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Summary Economics 144 - The Economy CORE unit 18
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Detailed summary based on unit 18 of The Economy CORE textbook. Analysis includes in-depth explanation using graphs.
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UNIT 18 – THE NATION AND THE WORLD ECONOMYThis Unit
• Use models and concepts from previous units to explain the effects of
globalization on:
§ International markets for goods and services (trade)
§ International capital markets (flows of savings and investment)
§ International labour markets (migration)
Context
§ Exchange between parties can be mutually beneficial but conflicts arise over how
these gains are distributed (Units 5-9)
§ When goods/services, people and financial assets can cross national boundaries,
new factors are involved
Þ How can governments influence trade?
Þ What affects the distribution of gains from trade?
Þ When can globalization be detrimental to growth?
Þ African and South African context
18.1 GLOBALIZATION AND DEGLOBALIZATION IN THE LONG RUN
Globalization
• Globalization = a process by which 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
Integration of goods market
• Merchandise trade: tangible products that are physically shipped across borders
• Common measures of globalization:
1. Imports/exports/total trade as a share of GDP
§ Clear upward trend in amount of trade worldwide (except from 1914-
1945) with sharp acceleration from 1990s onwards
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, competitive equilibrium the price gap should equal the sum of
all trade costs
Evidence of globalization of goods
• Price gaps between countries have generally declined over time, while the
volume of goods traded has generally increased
Trends in globalization of goods
• Two separate periods of increasing global economic integration:
§ Globalization I: before 1870 until 1914
§ Globalization II: the end of WW2 until now
• Deglobalization: increasing trade costs during the Depression
• Partly due to protectionist policies aimed at protecting domestic employment
(tariffs and quotas on imports)
18.2 GLOBALIZATION AND INVESTMENT
Balance of payments
• Balance of payments records the sources and uses of foreign exchange
• Two main components:
§ Current account
§ Financial account (some countries call it Capital account)
• SARB – quarterly economic review
§ Trade balance = merchandise exports + net gold exports – merchandise
imports
§ Balance on current account = net service, income and current transfer
payments + trade balance
• Impact of Tourism on travel receipts (part of net service)
§ Travel receipts = foreigners spending in SA
§ Decrease from average annual 1.5% of GDP to 0.1% of GDP
Integration of capital markets
• Countries lend and borrow from each other to finance investment
• The balance of payments records the sources and uses of foreign exchange,
which include:
1. Portfolio investment: buying foreign stocks/bonds
2. Foreign direct investment: ownership of foreign physical assets
§ Larger investment in Africa – growing consumer markets, cheap labour
§ Capital flights occurred in 2020: COVID, credit rating, load shedding
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