International Economics: Globalization

Globalization is a process in which national economies have become increasingly integrated and interdependent.

Reduction in barriers to trade (e.g., tariffs).
Countries realized the benefits of free trade in promoting growth by exploiting comparative advantages.
Efforts by organizations to reduce trade barriers.

Technological improvements and easier mobility of capital in world trade markets allowed MNCs to expand.
MNCs seek to improve profitability by operating in various countries, leading to greater interdependence of nations.

Internet improvements, transport improvements, and software development.
Businesses become more efficient when trading internationally.
Quicker and cheaper trade, increasing FDI and migration, integrating nations more.

Due to innovation and privatization of transport.
Trade (shipping) becomes cheaper and faster, promoting trade.
Increased FDI and migration flows due to improvements in the mobility of labor and capital.

Access to large international markets.
Businesses can sell to more consumers around the world.
Benefit from technical and purchasing economies.
Example: Business enjoys increased productive efficiency, decreasing costs, which increases profitability and lowers prices for consumers.
Access to best quality raw materials leads to increased consumer surplus.

Businesses can source raw materials around the world at the cheapest prices, decreasing the cost of production.
Decreased costs of production leads to increased market share and profitability.
Consumers have a wider market to buy goods.
Increased consumer living standards.

Increased market size leads to increased specialization.
Increased export potential leads to increased revenue.
$X-M$ component of AD increases.
Decreased unemployment as firms hire more labor, reducing poverty by increasing incomes/living standards, leading to economic growth.

Easier to produce overseas given tech/transport improvements.
Firms can move more production processes overseas, decreasing the cost of production.
Increased business profits lead to increased innovation/tech through R&D.
Consumers benefit from lower prices.
Creates jobs and incomes for workers in developing countries.

Countries attract migrant labor.
Migrant labor brings unique skills that fill job vacancies, leading to increased productivity and tax revenue.
Continuous business production during nights and weekends improves competitiveness.
Remittance income increases the income/living standard of families back home.

Higher growth does not guarantee higher incomes for all.
Corrupt governments may not redistribute tax revenue effectively.
Capital-intensive sector production widens gaps.
Key macro objectives not met in developed nations, leading to increased relative poverty.
Significant parts of the population live in absolute poverty, holding back economic development.

Industries decline because they cannot compete internationally.
Countries with comparative advantage and low labor costs benefit.
Offshoring for competitive advantage leads to structural unemployment domestically.
Major macro objective lost.
Occupational immobility is a problem for the government to re-train workers.
Costs to the government include direct (re-training workers) and indirect costs (high unemployment benefit + low tax revenue), leading to increased absolute poverty.

Trade dominated by a few exporting nations.
More countries have current account deficits than surpluses.
Increased international debt to fund deficits.
Countries more integrated/reliant means a shock affecting one country impacts others.
Economic crises can spread quickly, impacting the global economy and decreasing incomes for all.

Increasing FDI and focus on growth lead to negative externalities.
Examples: high pollution, resource depletion, and deforestation.
Decreased well-being and quality of life leading to negative economic development.
Unsustainable production means future generations lose out.

Countries exploit comparative advantage but do not produce goods where other countries are more efficient.
Risk to be too reliant on the production of a narrow range of goods/services.
If industries collapse, there is no other availability of growth.

Developing countries lose their best-skilled workers, leading to a brain drain effect.
The lure of high incomes abroad incentivizes workers to migrate abroad rather than tolerate low incomes, increasing poverty at home.
Decreased long-run growth rates lead to decreased prosperity.
Countries receiving migrant labor may see job opportunities taken away from the native population.

Growth rates do not guarantee decreased poverty.
Ensure high earners (MNCs) are taxed progressively.
Tax revenue can be redistributed to the poor to decrease income inequality that globalization causes.
Implement efficient environmental policy to prevent the destruction of the environment.
Education schemes ensure workers have the human capital to take new jobs created and those who lost jobs due to competition can re-train to be occupationally mobile and transfer to other sectors.
Infrastructure needs to be developed to benefit from trade.
Reducing trade barriers is not enough if roads/railway lines can't accommodate the volume of goods/services international trade demands diversification.
Governments should encourage diversification.
Huge revenue from the primary sector can trap countries in the resource curse and not develop other sectors.
Countries are prone to slumps in primary commodity markets and resource depletion and recession abroad.
Incentives are needed for countries to enter other sectors to break the resource curse, allowing them to perform better in incomes, living standards, and sustained growth.