Unit 1 Essay: International Economics

Unit 1 Essay: International Economics

BBA 4351, International Economics 1

Course Learning Outcomes for Unit I Upon completion of this unit, students should be able to:

1. Appraise how globalization contributes to greater economic interdependence. 1.1 Explain the importance of globalization in terms of the law of comparative advantage.

2. Discuss how comparative advantages lead to gains from international trade.

2.1 Explain the principle of absolute and comparative advantage.

Course/Unit Learning Outcomes

Learning Activity

1.1 Unit I Lesson Chapter 1 Unit I Essay

2.1 Unit I Lesson Chapter 2 Unit I Essay

Reading Assignment Chapter 1: The International Economy and Globalization Chapter 2: Foundations of Modern Trade Theory: Comparative Advantage

Unit Lesson Globalization Today, every part of the world is connected, and no country can be completely secluded and stand by itself. In other words, countries in a global economy must be interdependent. Throughout this course, you will learn how a nation interacts with other countries in the global economy. More specifically, you will understand how principles of economics can be applied to the global economy where countries are interdependent. There are a number of advantages and disadvantages to globalization as listed in the chart below from the textbook. The Unit l Lesson provides some new perspectives on various stages of globalization. Baldwin (2016) briefly summarizes four important phases of globalization that occurred during the past 200,000 years. The textbook stresses the fact that the third phase of globalization began with the steam engine and other significant improvements in transportation, increasing trade in goods and services among different parts of the world (Carbaugh, 2017). The fourth phase of globalization, which is not mentioned in our textbook, involves the transfer of rich-country technologies to workers in poor countries. This, in turn, has increased productivity and expedited industrialization in those poor countries. Baldwin (2016) argues that a reorientation of strategy and policy in both rich and poor countries is necessary. Rich countries need to develop better rules for governing foreign investment and intellectual property rights as well as concentrate on the training and welfare of workers rather than the preservation of particular jobs.

UNIT I STUDY GUIDE

International Economy and Comparative Advantage

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Think about what the next stage of globalization will be. It is not going to be industrialization for sure. What might it be? Some experts believe the next phase of globalization will be Big Data—a large volume of complex datasets that can be used in decision-making in various fields. The United States as an Open Economy The U.S. economy is a part of the global economy and, therefore, has been integrated into global markets in past decades. During this process, the United States has been involved in numerous areas such as the global trade of goods or services and global investment. This is known as an open economy, which is a key driver for the global economy. The chart below presents exports and imports of goods and services as a percentage of gross domestic product (GDP) in 2013 (Carbaugh, 2017).

Global economy example (Carbaugh, 2017, p. 10)

The advantages and disadvantages of globalization (Carbaugh, 2017, p. 23)

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Chapter 2 of the textbook discusses the importance of international trade. The most important part of this chapter is to understand how comparative advantage leads to international trade. Consider how international trade arises in the snowboard market. China is known as a primary exporter of snowboards to the United States. According to Feenstra and Taylor (2014), China generated revenues of approximately $19 million by exporting snowboards to the United States. Austria, known as the second largest exporter of snowboards to the United States generated revenues of roughly $10 million in 2012 (Feenstra & Taylor, 2014).

To explain the ranking of a snowboard exporter, it is important first to understand the concept of absolute advantage. A country is said to have an absolute advantage over a certain good or service, when it has a better capacity, skills, and technology to produce it. For instance, Switzerland has numerous mountains and, therefore, can have specialization in utilizing natural resources, land, and beautiful landscapes. Switzerland uses all of its resources and technology to produce something related to those resources instead of producing agricultural products or manufactured high- technology goods or services. Denmark, however, does not have the natural advantages that Switzerland does. However, the country is famous for having resources and lands that are suitable for producing a variety of agricultural and dairy products including cheese, milk, and grain. Due to this advantage, a number of dairy companies can

been found in Denmark. For instance, Arla Foods based in Viby, Denmark, is one of the largest suppliers of dairy products in northern European countries. However, note that countries do not engage in producing goods or services based on the principle of absolute advantage. For example, the United States is known as a world leader in terms of producing a range of products, including agricultural and manufactured goods. In other words, the United States has an absolute advantage in producing almost all types of goods. Interestingly, however, the United States is not said to be the primary exporter of computer devices to foreign countries. Instead, the largest exporter of computer devices is China. This clearly indicates that absolute advantage might not provide a good answer for why international trade is occurring. The concept of comparative advantage provides a good answer for this. A country is said to have a comparative advantage when it is able to produce a good at a lower opportunity cost than another country. Suppose that Argentina and Brazil each have 10,000 hours of labor per month. Argentina is capable of producing 1 kilogram (kg) of coffee that requires two hours and producing one bottle of wine that requires four hours. Brazil is able to produce 1 kg of coffee that requires one hour and to produce one bottle of wine that requires five hours. In this case, Brazil has an absolute advantage in coffee because producing 1 kg of coffee requires only one hour while the same task requires two hours in Argentina. On the other hand, Argentina has a comparative advantage in producing wine. Argentina’s opportunity cost of producing one bottle of wine is 2 kg of coffee because the four hours required to produce one bottle of wine could instead produce 2 kg of coffee. Brazil’s opportunity cost of producing one bottle of wine is 5 kg of coffee because the five hours required to produce the one bottle of wine could instead produce more coffee. Therefore, it is better for Argentina to devote available resources and technologies to produce wine rather than coffee because it is more cost effective. Brazil’s opportunity cost of producing 1 kg of coffee is one-fifth bottle of wine because the one hour required to produce 1 kg of coffee could instead produce one-fifth bottle of wine. Argentina’s opportunity cost of producing 1 kg of coffee is one-half bottle of wine because the two hours required to produce 1 kg of coffee could instead produce one-half bottle of wine. In this case, it is better for Brazil to devote available resources and technologies to produce coffee rather than wine because it is more cost effective. As a result, assuming both countries trade with each other, they would be better off when Argentina focuses on exporting wine and importing coffee while Brazil concentrates on exporting coffee and importing wine.

Snowboards lined up that are ready to be purchased (Jarmoluk, 2011)

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Likewise, although China might have an absolute disadvantage compared with Germany or the United States in producing manufactured goods, China is still better at producing snowboards than some other manufactured goods, so it is able to export snowboards to the United States. You can also relate the concept of trade, specialization, and comparative advantage to your career. Suppose there are four people working at a public school—David, Paul, James, and Susan—who all have different talents and skill sets. David is good at teaching, Paul is good at organizing human resources and events, James is good at overseeing the overall workflow within the school, and Susan is good at managing financial resources. Using economic-based concepts that we have already learned, we see that David has a comparative advantage over the other three people in terms of teaching. Paul has a comparative advantage over James, Susan, and David in terms of organizing. Susan has a comparative advantage over David, James, and Paul in terms of managing. Finally, James has a comparative advantage in terms of overseeing. If Susan engages in overseeing the overall workflow and James engages in teaching, then we would expect that limited resources are not allocated in an efficient manner, and everyone will likely be unhappy because they are not doing the tasks in which they specialize. If each person is assigned to do the task in which they specialize, human resources will be allocated efficiently within the school, and everyone will joyfully do the tasks in which they excel. At the same time, Susan, who manages financial resources, will also be able to recoup the benefits from other people’s skill sets. For instance, because James will be able to use all of his time, resources, and talents specifically to oversee the overall workflow, Susan (as well as Paul and David) will benefit from it. They are trading their own talents and gifts (specializations) with other people’s talents and gifts, and as a result, everyone will be much happier. This is in line with a famous economic principle that suggests that trade puts every party in a better position. Not every country can produce everything (e.g., manufactured goods, agricultural products). This is why almost all countries today engage in international trade. By exporting goods or services that each country is good at producing at a lower opportunity cost, every nation will be in a better and more beneficial economical position.

References Baldwin, R. (2016). The great convergence: Information technology and the new globalization. Cambridge,

MA: Harvard University Press. Carbaugh, R. J. (2017). International economics (16th ed.). Boston, MA: Cengage Learning. Feenstra, R. C., & Taylor, A. M. (2014). International trade (3rd ed.). New York, NY: Worth. Iven, W. [FirmBee]. (2014). Ipad, Samsung, music, play, Google, tablet, Internet [Photograph]. Retrieved from

https://pixabay.com/en/ipad-samsung-music-play-google-605439/ Jarmoluk, M. [jarmoluk]. (2011). Snowboarding, boards, board, winter, skiing, exhibition [Photograph].

Retrieved from https://pixabay.com/en/snowboarding-boards-board-winter-428612/

Suggested Reading The PowerPoint presentation below will introduce you to the international economy and to globalization. The presentation emphasizes the high degree of economic interdependence that characterizes today’s economies. By viewing the slides, you will have a better understanding of the international economy and globalization.

Click here to access the Chapter 1 PowerPoint presentation. (Click here to access a PDF version of the presentation.) The PowerPoint presentation below will provide you with the foundation of modern trade theory. This theory seeks to answer three questions: (1) What constitutes the basis for trade? (2) At what terms of trade are products exchanged in international markets? (3) What are the gains from trade in terms of production and

https://online.columbiasouthern.edu/bbcswebdav/xid-80138746_1
https://online.columbiasouthern.edu/bbcswebdav/xid-80138714_1

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consumption? By viewing the presentation, you will have a better understanding of the foundations of modern trade. Click here to access the Chapter 2 PowerPoint presentation. (Click here to access a PDF version of the presentation.)

Unit 1 Essay: International Economics