Transcript Comparative advantage

Globalization
The Debate over Globalization:
by David Hummels,
Purdue University
Focus Globalization
NCEE
1
What is
Globalization?
Telephone call centers
in India providing
service to American
customers who bought
Japanese electronics
while vacationing in
France
2
What is
Globalization?
Giant Multinational
firms with operations in
every time zone
3
What is
Globalization?
Fleets of container
ships moving trillions of
dollars worth of goods
across the oceans
4
Or is Globalization…
Erosion of labor and environmental
standards
 Loss of sovereignty to international
institutions not accountable to citizens of
any nation

5
Generally,
globalization refers to
increases in the
degree of integration
between national
economies.
6
Integration
encompasses all of the ways
national economies are
connected in international
markets
7
Integration
Trade in goods, services, and ideas
 International movements of factors of
production
 Coordination of public policies

8
US Trade
in Goods & Services
Exports
– 1960-2003 increase by 800%*
Imports
– 1960-2003 increase by 1300%*
(w/ inflation adjustment)
9
Part of this growth
(1960-2003) simply
reflects the growth in
the US economy which
expanded by 400%
10
International trade
grew faster than the
national economy.
11
US Trade
in Goods & Services
Imports grew from 4.2% to 13.8% of the
economy
 Exports increased from 4.9%-9.3%

12
Despite this growth, the US is
far less dependant on trade
than most other nations…

2003
– France exported 25% of its national output
– Canada exported 40% of its national output
– Belgium exported 80% of its national output
13
Although US exports have
grown since 1960, they are
comparable today to what
they were in 1880, and
actually less than they were
after WWI
14
Another trend in international
trade is that a growing share
of trade is done between
countries that are nearby
neighbors.
Canada & Mexico are US’s
greatest trading partners.
15
International Mobility
of Labor and Capital
Another way national economies are
integrated in the international marketplaces
is by movements of factors of production
 Both labor and capital can cross national
borders

16
International Mobility
of Labor and Capital
United States is and continues to be a nation
of immigrants
Migration is still important today
2001: 31.8 million migrants in the US
including 20 million in the work force.
17
International Mobility
of Labor and Capital
Migrants
represent:
–13.9% of the labor force
–11% of the population
Both percentages are twice as high as they
were in the 60’s & 70’s
18
International Mobility
of Labor and Capital
Capital is the other mobile factor of
production.
There are many ways to invest
capital in a foreign country.
19
International Mobility
of Labor and Capital

Private Investors can:
– Buy government or corporate bonds to earn interest
– Buy shares in foreign stock markets

Private Firms engage in FDI: (Foreign Direct
Investment) by building or purchasing affiliate
operations in other countries (FDI company
controls the affiliate operation).
20
International Mobility
of Labor and Capital
2003
– US agents* owned $7.8 trillion of foreign
financial assets
– Foreign agents owned $10.5 trillion dollars of
US financial assets
 3.4 trillion of US corporate bonds
 2.4 trillion in foreign direct investment
 1.7 trillion in government bonds
*Individual citizens, banks, or corporations & gov’t agencies
21
International Mobility
of Labor and Capital
A sizable fraction
of the total US capital stock
is owned by foreign citizens
22
Integration:
Old and New
Migration and merchandise trade has gone
on for thousands of years
 The level of US trade today is roughly
comparable in size to trade a century ago,
 Migrants are a considerably small portion of
the labor force than they were 150 years
ago.

23
Integration:
Old and New
So why do many observers claim
that we are experiencing an
unprecedented era of globalization?
24
Integration: Old and New
So, What’s New?
The kinds of things being traded are very
different from what was traded in earlier
eras.
 The ways countries are integrated now go
far beyond the simple trading of goods.

25
Integration: Old and New
So, What’s New?

1800’s bulk commodities
– Coal, wheat, cotton, and iron ore
– Some very simple manufactured products

Today manufactured products & services
– Still some bulk: coal wheat cotton & iron ore
– And much, much more!
26
Integration: Old and New
So, What’s New?

 Laptop
Coal
– No natural deposits
– Mine
– Value comes from
– Buy
technology
– Use (heat)
– Technology can be reused
– Transaction done
– Increasingly rare to find a
purely American or
Japanese computer
27
Integration: Old and New
Multinational
Corporations
MNC
When goods and Ideas are produced in
many different countries
28
Multinational Corporations
& Foreign Direct
Investment
 MNCs
& FDIs have skyrocketed in
recent decades
 Currently over 60,000 multinational
corporations direct nearly one million
affiliates.
 2003 investments = $8.2 trillion
29
Multinational Corporations
& Foreign Direct
Investment
Because production and trade have
become more complex, international
treaties governing trade have also
become more complex.
30
Multinational Corporations
& Foreign Direct
Investment
International agreements must now be
negotiated and ratified dealing with
protection of intellectual property,
regulation of foreign investment and
monopoly power, and mobility of highly
skilled scientists and other workers.
31
Multinational Corporations
& Foreign Direct
Investment
These issues are highly controversial
and difficult to negotiate.
32
Why Do Countries
Trade?
33
Because nations
specialize.
They produce more of some
goods than they consume, but
produce less than they consume
of many other goods.
34
Why do countries
specialize in
producing some
goods or services,
but not others?
35
1. Arbitrage
2. Absolute Advantage
3. Comparative
Advantage
36
Arbitrage
“Buying low
and
selling high”
37
Shirts made in
Mexico vs. US
$10 vs. $15
 Smart entrepreneur(s) uses arbitrage to
buy shirts in Mexico and sell in US
 Import/Export
 Shirt production increases in Mexico

38
Shirt production in Mexico
must increase to meet the
higher demand, while shirt
production in the US will fall.
39
45
40
35
30
25
20
15
10
5
0
$10
$15
Supply
$20
$25
Demand
40
Arbitrage causes the price of
goods to converge and
eventually equalize on both
sides of the border.
41
How does the US pay for the
imported shirts?
Are Mexico & the US
better or worse off as a result
of the trade?
Why are the costs of
production different in the
United States and Mexico?
42
To answer these questions
we must understand
Absolute and Comparative
advantage.
43
Absolute advantage
is the ability to make a good or
service with fewer inputs than
another individual, company or
county would use to produce it.
44
Comparative advantage
is the ability to make a good or service
at a lower opportunity cost * than
someone else.
*Opportunity Cost is what you gave up when making
a choice.
45
The Gains from Trade
Arbitrage and trade opportunities do
not depend on absolute advantage,
but only on comparative advantage.
46
Sources of Comparative Advantage
1.
Differences in endowments of natural
resources are important in some
industries.
– Agricultural productivity: climate and soil
– Energy productivity: crude oil, rivers, wind
47
Sources of Comparative Advantage
2.
Government services and regulations
also play a role in shaping
productivity.
– School quality & subject emphasis depending
on gov’t standards
– Gov’t regulations of factory emissions: pollution
vs. clean industries
48
Sources of Comparative Advantage
3.
Probably most important, the source of
comparative advantage and production
differences results from decisions by firms
to invest in technology.
– US strong Comparative Advantage especially in airplane
manufacturing and pharmaceuticals because these US
firms have spent billions in research and development
49
Sources of Comparative Advantage
4.
The sources of comparative
advantage are the differences in the
supply of key inputs.
– Land for agriculture
– Usually need multiple inputs: natural resources, skilled
labor, capital, energy, and material supplies.
50
Sources of Comparative Advantage
Example:
Producing aluminum uses electricity
intensively, which is why Canada, with
relatively abundant supplies of low-cost
hydroelectric energy, has a comparative
advantage in aluminum production.
51
Sources of Comparative Advantage
Example:
Textiles and apparel use unskilled labor
intensively, so China, with an abundant
supply of unskilled labor, has a
comparative advantage in textile and
apparel production.
52
Sources of Comparative Advantage
Example:
Automobiles use capital intensively, and so
Japan, with relatively abundant supplies of
capital (reflecting its high national savings
rate), has a comparative advantage in
automobile production.
53
Other Reasons
for Trade
Trade between similar countries (NorthNorth; Northern hemisphere’s rich
countries)
 Differentiated Products such as in cars;
consumers prefer different features in
vehicles often produced in other countries.

Other Reasons
for Trade
Increases Product diversity in styling and
other characteristics
 Greater degree of world wide convergence
in consumer culture.

Other Reasons
for Trade

Possible negatives:
– Loss of unique national cultures
– Large multinational firms driving small local
firms out of business
Proponents of
globalization point out
that no one forces
consumers to eat at
McDonalds, drink French
wine, or play Nintendo.
Increasingly, firms that produce
differentiated goods are moving
production facilities closer to
their final consumers
in different countries.
They are becoming
multinational firms.
Toyota & Honda are good
examples of companies that
built factories in the 80’s.
Surge of Japanese auto exports to the US
in the 80’s displaced sales by US
automobile firms.
 Created a backlash that eventually led to
quotas or limits on the number of Japanese
cars that could be sold in the US
 Moved production to US

– Allowed these firms to avoid trade restrictions.
– Eliminated the cost of shipping.
– Customized products to meet specific demands
of consumers.
Reasons for Trade:

Comparative Advantage
– Trade is driven entirely by cost differences
– The low-cost supplier will be the exporter

Differentiated Products
– Cost is still an issue
– Consumers may be willing to pay more for a
higher priced product if it has the
characteristics they prefer.
Trade Policy
62
Most economist view
free trade as a
desirable policy.
63
Despite this consensus
among economists; however,
governments routinely
interfere with international
trade by imposing a variety of
policy restrictions.
64
Tariffs and Trade Barriers
Tariff: sales tax on
imported goods
Average US tariff=5%
65
Loss from Trade in
Factor Markets
When countries specialize and trade,
Efficient sectors expand production
and export goods
Inefficient sectors decline and are
replaced
66
Loss from Trade in
Factor Markets
When countries specialize and trade,
Efficient sectors expand production
and export goods
Inefficient sectors decline and are
replaced
67
There is no question that specialization and
trade causes some redirection of resources
in the economy.
Indeed, there can be no gains from trade
without eliminating inefficient firms.
What are the consequences of this
dislocation for workers at inefficient firms
in the short and long run?
68
Generally, studies show that workers suffer
greater earnings losses from displacement
when they have been employed at the
same firm for a long time and are unable
to find work in the same sector of
employment.
69
Workers displaced because of import
competition experience more difficulty in
becoming re-employed mainly because of
the characteristics of the workers
themselves.
Location-EducationOthers willing to do the job for less
70
Trade and International
Institutions
All governments face a tug-of-war
between economic self-interests and
free trade policies.
Free trade is viewed as the
best economic policy for a
country as a whole.
But, there is pressure to
create trade barriers to
protect domestic producers
and workers.
Recognizing this, most nations in the
world have now joined international
institutions or signed international
agreements that limit how much they
can impede trade.
WTO
NAFTA
WTO
NAFTA
And that takes us to Seattle in 1999…