1. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair Prepared by: Fernando & Yvonn Quijano 35 Chapter Globalization

2. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2 of 24 Chapter Outline 35 Globalization The Global Circular Flow A Brief History of Economic Globalization The Benefits and Costs of Globalization The Free-Trade Debate Revisited Trade, Growth, and Poverty The Globalization of Labor Markets: The Economics of Immigration and Outsourcing Capital Mobility Public Policy and Globalization Global Externalities and Public Goods Nongovernmental Organizations and International Economics: The Washington Consensus Globalization, Capitalism, and Democracy A Final Word

3. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 3 of 24 GLOBALIZATION globalization The process of increasing interdependence among countries and their citizens. economic globalization The process of increasing economic interdependence among countries and their citizens.

4. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 4 of 24 THE GLOBAL CIRCULAR FLOW FIGURE 19.1 Economic Globalization: International Flows

5. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 5 of 24 A BRIEF HISTORY OF ECONOMIC GLOBALIZATION Economic historian Jeffrey Williamson classifies the period 1820–1914 as the first great period of globalization and the period since World War II as the second. Many dimensions of globalization are new today: Sharp reductions in trade barriers Increases in the flows of information and commerce over the Internet Increased speed and lower cost of travel Different nature of international relations. Dramatic increase in outsourcing.

6. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 6 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION comparative advantage A country enjoys a comparative advantage in the production of a good if the production of that good has a lower opportunity cost than it would have if produced in another country. THE FREE-TRADE DEBATE REVISITED

7. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 7 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION The argument for free trade rests on two pieces of intuition: Voluntary exchange is efficient, and Comparative advantage. A country enjoys a comparative advantage in the production of a good if the production of that good has a lower opportunity cost than it would have if produced in another country.

8. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 8 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION Those who oppose trade make a number of arguments: Buying imports simply ships jobs abroad. How can we compete with countries who pay low wages? Free trade will hurt the environment. The power of organizations like the WTO can undermine national sovereignty.

9. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 9 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION Proponents of free trade have a number of counter- arguments: We can’t buy from countries unless they simultaneously buy from us. Protecting an industry from foreign competition to save jobs will cost jobs in those sectors which would expand with free trade. Protecting an industry can lead to inefficiency and a lack of ability to compete in world markets later on. Keeping the unemployment rate low is a macroeconomic issue. If the objective is to reduce poverty, how can preventing trade help?

10. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 10 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION genetically modified (GM) foods Strains of food that have been genetically modified. Examples include insect- and herbicide-resistant soybeans, corn, and cotton and rice with increased iron and vitamins. One final issue is the debate over genetically modified (GM) foods or genetically modified organisms.

11. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 11 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION TRADE, GROWTH, AND POVERTY Controlling for other determinants of poverty and growth, is trade a plus or a minus? Studies show that countries that were more integrated into the world economy grew faster than those that were less integrated. When countries grow, the income of the lowest fifth of the income distribution rises at about the same rate as aggregate income.

12. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 12 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION THE GLOBALIZATION OF LABOR MARKETS: THE ECONOMICS OF IMMIGRATION AND OUTSOURCING Many agricultural firms in Texas and California rely on immigration from Mexico, Central America, and South America to supply them with labor during the peak growing season. But does immigration reduce domestic wages and increase unemployment nationally? The evidence is mixed.

13. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 13 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION A Brief History of Immigration into the United States Immigration Reform and Control Act (1986) Granted amnesty to about 3 million illegal aliens and imposed a strong set of employer sanctions designed to slow the flow of immigrants into the United States. Immigration Act of 1990 Increased the number of legal immigrants allowed into the United States each year by 150,000.

14. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 14 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION TABLE 19.1 Immigrants into the United States by Country of Origin: 2004 RANKCOUNTRYIMMIGRANTS 1Mexico173,664 2India65,472 3Philippines54,632 4China45,942 5Vietnam30,064 6Dominican Republic30,049 7El Salvador29,285 8Haiti13,502 9Cuba15,385 10Jamaica13,565 11Korea19,441 12Poland13,972 13Canada22,437 14Colombia17,887 Source: Statistical Abstract of the United States, 2002, Table 7.

15. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 15 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION Economic Arguments for Free Immigration If the productivity of low-wage workers is higher in the United States than in Mexico, the same labor force produces more total output after immigration, and world output rises. Immigrants do not necessarily displace U.S. workers but rather take jobs that Americans simply do not want. Almost all U.S. citizens except Native Americans have recent ancestors who came to this country as immigrants.

16. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 16 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION The Argument against Free Immigration The distribution of income is likely to change in response to immigration, affecting the returns to both labor and capital. Immigrants take jobs away from low-income Americans and drive up unemployment rates. Immigrants end up on welfare rolls and become a burden to taxpayers.

17. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 17 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION The Evidence: The Net Costs of Immigration A number of recent studies have found that metropolitan areas that have greater numbers of immigrants seem to have only slightly lower wages and only slightly higher unemployment rates. A more recent study argues that the effects of immigration on wages and unemployment must be analyzed at the national level, not at the city level. On the issue of immigration’s effects on government costs, mixed evidence also exists.

18. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 18 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION Is Immigration Bad or Good? The evidence on the effects of immigration is mixed, and theory gives us arguments on both sides of the issue. Only time will tell whether the recent wave of immigrants will assimilate as well as past waves.

19. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 19 of 24 THE BENEFITS AND COSTS OF GLOBALIZATION In the global economy, domestic households can put their wealth to work in foreign or domestic financial markets; domestic firms can finance investment projects by looking to domestic or foreign financial markets. CAPITAL MOBILITY The argument for free and open financial market mobility is that capital should flow to its highest and best use. Rapid and free flows of financial capital have, however, had adverse consequences for some nations.

20. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 20 of 24 PUBLIC POLICY AND GLOBALIZATION GLOBAL EXTERNALITIES AND PUBLIC GOODS public goods, or social goods Goods or services that bestow collective benefits on members of society. externality A cost or a benefit resulting from some activity or transaction that is imposed or bestowed on some party outside the activity or transaction.

21. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 21 of 24 PUBLIC POLICY AND GLOBALIZATION NONGOVERNMENTAL ORGANIZATIONS AND INTERNATIONAL ECONOMICS: THE WASHINGTON CONSENSUS Washington Consensus A set of 10 goals prescribed for countries receiving IMF grants and loans.

22. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 22 of 24 GLOBALIZATION, CAPITALISM, AND DEMOCRACY Very often, the issue of openness and globalization intersects with issues concerning political and economic systems. Advocates of globalization often are staunch supporters of laissez-faire capitalism.

23. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 23 of 24 A FINAL WORD A powerful logic exists in support of economic openness: The free flow of resources and goods and services across national borders, driven by efficient economic incentives, including the desire to maximize profit, is likely to make citizens better off than if borders were closed and economies turned inward.

24. CHAPTER 35: Globalization © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 24 of 24 comparative advantage economic globalization externality genetically modified (GM) foods globalization REVIEW TERMS AND CONCEPTS Immigration Act of 1990 Immigration Reform and Control Act (1986) public goods, or social goods Washington Consensus