TRADE IN THE GLOBAL ECONOMY1 International Trade

2Migration and Foreign Direct

3Conclusion1

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Learning ObjectivesWhy, how and what ???What is the reason behind trade relations to develop* How trade relations develop? In the sense who is the exporter / seller , who is the importer* What are the outcomes of trade? Benefits or merits associated with trade related activities

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IntroductionGlobalization world economy where countries participate in the process of exchange of goods and services, labourers, machines, ownership of firms, culture and ideas.Integration final product market , goods and services market, or in terms of integration of factor of production. Factor -> Factors of production, and the asset market [ were not going to cover it in the course]

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IntroductionIntegration : evolved over timeMigration : with strict labour law, its not that easy. Its been disrupted very frequentlyFDI trade in ownership/entrepreneurshipI factor investment factor , I= CHANGE IN K/K : PHYSICAL CAPITAL. MACROECONOMIC SENSE LEADING TO CAPITAL GROWTH.

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Trade in the Global EconomyImports are the purchase of goods or services from another country.Exports are the sale of goods or services to other countries.-> Real Flows across the borders : measured in real terms/in terms of physical units.

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Trade in the Global EconomyMigration is the flow of people across borders as they move from one country to another.Foreign Direct Investment is the flow of capital across borders when a firm owns a company in another country.Restrictions : As US has strict labour law, it is very difficult for foreigners to come and work. For FDI, its different. Some countries resist FDI, so it is subject to restriction imposed by government, to protect/preserve domestic economic sovereignty

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Trade in a Global EconomyWhy do countries trade?10 principlesTrade benefits allConsumer more variety of goods at cheaper priceProducers they can produce more efficiently and sell their product to the international market at a higher priceWorkers They get more opportunitiesFirm owners They are benefitted of efficiencyROLE OF GOVT : what role do they play in the context of trade.

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International TradeThe Basics of World TradeTrade balance = EX-IMTRADE SURPLUS = EX-IM > 0DEFICIT : EX-IM leading to trade efficiency.

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Map of World TradeOther RegionsOPEC : Oil and petroleum exporting countries. Given the products we were talking about, this is strong imperfect competition. These products are distributed very unequally in the world economy. This is potential source of imperfect competition. As a result of it, poor countries are alienated from world market bc of the fact that they cannot enter the market due to imperfect competition. Govt plays big role in trade activities. How we figure out whether the country is actively participating in trade?

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Trade Compared to GDPAnother way to measure trade is by looking at its ratio to GDP.It is given by the ratio of Trade/GDP = [EX+IM] / GDPHow do we use this ratio? If for a country, the ratio is greater than 1, assuming that GDP is reflecting the countrys value added . Then it is imported inputs. If the ratio is less than 1, it indicates two. Either the country is large economy, or the new entrant in the world market hesistant to open up trade related activities with the rest of the world.

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Barriers to TradeTrade barriers refer to all factors that influence the amount of goods and services shipped across international borders.Barriers to trade change over time as policies, technology, etc. change.

Import tariffsthe taxes that countries charge on imported goodsTransportation costs of shipping between countriesOther events such as wars, etc.

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Barriers to TradeImport quotaslimitations on the quantity of an imported goodwere also instituted during this time.Voluntary restriction voluntary restriction on export to another country.

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Migration and Foreign Direct InvestmentInternational trade, migration, and foreign direct investment (FDI) all affect the economy of a nation that opens its borders to interact with other nations.Now that we have introduced international trade, we need to introduce migration and FDI.

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Impact of MigrationUnlike trade, there are much more significant regulations on migration.Flow of people between countries is much less free than the flow of goods.Perfect comptition = w=value of MPL , W= PxMPL ,w/p = MPLPolicy makers fear that immigrants from low-wage countries will drive down wages for a countrys own lower-skilled workers.With immigration, -> more workers but everything constant. Law of diminishing MP , if you keep increasing workers , MPL declines. If w/p declines : restriction to favour domestic workers.

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Map of MigrationHowever, international trade can act as a substitute for movements of capital and labour across borders.Work standards, living standards, knowledge and education. These realistic features of labour market create natural hindrance/restriction regarding mobility. With technological evolution, we no longer require physical movement.These are the changes we are observing over time, in the context of labour market. In the context of capital market,

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Map of Foreign Direct InvestmentFDI occurs when a firm in one country owns a company in another country.Expected patterns: A country with low capital[poor countries] would be associated with high marginal product of capital -> offer high return to capital -> funds to flow into poor countries. This is only theory. In reality, it doesnt flow into poor countries because of the high risks and poor infrastructure associated with the country. [social/political stability]Indiviudlals would want diversification.

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Map of Foreign Direct InvestmentUnlike migration, most FDI occurs between OECD countries.Two ways FDI can occurHorizontal FDI occurs when a firm from one country owns a company in another industrial country.

An indian entrepreneur Ratan Tata purchasing range rover production unit in UK.Reason for horizontal FDI :

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Map of Foreign Direct InvestmentReasons for Horizontal FDIHaving a plant abroad allows the parent firm to avoid any tariffs or quotas from exporting to a foreign market since it produces locally.Having a foreign subsidiary abroad also provides improved access to that economy because the local firms will have better facilities and information for marketing products.An alliance between the production divisions of firms allows technical expertise to be shared.

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Map of Foreign Direct InvestmentVertical FDI occurs when a firm from an industrial country owns a plant in a developing country.This usually occurs to take advantage of lower wages in the developing countryMcdonalds in malaysia.

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Map of Foreign Direct InvestmentFDI with AsiaReverse-vertical FDI refers to companies from developing countries buying firms in industrial countries.They are acquiring the technological knowledge of those firms to combine with low wages in home country.