STD8

Geography and History of the World: 

Geography and History of the World Standard 8 - Trade and Commerce Economic interdependence between &/or among countries and regions Standard 12 – Global Change Change on a global scale and its impact on the lives of humans Globalization & Development

Top US Exports/Imports: 

Top US Exports/Imports Figures 1 and 2 illustrate the value of exports and imports in the US for different categories of goods and services, respectively. Note that the largest category of good traded by the US is capital goods, not consumer goods.

Top 15 US Trading Partners: 

Top 15 US Trading Partners Figure 3 illustrates the top trading partners of the US and the value of US trade with these countries (Aug. 2004)

World’s Major Trading Countries: 

World’s Major Trading Countries Most countries have roughly balanced trade but the US has a large trade deficit. The US has the highest value of exports in the world.

Geographical Areas of the World: 

Geographical Areas of the World

Ratio of Trade (Exports + Imports) to GDP, 2002: 

Ratio of Trade (Exports + Imports) to GDP, 2002

History of International Trade: 

History of International Trade Most “international” trade in NOT between nations but between private individuals and enterprises in different countries. International trade today is not qualitatively different from the exchanges that have occurred for centuries. Trade existed prior to the Industrial Era, but advances in transport and communications allowed the exchange of large quantities of goods over great distances to become routine.

Trade Complexity: 

Trade Complexity Technology increases the complexity of trade which has become “remote”. Markets are no longer necessarily “places”. Specialized market actors appear; ie wholesalers, transport services, information services, and legal services, to facilitate trade that would be too complex, distant, or just to expensive to conduct otherwise (transaction costs).

Rise of Specialized Middlemen: 

Rise of Specialized Middlemen EXAMPLE An English blacksmith would be unable to sell hand-made tools directly to craftsmen in France. But gains could be captured by someone specializing in “import/export” of tools by serving as an intermediary between the English blacksmith and the French craftsman, enabling both to benefit from international trade.

Why Nations Trade: 

Why Nations Trade Why to individuals conduct business with others who live far away, speak different languages, have different religions and cultures, and operate under different legal and economic systems when they can trade with fellow citizens without having to overcome any of these obstacles?

Gains from Exporting: 

Gains from Exporting Since the beginning of the Industrial Era, countries have tended to sell goods abroad because of: 1. Economies of Scale 2. Different Relative Scarcity (Values) 3. Earning foreign currency

Gains from Import: 

Gains from Import Consumers can enjoy more, and more diverse, goods and services by choosing products from foreign producers. Competition is a factor of the extent of the market.

Gains from Trade: Comparative Advantage: 

Gains from Trade: Comparative Advantage The key to creating mutual gain through trade is specialization. Trading partners specialize in the production of those products for which they are the low opportunity cost producer. Opportunity cost is what is given up when a resource is allocated to a specific use.

Comparative vs Absolute Advantage: 

Comparative vs Absolute Advantage A neurosurgeon can “process” 10 insurance forms per hour. Should she hire a processor who can only complete 8 forms per hour? The surgeon has an absolute advantage in the production of both neurosurgery and insurance form processing, but not a comparative advantage.

Comparative Advantage Example: 

Comparative Advantage Example Must calculate the opportunity cost of producing shirts & bicycles in both China and Italy to determine who has the comparative advantage in producing each good. Which country has an absolute advantage in producing each?

Comparative Advantage Example: 

Comparative Advantage Example The Chinese have a CA in the production of shirts because a shirt only costs ½ a bike in China but costs 3/5 of a bike in Italy. Likewise the Italians have a CA in the production of bicycles. Only if the ratio of cost between the trading partners is the same will one partner not have a CA in the production of one of the products.

Shirt to Bicycle Exchange Rate: 

Shirt to Bicycle Exchange Rate In order for both partners to be better off through specialization and exchange, the exchange must occur at a rate between the opportunity cost ratios of the 2 partners. Thus, in our example, a bicycle would trade for more than 5/3 of a shirt but less than 2 shirts. How do we know this will happen?

Regional Trade Agreements: 

Regional Trade Agreements NAFTA: Canada, United States, Mexico EU: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, UK, Cyprus, Czech Rep., Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia ASEAN: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam MERCOSUR: Argentina, Bolivia, Brazil, Chile, Uruguay, Paraguay CAFTA: Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States.

Changing Composition of Trade: 

Changing Composition of Trade

Comparative Advantage is Dynamic: 

Comparative Advantage is Dynamic In the first few decades following World War II, several developing nations became major industrial powers, producing manufactured goods equal and sometimes superior in quality and sophistication to products made in the United States. One such nation was Japan, whose per capita income at the end of World War II was less than it was in 1925, and equal to a large number of countries in Africa and Asia today. For the United States and several countries in Europe, the emergence of new manufacturing capacities has been a mixed, though mostly positive, blessing . The growth of developing economies and the postwar recoveries of Europe and Japan have helped turn poor and devastated countries into massive markets for U.S. exports and investment. American companies, farmers, and workers have benefited immensely from these new commercial opportunities. Had the rest of the world not developed and grown as much as it has since World War II, American living standards would not, on balance, have improved as much as they have.

Global Change - Social Systems: 

Global Change - Social Systems Old Systems Classification – Cold War capitalism vs socialism/communism decentralized vs centralized planning private ownership vs gov’t/communal New Systems Classification – Globalism open vs closed collaborative vs independent connected vs isolated

Globalization: The World is Flat: 

Globalization: The World is Flat The world’s economies are becoming more integrated: trade is expanding, migration (and tourism) is expanding, capital markets are expanding in developing and transition economies, new technologies have linked the farthest corners of the world.

Its not the first globalization: 

Its not the first globalization At the end of the 19th century: migration was rising, trade was expanding rapidly, new technology brought people and goods closer together. Globalization was interrupted in the 20th C by wars, protectionism, and restrictions on the movement of capital (including human).

Exports of Goods and Services as % of gross world product: 

Exports of Goods and Services as % of gross world product

Globalization Index: 

Globalization Index Annual ranking by Foreign Policy magazine.

Characteristics of the more Global : 

Characteristics of the more Global Freer trade (fewer trade restrictions) Less government regulation of business More political stability (less corruption) Greater government accountability More advanced “Rule of Law” Better defined property rights Pro-Innovation policies

Attributes of a Healthy Market Economy: 

Attributes of a Healthy Market Economy A number of think-tank type institutions compile fact-based ratings on the climate for capitalism around the world. Taken together they provide a measure for gauging the relative quality of economic policies. Comparing these measures with Foreign Policy globalization ranking reveals a correlation between more “open” and policies that bolster economic performance.

How Free is your Trade?: 

How Free is your Trade? Since 1990, nations have reduced trade restrictions, signing nearly 180 regional trade pacts as well as the creation of the 149 nation WTO in 1995.

How Open are your Capital Markets?: 

How Open are your Capital Markets? Many treaties that free trade also eliminated international barriers to investment and the flow of financial capital.

Property Right and Contract Enforcement: 

Property Right and Contract Enforcement Businesses and especially entrepreneurs rely on the sanctity of contracts.

How are property rights guaranteed?: 

How are property rights guaranteed? When property rights are questionable, economic activity becomes more risky. Do citizens have legal recourse to prevent theft, fraud and gov’t action that jeopardize their assets.

Government Corruption: 

Government Corruption Anticorruption policies take aim at illicit dealings that undermine economies by raising costs, creating uncertainty and thwarting competition.

Development: 

Development The term “development” in international or global usage encompasses the need and the means by which to provide better lives for people in poor countries. It includes not only economic growth, but also human development; providing for health, nutrition, education, and a clean environment.

Human Development Index: 

Human Development Index The UN Development Program rates, each year, countries development according to its HDI, a mix of factors intended to measure citizen’s access to: Health Education Decent standard of living

UN’s Human Development Index: 

UN’s Human Development Index The UN Human Development Index (HDI) is a comparative measure of poverty, literacy, education, life expectancy, childbirth, and other factors for countries worldwide. It is a standard means of measuring well-being, especially child welfare. It is used by many people to distinguish whether or not the country is a first, second, or third world country.

Why Are Some Nations Rich?: 

Why Are Some Nations Rich? Recent debates about globalization have led to a renewed interest in the reasons for the disparities in wealth among countries. Geography Culture Property Rights Freedom

Geography: 

Geography Jared Diamond – Guns, Germs, and Steel Geography played a pivotal role as much of Eurasia’s landmass has similar climate which enabled a more rapid spread of ideas, practices, technology (and disease resistance). Thus a few conquistadors were able to defeat the entire Inca Empire.

Culture: 

Culture David Landes – The Wealth and Poverty of Nations. Argues that culture, especially religion, explains different development rates. Protestantism promoted literacy and a work “ethic” that increased productivity in Europe and Buddhist beliefs emphasized labor and thrift which led to faster economic and social development in China and Japan.

Property Rights: 

Property Rights Herando DeSoto – The Mystery of Capital Development requires property rights be structured effectively. In poor nations wealth is tied up in “dead capital” due to legal and social customs. Egypt vs USA homeownership and ability to use as collateral. Estimates the value of “dead capital” tied up in real estate to be $74B in Peru, $133 B in the Philippines, and at $240B in Egypt, is 30 times the value of all shares on the Cairo Stock Exchange and 55 times the value of all foreign investment in the country.

Freedom: 

Freedom Bernard Lewis – What Went Wrong? Focusing on the Middle East, argues that it is a lack of freedom – intellectual, political, economic, religious, cultural – that is responsible for the decline of the Islamic world from a major center of global power to an area plagued by social and economic turmoil.

World Bank Development Recommendations: 

World Bank Development Recommendations Investment in education and health Increase productivity of small farms Improve infrastructure Develop an industrial policy to promote entrepreneurship and innovation Promote democracy and human rights Ensure environmental protection so development is sustainable

Sources: 

Sources Trade and Development: www.globalization101.org (A Project of the Carnegie Endowment) Globalization: http://dallasfed.org/fed/annual/2005/ar05.pdf 2005 Annual Report of the Fed (Dallas) National Council on Economic Education: http://www.econedlink.org/lessons/