BUSS508: Economics and International Business - Globalisation II Notes

Globalisation II (Week #5) Notes

Introduction to Specialisation

  • Definition: Specialisation occurs when a country focuses on producing a limited range of goods and services in which it has a cost or competitive advantage.

  • Purpose: It allows nations to become more efficient and leads to the necessity of international trade for goods not locally produced.

Reasons for Specialisation

  • Natural Resources: Different climates and resources make it expensive to produce certain goods in some regions (e.g., growing tropical fruits in New Zealand).

  • Economies of Scale: Costs decrease when producing in larger quantities, resulting in increased efficiency (e.g., China as the 'factory of the world').

  • Tradition and Heritage: Historic and cultural factors can influence patterns of production in different countries.

Comparative vs. Absolute Advantage

  • Absolute Advantage: A country has an absolute advantage if it can produce more of a good or service than another country using the same resources.

  • Comparative Advantage: A country has a comparative advantage if it can produce a good at a lower opportunity cost compared to another country.

Example: Farmers Greta and Carlos

  • Greta:

    • Can produce 1250 apples or 50 tonnes of wheat.

  • Carlos:

    • Can produce 1000 apples or 20 tonnes of wheat.

  • Questions to Consider:

    1. How does Carlos’ land compare to Greta’s?

    2. Does either farmer have an absolute advantage?

    3. Can Carlos benefit from trade despite his lower output?

Calculating Opportunity Costs

Cost of Producing Apples

  • Greta: 1 apple costs 0.04 tonnes of wheat.

  • Carlos: 1 apple costs 0.02 tonnes of wheat.

  • Conclusion: Carlos has a comparative advantage in apples.

Cost of Producing Wheat

  • Greta: 1 tonne of wheat costs 25 apples.

  • Carlos: 1 tonne of wheat costs 50 apples.

  • Conclusion: Greta has a comparative advantage in wheat.

Proposed Solution for Trade

  • Specialisation:

    • Carlos should specialise in apple production.

    • Greta should specialise in wheat production.

  • Expected Outcomes of Trade:

    • Each benefits from what the other produces, increasing overall consumption of both goods.

Winners and Losers of Trade

  • Trade leads to both benefits and harms:

    • Consumers benefit from lower prices.

    • Producers in competitive industries may suffer from lower demand and potential job losses.

  • Example: New Zealand imports clothing from China.

    • NZ consumers gain cheaper clothing.

    • Clothing workers in China gain from increased demand.

    • NZ clothing industry suffers, potentially leading to job losses and increased inequality.

The Welfare State After Globalisation

  • After WWII, the rise in international trade affected job security.

  • Many countries introduced welfare state measures like unemployment benefits to cushion the transition for displaced workers.

Globalisation and Inequality: The "Elephant Curve"

  1. The rich in the West have significantly increased their wealth since the 1980s.

  2. A new middle class has emerged in developing markets like China and India.

  3. The middle class in the West has faced stagnating income, becoming economically squeezed.

New Zealand's Comparative Advantages

  • Discussion on NZ’s competitive advantage in product categories:

    • Animal products (e.g., mutton, dairy)

    • Food products (e.g., vegetables, fruits)

  • Export Value Trends (1995-2018): Strong growth in agricultural exports, with a focus on existing product lines rather than diversification.

Conclusion on New Zealand's Exports

  • New Zealand's comparative advantages are tied to its agricultural output.

  • Export growth largely driven by scaling and enhancing existing product lines rather than developing new sectors post-GFC.

  • Concentration of value in industries with above-average world growth indicates changing economic dynamics and needs for continued adaptation.