First: Enhancement Week

• Come and play Settlers, 11:30am-2pm Monday, 12-2pm Tuesday.
  • Monday (16 Feb, 1130): https://doodle.com/gyzgtmghqpiqqmzm
  • Tuesday (17 Feb, 12 noon): https://doodle.com/zw966czp8ystzssw

Second: Joe Grice’s Lecture

• Slides: https://www.dropbox.com/s/qcymuxmcq1x3nn2/JG_Reading_20150205.pptx?dl=0
• Audio: https://www.dropbox.com/s/le5ec60bw7bdhuk/data-2015-2-5-14-02-45.3gp?dl=0
• Eye ahead to the essay/coursework/term paper (20%):
  • Will be based on the guest lectures.
  • Summarise the content, discuss the talking points.

Third: More Guest Lectures

• February 26: John Redwood (Conservative MP for Wokingham):
  • Note time: 5–6pm, venue G11 HBS
• March 5: Sam Juthani (Labour parliamentary candidate for GE2015 in Henley).
  • Usual time slot, 2–3pm in URS LLT.
• March 19: Clare Macallan, Bank of England. TBC.
• Please put all in your diaries:
  • If you’re going to slack off a lecture, please don’t slack off these ones!

Fourth: A Reminder About Classes

• Output of classes akin to production function: \(Y_i=f_i(E_i)\).
• Point is: You get out what you put in.
• Output of module is mark, \(M_{i,EC102}=g_i(E_i,Y_i)\).
• You won’t always have chance to discuss things you don’t understand!
• Output of degree is classification: \(C_i=h(M_{i,EC101},M_{i,EC102},\dots,M_{i,EC313})\).
• Complicated function of your effort in class via substitution.
• Your degree is costing you £27,000: Don’t waste your opportunity to maximise output!

Introduction

• Introductory Macroeconomics:
  • Week 1: National income measurement
  • Week 2: Total factor productivity and human capital.
  • Week 3: Unemployment and the labour market.
  • Week 4: Trade and Globalisation (Chs. 8–9).
  • Week 5: Revision (Thursday) and midterm exam (Friday).
    • Sample paper: http://rpubs.com/jjreade/ec114_sample_ex
  • Week 6: Enhancement Week — Settlers!
  • Week 7: Chapter 10: Consumption and Investment.
  • Week 8: Chapter 11: Business Cycles.
  • Week 9: Chapters 12–14: Money, Prices, Monetary and Fiscal Policy.
  • Week 10: Chapters 17–18: Banking, Debt and (Sovereign) Default.
  • Week 11: Chapters 19–21: Exchange Rates.

Today - Trade and Globalisation

-Trade Usually Grows Faster Than Output

Manufacturing is more than half of world trade

Largest flows are between US, Europe and Asia

Comparative Advantage

• Theory: All better off if produce what comparatively more efficient at producing.
  • Even if one country better at producing everything.
• Opportunity cost of production: Opportunity forgone by making choice.
  • Produce good for which opportunity cost lowest.
  • Trade with partner for goods for which no comparative advantage.
• Trade with countries producing other goods.
  • Trade must be at exchange rate such that countries benefit.
  • Assumption: Neither country has bargaining power.

Fictional Example: Terrania absolute advantage in both

Trading expands consumption possibilities for rich…

… but also for poor county, Oceania

Comparative Advantage

• All countries can benefit from trade but…
  • All countries gain, not necessarily become wealthy.
  • All countries gain, but not necessarily equally.
  • All countries gain, but not every citizen gains.

The UK and US, circa 1937

Terms of Trade

• Terms of trade: \[ \begin{align} \frac{\text{price of exports}}{\text{price of imports}}. \end{align} \]
• Bigger number, the better for a country.
• Declining terms of trade do not mean country harmed by trade:
  • Only that they gain less than if terms of trade increasing.

Terms of Trade

Prebish-Singer Hypothesis

• Biggest variation in terms of trade for countries exporting commodities.
• Prebish-Singer Hypothesis:
  • Price of commodities falls in real terms.
  • Income elasticity of food demand low.
  • Additionally, technology ensures supply continues to grow.
• In recent years however, commodity and food prices have increased:
  • Suggestion that speculation to blame.
  • More likely, huge increase in demand from China and India (relatively low incomes).

Prebish-Singer Hypothesis?

Prebish-Singer Hypothesis?

Trade in Natural Resources

What Determines Comparative Advantage?

• Heckscher-Ohlin model: Country must have important factor input in abundance.
  • E.g. China has labour, Saudi Arabia has oil, Canada and Russia have land.
  • Developed nations have large capital stocks.

• Esoteric and boring?
  • Tyler Cowen on the Marginal Revolution blog
  • PS Blogs are awesome for procrastinating…

But the US (and UK) Import Capital-Intensive Goods Also…?

Tastes, Tariffs and Technology

• Heckscher-Ohlin model assumes all countries have same tastes.
• US may import capital-intensive goods because demand so strong?
• H-O also assumes no trade restrictions:
  • Tariffs distort trade patterns away from what H-O predicts.
• Alternatively, we should consider more factors of production:
  • E.g. human capital, which the US (and developed nations) are abundant in.
• Technology also differs between countries creating differences.

Countries Export Influenced by Abundances

Intra-Industry Trade

• H-O cannot explain why countries both import and export same goods: e.g. cars.
  • Factor endowments cannot explain one country producing VWs, the other Fiats.
• Measure of intra-industry trade: \[ \begin{align} 1 - \frac{\left|\text{exports}-\text{imports}\right|}{\text{exports}+\text{imports}}. \end{align} \]

Intra-Industry Trade

Intra-Industry Trade

• Assumptions:
  1. Consumers like variety.
  2. Increasing returns to scale exist.

Not Everybody Thinks Trade is a Good Thing…

Socrative

• Can you all open Socrative Student App on your phone?
  • Navigate to room yVmAQCjIMw (that’s capital i).
• True/False: Free trade is a good thing?
• True to form, there’ll be a survey later…
  • Please do participate.
  • Results more meaningful with more participants.

Factor Price Equalisation Theory

• As trade occurs, factor prices across countries converge.
• Will UK wages fall to those in China as we trade with them?
• But unskilled labour has different productivity in different countries:
  • Capital stock matters: Machinery used to make UK workers more productive.
• Stolper-Samuelson theorem:
  • Trade increases/decreases real income of owners of abundant/scarce factor of production.
  • UK unskilled labour wages fall, UK skilled labour wages rise.

Factor Price Equalisation Theory

Competitiveness

• Classic government-speak:

“So that’s our plan: fiscal responsibility, monetary activism and restoring our competitiveness to succeed in the global race,” David Cameron, 7 March 2013.

• For balance:

“Competing, as David Sainsbury said, in the race to the top for high wages and high skills, not a race to the bottom. Addressing the long-standing productivity and competitiveness challenges facing our country. So we can pay our way in the world,” Ed Miliband, 3 July 2014.

• Idea that we must outperform all our rival nations central to national psyche — why?
  • Comparative advantage: We all gain from trade — the pie gets bigger.
• Trade is not adversarial. e.g. New invention in Germany.
  • UK firms can now access this improved technology and use it in production.
  • Germans are wealthier hence import more British goods.
• Investment aimed at improving productivity likely beneficial.
  • But advantage is relative, not absolute; may be ineffectual on trade.

Strategic Trade Theory

• Resource endowments lead to comparative advantage:
  • But how do resource endowments come about?
• New (strategic) trade theory: Comparative advantages can be manipulated.
  • Protectionist policies can help industry develop into comparative advantage.
• But: Only effective for increasing returns to scale industries.
  • Retaliatory action by other governments will nullify impact.
  • How does govt know which industries to target?

Political Economy, Vested Interest

• Stolper-Samuelson theorem: Some groups lose out from trade.
  • If groups have political power, lobbying govt will be successful.
• Gains from trade spread amongst population — no lobby group for free trade.
• E.g. agriculture in developed nations.
• Protected industries generally high employment, unskilled with monopoly power.
  • Dislocation of losers from free trade politically costly.

Chapter 9: Globalisation

• Globalisation: Process of national economies becoming increasingly interconnected.
• Trade in goods and services 16% (OECD) and 21% (emerging mkts) in 1990.
  • In 2008 29% and 37% respectively.
• Increased capital flows: 1.2% of world GDP in 1995, 3% in 2008.
• Immigration has risen sharply in recent years.

Globalisation leads to market liberalisation

Globalisation isn’t a new phenomenon

The last century of trade growth…

Concentrated efforts to reduce tariffs

Trade Liberalisation

• The more countries trade, the less likely they are to fight in war.
• Comparative advantage: Liberalise trade, all get richer.
• Converse: Import substitution — protect domestic industries.
  • Prebish-Singer: Manufacturing better than agriculture. TFP in manufacturing.
  • Bus raises overall cost of production for all industry (inc. investment).
  • Leads to many bloated (over-protected) industries.
• Empirical evidence suggests that liberalising countries grow faster.

It’s in the data…?

Consider the time profile…

Trade Liberalisation

• Could omitted variables explain liberalisation-growth correlation?
  • Could third factor be correlated with both, driving impact?
  • E.g. financial sector reform?
• Simultaneity: Growth and liberalisation happen — but which first?
  • Poorer countries can raise govt revenue easier at border than within.
• Even if relationship there in the data (which it is):
  • Policy conclusions needn’t be rapidly liberalise (dislocation etc).
  • Liberalisation alone without associated reforms developing institutions may be harmful.

The Case of India…

… chicken and egg?

FDI and Multinationals

• FDI: Foreign firm takes controlling interest in local firm.
• FDI by MNEs increases overall investment in recipient countries.
  • MNEs pay higher wages and do more R&D.
• FDI financial flows less volatile than other inflows.
• But: In attracting MNEs and FDI, govts `race to bottom’:
  • Tax concessions, law changes, cronyism.
  • That said, evidence suggests MNEs attracted by absence of corruption.

Immigration

The Impact of Immigration?

Theoretical Impact of Immigration on Wages

Globalisation and Inequality?

Globalisation and its Discontents

• Environment: Govts attracting MNEs, `needless’ trade, travel.
• Global institutions: World Bank and IMF:
  • Conditionality deprives countries of dignity; Washington consensus damaging…?
  • Global lender of last resort creates moral hazard — instability.
• Globalisation increases role of market — threatens governments.
  • E.g. difficulty of implementing fat tax given origins of imported food.
• Cultural concerns: Are local identities being lost?
• Suggestion: Globalisation increases need for global governance.
  • WTO and GATT, European governance.

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Concluding

• Today: Chapter 8–9, trade and globalisation.
  • Comparative advantage, intra-industry, globalisation’s discontents.
• For week 5 classes:
  • Prep for classes in week 5: http://rpubs.com/jjreade/ec114_class3
• Next Thursday: Revision and Exam Prep.
• Next Friday: Midterm exam, 9am start.