Chapter

35
Globalization

Prepared by:

Fernando & Yvonn Quijano

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
 Globalization 35
Chapter Outline
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
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A Final Word

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 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.
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 THE GLOBAL CIRCULAR FLOW
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FIGURE 19.1 Economic Globalization:

International Flows

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 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.
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 THE BENEFITS AND COSTS OF
GLOBALIZATION

THE FREE-TRADE DEBATE REVISITED

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.
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 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.
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 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.
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 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?
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 THE BENEFITS AND COSTS OF
GLOBALIZATION

One final issue is the debate over genetically

modified (GM) foods or genetically modified
organisms.

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.
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 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.
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 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.
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 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.
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 THE BENEFITS AND COSTS OF
GLOBALIZATION
TABLE 19.1 Immigrants into the United States by Country of Origin: 2004
RANK COUNTRY IMMIGRANTS
1 Mexico 173,664
2 India 65,472
3 Philippines 54,632
4 China 45,942
5 Vietnam 30,064
6 Dominican Republic 30,049
7 El Salvador 29,285
8 Haiti 13,502
9 Cuba 15,385
10 Jamaica 13,565
11 Korea 19,441
12 Poland 13,972
13 Canada 22,437
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14 Colombia 17,887
Source: Statistical Abstract of the United States, 2002, Table 7.

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 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.
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 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.
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 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.
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 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.
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 THE BENEFITS AND COSTS OF
GLOBALIZATION

CAPITAL MOBILITY

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.

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.
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 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.
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 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.
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 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.
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 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.
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 REVIEW TERMS AND CONCEPTS

comparative advantage Immigration Act of 1990

economic globalization Immigration Reform and
externality Control Act (1986)
genetically modified public goods, or social
(GM) foods goods
globalization Washington Consensus
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