International Economics PDF

Unit 5: International Economics Part I: Globalization Globalization: Who Cares? You Do. Definition: spread of products, technology, information, and jobs across national borders and cultures. In economic terms, it describes an interdependence of nations around the globe fostered through free tr...

Unit 5: International Economics Part I: Globalization Globalization: Who Cares? You Do. Definition: spread of products, technology, information, and jobs across national borders and cultures. In economic terms, it describes an interdependence of nations around the globe fostered through free trade. Supply Chain Defined: is a network between a company and its suppliers to produce and distribute a specific product to the final buyer. ... The supply chain also represents the steps it takes to get the product or service from its original state to the customer. REMINDER ABOUT TRADE AND GLOBALIZATION Remember our trading activity earlier in the year? What happened as a result of trade? Offshoring Defined: the practice of basing some of a company's processes or services overseas, so as to take advantage of lower costs. Examples: Capital One (a U.S. credit card company) moves its call centers to the Philippines. Ford Motor Company moves a factory to Mexico. Outsourcing Defined: obtain (goods or a service) from an outside or foreign supplier, especially in place of an internal source. Examples: IBM hires a Indian company to develop software. Group Discussion Connect to current events, specific companies, ect… share with the class. Part II: Economic Development Development Stages The Rich ● ● ● ● EDC’s Economically Developed Countries High GDP and GDP per capita Technologically Advanced Economy The Rapidly Growing ● ● ● ● NIC’s Newly Industrialized Countries Rapid growth in GDP and GDP per capita Investments in technological advancements The Poor ● ● ● ● LDC’s Least Developed Countries Low GDP and GDP per Capita Impoverished populations Life in Less Developed Countries LDC’s (Less Developed Country) ● Many things we do NOT view as luxury items are viewed that way by people in LDC’s (car, phone, shoes, more than one meal a day) ● Most LDC’s are in Asia, Africa, Latin America LDC’s are generally defined as: poor countries (low GDP and GDP per capita), the level of education is low, less access to technology, and limited infrastructure. ● No perfect $ line, but generally $3000 or less GDP per capita Life in Burundi Effects of Poverty on LDC’s Less Goods and Services: Clothing, sanitation (sewers and bathrooms), running water, health care access, radios, tvs, and cars are fewer that in developed countries, electricity, internet access, and airports are irregular or inaccessible. People who live in LDC’s have lower life expectancy compared to the rest of the world, due to lack of food or health care, inadequate shelter, social unrest, and lack of government services, and WAR. Compare: ● Burundi: ● Chad: ● Congo: ● To the United States: Political Problems are MAGNIFIED in LDC’s Many LDC’s have power resting in the hands of the few (OLIGARCHY) ■ Oli = few ■ few become corrupt ■ Inequality is high. Distribution of wealth is VERY uneven in LDC’s (almost no middle class). Conflict occurs due to the struggle for power and control: BECAUSE THERE IS SO LITTLE MONEY TO PAY FOR SOLDIERS, leaders, revolutionaries, militias (ect...) rely on children to use as soldiers. What type of economy do LDC’s have? Duel Economy = one groups that operates in modern global economy (market), and almost all people existing in subsistence economy (traditional). Those born poor stay poor. Review: Types of economic systems Market Economy (supply and demand) = capitalism Command Economy (driven by the government) = communism and socialism Traditional Economy (bartering and growing own food and hunting and gathering). SUDAN Poverty in LDC’s Impacts Advanced Countries 1. Opportunity Cost = when countries are poor they can’t buy our goods and services. American companies NEED expanding markets. 2. Their debt could cause problems with our own currency or with world economic stability (if they can’t pay). 3. Foreign Aid (NOT Loans): opportunity cost is what we could do in OUR OWN country There are 5 major barriers to development in LDC’s 1. Limited natural resources: usually have agriculture (which is not a big money maker) but limited in other resources. Usually NOT diverse in resources, usually NOT fully developed. There are 5 major barriers to development in LDC’s 2. Low level of human capital (LITERACY AGAIN). level of education and training is low. Usually not much spent on public education. a. What level of literacy do you think is necessary to participate in the economy? b. low literacy does NOT support advanced economies There are 5 major barriers to development in LDC’s 3. Shortage of Investment Capital: hand to mouth existence (subsistence living). When there is no $ left over, there is no $ to invest in businesses, equipment. a. most modern forms of technology are usually NOT available or appropriate. For example, without electricity that runs regularly, new machinery won’t mean much. There are 5 major barriers to development in LDC’s 4. Rapid Population Growth: population growing faster than GDP, meaning that GDP per person (per capita) can be falling while overall GDP rises. a. Population explosion b. Large growth in population with low productivity = potential starvation c. Doubling time (time it takes for population to double) is short in many LDC’s i. lack of medical care (lack of birth control) ii. religious prohibition of birth control iii. need for more children due to agricultural life (subsistence) There are 5 major barriers to development in LDC’s 5. Unfavorable Political Climate a. corrupt, dangerous, incompetent leaders b. Countries that are serious about improving often ask advanced countries for aid in structuring / running their government / economy Foreign Aid Can Promote Development Advanced countries provide aid 1. because it is moral 2. because of self interest (opening markets for US companies) Foreign Aid Can Promote Development Much of aid flowing from US is private NOT public ● Red Cross ● Rockefeller Foundation Or aid comes from international economic organizations. For example, the World Bank provides aid to LDC by borrowing money from the rich (EDC’s) and lending to the poor(LDC’s). ● How would EDC’s benefit from that arrangement? ● How could they be harmed? NIC’s - Newly Industrialized Countries They are GROWING RAPIDLY! Use the images to answer: What has been happening to China’s GDP over time? What has been happening to the RATE of growth of the Chinese economy recently? Activity: Country Study With a group, choose a county and assess how factors such as availability of natural resources, investments in human and physical capital, technical assistance, public attitudes and beliefs, property rights, and free trade are affect economic growth. Then, create a ‘briefing’ on a country to a private organization recommending if and what type of aid the country could benefit from. Pick from the following: ● Belarus, Algeria, Ghana, Cambodia, Pakistan, Romania, Turkmenistan Part 1: Background ● Location ● Key issues ● Demographics Part 2: Economic Indicators ● GDP / GDP per Capita ● Infant Mortality ● Unemployment Part 3: Primary Issues ● Determine 3 (assessing factors) Part 4: Recommendation ● Recommend aid for a specific primary issue Part III: The Global Marketplace - Trading Among Nations Free Trade vs Protectionism Trade: How does it work? The Global Marketplace:Trading Among Countries ● ● Exports: goods a country sells to another country (out flow) Imports: goods a country buys from another country (in flow) Activity: Trade Matters to Me Pick an object you are in possession of (notebook, pencil, phone protector, item of clothing…). Identify where it was made. Write the name of the item on a sticky note. Place the sticky note on the correct location on our world map. Demonstration results? US Imports and Exports How can capital goods (machinery) be both a major export and import? Perceptions and Reality What countries do you think are our largest export partners? What countries do you think are our largest import partners? How does that compare to reality? Use the next slide... Rank Country Exports Imports Total Trade Percent of Total Trade --- Total, All Countries 402.4 599.3 1,001.6 100.0% --- Total, Top 15 Countries 289.0 463.3 752.2 75.1% 1 China 32.0 123.1 155.1 15.5% 2 Canada 73.2 77.0 150.2 15.0% 3 Mexico 63.9 82.2 146.1 14.6% 4 Japan 17.5 35.0 52.5 5.2% 5 Germany 14.8 30.7 45.4 4.5% 6 United Kingdom 17.2 14.7 31.9 3.2% 7 Korea, South 13.1 16.8 29.9 3.0% 8 France 8.1 12.1 20.2 2.0% 9 India 7.4 12.7 20.1 2.0% 10 Italy 5.4 12.7 18.0 1.8% Why do Countries Trade? Companies from different countries have different advantages (more efficiency in some areas than others). They can use money they earn from producing those products to buy things they are inefficient at producing. ***trade makes everyone BETTER OFF Comparative Advantage David Ricardo 1817 Even when one country is better off in every area - they are still better off trading if they concentrate production on area with highest cost advantage. Handout: Gilligan vs. Skipper a Trade Example Practice: Absolute and Comparative Practice Is Free Trade Always the Answer? Quite a CONTROVERSIAL TOPIC! Two most common forms of limiting trade: Tariff: tax on imports passed on to those that purchase the import Quota: limit on the amount of import or export that makes it illegal to import/export more than a specified amount. Protectionism: limit trade to protect self interest ● National security argument: some industries are vital to national health and trade may mean that we would be caught without our own capabilities to produce a product (steel and aluminum for war). ● Infant industry argument: protect young industry until it is strong enough to compete with well organized foreign industry. ● Diversified economy argument: if you rely on only a few industries, you become too reliant on foreign suppliers of other goods. ● Protection of domestic wages argument: imports harm US worker wages in industries where products can be made in low wage countries / may even result in higher unemployment in US. Free trade : trade creates wealth and prosperity ● ● ● ● Tariffs and quotas cause prices to rise (harms consumers) because it causes a left shift of supply curve (decrease in supply) Tariffs and quotas interfere with efficient functioning of supply and demand ○ may result in misallocation of resources ○ Ex: rise in prices today for oil and gas may result in increased domestic production, but because our reserves are SIGNIFICANTLY less than OPEC countries - it will cause us to deplete our resources earlier. Each protectionist argument has weaknesses ■ we already have a diversified economy ■ labor unions can’t take JUST wages into account as factor of production - machinery has a much larger impact on cost of production Tariffs and quotas are difficult to change once you have them Types of Tariffs Protective Vs. Revenue Tariff ● protective = to limit trade ● revenue tariff = to raise money - can only be done on INELASTIC goods Primary, what you see in the news today are protective tariffs. Activity: US China Trade Tensions 1. 2. 3. 4. 5. 6. 7. 8. Silent Reading (homework) Choose a side and move seats Prepare your position and support (20 minutes) Present and note-taking on the other side (8 minutes) Group reflection (3 minutes) Groups present strengths from opposition (4 minutes) Open discussion (8-10) Quiz Part IV: International Organizations Activity: Economic Institution Chart Part 1: International Economic Institutions 1. 2. 3. Divide into 6 groups. Most are acronyms so figure out what they mean, for example NAFTA is the North American Free Trade Agreement. Go to the website of the organization. a. b. 4. Determine and record it’s main purpose. What does the organization do? How do they accomplish their goals? Present to the class. International Trade and Cooperation GATT - General Agreement on Tariffs and Trade ● FIRST INTERNATIONAL TRADE ORGANIZATION ○ 1947 - 23 countries signed (increased to 100 members) ○ purpose is to reduce tariffs and other trade barriers ○ ever changing rules and issues of trade ■ Uruguay round 1986-1994 International Trade and Cooperation WTO - World Trade Organization REPLACED GATT in 1995 ○ 159 members ○ WTO’s role is controversial. They help to negotiate free trade deals and eliminate trade barriers like tariffs and quotas. That can be good for profits and the creation of wealth. ○ BUT… with a reduction in barriers there is more “fluid” movement which can cause job losses in some places and job growth in an other. Economic development itself can also result in negative externalities. International Trade and Cooperation There are many REGIONAL trade agreements (two examples below) EU - European Union ○ started in 1950 as alliance of coal and steel interests ○ grown to now allow members to act together for mutual benefit in law, trade, and economic growth NAFTA - North American Free Trade Agreement ○ 1993 ○ US, Mexico, Canada Free trade zone International Trade and Cooperation Countries do not trade goods for goods Instead - companies complete these transactions with money Gold Standard: prior to 1920 $ was backed by gold (value set to price of oz of gold) ■ ■ Strengths: made bookkeeping easy, simple calculations Weaknesses: impacted money supply negatively ● countries with trade deficit (higher imports than exports) ended up with too few dollars (paper money). This resulted in high unemployment and low aggregate demand. ● countries with a trade surplus (higher exports than imports) ended up with too many dollars (paper money). This resulted in inflation. International Trade and Cooperation Bretton Woods Agreement of 1944: Dollar became key currency (replaced gold). ■ Created the IMF - International Monetary Fund ● REGULATES international money supplies ● countries can borrow if reserves get low ● short term currency stabilization ■ Countries keep $ (yes US $) in RESERVE ● Agree that the value of currency will not change more than 1% if it does countries will buy back or sell their own currency with US $ (US Dollars are the world’s RESERVE CURRENCY. Activity: Economic Institution Chart Part 2: Economic Institutions Comparison 1. 2. Use your answers to determine the correct organization in column 1 Search the web for RECENT news regarding the organization in action. Read to determine main points, then summarize and prepare to present your findings to the class. Review Economic Institutions BINGO! Trade Among Nations IS NOT EQUAL. Balance of Trade= exports - imports favorable = exports higher than imports (trade surplus) unfavorable = opposite (trade deficit) Balance of Payments = more comprehensive measure of trade because it includes not just goods and services but money spend, travel, and investments. Currency Exchange Exchange Rates: Money is treated as a commodity for sale ● price rises and falls based on demand and trade ● exchange rates are set daily ● published in Wall Street Journal ● Equivalency rates determine how much you will spend ● Coat in Canada = $300, with US $ ○ .7437*300=223.11 Now try with today’s rates. Activity: Exchange Rates 1. 2. 3. Using online calculators Using published daily equivalency rates Solve sample problems