Principles of International Economics

Principles of International Economics

Prof. Dr. Hans H. Bass, Bremen University of Applied Sciences, International Degree Programme in Economics

Summer Term 2010

Principles of International Economics

Topic 1: Basic Concepts

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1. International Division of Labor2. Classification of Economies3. Modes of Integration

AgendaInternational Economics

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1. Enterprise levelSmith: pin-makingproductivity gains, co-operation, alienation (Marx, Taylorism!)

2. Economy-wide levelsocial productivity gains, national trade, national interdependence

3. Global level

The division of labor principle

1. International Division of Labor

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3. Global level: integration into the world economyautonomous economic areas - autonomous currency areas

degree of integration depends on factor endowment, geography, history ...

degree of integration influenced by international economic policies / monetary policies

International welfare gains, international trade and factor movements, international interdependence (policy interdependence / IFOs / world economic order)

The division of labor principle


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Globalization

cultural

social

linguistic

ethic

economic

Globalization1. International Division of Labor

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“the increasing inter-dependence of markets and production in different countries through trade in goods and services, cross border flows of capital and exchange of technology”

(Nunnenkamp/Gundlach/Agarwal, 1994) “process through which an increasingly free flow of ideas,

people, goods, services, and capital leads to the integration of economies and societies” (Anninat 2002)

„die fortschreitende Internationalisierung der Wirtschaft, die einen weltweiten Abbau der Grenzen zwischen den nationalen und regionalen Märkten für Güter und Dienstleistungen, Kapital und technischen Know-how voraussetzt und vorantreibt“

(ZEW 2006)

Definitions of globalisation


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transport and communication revolution

Causes of globalisation


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0

20

40

60

80

100

120

1930 1940 1950 1960 1970 1980 1990 2000 2005

Seefracht

Lufttransport

Telekommunikation

Causes of globalisation: reduction of transport costs


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transport and communication revolution, new key technologies

increasing R&D costs and shortening of product life cycles

worldwide liberalisation of commodity and capital markets chances to exploit price differences (global sourcing, global marketing)

reshaping of the economic geography of the world (NIEs, China ending its autarky, new trading blocs)

Causes of globalisation


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1 1 1 1 1 2 24

7

3

6

12

3

25 26

5

17

60

1980 1985 1990 1995 2000 2005

EXPORTE ADI BONDS

The extent of globalisation


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Present Level

Speed

Low Medium High

Low

Medium

High

Source: adopted from Wohlmuth in Bass/Melchers 2004



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Present Level

Speed

Low Medium High

Low

• Shift of production sites (cost driven or market-driven)• Migraton of low-qualified workforce• Production of public goods

• Trade in commodities

Medium

• Long-term capital flows

• Commercial technology transfer• Migraton of high-qualified workforce ("brain drain")

High

• Trade in Services • Short-term capital flows• Direct investment & intl enterprise co-op

• Transfer of knowledge & technology (public goods characteristics)

Source: adopted from Wohlmuth in Bass/Melchers 2004



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1. Increasing relevance of TNCs !FDI, trade-induced and trade-inducing / intra-firm-trade, global value chains (“from sheep to shelf”)

2. Reduced scope of action for states?

Consequences of globalisation


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1. according to per-capita income: LIC, MIC, HICs2. ...3. ...

Modes of classification

2. Classification of economies

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1. HICs: $ 11,906+2. UMICs: $3,856 – $11,9053. LMICs: $976 – $3,8554. LICs: < $975

Income criterion2. Classification of economies

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One-dimensional, income-oriented classification


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(3*) Norway $ 87,070 HIC(22) Germany $ 42,440 HIC(56) Saudi Arabia $ 15,500 HIC(75) Russian Fed. $ 9,620 UMIC(82) Brazil $ 7,350 UMIC(130) China $ 2,770 LMIC(163) India $ 1,070 LMIC(179) Ghana $ 670 LIC(210) Burundi $ 140 LIC

http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf* # 1 and 2 only approximations: Liechtenstein, Bermuda

GNI p.c.2. Classification of economies

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1. according to per-capita income: LICs, MICs, HICs2. according to uni-dimensional structural

characteristics: oil-exporting countries, heavily indebted poor countries ...

3. according to multi-dimensional structural characteristics

Modes of classification


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1. Industrial economies (≈ HICs), post-industrial economies, “triade”, “OECD”-countries

2. Developing countries3. NIEs4. LDCs5. Transformation Economies

Structural criteria2. Classification of economies

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large service sector (60 %+ Fourastié model), medium-sized industrial sector

moderate inequalities in income and property distribution balanced current account, low level of foreign debts high investment rates (20%+) low population growth high standards in education and health political stability different economic orders possible: “varieties of capitalism”

(Anglo-American, German Social Market Economy, Japanese model, Scandinavian-type welfare state)

Characteristics of OECD countries


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Low levels of living, characterized by low incomes, high (income) inequality, poor health, and inadequate education (incl. Illiteracy)

High rates of population growth and dependency burdens Substantial dependence on agricultural production and

primary-product exports, high export concentration ratios Low levels of productivity (lack of complementary capital);

scarcity of jobs in the urban “formal” sector, “informal” employment (sponge function)

Lack of “good governance”

Characteristics of developing countries


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1. Longevity as measured by life expectancy at birth2. Knowledge: by a weighted average of adult literacy (2/3)

and mean years of schooling (1/3)3. Standard of living: GNI p.c. at Purchasing Power Parity* and

adjusted for diminishing marginal utility of income*number of units of the countries’ currency required to buy the same amount of goods + services in the domestic market as a dollar in the US

• Standardized from 0 to 1Index = (actual value – minimum value) / (maximum value – minimum value)

• GNI rank may differ from HDI rank

A comprehensive indicator: the HDI


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HDI-Rank GNI-Rank(3) Iceland 0.969 28(13) United States 0.956 14(22) Germany 0.947 22(59) Saudi Arabia 0.843 56(71) Russian Fed. 0.817 75(75) Brazil 0.813 82(92) China 0.772 130(152) Ghana 0.526 179(174) Burundi 0.394 210

# UNDP 2009 hdr.undp.org/en/media/HDR_2009_EN_Complete.pdf, World Bank 2008

The Human Development Index


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Newly Industrializing Economies rapid economic growth high investment into education rapid changes in sector composition subtle combination of opening up to world markets

and protection of „infant industries“ strong influence of government on the economy relatively equal distribution of wealth

(IBRD, inofficial)

Diversification: catching up ...


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Least Developed Countries Extremely low per capita income (< $ 750) Low level of human development as measured by the Human

Assets Index (HAI), based on nutrition, health, education, and literacy

High vulnerability by economic shocks as measured by Economic Vulnerability Index (EVI), based on agricultural output, export earnings, disadvantages from population size, natural disasters

ECOSOC 2003

Diversification: ... and falling behind ...


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Transformation economies Transformation from centrally planned economy with

predominance of collective property to decentrally planned economy (coordinated by markets) with a predominance of private property of producer goods

Low or lower-middle income p.c., (relatively) high HDI Comparatively high importance of industry, albeit obsolete

technologies posing high stress on the environment Dualistic structure of foreign trade (West/East) Budget deficits and current account deficits

Diversification: and dramatic changes


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Trade in commodities and services Factor movement:

capital (FDI, portfolio investment) Factor movement:

labor migration

Modes of intergration

3. Modes of integration

Documents

Principles of International Economics