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Global Political Economy Lecture Notes
- Instelling
- Universiteit Leiden (UL)
Global Political Economy Lecture Notes
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Global Political Economy LectureNotes
Lecture 1 – 8th of February 2022 – International Trade
(for all math and graph stuff, look at the slides)
International Trade
o Notion of globalization, started in the 1990s
o WTO: Global Trade gets teeth
o But globalization arguably started in the 1870s-1914
First golden age of international capital
Aka heyday of the British empire
Global economy united under the pound and the gold standard
o Before 1845 however politicians tend to act as thought the global economy
was a ‘zero sum game’
If I didn’t grab land and use it for resources and markets, someone
else would
o Economic model fueled the political model of colonialism, based on old
theory of mercantilism
Mercantilism
o Metropole: center of production
o Manufactured goods as a rule are far more profitable to produce – contains
more value added than raw materials
o Mercantilists want production to be ‘at home’
o To get raw materials for production, you could buy them on a competitive
international market, or you can take colonies and extract raw materials at
monopsonist (only one buyer) prices
o You then produce goods at home and sell at home but also use the colonies
as a forced market where you have a monopoly as a seller
o Meanwhile, other powers are jockeying to gain the most colonies, and most
raw materials, and markets, so that they can gain the most value added
o Most wealth = most military power = most economic power
o But in 1930s – 1940s, Anglo-Americans economist began to push a new idea
Trade: The Non-Zero-Sum Game
o The idea was that, instead of competing amongst each other for colonies and
captive markets, why not crease a new international order based on Ricardo’s
old idea (that trade, via comparative advantage, would enrich everyone)
o International trade would create more wealth than would autarky, even with
colonies
o This would create incentives to work together, rather than compete
o It would also create development and it would cement the world into one big
capitalist-democratic family
o This was extremely radical and many still view it cynically even though it was
the main cause of the end of colonialism
, o But to have the major powers create a whole economic system based on
accountability, democracy, good government, trust, rule of law, and on
human rights and dignity
o This was the dream; and in many ways it has delivered, and continues to lift
people out of poverty
o Before Covid, by 2030, no extreme poverty
o People bought into it, it ‘won’ by selling not only a promise, but real
prosperity for the ‘middle classes’ and those who aspired to be like them
Bretton Woods System
o Goal: To Foster World Trade and Democracy
United Nations
IMF
World Bank
GATT/WTO
OECD
Global currency union under the USD (UNTIL 1971)
Increasing cooperation
Free movement of capital, goods, and people across borders, with
minimal restrictions or tariffs
Globalization: Rise and Decline
o Thus, Globalization has been happening since before WWI (with the UK as
hegemon)
o Since WWII (with US as hegemon) it was believed that in 1989 that Russia
would join the global order
Fukuyama’s End of History
o Since 1997, China would also join this global order and we would be one big
democratic capitalist economy
o Since the 1980s, world leaders acted as though globalization was inevitable
Globalization
o What are anti-globalists’ economic concerns?
Immigrants
Depresses wages
Threat of moving companies overseas
Worsen working conditions
Help union busting
Reduce workers’ bargaining power
Foreign investment
Increase housing prices in cities
Increased debt levels
In general:
Reduce standards of living
Increase instability/quality of life
Globalization and International Trade
o But international economists will say: pish!
o International trade enriches everyone, and it creates more wealth than
autarky
, o Price of goods is lower than in the 1960s and can buy shoes, shirts,
appliances and phones for a lot less money
o Quality of life has gone way up and global poverty is rapidly decreasing: it is
at an all-time low
o This is despite huge population increases and it corresponds with the ‘golden
age’ of globalization and Bretton Woods
So, who is right?
o Reality is complex
o International trade indubitably creates more wealth than autarky and it raises
living standards (which also depends on a social safety net)
o Governments must intervene in markets, to reduce exploitation of the poor
o In other words, capitalism only works well if it has some government
intervention (i.e., ‘socialist’ elements)
International Trade
o Most economist believe that in the aggregate, international trade is better
than not (hence better than autarky)
International Trade Absolute Advantage
o To understand the case for international trade, one need to look at
international trade theory
o Theory of Absolute Advantage
Means that one country can produce a product more cheaply than
another, thus that country will export to another country
E.g., Vietnam could produce rice more cheaply than Japan, so it began
exporting rice to Japan
Some in Vietnam went hungry, yet the country exported rice.
This argument for that is that the extra currency from the rice
exports could be used to better wages in Vietnam and could
also be used to create more industry and infrastructure and
thus initiate a self-reinforcing cycle of development
In this way Vietnam entered the global economy – from being poor
and backward it began to develop
Gains from trade: cause countries to initiate trading partnerships
Supply and Demand Basics Refresher
o Supply Curve:
Changes in Quality Supplied, are indicated by movements along the
supply curve
Indicated that as price increases, firms supply more
Changes in Supply = shifts in supply curve
Can happen from:
Changes in input or factor prices
o Wages, raw materials
Technology
o Can enable more output from the same factor inputs
o At every price
o Demand Curve:
Changes in Quantity demanded = movements along the demand
curve
, As price goes down, people demand more
Changes in demand = shifts in demand curve
Preferences can shift demand at a given price
Changes in income can also shift demand at a given price
(i.e., as countries become riches, less desirable animal parts
are made into dog food, but in poor countries they are
confused by people)
International Rice Market
o Assume the same demand conditions
o Trade often arises due to differences in supply rather than demand
conditions
o We assume that supply conditions are different
o Supply curve for Vietnam is father to the right than supply curve for Japan,
which means at every price, Vietnam supplies more rice than Japan
Supply curve is further right because:
Superior technology and cheaper inputs
International Trade
o E = export, Z = Import
o You can see that prices in both countries will move towards an average, a
world level
o This will cause demand to fall in Vietnam, but also more to be supplied
o This will cause less to be supplied in Japan, but more to be demanded
o Opportunities for trade will open up
Comparative Advantage
o Absolute Advantage, then, is when a country produces the same product
more cheaply which is a one-product model
o This makes it want to export because it can gain profits from exporting
o But Comparative Advantage assumes a model with two products
o This is the logical next step, because why would a country want to accept
imports (and see its money flow away), if it could not reciprocate, and export
thing to other countries as well
o Only with balanced important and exports, recall, can a country sustain
international trade
o To measure this, we now talk about gains from trade when you have more
than one product
o If you recall from PoE, the argument is that countries can gain from trade,
even if one country is worse at making both things
o Reintroduction of PPFs: Production Possibility Frontiers
This indicates the tradeoff that countries must make to produce one
unit, in terms of another
Thus, to make one motorcycle, you must sacrifice 3 units of rice, but
in another country, you might only have to sacrifice 2 units
Demand Diagonals
o We will also introduce demand diagonals
o This simplifies demand, because our Comparative Models, like our Absolute
ones are Supply-Side Focused
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