ECO 3250

• Globalization


  The process of greater interdependence among countries and their citizens
• Protectionism refers to economic policies designed to protect domestic industries from foreign competition by imposing restrictions on imports.
• International trade is the exchange of goods or services between two different nations.
• Trade barriers are government policies that restrict international trade, such as tariffs (taxes on imported products) and quotas (limits on how much of a product can be imported).
• Free trade occurs when there are no trade barriers, allowing goods and services to flow freely across borders without restriction.
• Factors driving globalization

  1. Technological advancement
  2. Lower trade barriers and financial liberalization
• Global Manufacturing


  The geographical fragmentation of productive processes and the offshoring of industrial tasks
• First Wave of Globalization(1870-1914): The first wave of globalization was characterized by the establishment of international trade and international organizations.
• Second Wave of Globalization(1945-1980): The US helped construct a global economic order in which free trade was encouraged, also started several institutions to assist
• International Monetary Fund(1944)


  Seeks to stabilize the international monetary system by assisting countries having balance of payment and debt crises
• World Bank(1945)


  Provides loans and policy advice to help developing countries with education, health, and infrastructure
• United Nations(1945)


  Attempts to prevent conflict through global security and assists with humanitarian crises
• World Trade Organization(1995)

  Establishes rules for international trade and settles trade disputes
• Third Wave of Globalization

  1. Developing countries like China, India, and Brazil broke into the world markets as manufacturers.
  2. Other developing countries became extremely marginalized in the world economy.
  3. International capital movements became significant
• Automation


  The creation of technology that is used to produce and deliver various goods and services
• Third Wave of Globalization


  Some developing countries took advantage of their labor abundance to manufacture goods

  U.S Companies did more foreign outsoucing
• Foreign Outsourcing


  When certain aspects of a product's manufacture are performed in more than one country
• Openness: (Exports+Imports)/GDP
• Highest exports and imports percentage countries

  Netherlands, Germany, Canada, United Kingdom, China, Japan, and United States
• The U.S has become less open to trade between 1890 and 1950, but technological advancements have increased their openness
• Top Eight U.S Trading Partners

  China, Canada, Mexico, Japan, Germany, United Kingdom, South Korea, and France
• Open Trade System Pros:

  Higher level of consumption and investment, lower prices of goods, and a wider range of product choices
• The mercantilists came up with the idea of a favorable trade balance so there can be an increase in domestic output and employment.
• To promote a favorable trade balance, they advocated government regulation such as tariffs and quotas.
• Great Britain used mercantilism and forced colonists to buy only British goods through providing incentives and high tariffs.
• David Hume's price-specie flow doctrine


  A favorable trade balance is only possible in the short run because it would automatically be eliminated over time
• Adam Smith's Wealth of Nations


  He said that the world's wealth is not fixed, and through trade, all parties can have higher levels of productivity and consumption with trade
• Smith claimed that productivity of factor inputs and cost differences of goods are linked.
• Labor theory of value


  Labor within each nation is the only factor of production and is homogenous and the cost of a good depends exclusively on the amount of labor required to produce it
• Principle of absolute advantage

  In a two nation, two product world, international specialization and trade will be beneficial when one nation has an absolute cost advantage in one good and the other nation has an absolute cost advantage in the other good.
• Principle of comparative advantage


  Ricardo stated that even if a nation was more efficient in the production of all goods, mutually beneficial trade could still occur.
• Ricardo's principle of comparative advantage maintains that international trade is solely due to international differences in the productivity of labor.
• Comparative advantage depends on relative costs, which means that a country can't have a comparative advantage in all goods and another has a comparative advantage in no goods.
• Production possibilities frontier

  A frontier that shows various alternative combinations of two goods that a nation can produce when all of its factor inputs are used in thier most efficient manner.
• Marginal rate of transformation


  The amount of one product a nation must sacrifice to get one additional unit of the other product
• Two reasons for constant costs

  1. The factors of production are perfect substitutes for each other
  2. The units of a given factor are of the same quality
• Autarky

  The absence of trade
• Consumption gains


  The set of post-trade consumption points that a nation can achieve is determined by the rate at which the export product is traded for another country's export product
• Theory of reciprocal demand 


  Asserts that within the outer limits of the terms of trade, the actual terms of trade are determined by the relative strength of each country's demand for the other country's product
• The reciprocal demand theory best applies when both nations are of equal economic size