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Is This A Bad Thing? • Joe Smith started the day early having set his alarm clock (MADE IN JAPAN) for 6 a.m. While his coffeepot (MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN HONG KONG). He put on a dress shirt(MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA). After cooking his breakfast in his new electric skillet (MADE IN INDIA) he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today. After setting his watch (MADE INTAIWAN ) to the radio(MADE IN INDIA) he got in his car(MADE IN GERMANY) filled it with GASfrom Saudi Arabia and continued his search for a good paying AMERICANJOB. At the end of yet another discouraging and fruitless day checking his computer (MADE IN MALAYASIA), Joe decide to relax for a while. He put on his sandals (MADE IN BRAZIL)poured himself a glass of wine (MADE IN FRANCE) and turned on his TV(MADE IN INDONESIA), and then wondered why he can't find a good paying job in America..... Actually this is a good thing. We get more choices, lower prices, & because more is bought, more jobs are created.
SWEATSHOP LABOR AND BELOW SUBSISTENCE WAGES ARE WHAT MOST PEOPLE ENVISION
Globalization can be defined as: • Widening and deepening of international flows of trade, finance and information in a single, integrated local market. • Increasing linkages between the world's people as natural and artificial barriers fall. • Transformation of the world into a global village, as borders disappear, distances shrink and time shortens. • Impact of Globalization • The Good News… • Increased market access e.g. trade flows increased 12-fold in the past 50 years as a result of the removal of natural and artificial barriers. • Increased access to capital. • The General Agreements on Tariff and Trade (GATT) is expected to increase global income by an estimated US $ 212 - US $ 510 billion - from trade and efficiency gains and higher rates of return on capital. • Increased movement of people due to tourism and migration. • Greater access to information and increased long distance communication • The Disturbing News… • Gains are not equally distributed between countries. • Gains are not equally distributed within countries. • Financial volatility because of a globally integrated market. • Contagion and threat of worldwide recession. • More human insecurity such as crime (trafficking in drugs, weapons, women, international syndicates), spread of diseases such as HIV/AIDS, and loss of cultural identity.
Global Trade The world is becoming a smaller place. What happens in Tokyo affects what happens in New York and Dallas, Texas. There is over $12 trillion in world trade. Volume of Trade Exports as % of GDP Panama 80% Belgium 87% Netherlands 71% Kuwait 55% Norway 45% Canada 38% [If we sneeze, Canada catches a cold] South Korea 44% Germany 40% China 35%[1/3 bought by U.S.] United Kingdom 26% Spain 25% Italy 27% France 26% Mexico 25% [80% of Mexico’s exports are sold to U.S.] Japan 13% United States 11% [$1.6 trillion in 2007] World 25% The importance of trade has grown. 2008 16% In 2007, we had atrade deficit in goods of $815 billion. We had a trade surplusin services of $104 billion. ($711)
313 Canada 322 China Who Are Our 249 Canada 200 180 160 140 120 100 80 60 40 20 0 211 Mexico 180 160 140 120 100 80 60 40 20 0 Trade Partners? 2007 148 Japan 137 Mexico 95 Germany 57 UK 45 Korea 38 Taiwan 42 France 66 Deficit of $256 China 60 Japan IMPORTS 50 UK 50 Germany 32 Korea 26 Taiwan 25 Singapore 33 Netherlands 27 France EXPORTS
China - the "World's Factory" 10 million toys including “Big Bird” were recalled because of “lead” or magnets that tear the intestines when swallowed by children. After a series of product recalls, from pet food to tires, American regulators are paying more attention to goods exported to the U.S. from China. Who Buys Chinese Goods? The U.S. accounts for 1/5 of all Chinese export destinations, 2007. 450,000 tires were recalled because of tire separation problems. 1.5 mil imported toy trains were made using lead paint. $56 billion In goods from U.S. to China FDA ordered recall after a poisonous ingredient was found in toothpaste. 675,000 Barbie doll accessories More than 60 billion cans of cat and dog food were recalled.
Keep The Money At Home Point: When I buy a coat in England, I have the coat and England has the money. But when I buy a coat in America, I have the coat and America has the money. America is more wealthy because it has both the coat and the money. Abe Lincoln Counterpoint:Money is not wealth in and of itself, it merely facilitates trade. If America sends dollars to England, England will eventually use those dollars to buy American goods. If we don’t buy goods from other countries, then other countries will not be able to buy goods from us.
Jobs, Jobs, Jobs Point: Protecting businesses from foreign competition preserves American jobs. Counterpoint:Few are helped by protective policies, but they are more visible and more vocal than the many whoarehurt. Protecting jobs in import competing industries raises prices to consumers and costs jobs in industries that use imported inputs. America and consumers pay dearly each time protectionist measures “save” jobs.
Saving Jobs Costs Money Industry Yearly Loss Employment Annual Cost To Economy Loss If Barriers Per Job From BarriersWere RemovedSaved Textiles $15,850 billion 71,639 $221,258 Dairy Products 1,630 million 2,378 685,233 Sugar 657 million 2,040 322,059 Peanuts 74 million 397 187,223 Meat 177 million 928 190,733 Non-rubber 170 million 1,377 123,456 footwear Orange Juice 307 million 609 635,103 Canned Tuna 100 million 390 257,640
Low Wage competition Point: If we trade freely with low wage countries, U.S. businesses will flee to those countries and U.S. wages will plummet. Counterpoint:Low wages, combined with low productivity, will result in high unit costs. High wages in the U.S. result from the high productivity of American workers, aided by the availability of raw materials, massive capital equipment, sophisticated management, and elaborate infrastructure.
GLOBALIZATION LEADS TO LOWER FERTILITY RATES WHICH LEADS TO MORE OPPORTUNITY FOR GROWTH AND DEVELOPMENT, ESPECIALLY FOR WOMEN
What is the Global Economy? An international marketplace (in a very broad sense) • Trade in Goods • Final and intermediate goods • Trade in Services • Outsourcing • Vacation • Trade in Labor • Immigration … … legal and illegal • Trade in Capital • Foreign direct investment • Financial flows: stocks, bonds, currencies
Should Wisconsin grow oranges? Should Florida make cheese? • No and No! • Wisconsin should specialize in cheese • Florida should specialize in orange production • Then trade cheese for oranges Economic Background: Why are economists in favor of free trade?
Econ Lingo: Opportunity cost • How much orange production does WI give up to produce one more unit of cheese? Very little, because oranges don’t grow well in WI. • How much cheese production does WI give up to produce one more unit of oranges? A lot!
More Econ Lingo: Comparative advantage • The country with the lower opportunity cost in producing one good has a comparative advantage in that good. • Wisconsin has a comparative advantage in cheese production => specialize in cheese • Florida in orange production => specialize in oranges Comparative advantage Comparative advantage
U.S. Trade Flows (exports + imports of goods and services) as % of GDP Recessions in yellow More trade is associated with economic expansion Trade expanded 3 times faster than GDP, since 1950
Does the trade deficit cause unemployment? Most of the expansion in the trade deficit occurred during the roaring 1990s! Unemployment drops Since 2000 Trade deficit expands Before 2000
U.S. manufacturing output hurt by imports? Manufacturing output expands despite imports Since 2000: Both recovering 1990s: Surge in imports and manufacturing output 2000-2002: Manufacturing drops, imports slow
Loss of manufacturing jobs:Only in the U.S.? Manufacturing jobs: 1993 normalized to 100 3m jobs lost in the U.S. It’s a worldwide phenomenon!
Int’l financial flows are the flip side of the trade deficit: Countries that have a trade surplus with the U.S. are net purchasers of our assets. • There is a trend toward more internationalfinancial integration. • This has coincided with less volatility in U.S. GDP. The U.S. financial sector in a global economy. Some facts:
Notice the difference in scale! $2,546b more liabilities:accumulated trade deficits! $365b more assets U.S. International Investment Position(in $b) 112% of GDP 27% of GDP 92% of GDP 14% of GDP
GDP has become less volatile since the mid 1980s. Some economists argue that international diversification has been a contributing factor 2 times standard deviation around the mean
Labor movements: Immigration • Historical perspective of immigration • Who are the immigrants? • Why does immigration work?
Immigration is high compared to mid-1900s, but low compared to pre WW-I era!!! A lot of immigrants came in the late 1800s, early 1900s Currently about 1m immigrants per year (0.3% of total population) Drops after 1914 Peak demand for IT workers in the mid 1990s Drops again during the Great Depression
Who are the immigrants? • What’s their age? • What's their education? • How much money do they make? Do immigrants assimilate or do they present a burden on society and the economy for generations?
First generation immigrants have low income (they are younger, less educated), … … but consequent generations catch up!
Summary on Immigration • Large flow of immigrants, though not as large as in the 1800s and early 1900s • Immigrants tend to be young: They help alleviate impending problems of baby boomer’s retirement (but can’t solve the problem either) • Immigrants become more economically like the native population over time • Immigration helps the economy balance growth in labor demand with supply
