MODULE-1-3310AFE-1

Introduction to Global Macroeconomy

• Overview of the global macroeconomy.

• Discusses:

  • Macroeconomic aspects of open economies.

  • Extent and causes of globalization.

  • Benefits and drawbacks of globalization.

  • Trade openness and economic growth.

  • Trade policies.

• Textbook Reference: International Economics: Theory and Policy; Global Edition; Krugman, Obstfeld and Melitz; Chapters 1 and 12.

What is Open Economy Macroeconomics?

• Definition: Interaction of nations through trade of goods/services, money flows, and investments.

• Relation to:

  • Exchange rates.

  • Balance of payments.

  • Capital flows and global financial system.

• Highlights:

  • Increased international trade over the past 50 years.

  • Significant decline in imports/exports during the global financial crisis of 2009.

Learning Outcomes

By the end of the module, students should be able to:

1. Evaluate gains and drawbacks of globalization.

2. Distinguish between trade in goods and financial assets.

3. Evaluate arguments for interventionist trade policies, especially concerning externalities.

4. Discuss anti-globalization claims related to trade effects on workers and the environment.

5. Address key issues in trade policy and environmental debates.

Topic 1: International Trade and Government Policies

Gains from Trade

• Trade benefits nations by:

  1. Allowing export of goods made with abundant resources.

  2. Importing goods made with scarce resources.

  3. Enhancing efficiency via specialization and larger production scales.

  4. Facilitating international borrowing and lending for future resources.

• Evidence indicates trade openness promotes economic growth.

Potential Negative Effects

• Trade can harm specific domestic groups:

  • Owners of resources in competitive import industries.

  • Results in income distribution effects within a country.

International Trade vs Finance

• International Trade: Involves goods and services.

• International Finance: Involves transactions of financial assets (stocks, bonds).

  • Diversification of risky assets benefits all trading countries.

Effects of Government Policies on Trade

• Policymakers influence trade through:

  1. Tariffs: Taxes on imports/exports.

  2. Quotas: Limits on import/export quantities.

  3. Export Subsidies: Payments to exporting producers.

  4. Other regulations favoring domestic products over foreign.

• Consequences of restricted trade can incite retaliatory actions from other governments.

Topic 2: Controversies in Trade Policy

Arguments for Activist Trade Policy

• Activist trade policy involves government support for export industries via subsidies.

• Reasons for support include:

  1. Market failure.

  2. Externalities or appropriability issues.

  3. Imperfect competition leading to excess profits for firms.

Technology & Externalities

• Investment in technology generates benefits for others without compensation (appropriability problem).

• Governments encouraged to subsidize industries generating high social benefits.

Assessing Subsidy Needs

• Evaluate:

  • Which activities genuinely generate knowledge.

  • Differential impacts of subsidies on technology versus non-tech sectors.

Cross-Country Externalities

• Externalities may transcend borders due to competitive environments.

• Arguments for governmental policies that promote high-tech industries.

Imperfect Competition & Strategic Trade Policy

• Defined by monopoly profits in certain firms and subsidizing can shift profits from foreign to domestic firms (Brander-Spencer analysis).

• Example: Boeing vs. Airbus dynamics influenced through subsidies.

Arguments concerning Trade & People

Trade and Low-Wage Labor

• Manufacturing exports from low/middle-income countries often involve lower worker wages and conditions.

• Proponents of free trade argue notwithstanding these concerns, workers benefit from trade.

Labor Standards in Trade Negotiations

• Calls for labor standards face resistance due to potential economic burden on low/middle-income nations.

• Majority of workers in these regions are outside the export sector.

Trade & the Environment

• Environmental standards are often lower in developing countries.

• Some argue that this does not equate to harm as trade can also create degradation absent trade.

Environmental Kuznets Curve

• Initial economic growth leads to environmental decline, followed by improvement as incomes increase.

• Poor countries transitioning from poverty to wealth address environmental concerns progressively.

Pollution Havens

• Economic activities may shift to countries with laxer regulations, termed pollution havens, though not proportionally significant compared to domestic production impacts.

Conclusion on Trade Arguments

1. Gains from trade generally outweigh drawbacks.

2. Argument for active trade policy: investing in technology yields widespread benefits despite difficulties in quantifying these.

3. Critiques of free trade highlight worker exploitation but acknowledge that trade often uplifts existing conditions.

4. Trade negotiations incorporating labor and environmental standards face opposition from developing nations.