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Chapter Two

Chapter Two. The Global Economy. The Global Economy.

thomas-williams
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Chapter Two

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  1. Chapter Two The Global Economy

  2. The Global Economy I started the day early having set my alarm clock (MADE IN JAPAN) for 6 a.m. While my coffeepot (MADE IN CHINA) was perking, I shaved with my electric razor (MADE IN HONG KONG). I put on a dress shirt (MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA). After cooking my breakfast in my new electric skillet (MADE IN INDIA) I sat down with my calculator (MADE IN MEXICO) to see how much I could spend today.

  3. The Global Economy (cont.) After setting my watch (MADE IN TAIWAN) to the radio (MADE IN INDIA) I got in my car (MADE IN JAPAN) and continued my search for a good paying (!) American job. At the end of yet another discouraging and fruitless day, I decided to relax for a while. I put on my sandals (MADE IN BRAZIL) poured myself a glass of wine (MADE IN FRANCE) and turned on my TV (MADE IN INDONESIA), and then wondered why I can't find a good paying job in.....AMERICA!

  4. Imports and Exports as a Percentage of GDP (in Billions of Dollars)

  5. Historical Development Stock Market Crash 1929 US Isolationism, Protectionism Other Countries Retaliate with Similar Measures Global Depression – Germany and Japan Hit Particularly Hard World War II

  6. Historical Development (cont’d) Bretton Woods Conference GATT, WTO • Import Tariffs Decrease from 40% in 1947 to 4% Today • World Trade Increases 22-fold Since 1950 • Foreign Direct Investment Increased Over 100% in a Single Decade!

  7. Basic Theories of World Trade Absolute advantage • Trade is based on each country selling what it is best at producing Comparative advantage • Trade can occur between two countries even if one of the countries has no absolute advantage in any product • Make the product you have a comparative advantage in

  8. 1 (Vietnamese) machine = 4 tons (Vietnamese) tomatoes 1 (German) machine = 2 tons (German) tomatoes If Germanytrades 1 machine to Vietnamese for 3 tons of tomatoes…both countries win!

  9. Any trading ratio between: 1 machine = 2 tons of tomatoes and 1 machine = 4 tons of tomatoes will be a mutually advantageous trading ratio

  10. Competitive Advantage (Adam Smith) Comparative advantage is limited by its focus on the elements of production, including: • Land • Labor • Natural resources • Capital

  11. Porter’s Revised Theory of Competitive Advantage • Elements of production • Nature of domestic demand • Presence of appropriate suppliers or related industries • The conditions in the country that govern how companies are created, organized, and managed • Nature of domestic rivalry

  12. Exchange Rates An exchange rate measures the value of one currency in terms of another currency 1 US $ = 0.5 £ One currency can appreciate or depreciate against another 1 US $ = 0.75 £ 1 US $ = 0.30 £

  13. Balance of Payments An accounting record of the transactions between one country’s economy and the rest of the world’s collective economy at a point in time. Functions like a statement of cash flows.

  14. Balance of Payments • Add table 2.5, p. 26 here

  15. Supply and Demand and FOREX Pounds • The foreign exchange market reflects the supply and demand for one currency versus another S p D q DM

  16. Rates Determining Factors (besides Supply & Demand) • Imports/exports drive need for currencies • Inflation • Investors and speculators - ROI • Government actions

  17. Is a strong currency good or bad?

  18. “Soft” Currencies • Currencies of smaller, less developed countries • Rates can be artificially “determined” by the governments of these countries • Pegging of rates to more stable currencies • Governments must eventually respect FOREX supply and demand • Currencies often face significant devaluations

  19. Dollarization • Panama adopted the U.S. dollar as its currency in 1904 • Ecuador adopts U.S. dollar in 2000 • Good idea? + Monetary stability - Lack of flexibility in monetary or foreign exchange policy to respond to economic downturn or external shocks(i.e. what if dollar depreciates?)

  20. Agencies Promoting Economic and Monetary Stability • International Monetary Fund • Prevention of economic instability in emerging markets • World Bank • Long-term loans to developing countries • Group of 7(8) • Finance ministers/Central Bank governors of USA, Japan, Germany, France, Britain, Italy, Canada (Russia)

  21. Protectionism and Trade Restrictions • Tariffs • Quotas • Orderly marketing arrangements (voluntary export restrictions) • Non-tariff barriers (regulations, stringent standards, bribes, etc.)

  22. General Agreement on Tariffs and Trade (GATT) – Key Principles • Reciprocity • Non discrimination • Most favored nation (MFN) status • Transparency

  23. World Trade Organization • Created as final act of GATT • Unlike GATT, WTO decisions can only be overturned by consensus and not by unilateral veto • Challenges • Continued liberalization of trade • Establish trade policy for foreign investment, competition and labor standards • Promote regional trade agreements

  24. Opposition to WTO Agendas • Unfair to developing countries? • Threat to national sovereignty and culture? • Protectionist agendas still remain in some countries

  25. Different Types of Regional Economic Integration • Free Trade Area (i.e. NAFTA) • Liberal external trading policy • Customs Union • supranational trade policy-making body • Common external trade barrier adopted by all member nations • Common Market • Customs Union characteristics + mobile labor and capital among member nations • Monetary Unions (example: European Union and the “Euro”)

  26. Geographic Proximity Often Contributes to Economic Integration • Distances are short – lower cost of trading • Similar consumer tastes • Common history or interests

  27. Benefits Trade Creation Bigger Markets Greater Consensus Political Cooperation & Good Will Drawbacks Trade Diversion Shifts in Employment and Loss of Jobs Loss of National Sovereignty The Effects of Economic Integration

  28. European Integration…. ''When I need to get in touch with the Kremlin, I know who to call. When I need to get in touch with Europe, who do I call?'' --Henry Kissinger

  29. European Union - Characteristics • Founded on International Treaties among sovereign nations rather than a Supra-national Constitution • Power to enact laws that are binding on all EU citizens throughout EU territory • Common Currency established – the “Euro”

  30. EU Objectives • Promote economic and social progress • Assert the identity of the European Union on the international scene • Introduce European citizenship • Develop an area of freedom • Maintain and build an established EU law

  31. History of the EU 1951 -European Coal and Steel Community 1957 – Treaties of Rome: EEC (later EC) 1960 - European Free Trade Association 1967 – Internal Tariffs Eliminated in EC; Common External Tariff Imposed 1992 – European Union Signed in Maastricht 1999– Most Countries Adopt the Euro

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