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Unit 18: The Nation and theWorld Economy
Globalization
Introduction
Globalization is 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.
Offshoring is an important aspect of globalization.
Exchange between parties can be mutually beneficial but conflicts arise over how these gains are
distributed.
When goods/services, people, and financial assets can cross national boundaries, new factors are
involved.
- How can governments influence trade?
- What affects the distribution of gains from trade?
- When can globalization be detrimental to growth?
International markets for goods and services
Trade in goods is sometimes called merchandise goods.
Merchandise trade: Tangible products that are physically shipped across borders.
Trade in services refers to non-tangible products.
Common measures of globalization:
1. Imports/exports/total trade as a share of GDP.
2.Reduction in trade costs (price gaps) between countries.
, Law of One Price should hold if there are no transport costs or barriers to trade.
Price gap: Difference in the price of a good in the exporting and importing country.
Due to arbitrage, in competitive equilibrium the price gap should equal the sum of all trade costs.
Evidence of globalization of goods
Trends in globalization of goods
Two separate periods of increasing global economic integration:
- Globalization I: before 1870 until 1914
- Globalization II: the end of the Second World War until now
Deglobalization: increasing trade costs during the Depression.
Partly due to protectionist policies aimed at protecting domestic employment (tariffs and quotas on
imports).
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