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An Economic Education Newsletter from the Federal Reserve Bank of St. Louis Volume 13, Issue 1 Spring ‘08
Q. What is the WTO? A. The balance of payments is a and improve living standards. The IBRD
focuses on middle income and creditwor-
record of payments that one country
A. WTO is the acronym that stands pays to and receives from all other foreign thy poor countries, while the IDA focuses
on the poorest countries in the world.
for “World Trade Organization,” a forum countries.
for governments to negotiate trade agree-
ments and settle trade disputes. It oper- Q. What is the World Bank? Q. What is the OECD?
ates a system of trade rules. A. The World Bank is a source of A. The OECD (Organisation for
Q. What is the IMF? financial and technical assistance to
developing countries around the world.
Economic Cooperation and Develop-
ment) is a group of 30 member countries
A. IMF is the acronym for the Inter- It is not an actual bank by the common that share a commitment to democratic
national Monetary Fund, an international definition. It provides low-interest loans, government and a market economy. Best
organization of 185 member countries. interest-free credit and grants to develop- known for its publications and statistics,
It was established to promote interna- ing countries for education, health, infra- the OECD’s work covers economic and
Economic Snapshot
Fourth Quarter 2007 What is the difference between the two pie charts
(Percent change at an annual rate from the preceding period) at left?
Q1-’07 Q2-’07 Q3-’07 Q4-’07 The “Goods Export Shares, 2006” chart indicates the percentage
of total goods that the United States sells to other countries. The
Growth rate — “Goods Import Shares, 2006” chart shows the percentage of
Real Gross Domestic Product 0.6% 3.8% 4.9% 0.6%* goods the United States purchases from other countries.
Inflation rate —
For 2006, what two single countries—considering
Consumer Price Index 3.7% 4.6% 2.8% 5.0%
both exports and imports—are the United States’
Civilian Unemployment Rate 4.5% 4.5% 4.7% 4.8% largest trading partners?
*Preliminary estimate When adding both exports and imports for each single country
listed, Canada and Mexico are the United States’ largest trading
partners. The Organisation for Economic Cooperation and Devel-
Goods Export Shares, 2006 Goods Import Shares, 2006 opment (OECD) represents several countries; so, it does not qualify
as a “single” country. (See “Q and A” for more information.)
UK Mexico
4.44% Mexico
UK
10.65%
China For 2006, to which single countries did the United
13.11% 15.47%
2.87% States export a greater share of goods than it
All Other China All Other
27.47%
imported?
24.96% 5.40%
Japan
In 2006, the United States exported a greater share of goods to
Japan 7.96% the United Kingdom, Canada, Mexico and France than the share
5.83%
Germany
imported from these countries.
Germany
4.04% 4.78%
France
2.37% For 2006, from which single countries did the
United States import a greater share of goods
Canada
Other OECD Canada France 16.30% than it exported?
17.34% 22.52% 1.99%
Other OECD In 2006, the United States imported a greater share of goods
12.50%
from China, Japan and Germany than the share it exported to
these countries.
Globalization viding them access to new ideas and new balization episode and those from the past
Continued from front cover technologies; this exposure increases their is the sheer magnitude of the number of
productivity and real wages. According workers who have entered the labor pool.
a quarter of GDP, the rest of the world’s to Harvard professor Xavier Sala-i-Martin, The rise of China and India as important
exposure to international trade is much this has helped to reduce world income exporters of goods and services means that
larger: 70 percent. inequality over the past 20 years. many of their workers are now directly
competing with workers in countries
The Benefits of Globalization The Downside of Globalization like the United States, Japan or Mexico.
The benefits of globalization are essen- Although free trade benefits society Economically, an increase in the supply of
tially based on the benefits of free trade. because it increases the world output of labor puts downward pressure on wages
International trade is beneficial because of goods and services, it also creates losers in assuming no change in labor demand.
the principle of comparative advantage, certain industries which cannot compete
which allows a country to specialize in with foreign manufacturers. The biggest
Conclusion
the activities that it does best, given its losers are both the workers and the owners As global competition has increased, so
labor, natural resources and technology. (shareholders) in these industries, such as have the voices of protectionism. Ulti-
The estimated net benefits that flow from the U.S. television manufacturing industry mately, policymakers must decide whether
free trade are substantial. According to a which could not compete with foreign the costs of maintaining relatively free
study by economists Bradford, Grieco and competition. If producers can substitute a trade—by expanding public programs to
Hufbauer, international trade has increased cheaper foreign source of labor relative to compensate the losers of trade, or those
real household income by between $7,000 the domestic wage rate, many will choose who perceive themselves as losers—is a
and $13,000. Removing all existing bar- to move their production overseas, creating small price to pay for maintaining a global
riers to trade, they argue, would produce increased unemployment. economic system that has produced large
an additional real income gain of between The largest unemployment effects are benefits for most parts of the world.
$4,000 and $12,000. probably among less-skilled workers
In addition to the fact that people and employed in ordinary production processes This article was adapted from Trading
nations can produce more goods and that can be done much cheaper overseas, Barbs: A Primer on Globalization, which
services when they specialize, thereby such as making products like T-shirts or was written by Kevin Kliesen, an economist
increasing the total amount of goods and baseballs or reading service manuals at call at the Federal Reserve Bank of St. Louis, and
services produced worldwide, free trade centers. Since high-skilled workers are was published in the October 2007 issue of
also increases the variety of goods and paid a premium for their labor, moving The Regional Economist, a St. Louis Fed
services available to consumers. Without lower-skilled work offshore increases the publication.
trade, coffee drinkers in the United States domestic demand for higher-skilled work-
would pay much higher prices because ers relative to lower-skilled workers. Only
the nation’s supply would depend solely one-third of the current U.S. labor force
on Hawaiian or Puerto Rican sources. has graduated from college, however, and
Scarce resources would need to be redi- increasing that percentage will take time.
rected to produce more coffee, leaving At the end of WWII, the college-educated
fewer resources to produce other goods share of the labor force was 6 percent. At
and services. that rate, economists predict that reaching
Similarly, Honda or BMW drivers would 50 percent of the labor force will not come
be forced to drive Chevrolets or Fords. about until 2047. Classroom Discussion
Given that technological innovation in the One potential consequence of this is ris-
automotive industry, as well as other indus- ing income inequality between low-skilled
tries, often arise from competition, the and high-skilled workers. According to the 1. What are some historical examples
quality of cars might also be much lower Organisation for Economic Cooperation of globalization?
for all car manufacturers. and Development (OECD), increases in 2. Explain how globalization may
The competitive forces of globaliza- income inequality have been most pro- increase the demand for higher-
tion have also been important factors in nounced in the United States, the United skilled workers and decrease the
boosting U.S. labor productivity growth Kingdom and some smaller European demand for lower-skilled workers
in recent years. This growth can occur in countries. Increases in the demand for in the United States.
a couple of ways. First, increased com- skilled labor are clear market-based incen- 3. What are some arguments for and
petition spurs domestic firms to invest in tives for workers to boost their education some arguments against free trade?
equipment and software embodied with levels and, perhaps, for firms to increase
the latest technology. Second, moving their workforce training. The demand for
less-skilled labor to low-wage countries high-skilled workers over the long run can
increases the relative demand for higher- also be boosted by research and develop-
skilled, higher-productivity labor. ment, which is often the genesis of new For a lesson plan to accompany this
Proponents of globalization argue that ideas that boost economic growth and article, go to www.stlouisfed.org/
increased economic integration benefits living standards over time. education/itv_lesson_plan.html.
workers in relatively poor countries by pro- A key difference between the current glo-
continued from page 2 provide basic social services or undertake Web Site Sources:
community development.”
social issues from macroeconomics to • International Monetary Fund
trade, education, development and sci- Q. What is comparative advantage? • Organisation for Economic Cooperation
ence, and innovation.
A. The principal of comparative and Development
Q. What is outsourcing? advantage demonstrates that countries
benefit from trade when they specialize • Virtual Economics, National Council on
A. Outsourcing is subcontracting a in producing goods and services that they Economic Education
process such as customer service, product are able to produce at a lower opportunity
• World Trade Organization
design or product manufacturing to a cost than other countries.
third party. The third party might be
another organization within or outside of Q. What is the balance of trade? • World Bank
prsrt std
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