Country A has a comparative advantage in bananas and country B has a comparative advantage in televisions. With free trade, each country specializes in the good it can produce at a relatively lower cost, and both countries benefit from gains from trade. The first wave of globalization from 1870-1914 was driven by falling transport costs and reductions in tariffs, leading countries to specialize in primary commodities based on land abundance. The second wave from 1945-1980 saw further trade liberalization among developed nations and the rise of manufacturing clusters. The third wave from 1980-present saw many developing countries enter global markets, driven by trade reforms and continued declines in transport costs and rise of information technologies.
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Country A has a comparative advantage in bananas and country B has a comparative advantage in televisions. With free trade, each country specializes in the good it can produce at a relatively lower cost, and both countries benefit from gains from trade. The first wave of globalization from 1870-1914 was driven by falling transport costs and reductions in tariffs, leading countries to specialize in primary commodities based on land abundance. The second wave from 1945-1980 saw further trade liberalization among developed nations and the rise of manufacturing clusters. The third wave from 1980-present saw many developing countries enter global markets, driven by trade reforms and continued declines in transport costs and rise of information technologies.
Country A has a comparative advantage in bananas and country B has a comparative advantage in televisions. With free trade, each country specializes in the good it can produce at a relatively lower cost, and both countries benefit from gains from trade. The first wave of globalization from 1870-1914 was driven by falling transport costs and reductions in tariffs, leading countries to specialize in primary commodities based on land abundance. The second wave from 1945-1980 saw further trade liberalization among developed nations and the rise of manufacturing clusters. The third wave from 1980-present saw many developing countries enter global markets, driven by trade reforms and continued declines in transport costs and rise of information technologies.
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Country A has a comparative advantage in bananas and country B has a comparative advantage in televisions. With free trade, each country specializes in the good it can produce at a relatively lower cost, and both countries benefit from gains from trade. The first wave of globalization from 1870-1914 was driven by falling transport costs and reductions in tariffs, leading countries to specialize in primary commodities based on land abundance. The second wave from 1945-1980 saw further trade liberalization among developed nations and the rise of manufacturing clusters. The third wave from 1980-present saw many developing countries enter global markets, driven by trade reforms and continued declines in transport costs and rise of information technologies.
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Comparative advantage
• Country A produces bananas at lower cost than
country B; country B produces televisions at a lower cost than country A • There are potential “gains from trade” if country A exports bananas and imports tvs and country B exports tvs and imports bananas (because more of each can be produced holding resource endowments constant) • With free trade, countries will specialize in goods that are relatively cheaper for them to produce = comparative advantage
This holds only if transportation costs are less than
potential gains from trade (graph) First wave of globalization: 1870-1914 • Triggered by a combination of falling transport costs (e.g., switch from sail to steamships, railroads) and reduction in tariff barriers • Opened up the possibility of using abundant land
Production of and-intensive primary
commodities • People immigrated to these countries and capital was invested in manufacturing in these countries • Land-abundant countries: Argentina, US, Australia, New Zealand • Labor exporting countries: European countries, others
Protectionist policies: 1914-1945
• These are policies that seek to increase domestic demand for own products by reducing imports and increase domestic supply by reducing export of capital to other countries o Example: import tariffs • Post-WWI economic depression led countries to institute protectionist trade policies Second wave of globalization: 1945-1980 • Transport costs continued to fall • Trade liberalization began after WWII • By 1980, trade between developed countries in manufactured goods was free of barriers • Barriers facing developing countries were removed only for those primary commodities that did not compete with agriculture in developed countries • Most developing countries still had trade barriers in place • Consequences: o Led to agglomeration economies in manufacturing production in developed countries o Redistribution of manufacturing within developed countries to lower wage areas Third wave of globalization, 1980-present • Many developing countries broke into the global markets for the first time (include China, Bangladesh, Sri Lanka, India, Turkey, Morocco, Indonesia, Philippines, Mexico) o Between 1980 and 1988, share of total exports of developing countries of manufactured goods increased from 25% to 80% o During 1980, share of total exports of developing countries of services increased from 9% to 17% • Why? o Changes in economic policies many developing countries undertook major trade liberalization reforms and reduced barriers to foreign investment o Continued progress in declining transport costs (containerization, airfreight) and new information technologies (digital information is costless to ship)
Current trend: marked increase in globalization of
services due to information technologies • See BusinessWeek cover story from Feb 2003: http://www.businessweek.com/magazine/content/03_05/b3818001.htm
Indian Institute of Materials Management Post Graduate Diploma in Materials Management Graduate Diploma in Materials Management Paper No. 7 International Trade