The essential issue of development economics is why
some countries grow and develop and others do not and the policies that might help
developing countries get richer.
Putting World Poverty
into Perspective: At least one-third of the world’s population lives
at subsistence level. The official poverty level in the United States exceeds
the average income of at least one-half of the world’s population.
Between Population and Economic Development: World population is expected
to reach approximately 9.3 billion by the year 2050, up from 7 billion today.
Excessive population growth has been a concern ever since Malthus’ day (1798).
Malthus Was Proved Wrong: As population has
grown, the amount of food produced as measured by calories per person has
increased. Also, the relative
price of food has fallen for more than a century.
Growth Leads to Smaller Families: As nations
get richer, the average family size declines.
The Stages of Development:
Agriculture to Industry to Services: Modern rich nations went through
three stages as they developed. From the dominance of agriculture (primary)
to that of manufacturing (secondary) and finally to the dominance of services
(tertiary). [Note: You may find less developed nations with a larger than expected
tertiary sector. That's almost always due to a reliance on tourism.] It is important
that nations that wish to develop specialize in those products in which they
have comparative advantage.
poverty - low standard of living levels and per capita income
highly skewed income distribution
substantial dependence on agriculture: 30-60% of GDP
importance of primary products in trade: food and raw materials make up
half or higher of the value of exports
high rates of population growth
dependency and vulnerability in international relations
physical and human resources
ethnicity and religion
importance of public and private sectors
importance of primary, secondary and tertiary sectors
external economic, political and cultural dependence
interests and power of different groups
Which is the most relevant theory of development?
countries face institutional, political and economic rigidities, both on the
domestic and the international front and are caught in a dependence and dominance
relationship with rich countries. Three major streams of thought can be sorted
oThe False-Paradigm Model
oThe Neo-Classical Counterrevolution
This is an indirect outgrowth of Marxist thinking that attributes the existence
and continuance of underdevelopment between rich and poor countries primarily
to the historical evolution of a highly unequal international capitalist
system. In this system, rich countries are intentionally exploitative or
unintentionally neglectful, and the international system is dominated by
unequal power relationship between the center and the periphery. This makes
it difficult for poor nations to develop. The situation is perpetuated by
power groups (landlords, entrepreneurs, military leaders, merchants, public
officials, trade union leaders, etc). These groups enjoy high incomes, social
status and political power, and constitute an elite ruling class whose principle
interest lies in the perpetuation of the international capitalist system,
for which they are rewarded. Therefore underdevelopment is seen as an externally
The False-Paradigm Model
This model attributes underdevelopment to faulty and inappropriate advice
provided by well-meaning but often uninformed ethnocentric international
experts from developed countries or multinational organizations, Western-trained
university faculty, bureaucrats and technocrats. This set of theories emphasizes
the removal of international and domestic imbalances as the most effective
way to deal with diverse social problems. Acceleration of the pace of economic
growth can be accomplished through domestic and international reforms,
accompanied by a judicious mixture of both public and private economic activity.
However, these theories offer little formal or informal explanation on how
countries initiate and sustain development. More importantly, the actual
economic experiences of less developed countries that have pursued revolutionary
campaigns of industrial nationalization and state-run production has been
mostly negative. Also according to these theories countries pursuing policies
of autarky, or inwardly directed development, should be doing well, for
example, China and to a certain extent India. However, both these countries
experienced stagnant growths until they opened up their economies in 1978
The Neo-Classical Counterrevolution
These theories advocate freer markets and the dismantling of public ownership,
central planning by the state and government regulation of economic activity.
Underdevelopment results from poor resource allocation due to incorrect
pricing policies and too much state intervention by overly active developing
country governments … thus, slowing the pace of economic growth. The Free
Market approach argues that markets alone are efficient, prices of products
and factors reflect the accurate scarcity values of goods and resources,
competition is effective if not perfect, technology is freely available
and nearly costless to absorb, and information is also perfect and nearly
costless to obtain. Under these conditions any intervention by the government
is a distortion. However, this has not really been the case in the developing
countries. The Public Choice approach – and also the new political economy
approach – argues that politicians, bureaucrats, citizens and states use
their power and authority to act solely from a self-interested perspective,
resulting in corruption and misallocation of resources. The Market Friendly
approach recognizes that there are many imperfections in a developing country’s
product and factor markets and that governments do have a key role to play
in facilitating the operation of markets through non-selective (market friendly)
interventions … for example, investing in physical and social infrastructure,
health care facilities and educational institutions, and providing a suitable
climate for private enterprise.
Change Models of Development
change models focus on the mechanism by which underdeveloped economies transform
their domestic economic structures from a heavy emphasis on traditional subsistence
agriculture to a more modern, more urbanized and more industrially diverse manufacturing
and service economy. Important examples of such models are:
oLewis’s Structural Change Model
oChenery’s Patterns of Development
oRostow’s Linear Stages of Growth Model
oThe Harrod-Domar Model
Structural Change Model
Laureate Arthur Lewis said that an underdeveloped economy consists of two sectors:
(1) a traditional, overpopulated rural subsistence sector with surplus labor and
(2) a high productivity modern sector to which surplus labor is transferred. The
focus of the model is on the process of surplus labor transfer from the traditional
sector which leads to the growth of output and employment in the modern sector.
calculated that with an increase of 30% or more in urban wages, workers will migrate
from the rural areas to the urban areas, leading to growth in output and employment
through the modern sector. Lewis’ model reflects the historical experience of economic
growth in the West. It assumes that the faster the rate of capital accumulation,
the higher the growth rate of the modern sector and the faster the rate of new job
creation. It does not take into account that capitalist profits may be re-invested
in sophisticated labor-saving technologies or that there may be capital flight.
assumes surplus labor exists in the rural areas while there is full employment in
the urban areas. This is not supported by empirical literature and is generally
not valid. It also assumes the existence of a competitive modern-sector labor market
that guarantees the existence of constant real urban wages up to the point
where the supply of rural surplus labor is exhausted. However, urban wages continue
to rise even in the presence of rising levels of open modern sector unemployment
and the existence of surplus labor in the rural sector due to the presence of unions,
civil services wage scales and multinational corporations’ own hiring practices
that tend to negate competitive forces in the modern sector. Finally, evidence suggests
that increasing returns prevail in the modern sector instead of diminishing returns,
which means that the modern sector might continue to use more and more capital instead
Patterns of Development
to Hollis Chenery’s work, in addition to the accumulation of capital, both physical
and human, a set of interrelated changes in the economic structure of a country
are required for the transition from a traditional economic system to a modern one.
These structural changes involve all economic functions – including the transformation
of production and changes in the composition of consumer demand, international trade
and resource use as well as changes in socioeconomic factors such as urbanization
and the growth and distribution of a country’s population. Development shows certain
patterns, for instance, a shift away from agriculture to industrial production,
the steady accumulation of physical and human capital, the change in consumer demands
from emphasis on food and basic necessities to manufactured goods and services.
This leads to the growth of cities and urban industries as people migrate from the
rural to the urban regions with a decline in overall family size and rate of population
Linear Stages of Growth Model
1950s and the early 1960s, the process of development was viewed as a series of
successive stages through which all countries must pass. With the right mix of savings,
investment and foreign aid, these countries could be put on the path to development,
thereby making development synonymous with aggregate economic growth. Walt Rostow
became the most influential advocate of the stages of growth model of development.
Rostow argued that the advanced countries had all passed through a series of steps
leading to development and growth. The developing countries were still in either
the traditional society or the preconditions stage and had to follow a set of rules
to take-off into self-sustaining economic growth. The principal strategy to help
this takeoff was the mobilization of domestic and foreign savings in order to generate
sufficient investment to accelerate economic growth.
The Harrod-Domar Model
Model describes the economic mechanism through which more investment leads to more
growth. The theory states that the rate of growth of GNP is determined jointly by
the national savings ratio and the national capital-output ratio. Therefore, an
economy’s most fundamental growth strategy is to save and invest a certain proportion
of its GNP. However, the actual rate at which an economy can grow for any level
of saving and investment depends on how much additional output can be had from an
additional unit of investment. According to this theory the major obstacle to growth
is capital constraint, which became the reason for the transfer of capital and technical
assistance to developing countries. Stages theory did not always work because, although
savings and investment is a necessary condition for accelerated rates of growth,
it is not a sufficient condition. Economies also need to possess certain structural,
institutional and attitudinal conditions, such as well-integrated commodity and
money markets, highly developed transport facilities, a well-trained and educated
work-force and an efficient government.
How relevant are the lessons learned from the historical growth process?
to differences between the initial conditions of the current developing countries
and the initial conditions of the developed countries when they started their
economic growth, the lessons we have learned are of limited relevance.
physical and human resource endowments: Many developing countries are less well endowed with natural resources.
Asia where half of the world’s population lives is poorly endowed. Even
though Africa and Latin America are better endowed they need heavy capital
investment to exploit these resources.
per capita incomes and levels of GDP in relation
to the rest of the world: Four-fifths of the world has a real
per capita income that is on average lower than their counterparts in the
19th century. Today’s developed countries were in advance of
the rest of the world and hence could take advantage of the strong income
gaps between themselves and other nations.
climate: Most developed countries are
located in temperate climatic zones as opposed to the developing countries
that are located in the tropical zone. Heat and humidity result in a decline
in soil quality and depreciation of natural goods, lower agricultural
productivity, weakened regenerative growth of forests and poor health of
animals. Too, diseases, such as malaria, are concentrated in tropical areas.
population size, distribution and growth: In the earlier growth years developed countries experienced a slow population
growth rate and, as industrialization proceeded, population growth was due
mostly to falling death rates. The natural birth rate of Europe and North
America was always low. For today’s developing countries, however, population
growth rates have been and remain high.
historical role of migration:
the 19th and early 20th centuries, there was a major
outlet for excess rural populations in international migration, which was
both large scale and wide-spread. For instance, three major contributions
to labor-scarce areas of North America and Australia came from the Irish,
Germans and Scandinavians. International migration until WWI was both distant
and permanent, whereas after WWII it was mostly within Europe, over short
distances and essentially temporary. The same type of migration is not possible
today because of large distances involved and the very restrictive nature
of immigration laws in modern developed countries.
international trade benefits: During
the 19th and 20th centuries, international free trade
was called the engine of growth. Today developing countries cannot expand
as rapidly because the terms of trade have declined. That is, the price
that they receive for their exports is much less than the price that they
have to pay for their imports. The developed countries are so far ahead
in terms of producing more competitive and new products that the developing
countries cannot compete. Developing countries of today also face various
tariff and non-tariff barriers such as import quotas, sanitary requirements
and special licensing arrangements.
basic scientific and technological research and
development capabilities: 90% of research and development is
concentrated in the developed countries and is focused on solving their
problems. The technological requirements of developing countries are very
different and require simple solutions.
stability and flexibility of political and social
institutions: The developed countries in their pre-industrial
time were independent consolidated nation-states able to pursue national
policies on the basis of consensus towards modernization with ideals embodied
in the notions of rationalism. In contrast many of the developing countries
have only recently gained independence and have yet to gain political and
social stability, to become consolidated states.
is no strong empirical evidence of convergence between the living standards
of developed and developing countries. The most important lesson may be the
significance of technological, social and institutional changes that are essential
for long-term economic growth.
Keys to Economic
Population: Developing countries can advance more rapidly if
they invest more heavily in secondary education.
a System of Property Rights: The more certain property rights
are, the more capital accumulation and economic growth there will be, other
things being equal.
“Creative Destruction” Take Its Course: “Creative destruction”
occurs when new businesses ultimately create new jobs and economic growth
after first destroying old jobs, old companies and old industries.
Protectionism: Open economies experience faster economic development
than do economies that are closed to international trade.
Developed Country Policies for Promoting Growth
and strengthen the rule of law. Clearly defined and enforced property rights
bolster economic growth by ensuring that individuals get and keep the fruits
of their labor.
to international trade.
foreign direct investment.
human capital. Programs which increase basic literacy, education and labor-market
skills help enhance economic growth.
with neighboring countries.
independent central banks.
realistic international exchange rate policies.
Economically Developed Country Policies for Fostering Developing Country Growth
foreign aid to the poorest developing countries. Much of foreign aid from
developed countries is strongly influenced by potential and military considerations.
Only ¼ of foreign aid goes to those 10 countries whose
population constitutes 70% of the world’s poorest people.
tariffs and import quotas.
debt relief to developing countries.
temporary workers but discourage brain drains.
How do we define economic
growth? Increases in per capita real GDP over time. It is measured by
the rate of change of real GDP per capita per year. If there is economic growth,
the production possibilities curve will shift outward.
Problems in Definition:
Real standards of living can go up without any positive economic
growth when individuals are, on average, enjoying more leisure by working fewer
hours, but producing as much as before. Growth tells us nothing about the distribution
of output and income.
Is economic growth bad?
Anti-growth proponents suggest that economic growth is bad because
it raises expectations faster than income. Our measures of growth allow us to
make comparisons across countries and time and provide a serviceable measure
II. Determinants of Economic
The Heart of Economic Growth: Labor productivity is real GDP divided
by the number of workers (output per worker). Increases in labor productivity
lead to increases in the standard of living. If all resources are divided up
into labor and capital, then the growth of per capita GDP is the cumulative
contribution of the growth of capital, the growth of labor, and the rate of
growth of capital and labor productivity.
Saving: A Fundamental
Determinant of the Rate of Economic Growth: Higher savings rates
lead to higher living standards in the long run, other things equal, because
investment and the capital stock will increase.
New Growth Theory and
the Determinants of Growth: New Growth Theory examines factors that
determine why technology, research, innovation, and the like are undertaken
and how they interact.
1. Growth in Technology:
The growth of the power of the personal computer is an example of technological
Technology: A Separate Factor of
Production: One of the major foundations of new growth theory is that
the greater the rewards, the more technological advances we will get.
Research and Development: Technological
advance can come from R&D that develops new materials, products, and
processes. Thus, some technological advance depends on the rate of spending
on R&D and business spending on R&D depends on expected profits. The
greater the reward, the more technological advances we will get.
Patents: A 20–year monopoly on a
new product or technique granted by the federal government to an inventor.
Positive Externalities and R&D:
Some of the results of R&D spending accrue to others who benefit without
paying. An estimated 25 percent of R&D spending in the top 7 industrialized
countries accrues to foreigners.
2. The Open Economy
and Economic Growth: Open economies can experience higher
rates of growth than closed economies, because free trade encourages
a more rapid spread of technology and industrial ideas and may give
domestic industries access to a bigger market.
and Knowledge: Innovation involves transforming an invention
into something that benefits the economy. Much innovation involves small
improvements in the use of an existing technology.
a. The Importance of Ideas and Knowledge:
Past investment in capital may make it more profitable to acquire
more knowledge. There exists the possibility of an investment-knowledge
cycle where investment spurs knowledge and knowledge spurs investment.
Therefore knowledge, like capital, has to be paid for by forgoing current
consumption. Knowledge can be viewed as a store of ideas. Thus, economic
growth can continue as long as we keep coming up with new ideas.
b. The Importance of Human Capital:
Increases in the productivity of the labor force are a function of increases
in human capital. Human capital is at least as important as physical capital.
Population and Immigration
as They Affect Economic Growth: Population growth implies that
more workers are entering the labor force, which the evidence shows can
increase technological progress, which increases the rate of economic growth.
D. Property Rights and Entrepreneurship:
The more certain private property rights are, the more capital accumulation
there will be. If people have property rights in their wealth that are sanctioned
and enforced by the government, they will save and invest more.
III. Labor Resources and Economic
Growth: Important determinants of economic growth are growth of labor
and capital and the rate of increase of labor and capital productivity. This section
examines the conditions necessary for population growth to be translated into economic
Growth and Economic Growth: The growth rate of per capita real GDP
is equal to the rate of growth of real GDP minus the population growth rate.
How Population Growth
Can Contribute to Economic Growth: Immigration can increase real
GDP faster than population if they increase the labor force participation
rate. It is possible for higher birth rates to lead to an increase in the
labor force and an increase real GDP per capita.
Growth Hinders or Contributes to Economic Growth Depends on Where You Live:
There are countries such as Saudi Arabia where rapidly increasing
population leads to lower per capita real GDP and others such as Hong Kong
that have experienced high rates of growth of per capita real GDP.
The Role of Economic Freedom:
Economic freedom is expressed as the rights to own private property and to exchange
goods, services, and financial assets with minimal government interference.
In general the higher is the level of economic freedom, the higher is per capita
real GDP and growth rates.
The Role of Political
Freedom: Political freedom is the right to openly support and democratically
select national leaders. It seems less important than economic freedom in explaining
economic growth. In fact there is some evidence that greater democracy in a
nation reduces economic growth rates because of successful attempts to restrict
competition by producers. In general though as countries achieve high standards
of living through consistent growth they tend to become more democratic over
time. This suggests that there is a positive relationship between economic freedom
and economic growth.
Capital Goods and Economic
Growth: In general capital is necessary for economic growth. In many
developing countries one of the most significant problems they face that retards
economic growth is dead capital, which is any capital resource that lacks clear
title of ownership. Because people have difficulties exchanging, insuring, and legally
protecting their rights to it, it is not readily allocated to its most productive
Dead Capital and Inefficient
Production: Because people who unofficially own capital goods are
commonly constrained in using them efficiently, large amounts of capital goods
are used inefficiently.
Dead Capital and Economic
Growth: In developing countries the existence of dead capital reduces
the rate of return on investment thus reducing the incentive to invest in new
capital goods. This reduces investment. Since economic growth depends in part
on investment, the result is a decrease in the rate of economic growth.
Investment, and Growth: A major factor that contributes to dead
capital and resulting lower rates of investment in less developed countries
is inefficient government regulation. Economies of countries with less efficient
governments tend to grow more slowly. The reason is that capital is difficult
to direct to its most efficient uses.
Corruption and Growth:
The more widespread is corruption, the greater is the problem
of dead capital and the higher is the cost of investment. Greater corruption
leads to lower economic growth.
V. Private International Financial
Flows as a Source of Global Growth: One approach to promoting greater
economic growth in developing countries is to rely on private markets to direct
capital goods to their best uses.
Private Investment in
Developing Nations: Net private international flows of funds to developing
countries have averaged over $100 billion per year since 1995 (equal to about
10 percent of annual net investment in the U.S.).
Source of Foreign
Funding for Capital Goods: There are three sources of foreign
funds for capital goods. These are bank loans, portfolio investment—the
purchase of less than 10% of the shares of ownership in a company in another
nation—and direct foreign investment. Direct foreign investment is the acquisition
of a more than 10 percent share of a firm’s ownership.
Financial Flows Can Contribute to Global Growth: International
investors live in countries where there are fewer barriers to proof of capital
ownership. There is a greater likelihood that international investors will
be able to prevent the capital they own from becoming dead capital and thus
it will remain productive.
Obstacles to International
Investment: The major problems of financial markets in developing
countries are related to the problem of asymmetric information.
as a Barrier to Financing Global Growth: The problem here is
that institutions that make loans or investors who hold stocks and bonds
have less information than those who seek to use the funds. Adverse selection
arises when those who wish to obtain funds for the least worthy projects
are among those who wish to borrow or issue bonds or stocks. If lenders
and investors have trouble identifying these higher-risk persons, they may
be less willing to channel funds to even creditworthy borrowers. Moral hazard
exists when recipients of funds engage in riskier behavior after getting
the funds. These asymmetric information problems are great enough in some
countries as to form a significant obstacle to economic growth.
and International Financial Crises: An international financial
crisis exists when there is a rapid withdrawal of foreign investments and
loans from a nation. These happen because less sophisticated investors and
banks follow the example of larger, more sophisticated investors and institutions
in withdrawing funds when risks in a foreign country or group of foreign
VI. International Institutions
and Policies for Global Growth: Since 1945 the world’s governments have
taken an active role in supplementing private markets through the World Bank and
the International monetary Fund.
The World Bank:
A multinational agency that specializes in making loans to about 100 developing
nations in an effort to promote their long-term growth and development. The
bank mainly finances projects such as irrigation systems and road improvements.
The International Monetary
Fund: The IMF is an international organization that aims to promote
world economic growth through more financial stability. Each nation that joins
the IMF deposits funds to an account called its quota subscription and these
are measured in special drawing rights from a pool of funds held by the IMF.
The IMF currently makes both short-term and long-term loans to help finance
growth or to provide assistance to countries that are having trouble paying
off their debts.
The World Bank and
the IMF: Part of the Solution or Part of the Problem? In recent years
economists have questioned IMF and World Bank policy making.
Does the World Bank
Really Have a Mission Anymore?: While the World Bank’s mission
is to make loans to developing nations that fund projects incapable of attracting
private investors for funding, it makes many of its loans to countries that
have little trouble attracting private investment. Some countries such as
China are inappropriate recipients for World Bank loans.
the World Bank and the IMF: Lending policies of both organizations
can make the adverse selection problem worse.
Development Lending: Many economists argue that promoting market
reforms by governments in developing countries would have much higher payoffs
in promoting development. The major issue is whether the lending should
be for specific projects or more for financing the market reforms by government.
Structures for Limiting Financial Crises: Proposals range from
eliminating the IMF and the World Bank and replacing them with alternative
organizational forms to simply having the IMF and World Bank more carefully
monitor borrowers. Almost all economists agree that improved accounting
standards for international borrowers are needed.
Countries trade with each other when, on their own, they do not have the resources
or capacity to satisfy their own needs and wants. By developing and exploiting their
domestic resources, countries can produce a surplus and trade this for the resources
Clear evidence of trading over long distances dates back at least 9,000 years, though
long distance trade probably goes back much further to the domestication of pack
animals and the invention of ships. Today, international trade is at the heart of
the global economy and is responsible for much of the development and prosperity
of the modern industrialized world.
Goods and services are likely to be imported from abroad for several reasons. Imports
may be cheaper or of better quality. They may also be more easily available or simply
more appealing than locally produced goods. In many instances, no local alternatives
exist and importing is essential. This is highlighted today in the case of Japan,
which has no oil reserves of its own, yet it is the world’s fourth largest consumer
of oil and must import all it requires.
The production of goods and services in countries that need to trade is based on
two fundamental principles, first analyzed by Adam Smith in the late 18th
century (in The Wealth of Nations, 1776), these being the division of
labor and specialization.
The Output Gains from
Specialization: If specialization and trade occurs along lines of
comparative advantage, then production increases above what would be possible
without specialization and trade.
Specialization Among Nations:
Comparative advantage is the ability to produce a good or service
at a lower opportunity cost than can other producers. Comparative advantage
always exists as long as the opportunity cost of doing the same job varies for
different individuals or countries. Absolute advantage is the ability to produce
more output from given inputs of resources than another can.
Transmission of Ideas:
Ideas are transmitted through international trade. These ideas may be in the
form of intellectual property, new goods and services, and new processes.
Explaining Comparative Advantage (2:02)
Specialization and Trade (9:03)
II.The Relationship Between Imports and Exports:
In the long run, imports are paid for by exports. This is because foreigners
want something in exchange for the goods that are shipped to the US. Any restriction
of imports ultimately reduces exports, because restrictions on imports lead to a
reduction in employment in the export industries.
Balance Of Trade (1:52)
Competitiveness: This term is hard to define precisely because countries
do not compete. Businesses within each country compete with businesses in other
countries. Based on an international study, the US leads the world in measures of
IV.Arguments Against Free Trade: The arguments
against free trade do not consider the benefits of the possible alternatives for
reducing costs while still reaping benefits.
Industry Argument: The argument that tariffs should be imposed
to protect an industry that is trying to get started from import competition.
After the industry becomes technologically efficient, the tariff can
B Foreign Subsidies
and Dumping: When a foreign government subsidizes its producers,
ours claim they cannot compete fairly with subsidized foreigners. To
the extent that such subsidies fluctuate, one can argue that unrestricted
free trade will seriously disrupt domestic producers. Occasionally,
dumping takes place — selling a good or service abroad at a price below
its cost of production or below the price charged in the home market.
This disrupts international trade and may impair commercial well being
Domestic Jobs: The most often used argument against free
trade is that unrestrained competition from other countries will
eliminate U.S. jobs because other countries have lower-cost labor
and less restrictive environmental standards.
Against Free Trade: environmental concerns, undesirable
effects (genetic engineering), certain technologies should not be
V. Ways to Restrict Foreign Trade:
are government-imposed restrictions on the quantity of a specific good that
another country is allowed to sell in the US. Quotas restrict imports. These
restrictions are usually applied to a specific country or countries. With a
voluntary restraint agreement (VRA) a country agrees to voluntarily restrict
its exports to the US. The opposite is a voluntary import expansion agreement
(VIE) in which a foreign country agrees to voluntarily increase its imports
from the US. Neither a VRA nor a VIE has the force of law.
tariff is a tax on imported goods. A protective tariff is such that no similar
tax is applied to identical domestic goods.
1.Tariffs in the US: Tariffs on all
imported goods have varied widely. The highest tariff rates in 20th
century occurred with passage of the Smoot-Hawley tariff in 1930.
2.Current Tariff Laws: The Trade Expansion
Act of 1962 permitted the president to reduce tariffs by up to 50%. The Trade
Reform Act of 1974 and the Trade and Tariff Act of 1984 allowed the president
to reduce tariffs further and resulted in the lowest tariff rates ever. All
of these trade agreement obligations of the US are carried out under General
Agreement on Tariffs and Trade (GATT), an international agreement formed in
1947 to further world trade by reducing barriers and tariffs.
VI.International Trade Organizations: Widespread
efforts to reduce tariffs around the world have led to a growth of international
World Trade Organization
(WTO): The successor organization to GATT handles all trade disputes
among its 117 member nations. In addition, the WTO agreement will lead to a
40 percent reduction in tariffs worldwide, protection of intellectual property
rights, local content laws will be eliminated, and US service suppliers will
be subject to the same rules as foreign suppliers in their countries.
Regional Trade Agreements:
Other international trade organizations such as the EU and NAFTA
known as regional trade blocs also exist. These trade blocs are groups of nations
that grant members special trade privileges.
We, the Economy Films:
Chapter 4: What is globalization?
What is the global trade system? What does it mean to have a
globalized economy? And is it good for us? Seven experts break it all
down as a troupe of comedic actors enliven the commentary.
What happens when jobs disappear? Detroit has been the poster
child for the loss of well-paid manufacturing jobs, but this trend impacts
communities all over the country. How does a great American city bounce
Is China's boom good for our economy? China is often portrayed
as America’s greatest economic competitor and even accused of not playing
fair. But is it possible they could be a key ally in US economic development?
What do human rights have to do with the economy? As consumers
in a rapidly growing world economy, we have an insatiable appetite for
the next greatest electronic gadget, like smart phones and TVs. But
can we consume cheap imported products without exploiting someone in
the supply chain?
VII.The Balance of Payments and International
Capital Movements: The balance of payments is a system of accounts
that measures transactions of goods, services, income, and financial assets between
domestic households, businesses, and governments and between governments and residents
of the rest of the world during a specific time period. Balance of payments transactions
are normally grouped into three categories: current transactions, capital account
transactions and official reserve account transactions.
Accounting identities are definitions of equivalent values.
Disequilibrium: Disequilibrium exists
when the item that brings about a balance in an accounting identity cannot
Equilibrium: The accounting identity
does not contain a balancing item that cannot go on indefinitely.
An Accounting Identity Among Nations:
If a nation interacts with other nations, an accounting identity insures
a balance, but not necessarily an equilibrium.
Current Account Transactions:
All payments and gifts that are related to the purchase or sale of
both goods and services constitute the current account in international trade.
1.Merchandise Trade Exports and Imports:
The largest portion of any nation’s balance of payments current
accounts is typically the importing and exporting of merchandise goods.
The balance of trade is defined as the difference between the value of merchandise
exports and the value of merchandise imports.
2.Service Exports and Imports:
The services exports and imports have to do with invisible or intangible
items that are bought and sold, such as shipping, insurance, tourist expenditures,
and banking services. Also, income earned by foreigners on U.S. investments
and income earned by Americans on foreign investments is part of service
imports and exports.
3.Unilateral Transfers: Americans
give gifts to relatives and others abroad. The federal government grants
gifts to foreign nations. Foreigners give gifts to Americans and some foreign
governments have even granted money to the U.S. government. Net unilateral
transfers are the total amount of gifts given by Americans minus the total
amount received by Americans from abroad.
4.Balancing the Current Account:
If the sum of net exports plus unilateral transfers plus net investment
income exceeds zero, a current account surplus is said to exist; if the
sum of net exports plus unilateral transfers plus net investment income
is negative, there is a current account deficit.
Capital Account Transactions:
Capital account transactions concern the buying and selling of real
and financial assets in international transactions. They occur when foreigners
invest in the US or Americans invest in other countries. In the absence of interventions
by finance ministries or central banks, the current account and capital account
must sum to zero. Thus any nation running a current account deficit must also
be running a capital account surplus.
Official Reserve Account
Transactions: The third type of balance-of-payments transaction concerns
official reserve assets:
Special drawing rights
(SDRs): These are reserve assets that the International Monetary
Fund created to be used by countries to settle international payment obligations.
The reserve position in
the International Monetary Fund.
Financial assets held
by an official agency, such as the US Treasury Department. This
balance added to the sum of the Current and Capital Account balance makes
the Balance of Payments equal to zero.
What Affects the
Balance of Payments?: The balance of payments is affected by a country’s
domestic rate of inflation relative to that its trading partners and relative
political stability. Political instability in other countries causes “capital
flight,” moving assets to countries that are stable.
VIII.The Advantages of Trade:
International trade brings a number of valuable benefits to a country,
of a country's comparative advantage,
which means that trade encourages a country to specialize in producing
only those goods and services which it can produce more effectively
and efficiently, and at the lowest opportunity cost.
Producing a narrow range of goods and services for the domestic and
export market means that a country can produce
at higher volumes, which provides further cost benefits in
terms of economies of scale.
Trade increases competition and lowers world
prices, which provides benefits to consumers by raising the
purchasing power of their own income, and leads to a rise in consumer
Trade also breaks down domestic monopolies,
which face competition from more efficient foreign firms.
The quality of goods and services is likely to increase as
competition encourages innovation, design and the application
of new technologies. Trade will also encourage the transfer of technology
Trade is also likely to increase employment,
given that employment is closely related to production. Trade means that more
will be employed in the export sector and, through the multiplier process, more
jobs will be created across the whole economy.
The Disadvantages of Trade: Despite the
benefits, trade can also have some disadvantages, including:
Trade can lead to over-specialization with workers
at risk of losing their jobs should world demand fall or when goods for domestic
consumption can be produced more cheaply abroad. Jobs lost through such changes
cause severe structural unemployment.
Certain industries do not get a chance
to grow because they face competition from more established foreign firms, such
as new infant industries which may find
it difficult to establish themselves.
Local producers, who may supply a unique
product tailored to meet the needs of the domestic market, may suffer because
cheaper imports may destroy their market. Over time, the diversity of output in an economy may diminish
as local producers leave the market.
Globalization is the process of increased interconnectedness among countries most
notably in the areas of economics, politics and culture. McDonalds in Japan, French
films played in Minneapolis and the United Nations are all representations of globalization.
Over many centuries, human societies across the globe have established progressively
closer contacts. Recently, the pace of global integration has dramatically increased.
Unprecedented changes in communications, transportation and computer technology
have given the process new impetus and made the world more interdependent than ever.
Multinational corporations manufacture products in many countries and sell to consumers
around the world. Money, technology and raw materials move ever more swiftly across
national borders. Along with products and finances, ideas and cultures circulate
more freely. As a result, laws, economies and social movements are forming at the
The globalized world sweeps away regulation and undermines local and national politics,
just as the consolidation of the nation-state swept away local economies, dialects,
cultures and political forms. Globalization creates new markets and wealth, even
as it causes widespread suffering, disorder and unrest. It is both a source of repression
and a catalyst for global movements of social justice and emancipation. The great
financial crisis of 2008-09 revealed the dangers of an unstable, deregulated, global
economy but it also gave rise to important global initiatives for change.
The idea of globalization may be simplified by identifying several key characteristics.
in Transportation and Telecommunications
What makes the rest of
this list possible is the ever-increasing capacity for and efficiency of how
people and things move and communicate. In years past, people across the globe
did not have the ability to communicate and could not interact without difficulty.
Today, a phone, instant message, fax or video conference call is easily available
to connect people. Additionally, anyone with the funds can book a plane flight
and show up half way across the world in a matter of hours. In short, the "friction
of distance" is lessened and the world begins to metaphorically shrink.
Movement of People
A general increase in awareness, opportunity and transportation technology has allowed
people to move about the world in search of a new home, a new job or to flee a place
of danger. Most migration takes place within or between developing countries, possibly
because lower standards of living and lower wages push individuals to places with
a greater chance for economic success.
Additionally, we move capital (money) globally with the ease of electronic transference
and a rise in perceived investment opportunities. Developing countries are a popular
place for investors to place their capital because of the enormous room for growth.
Diffusion of Knowledge
The word 'diffusion' simply means to spread out, and that is exactly what any new-found
knowledge does. When a new invention or way of doing something pops up, it does
not stay secret for long.
A good example of this is the appearance of automotive farming machines in Southeast
Asia, an area long home to manual agricultural labor.
(NGOs) and Multinational Corporations (MNCs)
As global awareness of certain issues has risen, so too has the number of organizations
that aim to deal with them. So called non-governmental organizations, nationally-
or globally-focused, bring together people unaffiliated with the government. Many
international NGOs deal with issues that do not stop at borders, such as global
climate change, energy use or child labor regulations. Examples of NGOs include
Amnesty International, the International Red Cross or Doctors without Borders.
As countries connect to the rest of the world (through increased communication and
transportation), they immediately form what a business would call a market. A particular
population represents more people to buy a particular product or service. As more
and more markets open up, business people from around the globe come together to
form multinational corporations in order to access these new markets. Another reason
that businesses are going global is outsourcing, meaning that some jobs can be done
by foreign workers for a much cheaper cost than by domestic workers.
At its core globalization is an easing of borders, making them less important as
countries become dependent on each other to thrive. Some scholars claim that governments
are becoming less influential in the face of an increasingly economic world. Others
contest this, insisting that governments are becoming more important because of
the need for regulation and order in such a complex world system.
Is Globalization a Good Thing?
The advantages and disadvantages of globalization have been heavily scrutinized
and debated in recent years. Proponents of globalization say that it helps developing
nations "catch up" to industrialized nations much faster through increased employment
and technological advances. Critics of globalization say that it weakens national
sovereignty and allows rich nations to ship domestic jobs overseas where labor
is much cheaper. Good or bad, though, there isn't much argument as to whether
or not it is happening. Look at the positives and negatives of globalization,
and decide for yourself whether or not it is the best thing for the world.
1.Positive Aspects of Globalization
a. As more money is poured in to developing countries, there is a greater chance
for the people in those countries to economically succeed and increase their
standard of living.
b. Global competition encourages creativity and innovation and keeps
prices for commodities/services in check.
c. Developing countries are able to reap the benefits of current technology
without undergoing many of the growing pains associated with development of these
d. Governments are able to better work together towards common goals now
that there is an advantage in cooperation, an improved ability to interact and coordinate
and a global awareness of issues.
e. There is a greater access to foreign culture in the form of movies, music,
food, clothing and more. In short, the world has more choices.
Globalization I - The Upside: Crash Course World History #41 (11:51)
Negative Aspects of Globalization
a. Outsourcing, while it provides jobs to a population in one country, takes
away those jobs from another country, leaving many without opportunities.
b. Although different cultures from around the world are able to interact,
they begin to meld, and the contours and individuality of each begin to fade.
c. There may be a greater chance of disease spreading worldwide, as well
as invasive species that could prove devastating in non-native ecosystems.
d. There is little international regulation, an unfortunate fact that could
have dire consequences for the safety of people and the environment.
e. Large Western-driven organizations such as the International Monetary Fund and
the World Bank make it easy for a developing country to obtain a loan. However,
a Western-focus is often applied to a non-Western situation, resulting in
Globalization II - Good or Bad?: Crash Course in World History #42