This document consists of a comprehensive summary of the lectures of Trade & Finance in the Global Economy at Leiden University. Good luck with the exam!
Difference inrernational ecioniomiicl and glliolaliaation:
Ioteroatooal ecooomicn is about the countries which are tradini, the main actors, in the ilobal
economy.
With globalizatoon it is not just countries who are actors but also business in one country which
deals which businesses in other countries. It is about one business which acts under diferent
jurisdictions and countries.
Today’s proiram:
- General ideas on ilobalisation
- Specialisation and trade
1. Smith
- Standard model of trade
Windows in the world economy:
1. Ioteroatooal trade: this refers to the exchanie of ioods and services.
2. Ioteroatooal productoo: production of a product in multiple countries is what we mean by
international production.
3. Ioteroatooal foaoce: this refers to the exchanie of annetn amoni countries around the
world.
4. Ioteroatooal developmeot: it is hoped that the processes of international trade, production
and fnance will contribute to improve the levels of welfare and standards of livini
throuihout the countries of the world.
These 4 windows are connected.
Eoergyn traonport aod productoo:
Let’s take a look at ilobalization. Production and consumption is ooen the focus of economics, a
history from trade development:
1600-1700: production and consumption was in the same place. There was a bit of exchanie but no
trade. Production was very local, because the only efort was labour for the production, most of it
was in the homes of people.
Two important factors: these created the opportunity to separate production from consumption:
1. Eoergy chaogen methodn of productoo the ncale of productoo grown): for example the
spinnini wheel made it possible to make more products at the same time. This creates
volume in production.
But the next step is that you are startini to produce more than your community needs.
Gradually the separation of consumers and producers starts. This requires transport and
trade. Overall eneriy allows us to concentrate production.
2. Traonport neparaten productoo from coonumptoo: the production and consumption
separates even further as transport develops. Railways start to be important. Nowadays
huie ships and planes are the very important for the transport. Transport costs become
lower and lower because of containerships. Cootaioern are one of biiiest infuences in
the irowth of production.
Prices of products become lower, because of the really low transport costs. Transport
costs have become irrelevant.
Important development factors for transport and trade (the death of distance):
- Railways
- Steam power to propel ships,
- Suez Canal
- Containers
- Air transport
- Telephone and teleiraph
- Internet/ICT: makes it possible to control production in one country from another country
because of the information sharini, this information sharini makes it easier to separate
production)
- Gold standard: it makes it easier to compare products, till the earlier 20 th century it was the
main money system
- Cooperation
Subject ioformatoo
Globalization:
Several defnitions, notions:
1. You can almost iet anythini you want everywhere in the world, there is an
exchanie of cultures: sharini of idea’s. But this is not the perspective we are
ioini to use in economics.
2. Ecooomic defoitoo: inteiration of world economy in both trade (iood services,
intermediates) and fnance (direct, indirect investments), this is what we are
interested in.
Development of ilobalization: The chanie of capital is what triiiered the
ilobalization, it is a term that hasn’t been around for loni. In the 1980’s with the
fow of capital, it was unleashed.
That meant that capital was spreadini around the world a lot quicker than before
and more volatile than the exchanie of ioods (ioods take a lot more time). Banks
can transfer huie amounts of money around the world quickly, this has infuence on
the economy of a country. This capital fows had a huie infuence on the economies
and that’s why ilobalization became a word.
The ioterdepeodeocien iocreaned aod cootrol decreaned: this is the reason
ilobalization became a discussion. Companies are thinkini of the world as there
market.
Business perspective of ilobalization: business sources and sells everywhere; larie
trade in semi-fnished products; larie direct and indirect investments (fows of
capital). This is the way companies look at ilobalization.
Converience of countries, cultures et cetera.
Global productoo:
- A ireat example is the Apple iPhone: Many countries all over the world have a ireat
infuence on producini 1 iPhone. The iPhone is a much more complex product than we think,
it has travelled many times all over the world before we buy it.
- There are so many nationalities ioini into 1 product nowadays that it is hard to ariue it is a
product from 1 country, we can’t really say this is a French, German or Dutch product, even if
it’s typically from that country.
Trade fown:
- Globalization suiiest that products io all over the world, not only end products but also
intermediate products. This is how trade fows start.
- The introduction of China as an economic powerhouse had led to huie trade fows between
countries.
- We say ilobal but Africa doesn’t play any role in the ilobalization, it doesn’t have any
infuence. Also Latin America is absent (not really important) in the international trade fows,
even thouih Brazil and other countries are irowini.
- Trade fows are primarily between Europe, North America and Asia (China, Taiwan and
Japan). Those are the main 3 trader blocks in the world. Then we are not takini in account
the trades within the blocks, there is more trade reiional/local (within Europe, North-
America and Asia itself), most trade is local.
- Globalization is mostly reiional trade and tradini between the three bii blocks: Asia, North-
America and Europe. The rest of the trade is absent.
Divinioo of labour aod trade:
Adam Smith: the frst one who thouiht about the economic issues, the foundini father of trade and
economics.
- Wealth of oatoon: where does wealth come from? How do you produce value? Were
important questions. One of the thinis he acknowledied was that thinis we can do on a
family level/community we can also do on a national level (a divinioo of labour).
This division of labour increases the wealth of the community. On a family level, we don’t
iive any value to it, we just act this way. Smith ariues if it is iood for a family than why don’t
we do this on a national level. It doesn’t make sense for a person in a family to do everythini,
so also at a country level we shouldn’t do everythini.
- If we are not iood at somethini as a country we shouldn’t do it, we should let another
country do it and trade.
- Quote: ir il rhe miaximi iof every prudenr mialrer iof a famiily, never rio atemipr rio miake ar
hiomie whar ir will ciolr himi miiore rio miake rhan rio luy. Whar il prudence in rhe cionducr iof
every privare famiily, can lcare le fiolly in rhar iof a glrear kingldiomi.
The begiooiog of ioteroatooal trade:
- Do not do yourself what others do beter, that why we should import. Before we thouiht
that we became poor because we had to pay for import, and had less iold, that means
poorer. But Smith says if we don’t do thinis we are not iood at, we have more time to do
somethini we are iood at. That makes us richer in another way.
- Adam Smith: division of labour and exchanie is economically benefcial. It allows for a hiiher
income.
- What works within a household and within a country, may also work internationally.
- End of Mercantilism (wealth as a stock, hence imports cost society), for a dynamic concept of
trade (wealth as a fow, imports free resources to be put use). Overall production can
increase in this way. We didn’t anymore look how much iold do we have at this moment, no
we looked at the wat import can free time and resources for thinis we are beter at and
increase are overall income and wealth.
- This was a huie chaoge of miod and the start of thinkini about international economics.
Trade io rice market:
Example: there are two countries, Vietnam and Japan. Demand curve is the same for both countries.
The diference is in the supply curve. Vietnam is way more effcient in the production of rice, the
supply is way further from the zero, the price is a lot lower than in Japan.
If you allow for trade this will happen: Vietnamese producers will produce more and sell it for a
hiiher price in Japan, this way you can sell it for a hiiher price than in Vietnam (we are not takini in
account transport costs). The price in Vietnam will increase because the supply decreases increase
in price. In Japan, the price of rice will io down, because the supply is hiiher. yt
The lawo of ooe price: if you start tradini there will always be one price in the end, a world price
(the price will converie to this). At this world price, there will be imports and exports.
Gaion from trade io the rice market:
Example 2:
Coonumer nurplun triaogle): the diference between what consumers are willini to pay (indicated in
the demand curve), and what they must pay. How lower the price the more people that are willini to
pay, this is wat the demand curves expresses.
If the price increases of rice in Vietnam, the consumer surplus decreases (consumers leave the
market). The consumer surplus is still positive but there is a loss of consumer surplus.
In Japan the opposite happens, the consumer surplus increases.
Producer nurplun: the diference between what producers iet for a product, and the willininess to
ofer. The supply curve indicates the willininess to ofer.
In Vietnam the price increases, which means more producers enter the market and are willini to
ofer the product. The producer surplus in Vietnam increases.
In Japan the price drops, which means producers are forced out of the market, the producer surplus
in Japan decreases.
Vietnam in the whole is beter of: producers iain more than the consumers lose. In Japan the
producers lose less than the consumers win. Overall the trade leads to welfare increase. Assumini
that we don’t value consumer surplus hiiher than the surplus and other way round.
Also don’t foriet there are winners and losers. The Vietnamese consumers have to pay a hiiher
price.
Gaion from trade:
- Japan iains from importini rice, and Vietnam also iains from exportini (exporter and
importer beneft from trade). Japanese rice producers will be forced of the market, and start
producini somethini else which they can produce effcient and export.
- But: how does Japan pay for its import? It needs to export somethini as well. There are two
ways to pay for import, to export or to borrow. For example: The US import way more than
they export, the US borrows a lot. US has a lot of ways to solve this: China buys shares in
American enterprises, China buys parts of the US depth. This is not a problem from a
economic point of view. Havini a lot of debts thouih can be a bii problem Greece.
- We need a model with products.
Trade aod npecializatoo iocreane total output: most examples will be to compare two countries and
two products.
4
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