Sherif Khalifa Sherif Khalifa () Globalization 1 / 44
Globalization is a process by which the economies of the world become increasingly integrated and interdependent through expanded international trade, foreign portfolio investment and foreign direct investment. Globalization refers to the increased openness of economies to international trade and financial flows. Globalization refers to the increasing integration of national economies into expanding international markets. Sherif Khalifa () Globalization 2 / 44
Globalization is a process that leads to a global economy and a global economic policymaking. Globalization suggests exciting business opportunities and growth of knowledge and innovation. Globalization suggests a prospect of an integrated world too interdependent to engage in war. Globalization increases concerns that inequalities and environmental degradation may be accentuated. Globalization increases concerns that the international dominance of the wealthiest may be expanded. Sherif Khalifa () Globalization 3 / 44
Primary products are products derived from all extractive occupations such as farming, lumbering, fishing, mining, quarrying, foodstuffs, and raw materials. Current account is the portion of a country s balance of payments that reflects the market value of the country s exports and imports. Capital account is the portion of a country s balance of payments that shows the volume of private foreign investment and public grants and loans that flow into and out of the country. Sherif Khalifa () Globalization 4 / 44
In developing countries, income is derived from the overseas sale of agricultural and primary products. primary product export dependence carries with it a degree of risk and uncertainty due to volatile prices. Developing countries import raw materials, capital goods, intermediate goods and consumer goods. Import demands exceeded their capacity to generate suffi cient revenues from the sale of exports. This led to chronic deficits in their current account which was offset by a surplus in the capital account. They suffered deficits in capital account due to debt burden of repaying former international loans. This led to a rapid depletion of international monetary reserves and a slow down in economic growth. Sherif Khalifa () Globalization 5 / 44
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Commodity terms of trade is the ratio between the price of a typical unit of exports P x and the price of a typical unit of imports P m. It is the ratio of a country s average export price to its average import price. Terms of Trade = P x P m Sherif Khalifa () Globalization 10 / 44
Comparative Advantage It is impossible for individuals to provide themselves with all the consumption requirements. They engage in the activities for which they have a comparative advantage in terms of their natural abilities or endowments. They can then exchange any surplus of these products for products that others may be relatively suited to produce. Sherif Khalifa () Globalization 11 / 44
Comparative Advantage Comparative advantage is the production of a commodity at a lower opportunity cost than any of the alternative commodities that could be produced. Specialization is the concentration of resources in the production of relatively few commodities. The principle of comparative advantage asserts that a country should specialize in the exports of the products that it can produce at the lowest relative cost. Sherif Khalifa () Globalization 12 / 44
Comparative Advantage Free trade is the importation and exportation of goods without any barriers in the form of tariffs, quotas, or other restrictions. Autarky exists whenever a country can survive or continue its activities without external assistance or international trade. Autarky is a closed economy that attempts to be completely self reliant. Sherif Khalifa () Globalization 13 / 44
Comparative Advantage Country 1 Meat 1 Potato Potatoeville 60 labor 15 labor Beefyland 20 labor 10 labor Country 1 Meat 1 Potato 1 Potatoeville 4 potatoes 4 meat 1 Beefyland 2 potatoes 2 meat Sherif Khalifa () Globalization 14 / 44
Comparative Advantage Assume every country has 480 workers. Country Meat Potato Potatoeville 8 32 Beefyland 24 48 Sherif Khalifa () Globalization 15 / 44
Comparative Advantage Meat 8 4 16 20 32 Potatoes Sherif Khalifa () Globalization 16 / 44
Comparative Advantage Meat 24 14 12 24 48 Potatoes Sherif Khalifa () Globalization 17 / 44
Comparative Advantage 3P 1M 1M 4P 1M 2P Potatoeville Beefyland Sherif Khalifa () Globalization 18 / 44
Comparative Advantage Potatoeville Beefyland Meat Potatoes Meat Potatoes Without Trade Production & Consumption 4 16 12 24 With Trade Production 0 32 18 12 Trade +4-12 -4 +12 Consumption 4 20 14 24 Gains from Trade 0 +4 +2 0 Sherif Khalifa () Globalization 19 / 44
Comparative Advantage Potatoeville Beefyland Meat Potatoes Meat Potatoes Without Trade Production & Consumption 4 16 12 24 With Trade Production 0 32 18 12 Trade +5-15 -5 +15 Consumption 5 17 13 27 Gains from Trade +1 +1 +1 +3 Sherif Khalifa () Globalization 20 / 44
Neoclassical Model The Neoclassical model posits that the basis for trade arises because countries are endowed with different factor supplies. Labor abundant countries should specialize in the production of labor intensive products. Labor abundant countries should export the surplus in return for imports of capital intensive products. Capital abundant countries should specialize in the production of capital intensive products. Capital abundant countries should export the surplus in return for imports of labor intensive products. Sherif Khalifa () Globalization 21 / 44
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Manufacturing 25 20 25M=5A 5M=1A 20M=10A 2M=1A 5 10 Agriculture Sherif Khalifa () Globalization 24 / 44
Manufacturing 25 20 8 4 1 2 3 5 10 Agriculture Developed Sherif Khalifa () Globalization 25 / 44
Manufacturing 20 10 20M=10A 2M=1A 10M=20A 1M=2A 10 20 Agriculture Sherif Khalifa () Globalization 26 / 44
Manufacturing 20 10 6 5 2 6 8 10 20 Agriculture Developing Sherif Khalifa () Globalization 27 / 44
Outward looking development policies encourage not only free trade but also the free movement of capital, labor, enterprises, and an open system of communications. These policies encourage exports, often through the free movement of capital, workers, enterprises, and students. Inward looking development policies stress the need for developing countries to evolve their own styles of development and to encourage indigenous learning by doing in the development of technologies appropriate to a country s resource endowments. These policies stress economic self reliance on the part of developing countries, including domestic development of technology, the imposition of barriers to imports, and the discouragement of private foreign investment. Sherif Khalifa () Globalization 28 / 44
Export promotion cite the effi ciency and growth benefits of free trade and competition, the importance of substituting large world markets for narrow domestic markets, and the distorting price and cost effects of protection. These are governmental efforts to expand the volume of a country s exports through increasing export incentives, decreasing disincentives, and other means in order to generate more foreign exchange and improve the current account of its balance of payments or achieve other objectives. Import substitution believe that developing countries should initially substitute domestic production of previously imported simple consumer goods and then substitute through domestic production for a wider range of more sophisticated manufactured items. It is a deliberate effort to replace consumer imports by promoting the emergence and expansion of domestic industries. Sherif Khalifa () Globalization 29 / 44
Income elasticity of demand is the responsiveness of the quantity of a commodity demanded to changes in the consumer s incomes, expressed as the proportionate change in quantity divided by the proportionate change in income. Price elasticity of demand is the responsiveness of the quantity of a commodity demanded to a change in its price, expressed as the proportionate change in quantity divided by the proportionate change in price. Sherif Khalifa () Globalization 30 / 44
The price elasticity of demand for most primary commodity is low, causing low revenue for exporting nations with increasing incomes. The price elasticity of demand for most primary commodity is low, causing low revenue for exporting nations with decreasing prices. Developed country population growth is at or near the replacement level, causing no significant increase in demand from these economies. The growth of agricultural protection in developed countries work against the long run expansion of primary product export earnings. Structural rigidities especially the antiquated institutional and social structures in many agrarian systems in developing countries. Sherif Khalifa () Globalization 31 / 44
Infant industry is a newly established industry, usually protected by a tariff barrier as part of a policy of import substitution. Import substitution entails an attempt to replace commodities that are being imported with domestic production. The strategy is to erect barriers on imported commodities, and then set up a local industry to produce these goods. The infant industry will grow up and be able to compete in world markets, and then generate foreign exchange earnings. Tariff protection against imports is needed to allow the domestic producers enough time to learn the business. Tariff protection against imports is needed to allow the domestic producers to achieve economies of scale to lower costs and prices. With enough time and protection, the infant will eventually grow up and become competitive with developed country producers. Sherif Khalifa () Globalization 32 / 44
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Price S 0 40 30 10 Tariff Price No Tariff Price D 0 2 5 10 15 22 Quantity Sherif Khalifa () Globalization 34 / 44
The nominal rate of protection shows the extent, in percentages, to which the domestic price of imported goods exceeds what their price would be in the absence of protection. It is an ad valorem percentage tariff levied on imports. t = p p p Value added is the amount of a product s final value that is added at each stage of production. Sherif Khalifa () Globalization 35 / 44
Effective rate of protection shows the percentage by which the value added at a particular stage of processing in a domestic industry can exceed what it would be without protection. It shows by what percentage the sum of wages, interest, profits and depreciation allowances payable by local firms can, as a result of protection, exceed what this sum would be if these same firm had to face unrestricted competition from foreign producers. It is the degree of protection on value added as opposed to the final price of an imported product. ERP = v v v Sherif Khalifa () Globalization 36 / 44
P car = 10, 000 P steel = 8, 000 v = 10, 000 8, 000 = 2, 000 Sherif Khalifa () Globalization 37 / 44
t car = 0.1 P car = 10, 000 (1 + 0.1) = 11, 000 P steel = 8, 000 v = 11, 000 8, 000 = 3, 000 ERP = v v v = 3000 2000 2000 = 0.5 Sherif Khalifa () Globalization 38 / 44
t steel = 0.1 P car = 10, 000 P steel = 8, 000 (1 + 0.1) = 8, 800 v = 10, 000 8, 800 = 1, 200 ERP = v v v = 1200 2000 2000 = 0.4 Sherif Khalifa () Globalization 39 / 44
t steel = 0.1, t car = 0.1 P car = 10, 000 (1 + 0.1) = 11, 000 P steel = 8, 000 (1 + 0.1) = 8, 800 v = 11, 000 8, 800 = 2, 200 ERP = v v v = 2200 2000 2000 = 0.1 Sherif Khalifa () Globalization 40 / 44
South-South Trade South south trade is trade between developing countries. North south trade is trade between developing and developed countries. Developing countries should orient more of their trade toward one another. Export instability from fluctuations in developed country s economic activity can be reduced. Greater collective self reliance can be fostered. Sherif Khalifa () Globalization 41 / 44
South-South Trade Economic integration is the merging to various degrees of the economies and economic policies of two or more countries in a region. Economic union is the full integration of two or more economies into a single economic entity. Regional trading bloc is an economic coalition among countries within a geographic region, usually characterized by liberalized internal trade and uniform restrictions on external trade, designed to promote economic integration. Sherif Khalifa () Globalization 42 / 44
South-South Trade Customs union is a form of economic integration in which two or more nations agree to free all internal trade while levying a common external tariff on all non member countries. Free trade area is a form of economic integration in which free trade exists among member countries, but members are free to levy tariffs on non member countries. A common market is a form of economic integration in which there is free internal trade, a common tariff, and the free movement of labor and capital among partner states. Sherif Khalifa () Globalization 43 / 44
South-South Trade Sherif Khalifa () Globalization 44 / 44