Module Focus Putting into perspective “International Economy and Globalization” Appreciating the challenges of “International Trade Relations” Gaining grips of “International Monetary Relations”  1. The International Economy and Globalization ✓What is International Economics and its Uniqueness? ✓Forums for trade and monetary issues ✓Economic interdependence ✓Globalization and the waves of globalization ✓Trade Patterns and Openness ✓The importance of globalization ✓Common Fallacies of International Trade ✓Pros and cons of globalization  What is International Economics? International economics concerns the flow of commodities services productive factors across national boundaries. International transactions constitute an extension of domestic transactions. International Economics is the conduct of trade rather than the benefits that flow from it.  Uniqueness of International Economics This has to do with the conduct of trade that arise between domestic and foreign trade. 6 identifiable areas: Exchange rates Commercial Policies (Tariffs and Quotas – chapters 4 and 5) Different domestic policies (Macroeconomics) Statistical data (see mote below) Relative Immobility of Productive Factors (Factor movements – chapter 9) Marketing Considerations (see note below)  F o r u m s f o r Tr a d e a n d M o n e t a r y I s s u e s Institutions that deal with the world’s trade and financial challenges and problems: World Trade Organization (WTO) International Monetary Fund (IMF) World Bank The European Union (EU) | NAFTA Group of industrial Countries (G5 | G7 | G10) The United Nations Conference on Trade and Development (UNCTAD) Organization for Economic Cooperation and Development (OECD)  Economic Interdependence An economy’s features - such as industries, service sectors, levels of income & employment, and living standards are linked to its trading partners where International movements of goods and services, labour, business enterprise, investment funds, and technology play an important part. The world is becoming so interconnected that it is no wonder that “When the United States sneezes, the economies of other nations catch a cold”.  Economic Interdependence Negative spill overs experienced through a high degree of economic interdependence global recession of 2007 - 2009 caused through the collapse of the U.S. housing market resulting surge in mortgage loan defaults whereby financial institutions undermined acquiring loans becoming impossible crisis spreading through to Europe touching Russia and Iceland and the Rest of the World.  Economic Interdependence Quantitative Easing An attempt to grow a particular economy by purchasing large amounts of long-term securities What happens when the governments buys these securities? (The effects?) Increase in the ………………. supply, …… in the interest rates, stimulating investments, etc.  W h a t i s G l o b a l i z a t i o n ? Globalization is the process of greater international interdependence among countries and its citizens consisting of the increased interaction of product and resources markets across nations via trade, immigration, and foreign investment. International flows of Goods and services | People | Investments in equipment, factories, stocks, bonds Non-economic elements such as culture and the environment. All in all, globalization is political, technological, economic as well as cultural!  Wa v e s o f G l o b a l i z a t i o n What forces are driving globalization? Technological change Multilateral trade negotiations Continuing liberalization of trade and investment Widespread liberalization of investment transactions Development of international financial markets  Wa v e s o f G l o b a l i z a t i o n First Wave (1870 – 1914) The Great Depression (1930) Second Wave (1945 – 1980) Latest Wave (began somewhere in 1980) W a v e s o f G l o b a l i z a t i o n F i r s t W a v e ( 1 8 7 0 – 1 9 1 4 ) Decreases in tariff barriers & new technologies ◦Declining transportation costs ◦Shift from sail to steamships; Railways Driven by European and American businesses and individuals ◦Exports as a share of world income nearly doubled ◦Per capita incomes increased annually ◦Countries that actively participated in globalization ◦Became the richest countries in the world ◦First wave of globalization was brought to an end by World War 1.  W a v e s o f G l o b a l i z a t i o n Great Depression of the 1930 Governments – practicing protectionism By enacting tariffs on imports Read International Trade Application: To shift demand into their domestic markets Apple Growers – U.S versus Chinese Resulting in promoting sales for domestic companies And promote jobs for domestic workers What were the effects of increased protectionism? Exports as a share of national income to fall to 5%.  W a v e s o f G l o b a l i z a t i o n Second Wave (1945 – 1980) Horrors of the retreat into nationalism What are agglomeration economies? If two or more separate industries are incidentally beneficial to one Falling transportation costs another, there can be external economies of scale across the entire group. Decrease previously established trade barriers This phenomenon is sometimes called an “agglomeration economy,” in which businesses are located close to one another and can share resources Trade liberalization – discrimination and efficiencies (Investopedia) ➔ determined which countries participated & which products were included Inducing a New kind of trade ➔ whereby Rich country specialization in manufacturing niches Agglomeration economies ➔ Benefit those in the clusters & Bad news for those who are left out  W a v e s o f G l o b a l i z a t i o n S e c o n d Wa v e ( 1 9 4 5 – 1 9 8 0 ) C o n t ’ d Most developing countries ◦Did not participate in the growth of global trade in manufacturing and services ➔ Continuing trade barriers in developed countries ➔ Unfavorable investment climates ➔ Antitrade policies in developing countries ◦Dependence on agricultural and natural-resource products Increased per capita incomes within the developed countries Developing countries as a group were being left behind World inequality  W a v e s o f G l o b a l i z a t i o n R e c e n t W a v e ( 1 9 8 0 … … ) A large number of developing countries - China, India, and Brazil - Broke into the world markets for manufacturers Other developing countries - Increasingly marginalized in the world economy - Decreasing incomes - Increasing poverty Significant international capital movements  W a v e s o f G l o b a l i z a t i o n Recent Wave (1980…) cont’d Some developing countries Competitive advantage in labor-intensive manufacturing ➔ Countries such as Bangladesh, Malaysia, Turkey, Mexico, Hungary, Indonesia, Sri Lanka, Thailand, and the Philippines ➔ Tariff cuts ➔ Lower barriers to foreign investment ➔ Technological progress in transportation and communications enabled developing countries to participate in international production networks. Protectionist policies in developed countries  W a v e s o f G l o b a l i z a t i o n Recent Wave (1980…) cont’d The World is become More globalized ➔ international trade, capital flows Less globalization ➔ labor flows Foreign outsourcing Certain aspects of a product’s manufacture are performed in more than one country Manufacturing - moved to wherever costs were the lowest ➔ Job losses for blue-collar workers ➔ Cries for the passage of laws to restrict outsourcing  Trade Patterns and Openness Openness ◦Rough measure of the importance of international trade in a nation’s economy ◦Nation’s exports and imports as a percentage of its gross domestic product (GDP) ◦Large countries – lower measures of openness ◦Less reliant on international trade ◦Small countries – higher measures of openness (Exports + Imports ) Openness = GDP Trade Patterns and Openness (cont’d)  E x a m p l e - O p e n n e s s If U.S. export as a percentage of GDP is 14% and import as a percentage of GDP is 18% Whereas Canada’s export as a percentage of GDP is 30% and import of 32% as a percentage of GDP, What is the openness of the two countries? Which one of the two is more open as calculated in the openness ratio? Answer: U.S. openness ratio is 32 whereas Canada’s openness ratio is 62. Thus Canada’s trade pattern is more open as compared to the U.S.  The Importance of Globalization Law of comparative advantage ◦Citizens of each nation can gain ◦Spend more of their time and resources doing those things in which they have a relative advantage ◦If a good or service can be obtained more economically through trade ◦Trade for it instead of producing it domestically ◦How the available resources can be used to obtain each good at the lowest possible cost  The Importance of Globalization (cont’d) Open economies ◦Produce a larger joint output ◦Competition - essential to both innovation and efficient production ◦International competition - Domestic producers - strong incentive to improve the quality of their products - Weakens monopolies ◦More competition ◦More company turnover - Improvements for the industry  The Importance of Globalization (cont’d) Economic growth rates - close relation to: ➔ Openness to trade ➔ Education ➔ Communications infrastructure  The Importance of Globalization (cont’d) Globalization ◦Rapid growth in some countries ◦Increased demand for commodities - Examples: Crude oil, cooper, steel - higher prices ◦Increased supply of substitutes - Biodiesel, ethanol ◦Domestic economy - Vulnerable to disturbances initiated overseas  Common Fallacies of Globalization 1. “Trade is a zero-sum activity” ◦ In reality, both trading partners gain from trade (production and consumption wise) 2. “Imports reduce employment and act as a drag on the economy, while exports promote growth and employment” ◦ Failure to consider the link between imports and exports 3. “Tariffs, quotas, and other import restrictions will save jobs and promote a higher level of employment” ◦ Failure to recognize that a reduction in imports does not occur in isolation Free trade ◦ Increases competition, lowers prices ◦ Makes better products available to consumers ◦ Higher consumption  Pros and Cons of Globalization Advantages Disadvantages - Productivity increases rapidly when there is a - Imports creating job losses or production shifts abroad comparative advantage - New jobs pay less - Living standards improve more quickly - Fear of getting laid off - Cheap imports ➔ constraint on prices – inflation less - Wage concessions threatening local employees likely to disrupt economic growth - Outsourcing causing job losses at different levels - Promotes technological development and improvement, with ideas from abroad