Principles of International Economics

Principles of International Economics Prof. Dr. Hans H. Bass, Bremen University of Applied Sciences, International Degree Programme in Economics Summer Term 2010

Principles of International Economics Topic 1: Basic Concepts

Agenda International Economics • International Division of Labor • Classification of Economies • Modes of Integration

The division of labor principle 1. International Division of Labor • Enterprise levelSmith: pin-makingproductivity gains, co-operation, alienation (Marx, Taylorism!) • Economy-wide levelsocial productivity gains, national trade, national interdependence • Global level

The division of labor principle 1. International Division of Labor • Global level: integration into the world economy autonomous economic areas - autonomous currency areas • degree of integration depends on factor endowment, geography, history ... • degree of integration influenced by international economic policies / monetary policies International welfare gains, international trade and factor movements, international interdependence (policy interdependence / IFOs / world economic order)

Globalization 1. International Division of Labor

Definitions of globalisation 1. International Division of Labor • “the increasing inter-dependence of markets and production in different countries through trade in goods and services, cross border flows of capital and exchange of technology” (Nunnenkamp/Gundlach/Agarwal, 1994) • “process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies” (Anninat 2002) • „die fortschreitende Internationalisierung der Wirtschaft, die einen weltweiten Abbau der Grenzen zwischen den nationalen und regionalen Märkten für Güter und Dienstleistungen, Kapital und technischen Know-how voraussetzt und vorantreibt“ (ZEW 2006)

Causes of globalisation 1. International Division of Labor • transport and communication revolution

Causes of globalisation: reduction of transport costs 1. International Division of Labor

Causes of globalisation 1. International Division of Labor • transport and communication revolution, new key technologies • increasing R&D costs and shortening of product life cycles • worldwide liberalisation of commodity and capital markets  chances to exploit price differences (global sourcing, global marketing) • reshaping of the economic geography of the world (NIEs, China ending its autarky, new trading blocs)

The extent of globalisation 1. International Division of Labor

The extent of globalisation 1. International Division of Labor Source: adopted from Wohlmuth in Bass/Melchers 2004

Consequences of globalisation 1. International Division of Labor • Increasing relevance of TNCs !FDI, trade-induced and trade-inducing / intra-firm-trade, global value chains (“from sheep to shelf”) • Reduced scope of action for states?

Modes of classification 2. Classification of economies • according to per-capita income: LIC, MIC, HICs • ... • ...

Income criterion 2. Classification of economies • HICs: $ 11,906+ • UMICs: $3,856 – $11,905 • LMICs: $976 – $3,855 • LICs: < $975

One-dimensional, income-oriented classification 2. Classification of economies

GNI p.c. 2. Classification of economies (3*) Norway $ 87,070 HIC (22) Germany $ 42,440 HIC (56) Saudi Arabia $ 15,500 HIC (75) Russian Fed. $ 9,620 UMIC (82) Brazil $ 7,350 UMIC (130) China $ 2,770 LMIC (163) India $ 1,070 LMIC (179) Ghana $ 670 LIC (210) Burundi $ 140 LIC http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf * # 1 and 2 only approximations: Liechtenstein, Bermuda

Modes of classification 2. Classification of economies • according to per-capita income: LICs, MICs, HICs • according to uni-dimensional structural characteristics: oil-exporting countries, heavily indebted poor countries ... • according to multi-dimensional structural characteristics

Structural criteria 2. Classification of economies • Industrial economies (≈ HICs), post-industrial economies, “triade”, “OECD”-countries • Developing countries • NIEs • LDCs • Transformation Economies

Characteristics of OECD countries 2. Classification of economies • large service sector (60 %+  Fourastié model), medium-sized industrial sector • moderate inequalities in income and property distribution • balanced current account, low level of foreign debts • high investment rates (20%+) • low population growth • high standards in education and health • political stability • different economic orders possible: “varieties of capitalism” (Anglo-American, German Social Market Economy, Japanese model, Scandinavian-type welfare state)

Characteristics of developing countries 2. Classification of economies • Low levels of living, characterized by low incomes, high (income) inequality, poor health, and inadequate education (incl. Illiteracy) • High rates of population growth and dependency burdens • Substantial dependence on agricultural production and primary-product exports, high export concentration ratios • Low levels of productivity (lack of complementary capital); scarcity of jobs in the urban “formal” sector, “informal” employment (sponge function) • Lack of “good governance”

A comprehensive indicator: the HDI 2. Classification of economies • Longevity as measured by life expectancy at birth • Knowledge: by a weighted average of adult literacy (2/3) and mean years of schooling (1/3) • Standard of living: GNI p.c. at Purchasing Power Parity* and adjusted for diminishing marginal utility of income*number of units of the countries’ currency required to buy the same amount of goods + services in the domestic market as a dollar in the US • Standardized from 0 to 1Index = (actual value – minimum value) / (maximum value – minimum value) • GNI rank may differ from HDI rank

The Human Development Index 2. Classification of economies HDI-RankGNI-Rank (3) Iceland 0.969 28 (13) United States 0.956 14 (22) Germany 0.947 22 (59) Saudi Arabia 0.843 56 (71) Russian Fed. 0.817 75 (75) Brazil 0.813 82 (92) China 0.772 130 (152) Ghana 0.526 179 (174) Burundi 0.394 210 # UNDP 2009 hdr.undp.org/en/media/HDR_2009_EN_Complete.pdf, World Bank 2008

Diversification: catching up ... 2. Classification of economies Newly Industrializing Economies • rapid economic growth • high investment into education • rapid changes in sector composition • subtle combination of opening up to world markets and protection of „infant industries“ • strong influence of government on the economy • relatively equal distribution of wealth (IBRD, inofficial)

Diversification: ... and falling behind ... 2. Classification of economies Least Developed Countries • Extremely low per capita income (< $ 750) • Low level of human development as measured by the Human Assets Index (HAI), based on nutrition, health, education, and literacy • High vulnerability by economic shocks as measured by Economic Vulnerability Index (EVI), based on agricultural output, export earnings, disadvantages from population size, natural disasters ECOSOC 2003

Diversification: and dramatic changes 2. Classification of economies Transformation economies • Transformation from centrally planned economy with predominance of collective property to decentrally planned economy (coordinated by markets) with a predominance of private property of producer goods • Low or lower-middle income p.c., (relatively) high HDI • Comparatively high importance of industry, albeit obsolete technologies posing high stress on the environment • Dualistic structure of foreign trade (West/East) • Budget deficits and current account deficits

Modes of intergration 3. Modes of integration • Trade in commodities and services • Factor movement:capital (FDI, portfolio investment) • Factor movement:labor migration

Principles of International Economics