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Economic Globalization: The Global Circular Flow

Explore the history, benefits, and costs of economic globalization in this chapter. Learn about international trade, labor markets, capital mobility, public policy, global externalities, and more.

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Economic Globalization: The Global Circular Flow

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  1. 22 Globalization Chapter Outline The Global Circular FlowA Brief History of Economic GlobalizationThe Benefits and Costs of GlobalizationThe Free-Trade Debate RevisitedTrade, Growth, and PovertyThe Globalization of Labor Markets: The Economics of Immigration and OutsourcingCapital MobilityPublic Policy and GlobalizationGlobal Externalities and Public GoodsNongovernmental Organizations and International Economics: The Washington ConsensusGlobalization, Capitalism, and DemocracyA Final Word

  2. GLOBALIZATION globalization The process of increasing interdependence among countries and their citizens. economic globalization The process of increasing economic interdependence among countries and their citizens.

  3. THE GLOBAL CIRCULAR FLOW FIGURE 22.1 Economic Globalization: International Flows

  4. Interdependence among countries brought about by globalization occurs in which of the following arenas? a. Increased international trade of goods and services. b. Increased cross-border movements of labor. c. Expanded international financial flows. d. All of the above.

  5. Interdependence among countries brought about by globalization occurs in which of the following arenas? a. Increased international trade of goods and services. b. Increased cross-border movements of labor. c. Expanded international financial flows. d. All of the above.

  6. A BRIEF HISTORY OF ECONOMIC GLOBALIZATION Economic historian Jeffrey Williamson classifies the period 1820–1914 as the first great period of globalization and the period since World War II as the second. • Many dimensions of globalization are new today: • Sharp reductions in trade barriers • Increases in the flows of information and commerce over the Internet • Increased speed and lower cost of travel • Different nature of international relations. • Dramatic increase in outsourcing.

  7. Efficiency in a world economy is achieved only if: a. Restrictions are placed on the movement of labor to protect domestic workers from immigrant labor. b. Restrictions are placed on the movement of capital to prevent excessive outflows of capital from one country and into another. c. Restrictions are placed on the sale of goods and services in order to prevent the flow of cheap goods into the domestic economy. d. All of the above. e. None of the above.

  8. Efficiency in a world economy is achieved only if: a. Restrictions are placed on the movement of labor to protect domestic workers from immigrant labor. b. Restrictions are placed on the movement of capital to prevent excessive outflows of capital from one country and into another. c. Restrictions are placed on the sale of goods and services in order to prevent the flow of cheap goods into the domestic economy. d. All of the above. e. None of the above.

  9. THE BENEFITS AND COSTS OF GLOBALIZATION THE FREE-TRADE DEBATE REVISITED comparative advantage A country enjoys a comparative advantage in the production of a good if the production of that good has a lower opportunity cost than it would have if produced in another country.

  10. THE BENEFITS AND COSTS OF GLOBALIZATION • The argument for free trade rests on two pieces of intuition: • Voluntary exchange is efficient, and • Comparative advantage. A country enjoys a comparative advantage in the production of a good if the production of that good has a lower opportunity cost than it would have if produced in another country.

  11. THE BENEFITS AND COSTS OF GLOBALIZATION • Those who oppose trade make a number of arguments: • Buying imports simply ships jobs abroad. • How can we compete with countries who pay low wages? • Free trade will hurt the environment. • The power of organizations like the WTO can undermine national sovereignty.

  12. THE BENEFITS AND COSTS OF GLOBALIZATION • Proponents of free trade have a number of counter-arguments: • We can’t buy from countries unless they simultaneously buy from us. • Protecting an industry from foreign competition to save jobs will cost jobs in those sectors which would expand with free trade. • Protecting an industry can lead to inefficiency and a lack of ability to compete in world markets later on. • Keeping the unemployment rate low is a macroeconomic issue. • If the objective is to reduce poverty, how can preventing trade help?

  13. Which of the following is not an appropriate tool for fighting unemployment? a. Fiscal policy. b. Monetary policy. c. Antitrade policies. d. None of the above. All of the above can be effective policies for fighting domestic unemployment.

  14. Which of the following is not an appropriate tool for fighting unemployment? a. Fiscal policy. b. Monetary policy. c. Antitrade policies. d. None of the above. All of the above can be effective policies for fighting domestic unemployment.

  15. THE BENEFITS AND COSTS OF GLOBALIZATION One final issue is the debate over genetically modified (GM) foods or genetically modified organisms. genetically modified (GM) foods Strains of food that have been genetically modified. Examples include insect- and herbicide-resistant soybeans, corn, and cotton and rice with increased iron and vitamins.

  16. THE BENEFITS AND COSTS OF GLOBALIZATION TRADE, GROWTH, AND POVERTY • Controlling for other determinants of poverty and growth, is trade a plus or a minus? • Studies show that countries that were more integrated into the world economy grew faster than those that were less integrated. • When countries grow, the income of the lowest fifth of the income distribution rises at about the same rate as aggregate income.

  17. How can trade help to reduce poverty? a. By increasing exports from the richer to the poorer countries. b. By adopting polices that restrict trade between poor and rich countries. c. Through increases in the demand for labor in the export sectors of the poor country. d. None of the above. Trade is likely to increase, not reduce poverty.

  18. How can trade help to reduce poverty? a. By increasing exports from the richer to the poorer countries. b. By adopting polices that restrict trade between poor and rich countries. c. Through increases in the demand for labor in the export sectors of the poor country. d. None of the above. Trade is likely to increase, not reduce poverty.

  19. THE BENEFITS AND COSTS OF GLOBALIZATION THE GLOBALIZATION OF LABOR MARKETS: THE ECONOMICS OF IMMIGRATION AND OUTSOURCING Many agricultural firms in Texas and California rely on immigration from Mexico, Central America, and South America to supply them with labor during the peak growing season. But does immigration reduce domestic wages and increase unemployment nationally? The evidence is mixed.

  20. With respect to the international mobility of labor, the United States is: a. Substantially more globalized than we were at the beginning of the twentieth century. b. Only slightly more globalized than we were at the beginning of the twentieth century. c. No more or less globalized than we were at the beginning of the twentieth century. d. Less globalized than we were at the beginning of the twentieth century.

  21. With respect to the international mobility of labor, the United States is: a. Substantially more globalized than we were at the beginning of the twentieth century. b. Only slightly more globalized than we were at the beginning of the twentieth century. c. No more or less globalized than we were at the beginning of the twentieth century. d. Less globalized than we were at the beginning of the twentieth century.

  22. THE BENEFITS AND COSTS OF GLOBALIZATION A Brief History of Immigration into the United States Immigration Reform and Control Act (1986) Granted amnesty to about 3 million illegal aliens and imposed a strong set of employer sanctions designed to slow the flow of immigrants into the United States. Immigration Act of 1990 Increased the number of legal immigrants allowed into the United States each year by 150,000.

  23. THE BENEFITS AND COSTS OF GLOBALIZATION

  24. In 2004, the largest number of immigrants came from these countries: a. Poland, , Canada, and Colombia. b. China, Vietnam, and Dominican Republic. c. Mexico, India, and Philippines. d. El Salvador, Haiti, and Cuba.

  25. In 2004, the largest number of immigrants came from these countries: a. Poland, , Canada, and Colombia. b. China, Vietnam, and Dominican Republic. c. Mexico, India, and Philippines. d. El Salvador, Haiti, and Cuba.

  26. THE BENEFITS AND COSTS OF GLOBALIZATION Economic Arguments for Free Immigration • If the productivity of low-wage workers is higher in the United States than in Mexico, the same labor force produces more total output after immigration, and world output rises. • Immigrants do not necessarily displace U.S. workers but rather take jobs that Americans simply do not want. • Almost all U.S. citizens except Native Americans have recent ancestors who came to this country as immigrants.

  27. Fill in the blanks. Between 1880 and 1924, ___________ immigrants entered the United States. Between 1990 and 2000, immigration averaged close to __________ immigrants annually. a. 2 million; 300,000 b. 300,000; 2 million c. 25 million; 1 million d. 1 million; 25 million

  28. Fill in the blanks. Between 1880 and 1924, ___________ immigrants entered the United States. Between 1990 and 2000, immigration averaged close to __________ immigrants annually. a. 2 million; 300,000 b. 300,000; 2 million c. 25 million; 1 million d. 1 million; 25 million

  29. THE BENEFITS AND COSTS OF GLOBALIZATION The Argument against Free Immigration • The distribution of income is likely to change in response to immigration, affecting the returns to both labor and capital. • Immigrants take jobs away from low-income Americans and drive up unemployment rates. • Immigrants end up on welfare rolls and become a burden to taxpayers.

  30. THE BENEFITS AND COSTS OF GLOBALIZATION The Evidence: The Net Costs of Immigration • A number of recent studies have found that metropolitan areas that have greater numbers of immigrants seem to have only slightly lower wages and only slightly higher unemployment rates. • A more recent study argues that the effects of immigration on wages and unemployment must be analyzed at the national level, not at the city level. • On the issue of immigration’s effects on government costs, mixed evidence also exists.

  31. A recent study of the impact of immigration on wages suggests that the group that appears to experience the largest wage decline as a result of immigration is: a. Recent college graduates. b. Blue-collar workers. c. High school dropouts. d. White-collar workers.

  32. A recent study of the impact of immigration on wages suggests that the group that appears to experience the largest wage decline as a result of immigration is: a. Recent college graduates. b. Blue-collar workers. c. High school dropouts. d. White-collar workers.

  33. THE BENEFITS AND COSTS OF GLOBALIZATION Is Immigration Bad or Good? The evidence on the effects of immigration is mixed, and theory gives us arguments on both sides of the issue. Only time will tell whether the recent wave of immigrants will assimilate as well as past waves.

  34. THE BENEFITS AND COSTS OF GLOBALIZATION CAPITAL MOBILITY In the global economy, domestic households can put their wealth to work in foreign or domestic financial markets; domestic firms can finance investment projects by looking to domestic or foreign financial markets. The argument for free and open financial market mobility is that capital should flow to its highest and best use. Rapid and free flows of financial capital have, however, had adverse consequences for some nations.

  35. The United States can buy more goods than it sells to other countries for an extended period if those purchases are balanced by: a. Purchases of U.S. stocks and bonds by foreigners. b. Purchases of foreign stocks and bonds by U.S. citizens. c. Acquisitions of real assets by U.S. citizens in other countries. d. All of the above.

  36. The United States can buy more goods than it sells to other countries for an extended period if those purchases are balanced by: a. Purchases of U.S. stocks and bonds by foreigners. b. Purchases of foreign stocks and bonds by U.S. citizens. c. Acquisitions of real assets by U.S. citizens in other countries. d. All of the above.

  37. PUBLIC POLICY AND GLOBALIZATION GLOBAL EXTERNALITIES AND PUBLIC GOODS public goods, or social goods Goods or services that bestow collective benefits on members of society. externality A cost or a benefit resulting from some activity or transaction that is imposed or bestowed on some party outside the activity or transaction.

  38. In order to internalize a global externality, it is preferable if: a. Every country is invited to participate and those who want to participate are included. b. The number of countries involved is large. c. The number of countries involved is small. d. Bargaining and negotiation and prohibited between the participating countries.

  39. In order to internalize a global externality, it is preferable if: a. Every country is invited to participate and those who want to participate are included. b. The number of countries involved is large. c. The number of countries involved is small. d. Bargaining and negotiation and prohibited between the participating countries.

  40. PUBLIC POLICY AND GLOBALIZATION NONGOVERNMENTAL ORGANIZATIONS AND INTERNATIONAL ECONOMICS: THE WASHINGTON CONSENSUS Washington Consensus A set of 10 goals prescribed for countries receiving IMF grants and loans.

  41. GLOBALIZATION, CAPITALISM, AND DEMOCRACY Very often, the issue of openness and globalization intersects with issues concerning political and economic systems. Advocates of globalization often are staunch supporters of laissez-faire capitalism.

  42. A FINAL WORD A powerful logic exists in support of economic openness: The free flow of resources and goods and services across national borders, driven by efficient economic incentives, including the desire to maximize profit, is likely to make citizens better off than if borders were closed and economies turned inward.

  43. REVIEW TERMS AND CONCEPTS • comparative advantage • economic globalization • externality • genetically modified (GM) foods • globalization Immigration Act of 1990 Immigration Reform and Control Act (1986) public goods, or social goods Washington Consensus

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