CLASS 1
Two types of policy are fiscal and monetary.
Two types of fiscal policy are government spending and taxation. When the fiscal policy
is expansionary, it means an increase in government spending or reduction of taxation. If
the fiscal policy is contractionary, it means a decrease of government spending or increase
of taxation.
Expansionary monetary policy is increasing the money supply, which results in the
reduction in interest rates. Contractionary monetary policy is decreasing the money
supply, which results in an increase in interest rates.
International economics concern the flow of commodities (sugar, oil, etc.), services
and productive factors across national boundaries.
Gross domestic product (GDP) is a monetary measure of the market value of all the final
goods and services produced in a specific time period.
Autarky is an economic system of self-sufficiency and limited trade. A country is said to be
in a complete state of autarky if it has a closed economy, which means that it does not
engage in international trade with any other country.
International transactions constitute an extension of domestic transactions. International
economics is the conduct of trade rather than the benefits that flow from it. This is related
to conduct of trade that arises between domestic and foreign trade.
6 identifiable areas:
- Exchange rates;
- Commercial policies;
- Different domestic policies;
- Statistical data;
- Relative immobility of productive factors;
- Marketing considerations.
Institutions that deal with the world’s trade and financial challenges include World Trade
Organisation (WTO), International Monetary Fund (IMF), World Bank, the European Union,
groups of industrial countries (G5, G7, G10), etc.
An economy’s features, e.g. industries, service sectors, levels of income and employment,
and income standards are linked to its trading partners where international movements of
goods and services, labor, business enterprise, investment funds and technology play an
important part. The world is becoming so interconnected that it is no wonder that “when the
United States sneezes, the world catches the flu”.
,The financial crisis of 2008 is a good example of economic interdependence, during
which the global recession caused the collapse of the US housing market and spread
throughout Europe through affected financial institutions, reaching Russia, Iceland and the
rest of the world.
Quantitative easing is an attempt to grow a particular economy by purchasing large
amounts of long-term securities. When that happens, money supply increases, interest rates
fall and investments increase.
Globalization is the process of greater international interdependence among countries and
its citizens consisting of the increased interaction of product and resources markets across
nations via trade, immigration and foreign investment. International flows consist of goods
and services, people, investment in equipment, factories, stocks and bonds, and
non-financial elements, such as culture and environment.
Forces that are driving globalization:
- Technological change;
- Multilateral trade negotiations;
- Continuing liberalization of trade and investment;
- Widespread liberalization of investment transactions;
- Developments of international finance markets.
First wave of globalization (1870 - 1914) saw decreases in tariff barriers and the rise of
new technologies. Sailing was replaced by steamships and trains became widely used. It
was driven by European and American businesses and individuals. Exports as a share of
world income nearly doubled. Per capita incomes increased annually. Countries that actively
participated in globalization became the richest countries in the world. The first wave of
globalization ended with the start of World War 1.
During the Great Depression of the 1930s, governments became protectionist. Tariffs on
imports were placed in order to try to shift demand into domestic markets, promote sales for
domestic companies and promote jobs for domestic workers. Exports as a share of national
income fell to 5%.
Second wave of globalization (1945 - 1980) saw countries retreat into nationalism.
Transportation costs fell and previously established trade barriers decreased. A new kind of
trade, in which rich countries specialized in manufacturing niches, grew in scope. That
concerns agglomeration economies, which rose during this time. Most developing countries
did not participate in the growth of global trade in manufacturing and services due to
continuing trade barriers in developing countries, antitrade policies in developing countries,
and unfavorable investment climates. They were dependent on agricultural and
natural-resource products. Within the developed countries, per capita income increased.
Developing countries as a group were being left behind (world inequality).
Agglomeration economies are the specialization in manufacturing niches by rich countries
whereby productivity is gained through groups of firms clustered together, some producing
the same product and others delivering through vertical linkages.
,During the recent wave of globalization (1980 - now), a large number of developing
countries, such as China, India and Brazil, broke into the world markets for manufacturers.
Other developing countries are increasingly marginalized in the world economy. Incomes are
decreasing and poverty is increasing. International capital movements are significant.
Some developing countries (e.g. Bangladesh, Malaysia, Turkey, Mexico, Hungary,
Indonesia, Sri Lanka, Thailand, and the Philippines) have a competitive advantage in
labor-intensive manufacturing. That is because of tariff cuts, lower barriers to foreign
investment, and technological progress in transportation and communication, which enables
developing countries to participate in international production networks. Developed countries
have protectionist policies.
The world has become more globalized in terms of international trade and capital flows, and
less globalized in terms of labor flows. Foreign outsourcing refers to moving manufacturing
to wherever costs are the lowest. Certain aspects of a product’s manufacturing can be
performed in more than one country. Foreign outsourcing results in job losses for blue-collar
workers and public demand for laws that restrict outsourcing.
Openness is a rough measure of the importance of international trade in a nation’s
economy. Nations exports and imports are expressed as a percentage of its gross domestic
product (GDP). Large countries typically have lower measures of openness because they
are less reliant on international trade. Small countries typically have higher measures of
openness.
, The law of comparative advantage states that citizens of each nation can gain by
spending more of their time and resources doing those things, in which they have a relative
advantage. If a good or service can be obtained more economically through trade, it
should be traded for instead of producing it domestically. It provides a way for available
resources to be used to obtain each good at lowest possible cost.
Globalization is important because open economies produce a larger joint output.
Competition is essential for both innovation and efficient production. International
competition gives domestic workers a strong incentive to improve the quality of their
products and weakens monopolies. More competition results in more firm turnover, which
leads to improvements for the industry. Economic growth rates are in close relation to
openness to trade, education, and communications infrastructure.
Globalization leads to rapid growth in some countries, an increased demand for commodities
(e.g. crude oil, copper, steel are being priced higher) and an increased demand for
substitutes (e.g. biodiesel, ethanol). Domestic economies are vulnerable to disturbances
caused overseas.
Common globalization fallacies:
- “Trade is a zero sum activity” - in reality, both partners gain from trade (production
and consumption wise);
- “Imports reduce employment and act as a drag on the economy, while exports
promote growth and employment” - failure to consider the link between imports and
exports;
- “Tariffs, quotas, and other import restrictions will save jobs and promote a higher level
of employment” - failure to recognize that a reduction in imports does not occur in
isolation.
Free trade increases competition, lowers prices, makes better products available for
consumers and increases consumption.
Pros and cons of globalization:
