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Global Political Economy - lecture 1-6 notes
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Samenvatting "International Economics", 3de bachelor Handelswetenschappen
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Woordenlijst "International Economics", 3de bachelor handelswetenschappen
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Lecture 1:International Economics
1. International trade: trade of goods and services across borders, involves dealing with more than one
sovereign government, monetary regime, set of laws: can lead to any number of ‘complications’ as
deals are made → Trade regulation affects markets, but international trade can also be extremely
lucrative, arguably, it can help people in both countries, it might hinder some people in one or both
countries
- The Non-Zero-Sum Game: if I didn’t grab land and use it for resources and markets, then someone else
would
- New idea, based on Ricardo: instead of competing amongst each other for colonies and captive markets,
create a new international order based on Ricardo’s idea, that trade, via comparative advantage, would
enrich everyone → incentives to work together, rather than compete → create development --→ one big
capitalist-democratic family → it ‘won’ by selling not only a promise, but real prosperity for the ‘middle
classes’ and those who aspired to be like them
- Mercantilism: Manufactured goods are as a rule far more profitable to produce – contain more value
added, than raw materials, mercantilists want production to be ‘at home’
2. International Production: producing goods and services across borders, international networks
3. International Financial Systems: Foreign exchange, moving into another currency area: additional risk,
FDI
4. International Development: how do capital flows impact economic development, especially in
‘developing’ countries
Bretton Woods System: Goal: To Foster World Trade and Democracy, Free movement of capital, goods, and
people across borders, with minimal restrictions or tariffs
Is international Trade good: International trade indubitably creates more wealth than autarky, raises living
standards, But, raised living standards also depend upon a social safety net → capitalism only works well if it
has some government intervention, to reduce exploitation of the poor
Absolute advantage:
- one country can produce a product more cheaply than another, thus, that country will export to another
country
- a one-product model
- better technology or ground conditions
- reflects the differences in supply conditions in two countries, assumes that demand stays the same
- Limitations of absolute advantage model = suggest possibility that a country could not have an absolute
advantage in anything, therefore would not export anything → this is unlikely
- Superior technology in a sector and / or larger endowments of factors used in a sector (lower input
prices) → absolute advantage in a sector → tendency to export the sector’s product
- Inferior technology in a sector and / or endowments of factors used in a sector (higher input prices) →
absolute disadvantage in a sector → tendency to import the sector’s product
Comparative advantage:
- PPF: tradeoff that countries must make in order to produce one unit, in terms of another → Opportunity
Cost
- Differences in technology and/or factor endowments among the countries of the world can generate
patterns of comparative advantage. Although patterns of comparative advantage can be influenced by
patterns of absolute advantage, they are not determined by patterns of absolute advantage. Indeed, a
country can have a comparative advantage in a good in which it has an absolute disadvantage. Patterns
of comparative advantage determine patterns of trade in the world economy and generate mutual gains
from trade.
- model with two products
Causes of Comparative Advantage
- Ricardo Model – Productivity based on technology difference – what a country’s economy is “least
bad”/comparatively good at (relative rather than absolute productivity)
, - Heckscher-Ohlin Model – Relative costs differences as a result of different relative factor endowments
– Is a country capital- or labor abundant?
Heckscher-Ohlin Model
- “A country exports the good whose production is intensive in its abundant factor. It imports the good
whose production is intensive in its scarce factor.”
- Differences in factors of production (capital, labor, land, human capital) endowments between countries
=> comparative advantage => world trade.
Ricardian model:
- differences in technology => comparative advantage => world trade
Heckscher-Ohlin model and international trade - shortrun effects
Intra-Industry trade
- Inter-industry = a country either imports or exports a given product → either / or (source: comparative
advantage)
- Intra-industry = both / and
- Two types of intra-industry trade
1. horizontal intra-industry trade and its source in product differentiation = (horizontal refers to the
fact that the products exchanged are at the same level of processing→ both the exported variety and
the imported variety are final goods)
2. vertical intra-industry trade = source in fragmentation (comp. adv. In some instances) ex: china
imports computer components and assembles them into final product → imported computer
components are at a previous stage of processing than exported computers, but from POV of
computer products, this is intra-industry trade → this fragmentation of production processes is part
of international production = windows of international trade and production interact in an important
way here → some part of the fragmentation is comparative advantage working in a new way within
in the realm of parts and components rather than final goods
Lecture 2: Trade Policy and Regulation
Trade Policies
- major types of trade policy, which a government can enact, in order to limit international trade and
protect domestic suppliers→ “Import Protection”
- Types of tariff:
◼ Specific tariff: fixed tax per physical unit of import
◼ Ad valorem is tax on value
- Because tariffs are most transparent policies, they are less subject to corruption
- Dumping: when a country/company sets prices lower internationally than domestically (for the purpose
of driving international producers out of business)
,In sum:
- Tariff: unambiguous net welfare loss due to consumer surplus loss outweighing gains in producer
surplus and government revenue
- Tariff with terms-of-trade effects: ambiguous net welfare effect due to terms of trade gain (fall in world
price) potentially outweighing he efficiency loss
- Domestic-allocated quota: unambiguous net welfare loss due to consumer surplus loss outweighing
gains in producer surplus and quota rents
- Foreign allocated quota: unambiguous net welfare loss that exceed that of the domestic-allocated
quota case and equivalent tariff
PTAs and ROOs
- types of PTA listed tend to be in ascending order of economic cooperation
- In an economic union, the countries remain politically separate, but try and harmonize not only their
currency, but also all laws regarding trade; they also allow free movement of labour and capital
- Rules of Origin – the idea that it’s not very easy to determine where a good comes from given modern
manufacturing methods.
Examples of PTAs
- The most famous are:
◼ European Union
◼ NAFTA
◼ Mercosur
◼ ASEAN
- These often exist because it’s easier to do these than a large multilateral agreement; sometimes also
because of common concerns/culture, and/or proximity
Lecture 3: International Production
Firm Structure
two types of firms:
1. private
- owned by the company ‘founder’ and/or their family and heirs
- often smaller, but they can grow quite large
2. public
- publicly held, which means, the public owns them
- gone through an IPO (Initial Public Offering): offers stock shares to the public
- The more the public is willing to pay for shares, the more money a firm has to expand (it uses that
money as capital to expand operations)
- → public firms often get much larger, because they can tap stock markets for investment funds
- Shareholders appoint a board, who appoints the CEO
- run like mini-democracies
- statistically the best way to run a company, with the most consistent positive results
Decision making
, - cost/benefit analysis: a version of Supply/Demand, but it measures an individual’s or company’s benefit,
versus the cost they incur to do more of a given task → is the economic basis of decision-making
- Standard economic logic says: you do something until the marginal cost equals the marginal benefit →
as long as the marginal benefit outweighs the marginal cost, then it is profitable to keep doing it, and to
do more of it
International Production
- choice to exporte to international markets, to increase profit
- Companies decide to go international if the marginal benefit outweighs the marginal cost
- different ways to “go international” with regards to selling and producing
- start to export, (produce domestically, and sell internationally) → realize that it is cheaper if they
produce internationally (opens up further possible decisions)
- first level of foreign market entry → most simple: simply export domestically-made goods
- second level of foreign market entry: choose to contract, or outsource, a foreign firm to make things
for them → danger: have little control, and foreign firm might steal their tech, patents, or markets
- third level of foreign market entry: purchase a foreign firm themselves, or else create a new plant from
scratch (versions of Foreign Direct Investment)
Foreign Market Entry
- increase in complexity, and/or involvement in the foreign market
- indirect exporting mode: rely on intermediary, a sales agent or trading company to complete the
export transaction
- direct exporting mode: have to take on research, marketing, finance, logistics involved in the trade
transaction: a lot of it involves the management team familiarizing itself with foreign law codes, and
regulations
- Three types of contractual foreign market entry (FME)
1. Licensing: Sell a license to a foreign firm to allow it to use the home country firm’s production process;
including logos, trademarks, designs, branding; foreign firm pays royalties: often about licensing
technology (this is often used by manufacturing firms)
2. Franchising: Licensing, plus exercising more control to ensure consistency: often a retail arrangement
3. Subcontracting: Hiring foreign firm to produce a product to certain specifications (materials,
processes, and quality)
4. Investment: is the most ‘’committed’’ form → the riskiest: involves substantial amount of capital, also
time commitment: because it usually takes several years for a company to begin turning a profit
- → When a firm invests abroad in production/sales we call this FDI
One type of FME investment is a Joint Venture (JV):
- establishing a new firm which is jointly owned with a foreign firm: thus, you can rely on foreign
expertise of the foreign market
- Sometimes this is required by law to avoid many foreign firms entering and putting local firms out of
business
M&A ( ‘’Mergers and Acquisitions’’ )
- The most common form of FDI
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