Globalisation
Increased movement of goods, services, labour, capital and investments internationally (across borders)
Increase in X, M and FDI
Measure of openness (of a country)
GDP ratio = Value of X+M / GDP
Free trade
Government does not discriminate against X or M from other countries
Inter-industry trade
Trade in products belonging to different industries
Horizontal intra-industry trade
Trade in different varieties of the same end-product of the same industry
Vertical intra-industry trade
Trade in parts and finished products belonging to same industry
Global supply chain
World-wide system involving flow of info and resources that a firms uses to produce good and services
Free trade agreements (trade integration)
FTAs allow goods and services to move more smoothly, Eg less border checks
Capital mobility
- Decrease in capital controls
- Increased movement of hot money and FDI
- More offshoring and outsourcing
Comparative advantage
Countries that produce a product at a lower opportunity cost are preferred
Absolute advantage
Countries that produce a product at a lower absolute cost are preferred
Terms of trade
Rate of exchange of one good for another between countries
Assumption of CA theory
- Perfect Competition
- Perfect mobility of resources within a country
- Imperfect mobility of resources across countries
- Constant opportunity costs of production
- No transport costs
- No trade restrictions
Import-competing industries
Domestic industry that also produces good and services that are imported (competing with foreign firms)
Dumping
Foreign producers selling their product below MC in a local market to gain monopoly power, usually requires government subsidy. (similar to predatory pricing)
Protectionism
Partial or complete protection of domestic industries from foreign competition
Benefits of free trade
- Increase in welfare
Trading with CA allows country to have goods more than PPC
Trading increases variety of goods - Promotes more competition
Increases efficiency and drives innovation - Drives AG if BOT improves
- Drives PG
Importing high-tech equipment
Costs of free trade
- Structural unemployment
Workers in import-competing industries may lose CA thus retrenched - Income inequality
Exporting sectors income increase disproportionately - Dependence of other countries
Macro instability
Vulnerable to external DD/SS shocks - Exposure to unfair competition
Dumping
Benefits of free flow of capital
- Long term capital inflow (FDI)
Increases I component of AD
Increase capital stock, increasing AS
Provides access to overseas markets - Short term capital inflow
Increases supply of loanable funds, reducing IR
Costs of free flow of capital
- Forex
Maybe lead to BOT deficit and thus ER depreciates - DD deficient unemployment
Offshoring and outsourcing of local companies result in DD for domestic labour to fall
Benefits of protectionism
- Stimulate EG (during a recession)
Increases domestic C - Reduce structural unemployment
Restriction on imports slow down decline of import competing industries, providing time for skills retraining
Benefits of free flow of labour
- Increases quantity and quality of labour
Reducing labour costs - Foreign workers remit money back home
Costs of free flow of labour
- Brain drain
Emigration of high-trained professionals
Protectionist policies
- Quotas
Limit the quantity of a good that can be trades - Tariffs
Taxes levied on products when they cross national boundaries (fixed amount of money per unit of good) - Subsidies
Government subsidies firms to decrease UCOP thus increasing competitiveness
