MSc in International Management: Global Scenarios, Module 2 Report

This report analyzes key aspects of economic globalization, focusing on international trade in goods and services. It explores the main drivers of globalization, including transportation and communication cost declines, and the impact of trade liberalization through organizations like the WTO. The report delves into the theory of comparative advantage, economies of scale, and the new trade theory, along with the gains and costs associated with free trade. It also examines trade policies, particularly the impact of import tariffs, and discusses offshoring, outsourcing, and the role of global value chains. The analysis includes the location of production, internalization versus outsourcing decisions, and concludes with a discussion of the pandemic's impact on GVCs, providing a comprehensive overview of macroeconomic concepts related to globalization and international trade.

MSc in International Management
«Global Scenarios: Module 2 (Macroeconomics)»
Lectures 10 & 11
Globalization

Economic Globalization
• International exchange of:
– Goods
– Services
– Factors of production
• Capital (FDI)
• Labor (Migration)

Agenda
• Trade in goods and services
– Main drivers
– Gains from trade
– Debate over globalization
– Trade policy: impact of import tariffs
• Trade liberalization
– WTO: main principles
• Offshoring and outsourcing
– Location
– Internalization
– The pandemic and GVCs

TRADE IN GOODS AND SERVICES

World trade over GDP
Source: World Bank

Main drivers of economic globalization
• Decline in
transportation &
communication costs
• Decline in
tariffs/quotas & other
barriers to trade
– WTO
– Regional/Bilateral
trade agreements
(NAFTA, EU,
Mercosur, ASEAN, …)

Why do countries trade?
• Comparative advantage
– Trade among different countries (North – South trade)
• Economies of scale
– Trade among similar countries (North – North or South
– South trade)
Gains from trade

Comparative advantage
2 key elements
8
Countries are
different
if resources are used to produce units of one good,
the same resources cannot be used to produce
another good…
Scarcity of
resources
Opportunity cost

Comparative advantage
• comparative advantage in the production of a
good if opportunity cost lower compared to
other countries
– A country is relatively more efficient in the
production of that good
• Even a country with an absolute disadvantage in
the production of both goods always has a
comparative advantage!!!
9

Absolute and comparative advantage
• Absolute advantage:
– One economy can produce a particular good more
cheaply than another country
– Even if a country has an absolute advantage in
producing all goods, gains from trade may still be
realized
• Comparative advantage:
– The relative price of a good is lower than in another
economy
10

Gains from trade
• Trade is welfare improving:
– Makes people better off: buy where goods are
cheaper
– Countries specialize in the productions in which
they are relatively more efficient compared to the
rest of the world
– Improves efficiency and welfare:
gains from specialization!!!
→ Growth!
11

Sources of comparative advantage
• Different technologies (Ricardian model)
• Different factor endowments (Heckscher-Ohlin
model)
– Idea
• China and US produce textile products and airplanes
• Textile industry is more labor intensive
• Airplanes industry is more capital intensive
• China has more labor than the US, while the US has
more capital than China (in relative terms!!!)
• China will specialize in textiles, while the US in
airplanes
12