Augustine H H Tan Jan 2020

TABLE 2.1
Econ 113: Economics of Globalization
Absolute advantage; each nation is more efficient in producing one good
1 2

Basic Concepts
Presented by

Professor Augustine H H Tan

Augustine H H Tan Ec113 Jan 2020 Augustine H H Tan Ec113

1 2

Role of Productivity Productivity

3 4

 US has higher productivity in Cloth: therefore would  Two measures

specialize in it and export for wine from UK
 UK has higher productivity in Wine: therefore would
specialize in it and export it for cloth from US
 Assumption: homogenous goods
 Only one factor of production: labor
 Labor Productivity: output per man hour
 Total Factor Productivity [TFP]: measures the
effect of technological progress after accounting
for the contributions of labor & capital.
 Imagine a sausage making machine. If you put

 Labor has same attributes for the 2 countries in 1 kg of meat and bread crumbs you get only 1
kg of sausage, then TFP = 0
 If you get 1.01 kg of sausage, then TFP = 1%
 TFP is crucial to improving living standards

Augustine H H Tan Ec113 Jan 2020 Augustine H H Tan Ec113 Jan 2020

3 4

Ec113 1
Augustine H H Tan Jan 2020

TABLE 2.3
Comparative advantage, U.S. -absolute advantage in producing both goods David Ricardo [Table2.3]
5 6

 US more productive in both goods

 This illustrates the role of superior technology

which can be achieved by better education, skills

& R&D
 Is there specialization & trade?
 Yes
 US is comparatively more productive in Cloth and
UK in Wine

Augustine H H Tan Ec113 Augustine H H Tan Ec113 Jan 2020

5 6

TABLE 2.4 Gains from specialization & trade: constant opportunity costs
Gains From Trade & Global Output
7 8

 Trade enables all trading partners to gain, as

measured by consumption or investment
 Some countries may gain more than others
 Global output increases as a result of trade
 Protectionism [tariffs & non-tariff barriers to trade]
reduces welfare and global output
 Protectionism can trigger retaliation, resulting in
mutual losses.
 1929-33 Because of protectionism, world trade
collapsed from US$4bill to under $1 bill.

Augustine H H Tan Ec113 Augustine H H Tan Ec113 Jan 2020

7 8

Ec113 2
Augustine H H Tan Jan 2020

Table 2.10: Role of Wages & Exchange Rates

10

 An increase of wages in one country can cause it to

lose comparative advantage
 A change in exchange rate can change the
comparative advantage
 Exchange rate: price of one currency in terms of
another
 1£ = $1.60

 1£ = $2.00 [£ has appreciated]

What is missing in this table that will be
crucial for Singapore’s future?  1£ = $1.40 [£ has depreciated]

 The reverse has happened to the $

9
Augustine H H Tan Ec113 Jan 2020 Jan 2020
Augustine H H Tan Ec113

9 10

TABLE 2.2
Examples of comparative advantages in international trade
Competitiveness
11 12

 Productivity
 Wage level compared to partner countries
 Exchange rate
 Education & training of workers
 Infrastructure
 Quality of governance
 R&D

Augustine H H Tan Ec113 Augustine H H Tan Ec113 Jan 2020

11 12

Ec113 3
Augustine H H Tan Jan 2020

The Absorption Approach to the Balance of

National Income [GDP, GNP]
Payments
13 14

Y = C + I + G + [X-M] Y = C + I + G + [X-M]
A = C+I+G = Absorption
C = Consumption B = X-M balance of trade
I = Investment
G = Government Expenditure
B=Y–A
X = Exports
*To improve the balance of trade, the country must
M = Imports
increase Y and/or decrease A
X-M = Trade balance
X>M = Export surplus
*Putting tariffs on imports and/or devaluing the
X<M = Import deficit
currency will do little or nothing to reduce a trade deficit.
The other country can retaliate and/or devalue as well.
Augustine H H Tan Ec113 Jan 2020 Augustine H H Tan Ec113 Jan 2020

13 14

GNP vs GDP Balance of Payments

15 16

 GDP: final goods and services produced within the
boundaries of a nation
 GNP: GDP + income from investments abroad less
income earned by foreigners
 Singapore: because of land and labor constraints,
tries to grow GNP and not merely GDP. Investments
abroad by GIC & Temasek Holdings yield an income
for us. Likewise, private investments abroad yield
income to residents here.
 Balance of trade [goods & services]: X-M
 Current Account: largely X-M but also includes
investment income, transfers abroad, military
expenditures….
 CA > 0 surplus: the country is a net lender to others
 Ca < 0 deficit: the country is a net borrower from
others
 Global economic imbalance: a few countries like
China, Germany, Singapore, S Arabia…have CA
surpluses while others like the US are in huge CA
deficit

Augustine H H Tan Ec113 Jan 2020 Augustine H H Tan Ec113 Jan 2020

15 16

Ec113 4
Augustine H H Tan Jan 2020

Short-term Vs Long-term Capital

17

 Short-term: less than a year

 Long-term: greater than a year—bonds, FDI
 Long-term more stable
 Short-term: volatile capital flows

Augustine H H Tan Ec113 Jan 2020

17

Ec113 5