b416 evolution of global economies lecture 1

B416: The Evolution of Global Economies

Lecture 1 : Module Aims, Outcomes & Assessment;

Introduction to Global Economics; Riccardo’s Comparative Advantage

Module Aims• This module aims to introduce learners to the major issues and influences in

the international economy over the past 150 years.

• Understanding the patterns of economic cycles and the causes of growth and recession is an important aim of this course.

• Putting into perspective the extreme economic booms and busts of the past will enable learners to analyse contemporary events in a historically relevant context, and enable learning from past events to be applied to challenges which present themselves today.

• An important objective of this module will be to identify the role of national and institutional economic policies, in combination with a geographical context, to explain key changes in the evolution of the global economy.

• The module aims to give learners an understanding of the causes and impact of ideological, political and socio-economic change on nations, and to enable appropriate use of economic analysis from understanding of key events in the past.

• Comparative Advantage & Riccardian Economics 2

Module OutcomesBy the end of this module, students should be able to:• Understand the foundations of industrialisation and the

drivers of economic growth.• Understand critical points in time and importance of the

evolutionary changes in the international and global economy during the past 150 years.

• Apply constructive critical analysis to, and interpretation from, economic history and consider its relevance to contemporary issues.

• Assess the economic circumstances, theories and principles that were drivers of economic development and growth for specific nations, and barriers to growth for other nations.

• Understand the causes and effects of ideological, political and socio-economic transitions on nation’s economies.

• Demonstrate appropriate use of economic analysis from understanding of key events in the past. 3

Assessment

• Group Presentation between week 5 and week 6 (30% of the overall grade)

• Course Work: 1,500 words assignment (70% pf the overall grade)

4

5

Topic 1: How did the global economy get to where it is today?Topic 2: Modern Economic Growth.Topic 3: The Economic History of Nations: Migration, Colonialism and Historical Persistence.Topic 4: Africa’s economy: Past and PresentTopic 5: Asian Tigers? Transition to Asia Topic 6: Disintegration: The Great Depression and recovery.Topic 7: Between the Military Storms: The Dark Valley to 1939Topic 8: Reconstruction and recovery: post 1945Topic 9: Demography and Economic GeographyTopic 10 The Great Recession 2008

Overview of Syllabus

Preparation Time

6

Preparation Activity Symbol Time Budget

Lecture 1 Hour

Seminar 30 Minutes

Work shop 30 Minutes

Read a chapter from

the core text + any

other recommended

material

30 Minutes

Annotate, take

notes15 Minutes

Online Individual

Activity30 Minutes

Group Activity 1 Hour

7

The Module Reading ListCore Textbook:Age of the Economist, by Daniel R. Fusfeld, 9th Edition, 2002; ISBN-10: 0321088123 • ISBN-13: 9780321088123, Prentice Hall

Recommended Reading:1. International Business - 14th Edition by John D Daniels, Lee H Radebaugh &

Daniel P Sullivan, Pearson, ISBN 978-0-273-76695-7 (available via DawsonEra)

2. An Outline of the History of Economic Thought, by Screpanti, Ernesto; Zamagni, Stefano, 2nd Edition, 2005; Oxford University Press, ISBN 0-19-927913-6 (cloth); 0-19-927914-4 (pbk). (available via DawsonEra)

3. The New Introduction to Geographical Economics by Charles Van Marrewijk(available via DawsonEra)

Further Reading:1. International Economics - 2nd Edition by Charles Van Marrewijk, Oxford

University Press, ISBN 978-0-19-956709-6

The core textbook will be used in Lectures and Seminar and should be brought to each Lecture and Seminar.

B416: The Evolution of Global Economies

Lecture 1: How did the global economy get to where it is today?

Learning Outcomes

By the end of this lecture, you should understand the following:

• We present basic information on the world economy

• Countries are ‘big’ measured by area, population, or income

• Income can be measured as Gross Domestic Product or Gross National Product; the difference is based on nationality of ownership of production factors:

• GDP + net receipts of factor income = GNP

• For most countries the difference (GDP – GNP) is small (but not, e.g. for small oil-rich countries)

• Using exchange rates to compare income levels in different countries underestimates income in developing countries; it is better to use Purchasing Power Parity (PPP) rates to correct for price differences.

• We can distinguish two waves of globalization, both for trade flows and capital flows.

9

Scope of Global Economics• What is international economics about?• International trade topics

– Gains from trade, explaining patterns of trade, effects of government policies on trade

• International finance topics– Balance of payments, exchange rate determination, international

policy coordination and capital markets

• International trade versus finance

• International economics is about how nations interact through:

– trade of goods and services, flows of money, and investment.

• International economics is an old subject, but continues to grow in importance as countries become tied more to the international economy.

• Nations are now more closely linked than ever before.

GDP and GNI, 2008 (billion current $)

10

100

1,000

10,000

100,000

10 100 1,000 10,000 100,000

Gross Domestic Product, GDP

Gro

ss N

ational In

com

e,

GN

I

USA

China

Germany

Japan

GDP and GNI income levels generally similarG

ross N

atio

na

l In

co

me

(lo

g s

ca

le)

Gross Domestic Product (log scale)

GDP, 2008; top fifteen countries, ranked according to PPP

992

1,302

1,344

1,443

1,549

1,872

1,978

2,122

2,178

2,260

2,905

3,359

4,358

7,909

14,093

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

Turkey

Canada

S. Korea

Spain

Mexico

Italy

Brazil

France

UK

Russia

Germany

India

Japan

China

USA

GDP; PPP

GDP; current $

Developing country income higher at PPP rates

China # 3 at exchange rate;

China # 2 at PPP rates

India # 12 at exchange rate;

India # 4 at PPP rates

Exports and imports of goods and services, 2008 ($ bn)

1

10

100

1,000

10,000

1 10 100 1,000 10,000

export value

import

valu

e

USA

GermanyChina

Russia

Saudi Arabia

Ethiopia

Brunei

Export – Import deviations can be substantial

Export value (log scale)

Imp

ort

va

lue

(lo

g s

ca

le)

Relative exports of goods and services, 2008 (% of GDP)

88

90

91

92

97

110

131

179

212

234

0 50 100 150 200 250

Malta

Macao

United Arab Emirates

Belgium

Bahrain

Malaysia

Seychelles

Luxembourg

Hong Kong

Singapore

Exports(not value added) can be higher than income(value added)

Taxes on international trade, 2008 (% of revenue)

25

26

27

32

32

35

35

44

52

57

0 10 20 30 40 50 60

Russian Federation

Niger

Bangladesh

St. Kitts and Nevis

Maldives

Madagascar

Cote d'Ivoire

Namibia

Bahamas, The

Lesotho

Developing countries depend on tariffs for tax revenue

World per capita income increased past 200 years

World GDP per capita (1990 international $), logarithmic scale

5,709

435444667

1820

100

1,000

10,000

0 500 1000 1500 2000

Two waves of globalization in tradeMerchandise exports, % of GDP in 1990 prices

4.6

17.2

2.5

10.1

0.2

13.4

0

5

10

15

1870 1900 1930 1960 1990

world USA Japan

Before World War I

After World War II

Two waves of globalization in capital flows

0.6

0.4

0.2

0

1860 1880 1900 19601920 1940 1980 2000

Foreign capital stocks; assets / world GDP0.6

0.4

0.2

0

1860 1880 1900 19601920 1940 1980 2000

Foreign capital stocks; assets / world GDP

After World War I

Before World War I

Labour migration peak before World War I

Relative annual immigration flows, 1870-1998 (per 1000)

-2

0

2

4

6

1870-1913 1914-1949 1950-1973 1974-1998

Western Europe Western Offshoots

Global regional trade flows; manufactures, 2008

Merchandise trade export by region, 2008 (% of total)

0.3

0.9

1.0

0.8

6.5

13.9

29.9

3.5

3.8

4.5

6.5

13.0

27.7

41.0

0 10 20 30 40

AFR

SCA

CIS

mEAST

NAM

ASIA

EUR

total

intra-region

Concluding remarks The World Economy

• Large countries land: Russia, China, Canada, USA• Large countries population: China, India• Large countries income: USA, Japan, Germany, UK, France• Large countries income PPP: USA, China, Japan, India• Price differences (at exchange rates) between countries

can be large for non-traded goods (no arbitrage opportunities)

• Deviations GDP – GNP relatively small for most countries• Large trade flows within Europe• Deviations Exports – Imports can be relatively large• Global per capita income levels increased fast last 200

years• Two waves of globalization, both for trade and capital

flows

David Ricardo (1772-1823)

“When a country can either import a commodity or produce it at home, it compares the cost of producing at home with the cost of procuring from abroad; if the latter is less than the first, it imports.”

Overview Ricardian (classical) model

• Technology differences between countries are the driving force behind international trade flows

• Relative (or comparative) differences are crucial, not absolute differences

• Absolute differences are important for determining a country’s welfare level

• The production possibility frontier summarizes the state of technology and the available factors of production in final goods space

• Trade flows increase welfare (technology gains from trade)

Assumptions of the Ricardian technology model

• Two countries (EU and Kenya)• Two final goods (Food and

Chemicals)• One factor of production (Labour)• Constant returns to scale production functions• Perfect competition• Labour is mobile between sectors, but not between

countries• Costless trade in final goods (no impediments to

trade)• Technology differs between countries

• General (example)

Technology differences between countries

Production technology is summarized in a productivity table:

Labour units required to produce one unit of output

Food Chemicals

EU 2 8

Kenya 4 24

The EU technology is more productive for both goods

The EU has an absolute advantage in Food production: it

requires less labour (2 units instead of 4)

The EU also has an absolute advantage in Chemicals

production: it requires less labour (8 units instead of 24)

Comparative advantage: productivity method


Food Chemicals

EU 2 8

Kenya 4 24

• The EU is twice as productive in the Food sector (4/2 = 2)

• The EU is three times as productive in the Chemicals sector

(24/8 = 3), so

The EU has a comparative advantage in Chemicals, and

Kenya has a comparative advantage in Food

• An extra unit of Chemicals needs 8 labour in the EU

• This labour could have made 8/2 = 4 units of Food; the

opportunity cost of Chemicals production in the EU is 4 Food

• An extra unit of Chemicals in Kenya needs 24 labour

• This labour could have made 24/4 = 6 units of Food; the

opportunity cost of Chemicals production in Kenya is 6 Food

Comparative advantage: opportunity cost method


Food Chemicals

EU 2 8

Kenya 4 24

The EU has a comparative advantage in Chemicals,

Kenya in Food

Production possibility frontier (ppf)

Definition: all possible combinations of efficient production points of final goods, given the available factors of production and the state of technology;

note that:• It is a technical specification: the ppf does not depend on the type of market competition• The ppf depends on the available factors of production: if, e.g., more labour becomes available more goods can be produced• The ppf depends on the state of technology: if new techniques become available, output increases with the same use of inputs

The ppf is a straight line in the Ricardian modelLabour units required to produce one unit of output

Food Chemicals

EU 2 8

Kenya 4 24

• Suppose the EU has 200 units of labour available and Kenya has

480 units available (remember: it is just an example)

• If all workers in the EU produce only Food, the EU can make

200/2 = 100 Food (and 0 Chemicals)

• If all workers in the EU produce only Chemicals, the EU can make

200/8 = 25 Chemicals (and 0 Food)

• Similarly, if all workers in Kenya produce Food total output is

480/4 = 120 Food (and 0 Chemicals); if they all produce Chemicals

total output is 480/24 = 20 Chemicals (and 0 Food)

Concluding remarks Ricardian (classical) model

• Technological differences between countries are the classical driving force for international trade flows.

• Only comparative costs, not absolute costs, are important for determining the direction of trade flows.

• Absolute costs are important for determining a country’s welfare level.

• Allowing for more countries and more goods is easy, allowing for more than one factor of production is not (see neoclassical model).

And Now…Work Outside the Lecture

Preparation

For

Padagogic

Style

Preparation

Time Budget

Individual

TaskGroup Task Output Week 1 Preparation Activity

Read Chapter 1 to Chapter 4 from Core Text

Book: The Age of the Economist

An outline of the history of economic thought by

SCREPANTI & ZAMAGNI, Section 1 to 3

Seminar 1 30 Minutes Read above Material + Seminar material

Workshop 1 1 HourOnline Collaboration Activities relating Group

Presentation in Week 6

Lecture 1 2 Hour

b416 evolution of global economies lecture 1

Economy & Finance