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Lecture notes for week 6 - Unit 18(ECO2004)
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Summary of the lecture notes for week 6 for macroeconomics
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Unit 18The nation and the world economy
Defining Globalization
• Globalization = A process by which the economies of the world become more integrated by the freer
flow across national boundaries of goods, investment, finance, and labour.
• It is commonly used to describe our increasingly interconnected world.
• Offshoring is an important aspect of globalization.
• Offshoring = The relocation of part of a firm’s activities outside of the national boundaries in which it
operates. It can take place within a multinational company or may involve outsourcing production to
other firms.
Government policies to reduce Globalization
• Governments have additional powers over their national boundaries (compared to within their nation) that
they can use to limit globalization:
• Imposition of tariffs: Taxes on imports effectively discriminate against foreign-produced goods.
• Immigration policies: Regulate the movement of people between nations that is not possible within nations
• Capital controls: Limits on the ability of individuals or firms to transfer financial assets among countries.
• Monetary policies: Affect the exchange rate hence the relative price of imported and exported goods.
Measuring Globalization
Common measures of globalization:
1. Imports/exports/total trade as a share of GDP.
- This is usually measured in terms of merchandise trade.
- Merchandise trade = tangible products that are physically shipped across borders.
- If it increases, we conclude that the entity in question (country, region or the whole world) is becoming more
globalized.
2. The additional costs associated with exporting goods relative to selling them domestically
Measuring Globalization: Imports/exports/total trade as a share of GDP
• Clear upward trend in amount of trade worldwide (except from 1914-1945 which included two world wars
and the Great Depression).
• There has been a sharp acceleration in global trade from 1990s onwards.
Measuring Globalization: Additional costs associated with exporting goods
relative to selling them domestically.
•A second method is to measure the additional costs associated with exporting goods relative to selling them
domestically.
•When the costs of trading between countries fall, then in economic terms, the world has shrunk. It is as if countries
were closer.
•Key concept: Law of one price
- Holds when a good is traded at the same price across all buyers and sellers.
- If a good were sold at different prices in different places, a trader could buy it cheaply in one place and sell it
at a higher price in another.
, • When the costs of trading between countries falls, then in economic terms, the world has shrunk. It is as if
countries were closer.
• The law of one price only holds if it is costless to take advantage of those trading opportunities.
• If, on the other hand, trading between markets in two countries is costly because of transport costs, trade
barriers, or other factors, then there is no reason to suppose that prices will be the same in both markets.
n e ample
onsider the mar et for a ood that is produced in
and e ported from one countr and consumed in
and imported into another e apan e ports
cars to the
To eep the anal sis strai htforward ima ine that
these are the two onl countries in the world that
the apanese do not consume cars and that the
does not produce an cars itself This means
that ever thin that is produced is traded
The blue line in represents the suppl curve in
apan it is an upward slopin function of the price
in apan The red line represents the demand
curve in the t is a downward slopin function
of the price in that countr
et t be the cost of shippin a car from apan to
the includin all transportation costs trade
ta es and so on
• If the market is competitive, then the total cost of obtaining a car in the US will be the cost of buying it in
Japan, plus the trade cost t.
• Here, t is a measure of the price gap between cars in Japan and cars in the US.
• Price gap = A difference in the price of a good in the exporting country and the importing country. It includes
transportation costs and trade taxes. When global markets are in competitive equilibrium, these differences
will be entirely due to trade costs.
• Changes in trade costs are reflected in price gaps.
f the mar et is competitive then
the price of the car in the will be
the cost of bu in it in apan plus
the trade cost et us assume that
rice
the cost of shippin a unit of the
ood is f this is the case rice at which
The e porter s
cars will be produced h suppl curve
ood sells =
rice
ecause at cars the ap = t
difference between the suppl
The consumer s
curve and the demand curve is ar inal cost of demand curve
e ual to the trade cost producin
= The mar inal cost amount traded =
in apan will be while the
customers in the are willin
to pa per unit
uantit
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