Globalization Study Guide 1

This is for Globalization Midterm

First Period of Globalization (1870-1914)

- No international institutions, colonial power dominates.

- Hegemonic Power: UK

- Ended by WWI (1914)

Interwar Retreat From Globalization (1919-1939)

The League of Nations fails; no effective international institutions.

- No dominant power or hegemon.

- Ended by WWII (1939)

Post WWII, Government-Managed Internationalization (1945-1973)

Bretton Woods institutions, United Nations and GA TT emerge; still strong roles

for national governments.

- Hegemonic Power: US

- Ended by the first oil shock, stagflation (1973)

Contemporary Globalization (1980-2008)

Bretton Woods and UN institutions with new roles and more rules.

- Hegemonic Power: US

- Ended by the global financial crisis followed by the Eurozone crisis (2008)

Current Period (2010 - Now)

Bretton Woods and UN institutions; new institutions with uncertain roles.

Creation of the G20 and regional organizations.

- Hegemonic Power: The US but with increasing diffusion of power to EU, China,

and major emerging markets.

- SLow trade growth, same pace as GDP or slower.

Period V (1980-2008) is characterized by two major factors:

In the need to establish international collaboration among nations to recover from

World War II, the circumstances led to the birth and solidification of international organizations like

The World Bank and IMF (Bretton Woods). There was also a shift from gold reserves as the

A common global currency to U.S. dollars, making Americans the dominant economic leader.

Did globalization go into reverse in the Interwar Period (1919-1939)? Could it happen again?

Yes, it did, and in theory, it could because any country can experience a rise in nationalism

resulting from an economic recession. Once that country recovers economically and nationalism remains, there will be a strong disdain for trade deals, migrants, and interconnected economies.

The first post-war period (1945-1975) witnessed strong economic growth and gradual increase

in globalization under the Bretton Woods institutions. What do we mean by “the Bretton Woods

institutions” (Background Brief: Bretton Woods Institutions)?

The Bretton Woods Institutions

1. The World Bank Group:

2. A General Agreement on Tariffs and Trade (GA TT):

3. The United Nations:

4. IMF

In what way does the Bretton

Woods’ system (Period 3 of globalization) developed as a reaction to the problems of the Interwar

Period?

The Bretton Woods system recognized the failures of the international community after WWI

and the ending of the first period of globalization. This led to the second period of globalization

where the world did not have an outstanding power, countries did not often trade with each other

and migration was low. The systems created under the Bretton Woods system aimed to limit the

potential downfall of the economies and create an open dialogue between nations.

What role did the US play in setting up these institutions and what were its motives?

The US sent

_____

to Bretton Woods to negotiate and forge an economic future with all of the

major economists and representatives from around the world. He outdueled John Maynard

Keynes, who wanted to establish an international currency and international institutions located in

London. The mission of the US was to make the US dollar the world's currency used in trade.

Goldberg & Reed (2023) argue that deglobalization is not yet clearly visible in trends in goods

and capital flows. Nevertheless, they worry that deglobalization is going to ensue over the next

decade or two. Why?

Goldberg & Reed worry that deglobalization will ensue over the next decade or two due

to deglobalization becoming more popular domestically in response to the 2007-2008

financial crisis, import competition, COVID-19, and the Russian invasion of Ukraine.

This has generated greater economic instability and inequality domestically

2. Traditional measures of globalization continue to grow, but public opinion has shifted

towards protectionism, which may lead to policy changes

3. Three phases of deglobalization sentiment:

a. 2015: import competition from China and refugee flows in Europe

b. COVID-19 pandemic (supply chain resilience, reshoring)

c. Russian invasion of Ukraine (decoupling, friendshoring)

Factor Endowments, Growth, Trade and Trade Policy

• What do we mean by GDP and GDP growth? (see Background Brief No. 3)

GDP: The sum total of the value added in the economy. It’s a net concept that fully

encompasses economic output.The centerpiece of the system of national income accounts

(SNA), which is the basic accounting framework used to organize data collection and the

description and measurement of most economies. GDP can also be used to give a sense of the

relative magnitude of other economic numbers, to help benchmark.

GDP Growth: The annual rate of change of GDP .

Production Approach

The production approach builds up GDP by looking at the net

value-added in each sector. Double-counting is avoided by subtracting the value of

purchased inputs from each sector’s total output value. For example, in the example given

earlier, purchased steel is subtracted from the value of automobiles produced and sold.

The production approach is especially useful for understanding structural change as

economies develop. In the production approach, GDP equals the sum of output in

agriculture (the primary sector), mining and manufacturing (industry: the secondary

sector), and services (the tertiary sector).

Expenditure Approach:

The expenditure approach looks at broad categories of final

expenditure to determine what goods and services are the actual uses of output. In the

expenditure approach, GDP equals the sum of consumption, investment, government

consumption, and net exports (exports minus imports). The expenditure approach is

useful for determining where demand comes from and, thus, what the drivers of

economic growth are.

Income Approach:

The income approach aggregates the net income of different

population categories. Households, businesses, and government all receive income. In the

income approach, GDP is equal to the sum of wages, profits, interest, taxes, and

depreciation. This approach is useful in determining who benefits from economic

activity and how the financial system works.

factor endowments and factor intensity

Factor endowments refer to the quantity and quality of factors of production (like labor, land, and

capital) that a country possesses. Countries have different levels of these resources, which often

influence their economic activities and trade patterns. For instance:● A country with abundant capital but limited labor is considered capital-abundant.

● A country with a large labor force but less capital is considered labor-abundant.

How are factors of production, factor abundance and factor intensity related to trade (and with

respect to both exports and imports)?

Factors of production, factor abundance, and factor intensity are all closely related to a country's

trade patterns and provide insight into the types of goods it will export or import. These concepts

are foundational in understanding comparative advantage and are central to the

Heckscher-Ohlin (H-O) trade theory.

What is the relationship between underlying factor endowments and relative prices within a

country? For both of these questions, be prepared to talk through an example or be able to

discuss a particular case.

1. Factor Endowments and Factor Prices

In a country with a particular factor endowment, the abundant factor tends to be cheaper relative

to the scarce factor. This is because:

● Abundant factors are available in larger supply, which drives their prices down due to

higher availability.

● Scarce factors are in limited supply, leading to higher prices because of their relative

shortage.

Example: In a labor-abundant country (e.g., India), wages (the price of labor) tend to be lower

relative to capital costs, as there is a plentiful supply of labor. Conversely, in a capital-abundant

country (e.g., the United States), capital is relatively cheaper, making wages higher compared to

capital costs.

What is the relationship between underlying factor endowments and relative prices within a

country? Part 2

2. Relative Prices of Goods and Factor Endowments

The prices of goods within a country also reflect its factor endowments. According to the

Heckscher-Ohlin (H-O) model:

● A country with an abundance of a particular factor (e.g., labor) will produce goods that

use that factor intensively (e.g., labor-intensive goods).

● Because of the lower cost of the abundant factor, these goods can be produced more

cheaply, which lowers their prices relative to goods that require the scarce factor.

What do we mean by the middle income trap? (Larsen et al). What is the basic logic of the

concept of the middle income trap? What does the evidence say?

The middle-income trap happens when a country’s growth slows after reaching middle-income status. It can no longer rely on cheap labor to stay competitive, but it also lacks the innovation and advanced industries of high-income countries. Many nations in Latin America and Southeast Asia face this problem because of weak institutions, poor education systems, and limited investment in technology. However, countries like South Korea and Singapore escaped by improving education, encouraging innovation, and building strong governments. Some experts argue the trap may be overstated, since steady growth over time and good economic policies can still lead to high-income status.

 It is difficult to show (that is, empirically demonstrate) that there is a middle-income trap.

However, it is easy to point to the relatively small number of countries that have unambiguously

escaped any such trap and grown into high-income status since 1960. Which groups of countries

have clearly escaped the middle-income trap?

The group of countries that have clearly escaped the middle income trap since 1960 primarily

includes several East Asian economies and a few others. According to 2008 per capita income

levels, approximately 13 countries became high-income by 2008: Equatorial Guinea, Hong Kong

SAR, Ireland, Israel, Japan, Mauritius, Portugal, Puerto Rico, Republic of Korea, Singapore,

Spain, and Taiwan. Notable examples are South Korea, Taiwan, Hong Kong, and Singapore,

which successfully transitioned to high-income status through rapid industrialization,

technological advancement, and strong institutional development. Additionally, some European

countries like Spain and Portugal and a few from the Middle East, such as Israel and the

United Arab Emirates, have also made this transition, largely due to targeted economic reforms

and investments in high-value industries.

Trade enables economies to take advantage of differences in factor endowment by trading and

specializing in line with their factor endowments. Gains from trade come from increased opportunities for exchange, and from the ability to specialize; what do we mean by

specialization? Can factor endowments change over time? What are the implications for patterns

of trade?

When countries specialize:

● They concentrate resources (like labor and capital) on industries where they have a

competitive edge due to factor abundance.

● This focus allows them to produce more of these goods, leading to higher productivity,

lower costs, and better trade competitiveness.

specialization allows countries to capitalize on their existing factor endowments, but as these

endowments change over time, so do comparative advantages and trade patterns. Nations can

adapt by shifting production to align with their evolving resources, enabling them to continue to

gain from trade.

Trade changes relative prices in the domestic economy, so there are necessarily winners and

losers from increased or decreased trade opportunities. Who are the winners and losers from

trade? (Hint: the answer depends on initial factor endowments; it is not the same in capital- and

labor-abundant economies).

Trade creates winners and losers within the domestic economy. Winners typically include

export-oriented industries, consumers, and factory owners in successful sectors, while losers

include import-competing industries, affected workers, and regions dependent on specific

industries.

The main instruments of trade policy are tariffs, quotas, subsidies, and non-tariff barriers.

Understand the similarities and differences.

The main trade policy instruments are tariffs (taxes on imports), quotas (quantitative

limits on total imports), subsidies (financial assistance granted by the government to support a

domestic industry, so the price of a good or service remains competitive), and non-tariff barriers

(government standards and regulations designed to restrict trade like standards and licenses).

Tariffs generate revenue and raise import prices, quotas limit quantities without revenue,

subsidies lower costs for local firms, and non-tariff barriers restrict imports through regulations

rather than direct costs. All aim to protect domestic industries but differ in their approach and

impact on trade.

Refer to Effects of regulating international trade on firms and workers by Robertson for

more information.

How do firms respond to trade barriers? How has this changed? (note the “Trade Fraud

Detective”!)

Firms respond to trade barriers through various strategies, including cost-pass-through,

relocation, supply chain adjustments, product adaptation, market diversification, and advocacy.

Over time, their responses have evolved due to technological advancements and increased focus

on compliance, as illustrated by concepts like the "Trade Fraud Detective." These changes

reflect a more complex and dynamic global trade environment, where firms must continually

adapt to maintain competitiveness and ensure compliance in an increasingly regulated landscape.

The most common form of trade policy in the developing world has been “Import Substituting

Industrialization (ISI).” What are the problems associated with this strategy?

ISI often leads to inefficiencies because protected domestic industries may lack incentives to

innovate or improve productivity. It can also create economic imbalances, as resources are

diverted from potentially more efficient sectors. Additionally, ISI strategies may result in higher

consumer prices and limited access to foreign technology and investment, hindering long-term

economic growth. Furthermore, reliance on import substitution can stifle competition, leading to lower-quality products and less choice for consumers, and it may also foster a dependence on government support, creating fiscal burdens.