International Economy and Globalization Chapter 1 Copyright 2009

Globalization 1) greater interdependence among nations 2) increased integration of product and resource markets through trade, immigration, and foreign investment 3) includes noneconomic elements such as cultural and environmental factors 4) occurs on political, technological, cultural and economic levels

First Wave of Globalization 1870 -1914 o triggered by technological developments in transportation – steam engine and railroads o dominated by European and American businesses o brought to an end by World War One o Great Depression prompted further limitations on trade and protectionism

Second Wave of Globalization 1945 -1980 o result of reaction against nationalism following WWII as well as lower transportation costs o dominated by developed nations with developing nations largely excluded o lead to greater increase in per capita income for developed countries than for less developed countries

Latest Wave of Globalization 1980 -present o included some but not all developing countries o featured increased capital movement o decline in mobility of labor o outsourcing became more prevalent with both blue collar and white collar jobs moving from the U. S. into lower cost areas

Openness - rough measure of the importance of international trade (Exports + Imports) Openness = GDP

Labor and Capital Greater interdependence typically leads to more movement of the factors of production between nations. o mobility of labor into the U. S. declined from the 1920 s to the 1960 s due to more stringent immigration policies o capital flows have increased substantially as other nations invested in U. S. assets

Importance of Globalization 1) law of comparative advantage – countries can benefit by producing goods for which they have lower opportunity costs 2) increased competition leads to lower prices for consumers 3) open economies lead to increased technological development and innovation

Fallacies of International Trade 1) zero sum game – untrue – both countries can gain by specializing 2) reduced domestic employment – untrue – specific industries may suffer but overall employment increases 3) trade restrictions as beneficial – untrue – restrictions reduce purchasing power of other nations and lead to retaliatory actions

Threat to Workers 1) significant threat to unskilled workers in the U. S. 2) companies may move production to other countries which exploit labor or environmental resources 3) similar to threat created by technological improvements which increase efficiency

Criticisms of Globalization 1) free trade benefits U. S. corporations rather than citizens 2) environmental exploitation 3) human rights issues 4) reduction in domestic wages 5) lower domestic competitiveness as a result of developing facilities elsewhere