SEU Role of Foreign Direct Investments in Stimulating Saudi Arabia Economy Essay
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In a critical essay, analyze the role of FDI in the economic development of Saudi Arabia. What are the determinants of FDI? What are the motives and types of FDI? What policies should the government implement to promote the role of FDI in stimulating the economy? What implications does the Saudi Vision 2030 have on FDI?
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INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 1: The
International
Economy and
Globalization
© 2019 Cengage. All rights reserved.
2
Chapter Outline
Economic Interdependence: Federal Reserve Incites
Global Backlash
Globalization of Economic Activity
Waves of Globalization
The United States as an Open Economy
Why Is Globalization Important? 3 points
Globalization and Competition
Common Fallacies of International Trade
Is International Trade an Opportunity or a Threat to
Workers?
Has Globalization Gone Too Far?
© 2019 Cengage. All rights reserved.
3
Economic Interdependence (1 of 2)
High degree of economic interdependence
No nation exists in economic isolation
All aspects of a nations economy linked to
economies of trading partners
Reflects historical evolution of the worlds
economic and political order
Economic interdependence is complex, and its
effects are uneven
© 2019 Cengage. All rights reserved.
4
Economic Interdependence (2 of 2)
High degree of economic
interdependence (cont.)
Steps toward international cooperation
Mutually advantageous for trading nations
Protectionist pressures
Some developing nations argue that liberalized
trading system serves to keep them in poverty
© 2019 Cengage. All rights reserved.
5
Economic Interdependence: Fed
Policy Incites Backlash
Domestic economic policies have spillover
effects on other economies
Quantitative easing by Fed, intended to
stimulate U.S. economy during Great
Recession
criticized by U.S. trading partners as attempt
to improve American competitiveness through
depreciation of dollar
© 2019 Cengage. All rights reserved.
6
Globalization of Economic
Activity (1 of 2)
Globalization
Process of greater interdependence between
countries and their citizens
Increased international flows of
Goods, services, people
Investments in equipment, factories, stocks, bonds
Globalization is political, technological,
cultural, and economic
© 2019 Cengage. All rights reserved.
7
Globalization of Economic
Activity (2 of 2)
What forces are driving globalization?
Technological change
Advances in transport technology
Widespread liberalization of investment
transactions
Development of international financial
markets
© 2019 Cengage. All rights reserved.
8
Waves of Globalization (1 of 14)
History of globalization tied to evolution of
trade
In late 1700s and 1800s, mass production
and improved transportation made
international trade easier; most goods
tradeable
Rise of global manufacturing in 1990s
characterized by geographical fragmentation
of productive processes and offshoring of
industrial tasks
© 2019 Cengage. All rights reserved.
9
Waves of Globalization (2 of 14)
First Wave of Globalization: 18701914
Decreases in tariff barriers
Technological developments
Declining transportation costs; shift from sail
to steamships; railways
Driven by European and American
businesses and individuals
© 2019 Cengage. All rights reserved.
10
Waves of Globalization (3 of 14)
First Wave of Globalization: 18701914 (cont.)
Exports as share of world income nearly
doubled to 8%
Per capita incomes increased 1.3% per year
Previous 50 years: 0.5% per year
© 2019 Cengage. All rights reserved.
11
Waves of Globalization (4 of 14)
First Wave of Globalization: 18701914 (cont.)
Nations that actively participated in
globalization became richest countries in
world
Ended by World War I
© 2019 Cengage. All rights reserved.
12
Waves of Globalization (5 of 14)
Great Depression of 1930s
Governments practiced protectionism
Raised tariffs on imports
Tried to shift demand into domestic markets to
promote domestic sales and jobs
Exports as share of national income fell from 8%
to 5%
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13
Waves of Globalization (6 of 14)
Second Wave of Globalization: 19451980
Renewed incentive for globalization
Falling transportation costs fostered increased
trade
Trade liberalization not uniform
© 2019 Cengage. All rights reserved.
14
Waves of Globalization (7 of 14)
Differential impacts of second wave
Developed countries largely freed of barriers
Greatly increased the exchange of manufactured
goods
Raised incomes
Developing countries
Only agricultural exports that do not compete with
agriculture in developed country free of barriers
© 2019 Cengage. All rights reserved.
15
Waves of Globalization (8 of 14)
Second Wave of Globalization: 19451980
(cont.)
New kind of trade
Rich country specialization in manufacturing
niches
Gained productivity through agglomeration
economies
Firms clustered together
Some clusters produced same product; others connected
by vertical linkages
Benefits only those in clusters
© 2019 Cengage. All rights reserved.
16
Waves of Globalization (9 of 14)
Second Wave of Globalization: 19451980
(cont.)
Developing countries as group left behind
Continuing trade barriers, unfavorable investment
climates, antitrade policies, dependence on
agricultural and natural-resource products
© 2019 Cengage. All rights reserved.
17
Waves of Globalization (10 of 14)
Latest Wave of Globalization (1980
present)
Some developing countries (e.g. China, India,
Brazil) broke into world markets for
manufacturing
Other developing countries marginalized,
causing incomes to decrease and poverty to
rise
Significant international capital movements
© 2019 Cengage. All rights reserved.
18
Waves of Globalization (11 of 14)
Latest Wave of Globalization (1980
present) (cont.)
Some developing countries have competitive
advantage in labor-intensive manufacturing
(e.g. Bangladesh)
Protectionist policies in developed countries
© 2019 Cengage. All rights reserved.
19
Waves of Globalization (12 of 14)
Latest Wave of Globalization (1980
present) (cont.)
Foreign outsourcing
Products manufactured in more than one country
Manufacturing moved to wherever costs were
lowest
Job losses for some workers in developed countries
Cries for laws restricting outsourcing
© 2019 Cengage. All rights reserved.
20
Waves of Globalization (13 of 14)
Latest Wave of Globalization (1980
present) (cont.)
By 2000s, foreign outsourcing of
professionalized work
Information Age
Internet, high-speed data
Sending upscale jobs offshore
Accounting, chip design, engineering, basic research,
and financial analysis
© 2019 Cengage. All rights reserved.
21
Waves of Globalization (14 of 14)
Latest Wave of Globalization (1980
present) (cont.)
Integrated factory floor increasingly
replaced by network of individual,
specialized suppliers
Countries tend to specialize in specific
stages of production
E.g. Boeing 787 Dreamliner
© 2019 Cengage. All rights reserved.
22
TABLE 1.1 The Fruits of Free
Trade: A Global Fruit Basket
On a trip to the grocery store, consumers can find goods from all over the globe.
Fruit
Country
Fruit
Country
Apples
New Zealand
Limes
El Salvador
Apricots
China
Oranges
Australia
Bananas
Ecuador
Pears
South Korea
Blackberries
Canada
Pineapples
Costa Rica
Blueberries
Chile
Plums
Guatemala
Coconuts
Philippines
Raspberries
Mexico
Grapefruit
Bahamas
Strawberries
Poland
Grapes
Peru
Tangerines
South Africa
Kiwifruit
Italy
Watermelons
Honduras
Lemons
Argentina
Source: From The Fruits of Free Trade, Annual Report, Federal Reserve Bank of Dallas, 2002, p. 3.
© 2019 Cengage. All rights reserved.
23
The U.S. as an Open Economy
(1 of 8)
Trade patterns
Openness
Rough measure of the importance of international
trade in a nations economy
Nations exports and imports as a percentage of its
Gross Domestic Product (GDP)
Exports + Imports )
(
Openness =
GDP
© 2019 Cengage. All rights reserved.
24
The U.S. as an Open Economy
(2 of 8)
Openness (cont.)
Large countries lower measures of
openness
Less reliant on international trade
Firms can attain optimal production size without
having to export due to the population and
economic size
Small countries higher measures of
openness
© 2019 Cengage. All rights reserved.
25
The U.S. as an Open Economy
(3 of 8)
Openness of the U.S. economy, 1890
2018
Less open to international trade, 18901950
Two world wars + Great Depression of the 1930s
Reduced dependence on trade
National security reasons
Protect home industries from import competition
© 2019 Cengage. All rights reserved.
26
The U.S. as an Open Economy
(4 of 8)
Openness of the U.S. economy, 1890
2018 (cont.)
After World War II negotiated reductions in
trade barriers
Rising world trade; technological improvements in
shipping and communications
© 2019 Cengage. All rights reserved.
27
The U.S. as an Open Economy
(5 of 8)
Openness of the U.S. economy, 1890
2018 (cont.)
Relative importance of international trade
increasing
Example: need for personal computers with
imported components
© 2019 Cengage. All rights reserved.
28
The U.S. as an Open Economy
(6 of 8)
TABLE 1.3 Top 8 Countries with Whom the United States Trades, 2016
Country
Value of U.S.
Exports of Goods
(in billions of
dollars)
Value of U.S.
Imports of Goods
(in billions of dollars)
Total Value of
Trade
(in billions of
dollars)
China
115.8
462.8
578.6
Canada
266.8
278.1
544.9
Mexico
231.0
294.2
525.2
Japan
63.3
132.2
195.5
Germany
49.4
114.2
163.6
United Kingdom
55.4
54.3
109.7
South Korea
42.3
69.9
112.2
France
30.9
46.8
77.7
Source: From U.S. Department of Commerce, U.S. Census Bureau, Foreign Trade: U.S. Trade in Goods by Country, 2017.
© 2019 Cengage. All rights reserved.
29
The U.S. as an Open Economy
(7 of 8)
Labor and Capital
Labor mobility in U.S. has not risen in past
100 years
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30
The U.S. as an Open Economy
(8 of 8)
U.S. increasingly tied to rest of the world
through investment flows
Foreign ownership increasing
Concerns over rising cost of debt
International branches of U.S. banks
U.S. securities are increasingly globalized
© 2019 Cengage. All rights reserved.
31
Why Is Globalization Important?
(1 of 5)
Law of Comparative Advantage
Each nation gains by producing goods in
which it has relative advantage
If a good or service can be obtained more
economically through trade, it makes sense to
trade for it, not produce it
© 2019 Cengage. All rights reserved.
32
Why Is Globalization Important?
(2 of 5)
Law of Comparative Advantage (cont.)
International trade also gains from
competitive process
Competition essential to innovation, efficiency
Global competition can result in high-cost
domestic producers exiting market
© 2019 Cengage. All rights reserved.
33
Why Is Globalization Important?
(3 of 5)
Open economies
More competition lowers prices
Strong incentive for highest quality
Weakens monopolies
© 2019 Cengage. All rights reserved.
34
Why Is Globalization Important?
(4 of 5)
Open economies (cont.)
More firm turnover
Less productive firms exit
Improvement for industry
© 2019 Cengage. All rights reserved.
35
Why Is Globalization Important?
(5 of 5)
Economic growth rates closely related to
openness, education, communications
infrastructure
International trade can provide stability for
producers via exports
Rapid growth increases demand for
commodities
© 2019 Cengage. All rights reserved.
36
Globalization and Competition
(1 of 3)
Globalization Forces Kodak to Reinvent Itself
Kodak had 90% camera market; did not address
competition with new technology
Fuji entered U.S. market with lower-priced film and
supplies; Kodak ignored them
By mid-1990s, Fuji had 17% of market, Kodak, 75%
Kodak finally developed digital camera but was
undercut by smart phones; filed for Ch 11
bankruptcy
Kodak now a small digital imaging company
© 2019 Cengage. All rights reserved.
37
Globalization and Competition
(2 of 3)
Bicycle Imports Force Schwinn to
Downshift
Schwinn bicycles once standard
Competitors produced mountain bikes and
racing bikes; cheap imports entered market
Schwinn moved production to non-union
state; obtained foreign parts. Uneven quality;
Schwinn declared bankruptcy
Today Schwinn made in China
© 2019 Cengage. All rights reserved.
38
Globalization and Competition
(3 of 3)
Element Electronics Survives by Moving TV
Production to America
Once, 150 U.S. TV manufacturers
Imports from Japan, China, South Korea, others
Flat panel TVs lighter, cheaper to ship from Asia
By 2000, no U.S. TV manufacturers
Costs in China rising; U.S. factories more
competitive
Element Electronics became only TV
manufacturer in U.S.; Made in America logo
© 2019 Cengage. All rights reserved.
39
Common Fallacies of
International Trade (1 of 2)
Trade is a zero-sum activity
False; both partners gain from trade
Imports result in unemployment and
burden the economy, while exports
promote growth and jobs
False; source of fallacy is failure to consider
connection between imports and exports
© 2019 Cengage. All rights reserved.
40
Common Fallacies of
International Trade (2 of 2)
Tariffs, quotas, and other imports result in
more jobs for domestic workers
False; fails to recognize that a reduction in
imports does not occur in isolation
© 2019 Cengage. All rights reserved.
41
Is the United States Losing Its
Innovation Edge?
Some economists say U.S. is losing its
innovation edge
Manufacturing is key to R & D that generates
inventions
Other economists disagree
All of the key technologies and high-valueadded activities are U.S.
© 2019 Cengage. All rights reserved.
42
International Trade: Opportunity
or Threat to Workers? (1 of 6)
International trade is both opportunity and
threat for firms and workers (e.g. exports
and closing mill in NC)
© 2019 Cengage. All rights reserved.
43
International Trade: Opportunity
or Threat to Workers? (2 of 6)
TABLE 1.4 Millions of American Jobs Supported by Exports:
Totals, Goods, and Services
Year
Total
Goods
Services
2009
9.6
5.8
3.8
2010
10.2
6.2
4.0
2011
10.9
6.6
4.3
2012
11.2
6.7
4.5
2013
11.4
6.7
4.7
2014
11.6
6.8
4.8
2015
11.5
6.7
4.8
Source: Chris Rasmussen, Office of Trade and Economic Analysis, International Trade Administration,
U.S. Department of Commerce, Jobs Supported by Exports 2015: An Update, April 8, 2016.
© 2019 Cengage. All rights reserved.
44
International Trade: Opportunity
or Threat to Workers? (3 of 6)
International trade increases total
productivity
Wages paid by exporters higher than nonexporters
Exporting industries require more
educated workforce
© 2019 Cengage. All rights reserved.
45
International Trade: Opportunity
or Threat to Workers? (4 of 6)
Not all workers gain from international
trade
Some places lose jobs to cheap imports
Concern over mass immigration for lowwage work
Particular threat to unskilled workers in
developed countries
© 2019 Cengage. All rights reserved.
46
International Trade: Opportunity
or Threat to Workers? (5 of 6)
Hurts unskilled workers in import-competing
industries
Wages increase for skilled workers
Workers more productive
Imports do NOT decrease the total jobs in
nation
© 2019 Cengage. All rights reserved.
47
International Trade: Opportunity
or Threat to Workers? (6 of 6)
International trade
Just another kind of technology
Adds value to inputs
© 2019 Cengage. All rights reserved.
48
Has Globalization Gone Too Far?
(1 of 2)
Mainstream economists=open economies
provide more than closed
Critics=U.S. trade policies primarily benefit
large corporations rather than average
citizens
© 2019 Cengage. All rights reserved.
49
Has Globalization Gone Too Far?
(2 of 2)
Gnawing sense of unfairness and
frustration over environment, American
workers, international labor standards
Noneconomic aspects of globalization also
shape international debate
© 2019 Cengage. All rights reserved.
50
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