This document discusses the course Econ 672/IB 561 International Economics and Business. It provides details on office hours, textbooks, grading breakdown, assignments, exams, and quizzes. The course will cover three parts: globalization and related issues, foreign exchange and global financial markets, and international trade, policy, and immigration.
2. Imagine
Imagine there's no heaven
It's easy if you try Imagine no possessions
No hell below us I wonder if you can
Above us only sky No need for greed or hunger
Imagine all the people living for today A brotherhood of man
Imagine all the people sharing all the world
Imagine there's no countries
It isn't hard to do You, you may say
Nothing to kill or die for I'm a dreamer, but I'm not the only one
And no religion too I hope some day you'll join us
Imagine all the people living life in peace And the world will live as one
You, you may say
I'm a dreamer, but I'm not the only one
I hope some day you'll join us
And the world will be as one
3. Office Hours:Open door policy
Textbook?
The Wall Street Journal
Lecture Notes (available on Blackboard)
Readings (available on Blackboard)
Grading:
15% 3 assignments
20% Weekly quizzes (first 3 minutes of every class)
65% 3 exams, 20-20-25%
September 11, Tuesday
September 25, Tuesday
October 9, Tuesday
All grades will be posted on Blackboard.
4. Grading Criteria for the Assignments
A two-page report on article assigned.
Page 1--summarize the article.
Page 2--criticize the approach, argument or
methodology of the article.
Accuracy of the summary (4 points)
Coverage of the summary (4 points)
Critical thinking (8 points)
Writing and organization (4 pints)
Total 20
5. Why the assignments?
Study: Many college students not learning to think
critically (Sara Rimer, The Hechinger Report, reported in the Eagle 1-18-2011)
45% of students made no significant improvement in their
critical thinking, reasoning or writing skills during the first
two years of college. After four years, 36 % showed no
significant gains in these so-called "higher order" thinking
skills.
Students devoted less than 1/5 of their time each week to
academic pursuits. By contrast, students spent 51 percent
of their time — or 85 hours a week — socializing or in
extracurricular activities.
6. Quizzes
5 questions. 2 points each.
Exams
Part 1: short essays/calculations, true and
false
Part 2: long essays/calculations
Grades will be curved.
Review Questions and Review Sessions
RSC fireplace or Panera Café on Rock Road
7. What will we learn this
semester ?
Part One: Globalization and
Its Related Issues
Part Two: Foreign Exchange and the
Global Financial Markets
Part Three: Trade, Policy and
Immigration
9. A. Globalization and examples
What is globalization?
Globalization is simultaneous an economic,
cultural, and political phenomenon.
It includes
the integration of world markets through
increasing trade and capital mobility,
the rapid diffusion of ideas and norms
transnational, and
the restructuring of power relationships and
political interests.
10. (i) Local Examples
Wichita—food, cultural
activities, immigrants
Boeing—Onex—Spirit
Wal-Mart: the single
largest importer of
foreign-produced goods
in the United
States
19. Case 1: Cadbury and
Kraft
1/20/2010 USA Today
Cadbury is stronger in
India, Turkey, South Africa,
and Mexico.
On the flip side, Kraft could
promote Cadbury's sales in
Brazil, Russia and China.
Kraft
Revenue: $40.3 billion
Net income: $2.5 billion
Employees: 98,000
Cadbury
Revenue: $5.7 billion
Net income: $564 million
Employees: 45,000
20. Case 2: Starbucks in
China 4/14/2010 WSJ
Starbucks opened its first store on the Chinese
mainland in 1999.
It has only 376 stores on the China mainland,
compared with 878 in Japan. The retailer has more
than 11,000 outlets in the U.S.
21. Case 3: Wal-Mart Thinks
Locally to Act Globally
8/14/2009 WSJ
Wal-Mart has struggled to
extend its dominance
across the globe. Now the
retailer is tailoring
inventories and stores to
local tastes -- and
exporting ideas and
products pioneered
outside the U.S.
22. Case 4: Procter &
Gamble
8/19/2010 WSJ P&G’s global thinking
Background: Consumers switched to a cheaper
substitute
Old strategies: Rolling out new versions of old
products
New strategies: (1) price cut, (2) new markets
Main target: Brazil (170 m customers of the 190 m
population)
25. B. Four Challenges to the
U.S.
(1) Financial Crisis and Euro Crisis
Congressional Report 4/13/2011
Permanent Subcommittee on Investigations (PSI), US
Senate
Four causes:
(1) High Risk Lending: Washington Mutual Bank
(2) Regulatory Failures: the Office of Thrift Supervision
(3) Inflated Credit Ratings: Moody’s and Standard &
Poor’s
(4) Investment Bank Abuses: Goldman Sachs and
Deutsche Bank
30. Credit scores
Experian, Fair Issac Model: 250-
900
Equifax, Beacon 5 Model: 300-850
Trans Union, New Emperica Model:
300-850.
Subprime mortgage:
A mortgage issued to a
borrower with impaired
credit, typically reflected in
a credit score below 620.
Alt-A mortgage:
A mortgage with an A-
credit rating.
31. Inflated Credit Ratings
Report by The Permanent Subcommittee on Investigations (PSI) of the US
Senate April 13, 2011
Between 2004 and 2007, Moody’s and
S&P issued AAA credit ratings for the vast
majority of tens of thousands of U.S.
residential mortgage backed securities
(RMBS) and collateralized debt
obligations (CDOs).
Inflated credit ratings contributed to the
financial crisis by masking the true risk of
many mortgage related securities.
37. Bureau of Labor
Statistics (BLS) for 2010
UnE rate Education attained Median weekly earnings
(Percent) in 2010 (Dollars)
1.9% Doctoral degree $1,550
2.4 Professional degree 1,610
4.0 Master's degree 1,272
5.4 Bachelor's degree 1,038
7.0 Associate degree 767
9.2 Some college, no degree 712
10.3 High-school graduate 626
14.9 Less than a high school diploma 444
8.2 All Workers 782
39. Policy: (2) Government Bailouts and
Fiscal Policy
9/19/08: the government announced a plan to
purchase illiquid, risky mortgage backed
securities, estimated to be $700 billion (TARP).
$
1/16/09 Obama’s Stimulus Package: The plan
includes roughly $550 billion in spending
and $275 billion in tax cuts.
40. Chrysler files for GM bankruptcy:
bankruptcy End of an era
4/30/2009 6/1/2009
Cash For Clunkers :
vehicles purchased
after July 1, 2009 are
eligible for refund
vouchers worth $3,500
to $4,500 on traded-in
gas guzzlers. The
program ended on
8/24/09.
41. Policy: (3) Regulations
Senate Passes Finance Bill, Biggest Regulatory Overhaul
of Wall Street Since Depression Moves Closer to Law
5/21/2010 WSJ
1. Establish a new council of "systemic risk" regulators.
2. Create a new consumer protection division within the
Federal Reserve.
3. Empower the Federal Reserve to supervise the largest,
most complex financial companies.
4. Allow the government in extreme cases to seize and
liquidate a failing financial company.
5. Give regulators new powers to oversee the giant
derivatives market.
42. Whose fault from a global perspective?
Two interesting reports
(1) The Global Financial Crisis: Getting Past the
Blame Game, Brookings 1-29-2009
Bernanke’s Saving Glut Hypothesis
(2) Chinese Premier Blames Recession on U.S.
Actions, Beijing Rethinks Some of Its
American Investments, WSJ 1-29-2009
“Unsustainable model of development,
characterized by prolonged low savings and
high consumption.”
45. Euro Area Unemployment
Rate, Q2 2012
Among the Member States, the lowest
unemployment rates were recorded in Austria
(4.5%), the Netherlands (5.1%), Germany and
Luxembourg (both 5.4%), and the highest in
Spain (24.8%) and Greece (22.5% in April
2012).
46. Euro Debt Crisis
Spanish Banks' Bad Loans Surge
8-17-2012 WSJ
Nonperforming loans grew by €8.39 billion
($10.37 billion) in the month of June, to
€164.36 billion, or 9.42% of total outstanding
loans compared with 8.95% in May.
http://live.wsj.com/video/eurozone-rot-keeps-spreading-/90677520-
47.
48. PIGS (PIIGS) and the
Euro
PIIGS: Portugal, (Italy,) Ireland, Greece
and Spain
49. Debt crisis: Angela Merkel
and Francois Hollande
pledge to back euro 7-27-2012 The
Telegraph
They issued a joint statement following a crisis
telephone call echoing Mario Draghi's promise
that the European Central Bank would do
whatever it took to save the euro.
52. U.S. Crude Oil Imports
The top five exporting countries
accounted for 67 percent of
United States crude oil imports in
May while the top ten sources
accounted for approximately 87
percent of all U.S. crude oil
imports.
http://www.eia.gov/ (8/22/2011)
53. Obama Rejects Canada-
Texas Oil Pipeline _ for Now
1/19/2012 ABC
http://abcnews.go.com/Politics/wireStory/state-department-decision-oil-pipeline-15387299
54.
55. Impacts on Current Account
U.S. Net Imports of Crude Oil and Petroleum Products
(Thousand Barrels per Day)
Around 50% of the trade deficit is due to energy prices
59. Reasons for High Oil Price
1. Demand
Strong economies worldwide have led to rising demand for
oil for years. Demand growth is strongest in China, the USA
and the Middle East.
2. Supply
Supply has lagged: OPEC in 2006 and early 2007 cut
production; the oil cartel increased production at the end of
2007 and gradually boost production throughout 2008.
Production outside of OPEC member countries has not
kept pace with demand gains.
OPEC was found in 1960. Currently, the organization has a total of 12
member countries.
60. 3. Geopolitical worries
Much of the world’s oil reserves are in the Middle East,
where tensions have led to concerns about the stability of oil
supplies. That has led investors to add a risk premium into
oil prices. (Libya and Iran)
61. EU Bans Imports of Iran's
Oil, Raising Pressure on
Tehran
1-24-2012 WSJ
Why? The Iranian leadership has failed to restore
international confidence in the exclusively peaceful
nature of its nuclear program.
The ban is set to take effect on July 1.
62. Oil Climbs 1.3% on EU
Embargo 1-23-2012 WSJ
The EU imports about 600,000 barrels of oil a day from
Iran—close to a quarter of Tehran's exports of 2.6
million barrels a day.
Light, sweet crude oil for March delivery on the New
York Mercantile Exchange settled 1.3%, or $1.25 higher,
at $99.58 a barrel.
The U.S. has been lobbying Iranian oil buyers in Asia
and elsewhere to reduce their purchases or face U.S.
sanctions for conducting business with Iran's central
bank.
China and India did not cooperate.
63. Renewed Iran Threat
Rattles Oil Markets 2-21-2012 WSJ
EU ban on Iranian oil starting
July 1.
The threat: Iran will sell oil to
European countries in terms of
two- to five-year contracts and
without any preconditions,
and…otherwise the exports will
be canceled.
64. 4. Dollar
Oil is traded in dollars. For consumers in countries
whose currencies have appreciated against the dollar,
the increase in oil prices has had less of a bite and
demand for oil has been strong. For oil-producing
countries, the decline in the dollar may lead them to
keep oil off the market to prop up prices.
5. Speculation
Money has flowed into oil and other commodity markets.
But speculation is really a symptom of the market
fundamentals.
7/29/2011 Reuters Goldman Sach's Turns
Warehouses Into Surprising Sources Of Revenue
65. As Oil Spiked, Many
Traded 8/18/2011 WSJ
The secretive world of oil
trading: Wall Street, foreign
pension funds, corporate
icons and even an Ivy
League endowment.
The list could fuel calls for a
crackdown on oil
speculators.
Banks such as
Goldman Sachs Group Inc.
and Morgan Stanley, which
have long played a central
role in oil trading, dominate
the list.
67. Economic Effects – Macro Level
(country)
(See handout for a review of AD-AS)
68. Four Challenges to the U.S.
(3) Offshore Outsourcing (Offshoring)
Outsourcing is the process of contracting a
third party to manage or operate a non-core
business function in order to reduce cost and
increase efficiency.
Outsourcing is typically conducted offsite by
companies who have the infrastructure,
manpower and know how to run the
business function at a profit.
70. Factors contributing to outsourcing (1)
1/22/2009 WSJ A12
China orders rise in
minimum wage rates
6/17/2010 WSJ
Effective 7/1/2010, the minimum
wage in Guangdong will increase
by 10 percent to 1,100 yuan per
month (around $162) from 1,000
yuan ($147). The minimum wage
in Beijing will rise by 20 percent to
960 yuan ($141) a month from
800 yuan ($118).
74. Factors contributing to outsourcing (3)
Beyond the Border, Do
What You Do Best,
Outsource the Rest?
Federal Reserve Bank
of Dallas, Southwest
Economy, Issue 6,
November/December
2003
76. Factors contributing to outsourcing (4) NSF
Overall: Students
enrolled in science
and engineering in
fall 2009 (top 10):
1. India 67,800
2. China 53,740
3. S. Korea 19,850
77. Example of Outsourcing
(1)
Cessna November 28, 2007 WSJ
• Starter Plane: Cessna hopes
building the SkyCatcher in
China will help keep prices low
enough to attract buyers.
• Fill Cockpits? Cessna hopes it
will appeal to flight schools and
new fliers amid a tight global
market for pilots.
• Shrinking Base: It also hopes
the plane will help counter the
dwindling number of U.S. pilots,
who face rising costs to own
and fly planes.
79. Theoretical Model: Bhagwati, Panagariya and Srinivasan.
“The Muddles over Outsourcing.” The Journal of Economic Perspectives, Fall
2004
Two important concepts: (1) Diminishing Return,
(2) Profit Maximization, MPL = (W/P)
marginal product = real wage
80.
81. Jagdish Bhagwati, Arvind Panagariya, and
T.N. Srinivasan
As skills in China and India improve, trade with
them will become more like that with other rich
countries, from which America has historically
benefited.
Forrester Research predicts that 3.4m jobs will
be outsourced by 2015. That may sound
enormous, but it implies an annual outflow of
only 0.5% of the jobs in the industries affected.
82. The other side of the story (1)
The role multinational
companies play in China's
growing pollution. One way
China's factories have
historically kept costs down
is by dumping waste water
directly into rivers.
Montenegro’s high growth
rate and pollution
83. Environmental Kuznets Curve” (EKC)
Hypothesis
Simon Smith Kuznets (April 30, 1901 – July 8,
1985) was a Russian American economist at
the Wharton School of the University of
Pennsylvania who won the 1971 Nobel
Memorial Prize in Economic Sciences.
“Confronting the Environmental Kuznets
Curve,” Journal of Economic Perspectives Vol.
16, No. 1, 2002
84. Definition of EKC
Gallagher, Kevin P. “Free Trade and the Environment: Mexico, NAFTA, and Beyond”
Americas Program, Interhemispheric Resource Center 9/17/2004
The EKC hypothesizes that the relation between income
per capita and emissions has an inverted U-shape.
At relatively low income levels, emissions increase with
income, but after some “turning point”, emissions
decrease with income.
Economists hypothesized that environmental
improvement beyond the “turning point” happened for
three reasons.
(1)Scale effects
(2)Composition effects
(3)Technique effects
85. Richmond, Amy K. & Kaufmann, Robert K., 2006. "Is
there a turning point in the relationship between income
and energy use and/or carbon emissions?," Ecological
Economics, vol. 56(2), pages 176-189, February
86.
87. Empirical evidence
1. EKC found to hold for some pollutants (sulphur
dioxide, particles), but others increase
monotonically with income (carbon emissions).
2. Differences if study OECD countries or non-
OECD countries. No or higher turning point for the
latter for CO2 emissions, for example. (Richmond
and Kaufman, 2006)
88. The policy issue?
EKCs have been used as an argument that
economic growth and increased environmental
quality go hand in hand. They have also been
used in support of a do-nothing policy.
This is not very useful since, if there is a turning
point, we would like to know what factors explain it
before making assessments of whether
environmental policy is necessary or not.
89. The other side of the story (2)
JET BLUES, Boeing Scrambles to Repair Problems With
New Plane, Layers of Outsourcing Slow 787 Production;
'Hostage to Suppliers‘’12/7/2007 WSJ
To lower the $10 billion or so it would cost to develop the
the Dreamliner, Boeing authorized a team of parts
suppliers to design and build major sections of the craft,
which it planned to snap together at its Seattle-area
factory.
But outsourcing so much responsibility has turned out to
be far more difficult than anticipated.
91. Boeing Delays New Jet Again
6/24/09 WSJ Boeing Set to Buy Dreamliner P
Boeing again delayed the first 7/8/09 WSJ
787 Dreamliner flight due to a Boeing agreed to buy
structural flaw, which further manufacturing operations from
dents the company's credibility Vought, a key Dreamliner
and could hurt the jet's supplier, for $580 million.
profitability.
Boeing Halts Dreamliner
Plant 8/14/2009 WSJ
Boeing has ordered work
halted at a fuselage assembly
plant in Italy working on its
marquee 787 Dreamliner
aircraft.
Finally took off on Dec. 15,
2009
92. Cessna retooling delays
deliveries of Skycatchers
2/4/2010 Wichita Eagle
Deliveries of its light sport aircraft will be delayed from
six to 10 months.
The company decided to build the $112,250 plane at
the Shenyang Aircraft Corp. in China so it could be
sold at a competitive price.
Last year during flight testing, two test aircraft crashed
after they could not recover from planned aggressive
spins.
95. Diana Farrell, “Smarter Offshoring.”
Harvard Business Review June 2006
India, eastern Europe, and Russia.
MGI studied 28 low-wage countries.
There were 6.4 million young professionals
suitable for offshore jobs in 2003.
“Suitable” professionals are university
graduates with up to 7 years of experience who
have the skills and attributes that multinationals
want.
96. More than 90% of the supply of young professionals suitable for work in
offshore centers reside outside the current hot spot cities and 72% live outside
India.
97. Onshoring or Reshoring
8/6/2010 USA Today
Examples: General Electric, NCR, Caterpillar, and Ford.
Reasons:
1)Rising Chinese wages and shipping costs
--Chinese wages have jumped 15% a year
--Shipping costs are up about 71% the past four
years
1)poor quality of goods made by foreign contractors
2)theft of their intellectual property
3)long product-delivery cycles that make them less
responsive to customer demand
98. The end of cheap China
What do soaring Chinese wages mean for global manufacturing?
2012-3-10 Economist
99. Auto Makers Now Import
Jobs
Labor Deals at Ford, GM to Shed Veterans for New
Hires, Returning Some Production From Abroad
10/5/2011 WSJ
Reshoring
New hires are expected to earn half the roughly $28 an
hour wage that veteran auto workers make. The wage
shift is paving the way for the hiring of up to 12,000 U.S.
workers through 2015, including 7,000 previously
announced jobs.
Ford: Move Fusion from Mexico to Flat Rock, Mich.
Another Ford plant in Kentucky will assemble
commercial vans that the company now builds in Turkey.
101. How to Stop
Outsourcing?
Book Review: Assembled Elsewhere 1-25-2011 WSJ
To manufacture the Kindle,
Amazon couldn't find enough
expertise and capacity in the U.S.
It headed to Taiwan.
Policy suggestions:
(1) Cut taxes,
(2) R&D tax credit permanent,
(3) Federal financial incentives,
(4) “Growth bank”,
(5) Overhaul K-12 education.
102. Four Challenges to the U.S.
(4) The Dollar’s Value and Current Account Deficits
8-17-2012
104. Effects of a declining dollar
Helps exports
Increases import costs
Increases pressure on domestic inflation
Other effects
(1) Foreign investment in the U.S.?
(2) US investment in other countries?
(3) Cost of traveling to other countries?
(4) Foreign exchange reserve?
105. Example 1: German Auto Makers Rev Up U.S.
Output, BMW and Mercedes Seek Hedge Against
Weak Dollar, Giving the South an Economic Boost
8-14-2007 WSJ
106. More than two-thirds of the
world's central banks have
boosted the euro holdings in
Example 2: their currency reserves over
Central the past two years.
Banks Boost The findings cast further
Holdings in doubt on the U.S.'s ability to
Euros at rely on dollar-buying from
Expense of central banks, which are
Dollar among the world's biggest
January 24, holders of foreign-currency
2005, WSJ assets.
107.
108. Example 3: Senate Moves to
Punish China for Yuan's Low
Value 10-4-2011 WSJ
The Senate voted yesterday, 79-19, move
ahead with a bill that would punish China for
keeping the value of its currency low.
109. Why blame on the Chinese yuan?
$1 = 6.3137 yuan as of 1-17-2012
110. The Top Ten Countries by
Foreign Exchange
Reserves
112. A Falling Dollar Will Mean
a Faster U.S. Recovery 8-1-
2011 WSJ
Martin Feldstein (Harvard)
U.S. exports are only 10% of GDP, but
account for more than 50% of GDP growth
in the past four quarters.
4 strong market forces will put downward
pressure on the dollar during coming years.
113. Four market forces to
depreciate the dollar
1. Selling by sovereign wealth funds and other
international holders of large dollar balances.
2. Interest rate difference between short-term dollar
securities and similar euro securities.
3. Enormous U.S. trade deficit, nearly $500 billion
over the past 12 months.
4. The likely decline in China's current-account
surplus and therefore in China's demand for U.S.
bonds.
114. The resilient dollar
Why the greenback has so far withstood
the panic in financial markets 10/2/08 The
Economist
Kristin Forbes of MIT
1. Against the theory of
risk diversification.
2. Lack good options in
foreign (developing)
counties.
115. Common Measures of Globalization
1. Exports and imports of goods and services as
a percentage of GDP
117. Top 5: Industrial supplies and
capital goods account for about $1
trillion.
118.
119. How about Kansas?
Total KANSAS Exports and % Share of U.S. Total
2005: 6,736(m) 0.7
2006: 8,636 0.8
2007: 10,277 0.9
2008: 12,514 1.0
2009: 8,917 0.8
2010: 9,905 0.8
The state's largest export markets: Canada, Mexico, and Japan.
The state’s top exports (2010):
1) CIVILIAN AIRCRAFT, ENGINES, EQUIPMENT, AND PARTS
2) MEAT
3) ?
120. 2. Foreign Direct Investment
Foreign Direct Investment (FDI) is investment of foreign
assets into domestic structures, equipment, and
organizations.
FDI does not include foreign investment into the stock
markets.
FDI is believed to be more useful to a country than
investments in the equity of its companies. Why?
(1) Equity investments are potentially "hot money.“
(2) FDI is durable.
121. Motives for Direct
Foreign Investment (1)
Revenue-Related Motives
a. Attract New Sources of Demand
b. Enter Profitable Markets
c. Exploit Monopolistic Advantages
d. React to Trade Restrictions
e. Diversify Internationally
122. Motives for Direct
Foreign Investment (2)
Cost-Related Motives: Reduce Costs
a. Fully Benefit From Economies of Scale
b. Use Foreign Factors of Production
c. Use Foreign Raw Materials
d. Use Foreign Technology
e. React to Exchange Rate Movements
124. FDI in China:
Foreign Direct Investment in China Rises
17%
1-19-2011 WSJ
Inbound FDI in 2010 rose
17% to $105.74 billion.
About 23% of FDI last year
flowed into China's real-
estate market.
Investment overseas in
nonfinancial sectors by
Chinese companies totaled
$59 billion last year, up
36.3% from a year earlier
125. China’s Outward
Investment: China's Next Buying Spree:
Foreign Companies
Charles Wolf Jr. 1-24-2011 WSJ
From 2007 through the first half of 2010,
Chinese buyers—state, private and in
between—acquired 400 companies located
outside of the country.
China's share of the total number was 3.2%,
and its share of total acquisition value was
6.6%.
126. Reasons for the trend
(1) China has high rate of domestic savings—
above 45% of GDP. (Note: US 10.86%)
(2) China has shifted its focus away from
investing in U.S. government debt.
(3) Beijing's interest in acquiring foreign
companies that have rich holdings of natural
resources, high-technology or emergent
technologies, and financial know-how and close
connections with other financial institutions.
129. How Foreign Direct
Investment Benefits the
United States
1. Foreign Direct Investment (FDI) Creates New
Jobs: U.S. affiliates of foreign companies (majority
owned) employ 5.3 million U.S. workers, or 4.7% of
private industry employment.
2. Foreign Investment Boosts Wages: Some studies
have found that foreign companies have paid wages
in the past that were as much as 15% higher on
average than wages paid by U.S. companies.
3. Foreign Investment Strengthens U.S.
Manufacturing: 41 % of the jobs related to U.S.
affiliates of foreign companies are in the
manufacturing sector.
130. 4. Foreign Investment Brings in New Research,
Technology, and Skills
5. Foreign Investment Contributes to Rising U.S.
Productivity
6. Foreign Investment Contributes to U.S. Tax Revenues:
In 2002, foreign affiliates paid $17.8 billion in taxes, which
represented 12 % of U.S. corporate tax revenues.
7. Foreign Investment Can Help U.S. Companies Penetrate
Foreign Markets, and Increase U.S. Exports:
Approximately 21 % of all U.S. exports come from U.S.
subsidiaries of foreign companies.
8. Foreign Investment Helps Keep U.S. Interest Rates Low
134. What’s in the news?
“Illegal Immigrants Flock to Youth
Program” 8-16-2012 WSJ
Nearly two million immigrants could benefit
from the Deferred Action for Childhood
Arrivals (DACA) program, which began
accepting applications 8/15.
Qualifications:
(1) arrived in the U.S. before turned 16.
(2) 30 or younger and have lived continuously in
the country for at least five years.
(3) Must be enrolled in school in the U.S., have
graduated from high school here or served in
the U.S. military.
135. Policy Debate on immigration law
(Arizona) 4/23/2010 WSJ
Arizona's law orders
immigrants to carry their
alien registration
documents at all times
and requires police to
question people if there's
reason to suspect they're
in the United States
illegally.
Judge Blocks Arizona’s
Immigration 7/28/2010
136. Policy Debate on Immigration Law
(Georgia) 7/3/2011 WSJ
A new law targeting undocumented immigrants has gone into
effect in Georgia, with the most controversial two parts put on
hold.
(1) to check the immigration status of suspects without proper
identification and to detain illegal immigrants.
(2) creates a state penalty for people who knowingly and willingly
transport or harbor illegal immigrants while committing another
crime.
137. Policy Debate on Immigration Law
(Alabama) 8-28-2011 NYT
Alabama’s law takes effect 9/1/2011. The
Nation’s Cruelest Immigration Law
Added items such as: criminalizes working,
renting a home; nullifies any contracts when
one party is an undocumented immigrant;
requires public school officials to determine
students’ immigration status and report back to
the state.
138. Policy Debate on Birthright
Citizenship 2010-8-12 USA Today
“Births up for those in USA illegally”
The total number of children in the USA born to
illegal immigrants on U.S. soil jumped to 5.1
million in 2009, representing 7% of all children
under the age of 18 in the U.S.
Some senators are calling for a revision of the
14th Amendment that grants citizenship to
anyone born in the United States.
139. Immigration and the
Economy
Illegal Immigrants Numbers Steady2-2-2011 WSJ
2010 Undocumented: 11.2 m (4% of U.S. population, Pew Hispanic
Center). 2011: 11.5 m.
Illegal immigrants in the work force: 8 m (5.2% of labor force)
140. Reasons for Decline:
The economy
Intensifying border security, including stiffer penalties for
illegal entry, and steep fees charged by "coyotes."
Speed of Inflows:
850,000 a year (2000-2005)
300,000 in 2008
143. Another Measure of Globalization
A.T. Kearney/FOREIGN POLICY Magazine
Globalization Index
(http://www.foreignpolicy.com)
Economic Integration: trade, foreign direct investment,
portfolio capital flows, and investment income
Technological Connectivity: Internet users, Internet
hosts, and secure servers
Personal Contact: international travel and tourism,
international telephone traffic, and remittances and
personal transfers (including worker remittances,
compensation to employees, and other person-to-person
and nongovernmental transfers)
Political Engagement: memberships in international
organizations, personnel and financial contributions to
U.N. Security Council missions, international treaties
ratified, and governmental transfers
146. The Global Cities Index 2010
Foreign Policy, A.T. Kearney, and The Chicago
Council on Global Affairs
Analyzed 65 cities with more than 1 million people
Factors: a city's business activity, human capital,
information exchange, cultural experience, political
engagement.
Data: the number of Fortune Global 500 company
headquarters, the size of its capital markets, the flow of
goods through its airports and ports, the number of
embassies, think tanks, political organizations, and
museums.
147.
148. Advantages of Globalization
Productivity increases faster when countries
produce goods and services in which they
have a comparative advantage.
Global competition and cheap imports keep a
constraint on prices.
Promotes technological development and
innovation.
Jobs in export industries tend to pay about 15
percent more than jobs in import-competing
industries.
Provides the United States access to foreign
capital.
149. Disadvantages of Globalization
Americans have lost jobs because of imports or
shifts in production abroad.
Other Americans fear getting laid off, especially
those work in import-competing industries.
Workers face demands of wage concessions
from their employers.
Service and white-collar jobs could be sent
overseas.
American employees can lose their
competitiveness when companies build state-of-
the-art factories in low wage countries.
151. Globalization and Global
Inequality
“Catching up” Aug 21st 2003, From The Economist print edition
Stanley Fisher
152.
153. The debate on globalization, poverty and
inequality
Optimists
Bhagwati, Jagdish. 2004. In Defense of Globalization. New
York, NY: Oxford University Press.
Doubters and/or data driven
Bardhan, Pranab. 2005. “Globalization, Inequality and
Poverty: An Overview” University of California, Berkeley.
http://globetrotter.berkeley.edu/macarthur/inequality/papers/
BardhanGlobalOverview.pdf
Pessimists
Stiglitz, Joseph. 2002. Globalization and Its Discontents.
New York, NY: Norton & Company, Inc. (2001 Nobel Prize
winner)
155. Lorenz Curve for the American Economy
The Lorenz curve is the
dark red curve. The
poorest 20% of the
population earned only
3.6% of the income, the
poorest 40% of the
population earned 12.5
percent of income, and so
on. similarly, the least well
off 95% of the population
earned 78.8% of the
income, leaving 21.2% for
the richest 5% of income
for the richest 5%.
156. U.S. Lorenz Curve and Gini Coefficient
The Gini coefficient is
the area shaded in pink
divided by the total of
the areas shaded in
pink and light blue-
green.
157.
158. China Narrows Inequity
Between the Rich and Poor
2-3-2010 WSJ
The OECD, using what it says are better
estimates of price changes and the ranks
of undocumented rural migrants in cities,
puts the Gini index for 2005 at .41, and
says the measure of inequality edged
down to .408 by 2007.
159. Nobel Laureates Say Globalization's
Winners Should Aid Poor 8/25/08 WSJ
http://www.lindau-nobel.de/LecturesOnline.AxCMS
Robert Solow (Nobel 1987): Much of
economics is about the relative
efficiency of market allocation.
Economists also have to study how
best to reroute income "to those who
are damaged by otherwise useful
developments in the economy from
those who profit."
160. Robert Solow
3 main causes of growing inequality
1. Globalization has dramatically increased the world's
supply of low-skilled labor, damping wages for such
workers in developed countries.
2. Rapid technological change also has boosted demand for
high-skilled workers, whose wages have risen as demand
has exceeded supply.
3. Labor unions have lost ground and workers' wages have
suffered as wealthy countries have shifted to service
industries from manufacturing.
161. How to solve global inequality?
Bill Gates at Harvard (2007)
“Humanity’s greatest advances are not in its discoveries — but in how
those discoveries are applied to reduce inequity. Whether through
democracy, strong public education, quality health care, or broad
economic opportunity – reducing inequity is the highest human
achievement.” http://www.youtube.com/watch?v=AP5VIhbJwFs
Warren Buffett gives away his fortune (2006)
The world's second richest man - who's worth $44 billion in 2006 -
started giving away 85% of his wealth - most of it to the Bill & Melinda
Gates Foundation.
162. Aid to Haiti
2010 Haiti Earthquake
The Haitian Government reported that an estimated 230,000
people had died, 300,000 had been injured and 1,000,000
made homeless.
The World Bank:
(1) Haiti has dysfunctional budgetary, financial or procurement
systems, making financial and aid management impossible.
(2) The government did not exhibit ownership by taking the
initiative for formulating and implementing its assistance
program.
(3) A total mismatch between levels of foreign aid and
government capacity to absorb it.
James Shikwati, a Kenyan economist: "For God's sake, please
just stop (giving aid)."
163. Summary of Research findings:
(1) Policy matters. Foreign aid works better in
countries with good economic policies.
(2) Aid is better at reducing poverty if it is spent in
very poor countries.
(3) Not all foreign aid is equal. Money spent in
certain ways—such as on campaigns to eradicate
river blindness and smallpox, or to raise rice
yields—has been more successful. Other
spending, such as food aid (which helps rich-
country farmers) or tied aid (which must be spent
on services from the donor country) is much less
useful.
Alberto Fujimori (born 1938), President of Peru from 1990 to 2000.
164. The Five Wars of Globalization
(Foreign Policy, January/February 2003, 28-37)
1. Drugs
In 1999, the U.N.
CNN: 1-26-2006
calculated the annual Feds smoke out largest drug tunnel yet
trade in illicit drugs at Two tons of marijuana found in U.S.-
$400 billions (about 8% of Mexico passageway
world trade).
U.S. spent $35 billion to AFP: 9-3-2008 Mexican police discovered
$40 billion each year on an air-conditioned drug-smuggling tunnel
the war on drugs. less than 60 meters (65 yards) from the US
Between 1990 and 2000, border.
median price of a gram of
cocaine in the U.S. fell
from $152 to $112.
Drug war: 12,456 people
were killed during the
months of January to
November 2010 in
Mexico.
165. New drug tunnel found at
U.S.-Mexico border 11-26-2010
Reuters
166. Pot-smuggling tunnels in
Tijuana grow more elaborate 2-21-
2012 Eagle
Some tunnel excavators
in Mexico are killed when
the job is done to prevent
them from spreading the
word on the location.
167. 2. Arms trafficking
Drugs and arms often go together.
According to the United Nations, only 18 million
(about 3 percent) of the 550 million small arms and
light weapons in circulation today are used by
government, military, or police forces.
The demand for and supply of nuclear-, biological-,
or chemical-weapons are on the rise.
168. 3. Intellectual property
What are intellectual property rights? Intellectual
property rights are the rights given to persons over the
creations of their minds. They usually give the creator an
exclusive right over the use of his/her creation for a
certain period of time.
Intellectual property rights are customarily divided
into two main areas:
(i) Copyright and rights related to copyright.
(ii) Industrial property.
Why safeguarding these property rights? (i) It fosters
economic growth, (ii) provides incentives for technological
innovation, and (iii) attracts investment that will create
new jobs and opportunities for all their citizens.
170. The Finer Art of Faking It
Counterfeits Are Better Crafted, Duping
Even Sophisticated Shoppers 6-30-2011 WSJ
171. Chinese Shoppers Lose
Taste for Fakes 2-14-2012 WSJ
A survey in 2011 by China Market Research found that 95%
of Chinese women between 28 and 35 said they would be
embarrassed to carry counterfeit handbags.
The shift has fueled the expansion plans of foreign
companies in China.
Companies: Nike Inc., Columbia Sportswear Co., cosmetics
maker Shiseido Co. and North Face parent VF Corp.
174. My momma always
said, "Life was like a
box of chocolates. You
never know what you're
gonna get." 1994 Oscar.
175. Drug Headache: As Pfizer Battles Fakes in
China, Nation's Police Are Uneasy Allies WSJ 1-24-06
Pfizer is fighting a rising tide of fake drugs that
increasingly has China as its source.
176. China: Online sales of
fake drugs targeted 1-11-2011
China Daily
The administration on Dec 20 shut down five production
lines and destroyed 60 illegal bases that had sold fake
drugs via express delivery companies.
177. W.T.O. Finds China Copyright Law Lacking
1/27/2009 NYT B11
China was found to have failed to
protect and enforce copyrights and
trademarks on a wide range of goods.
U.S. will engage with China on
appropriate corrective actions to ensure
that U.S. rights holders obtain the
benefits of this decision.
178. 4.Alien smuggling
About 1 million people entered the
Untied State illegally in 2007—twice
as many as the illegal that entered the
original 15 EU countries.
$35,000 to smuggle from China to
New York City.
$50 to $200 to buy a woman in
Romania.
Central and Western Africa enslave
200,000 children a year.
179. 5. Money laundering
The Cayman Islands: population 3,600; 2,200 mutual
funds, 500 insurance companies, 60,000 businesses, 600
banks and trusting companies.
Russia has 700 legal and financial institutions owned by
organized crime groups.
Estimates of the volume of global money laundering range
between 2 and 5 percent of the world’s GNP, or between
$800 billion and $2 trillion.
181. 2. Culture and International
Business
Success or failure of a company abroad
depends
(1) Job-related expertise
(2) Sensitivity and responsiveness to the
new cultural environment.
It is just not enough to have a good product
with a good price. We need both
interpersonal and intercultural skills.
185. The educational expense
as a percentage of
household income: S.
Korea is 3 to 9 times of the
U.S., Japan, and Germany.
“Shanghai Test Scores
Stun Educators” NYT 12-6-
2010
188. (2) Technology
"Open your Eyes: The Evidence is There," Technology
and Learning, September 1997.
A Vanderbilt University research group's study of at-
risk, inner-city kindergartners.
The researchers found that students studying language
arts in a multimedia environment gained more auditory,
language, decoding-in-context, and story-composition
skills than did students in a control group who did not
use computers.
189. Huge crowd forces delay of
China's iPhone 4S release
1-13-2012 AP
Apple reacted to the outburst by postponing
iPhone 4S sales in its mainland China stores to
protect the safety of customers and
employees.
The crowd erupted after the store failed to
open on schedule at 7 a.m. Some threw eggs
and shouted at employees through the
windows.
http://www.usatoday.com/tech/news/story/2012-01-13/apple-china-iphone/52529164/1
190. (3) Marriage
U.S.: 50%, divorce rate of the 1st marriage and 65% of 2nd
marriage <http://www.oecd.org/dataoecd/4/19/40321815.pdf>
191.
192. Happy Couples Kiss and Tell
2-9-2010 WSJ
Find the middle ground
Be funny
Keep (some) secrets
Never, ever give up
Stay alive
193. (4) Medicine
First Flu Death Provides Clues to Mexico Toll 5-1-2009
NYT
1st death of swine flu in Mexico: Adela María Gutiérrez.
194. Chinese herbal medicine: how
effective is it? 2/16/2008 The Times
Dr. Stephen Minger, the leading stem cell
scientist of King’s College in London and his
experience of using a Chinese herbal medicine to
boost brain cell growth.
Hope for diabetes, Parkinson’s and Alzheimer’s.
In recent years the Chinese Government has
invested huge sums into investigating whether its
vast library of traditional remedies can be
converted into orthodox treatments.
196. (6) Government
U.S., Europe Are an Ocean Apart
on Human Toll of Joblessness
5/7/2009 WSJ
The differing U.S. and European
approaches toward worker
protections can influence recovery
prospects.
Europe's high payroll taxes, along
with restrictions on when and how
companies can lay off workers,
make employers slower to rehire
when a recession ends.
197. (7) Religion
5-6-07 NYT 2-9-09 NYT Sri Ram Sena attacked
When a Kiss Is More several women at a bar in the southern
Than a Kiss Indian college town of Mangalore and
accused them of being un-Indian for
being out drinking and dancing with
men.
198. Religion in the U.S. Presidential Election
Few informed, many wary of Mormon
beliefs 1-25-2012 USA Today Cover Story
3 reasons:
(1)Mormons are unfamiliar to many.
There are 6 million, accounting for fewer
than 2% of the U.S. population.
(2)Outspoken evangelical pastors call
Mormonism a "cult.“
(3)Mormonism is not a faith commonly
studied in comparative religion classes.
199. (8) Family
Joe Jessop: 5 wives, 46 children, and 239 grandchildren(National
Geographic 2/2010)
200. Afghan Boys Are Prized,
So Girls Live the Part
9/20/2010 NYT
Economic need,
social pressure to
have sons, and in
some cases, a
superstition that
doing so can lead to
the birth of a real
boy.
201. Implications
Less likely to view foreign cultures
ethnocentrically.
Any cultural feature must be understood in terms of
that culture.
No cultures are better or worse than any other, only
different.
Offer a lesson for doing international
business.
Steel axes -- Australia
Marlboro – Taiwan
Wall clocks – Chicago Lighthouse
(2-2-05 WSJ)
202. Communication across cultures: verbal
factors
There are about 5,000-6,000 different languages
spoken in the world today.
Source: Ethnologue, 16th Edition.
203. Countries in Which English Is
an Official Language (52 countries, red areas)
204. English is the dominant language in
electronic communication.
It accounts for
1. 75% of the world's mail, telexes, and
cables.
2. 60% of the world's radio programs.
3. 90% of all Internet traffic.
The percentage of Internet users who
are not native English speakers is
increasing rapidly, especially in Asia.
206. Use Correct English
Avoid using slang and taboo words in
communicating with foreigners. Example:
“cash cow,” “die,” “graves.”
Understand explicit vs. implicit
communication. Example: in Chinese,
Positive: “maybe”, Negative: “inconvenient”
207. Business Example (1)
Pilot Program Aims to Train
Spanish-Speaking Doctors
12/18/2007 WSJ
Latino: 14.2 percent of the U.S.
population, 6.4 percent of the
medical students.
There are roughly 3,000 Latino
patients to each Latino
physician. In comparison, for
non-Latinos, the ratio is 335
patients to 1 doctor.
208. Business Example (2)
Avoid Translation Mistakes
When a famous pen manufacturer marketed a
ballpoint pen in Mexico, its ads were supposed to
say "It won't leak in your pocket and embarrass
you " However, the company mistakenly thought
the Spanish word "embarazo" meant embarrass.
Instead the ads said that "It won’t leak in your
pocket and make you pregnant.“
209. Business Example (3)
“How Carlyle Adapts to China, $20 Million
Deal Highlights Focus On Smaller Stakes”
9/4/2007 WSJ
Carlyle plans to invest $20 million in privately
owned NeWorld Education Group, which runs
a chain of 65 schools teaching foreign
languages such as English and Japanese.
210. Business Example (4)
Number-Crushing: When Figures
Get Personal
Real-Estate Developers Factor In
Love of 6 and 8, Fear of Unlucky 4
and 13; What Happened to Floors
40 Through 59? 10/28/2009 WSJ
211.
212. The nonverbal dimension
1)Body posture
British professor in Cairo
Japanese bowing
2)Hand gestures
President Bush’s visit to Australia in 1992.
Soviet Premier Nikita Khrushchev visited the
US in 1959.
“OK” gesture in the U.S. means “zero” or
“worthless” in France, “money” in Japan, and a
general sexual insult in Greece.
213.
214. The nonverbal dimension
3) Facial Expressions
Eyebrow, Wink
4) Eye Contact
Highest levels of gaze – Arabs and people
from Latin America
Lowest – Indians and Northern Europeans
5) Proximity
6) Body Contact
Hand-shaking in Spain
Kissing in Brazil
Dancing in US
215. Contrasting Culture Values (West vs. East)
1) Individualism
2) A precise reckoning of time
3) Work and achievement
4) Control over the natural environment
5) Youth orientation
6) Informality
7) Competition
8) Relative status of women
216. Cultural Dynamics (1)
In Egypt, a New Battle Begins Over the Veil
1/28/07 NYT (and 8/12/09 NYT)
217. Cultural Dynamics (2)
Saudi women campaign for
right to drive
Saudi women campaign for Saudis Push Young People,
right to drive Including Women, Into Jobs
Clinton Adds Her Voice in 1-31-2012 WSJ
Support of Saudi Women 6-
21-2011 NYT
“What these women are doing
is brave and what they are
seeking is right.”
218. Cultural Dynamics (3)
India's Surging Economy Lifts Hopes and Ambitions,
Socialism and Castes Begin to Give Way WSJ 11/28/07
2007/2008
India: 94,563
China: 81,127
S. Korea: 69,124
Japan: 33,974
Canada: 29,051
Taiwan: 29,001
219. Age and wisdom: Older and
wiser? 4-7-2012 The Economist
Psychological Science, Igor Grossmann of the University of
Waterloo
5 crucial aspects of wise reasoning: willingness to seek opportunities to
resolve conflict; willingness to search for compromise; recognition of the
limits of personal knowledge; awareness that more than one perspective
on a problem can exist; and appreciation of the fact that things may get
worse before they get better.
The results suggest Japanese learn wisdom faster than
Americans.
The results also suggest a paradox: Japanese have higher
scores than Americans for the sort of interpersonal wisdom
you might think would be useful in an individualistic society.
220. Chinese Shoppers Lose
Taste for Fakes 2-14-2012 WSJ
A survey in 2011 by China Market Research found that 95%
of Chinese women between 28 and 35 said they would be
embarrassed to carry counterfeit handbags.
The shift has fueled the expansion plans of foreign
companies in China.
Companies: Nike Inc., Columbia Sportswear Co., cosmetics
maker Shiseido Co. and North Face parent VF Corp.
221. Culture, Economic Success, and
Business Strategy (1)
Fareed Zakaria, “Asian
Values,” Foreign Policy,
Nov/Dec 2002, 38-39
Mikhail V. Gratchev,
“Making the Most of
Cultural Differences,”
Harvard Business
Review, 2001
222. Secretive Culture Led
Toyota Astray 2-10-2010 WSJ A1
Evidence had been mounting for years that Toyota
cars could speed up suddenly.
The heart of Toyota's problem: Its secretive corporate
culture in Japan clashed with U.S. requirements that
auto makers disclose safety threats.
223.
224. Culture, Economic Success, and Business
Strategy (2)
Scholars Link Success of Firms To Lives of CEOs, A Family Death Hurts,
as Does Buying a Mansion September 5, 2007 WSJ
225. Research 1
Does Culture Affect Economic
Outcomes? Luigi Guiso, Paola Sapienza
and Luigi Zingales
Journal of Economic Perspectives—
Volume 20, Number 2—Spring 2006—
Pages 23–48
226. Source: European Values Survey and World Values Survey 1981–84, 1990–93, 1995–97
(ICPSR 2790); Guiso, Sapienza and Zingales (2003, tables 2 and 4).
Note: The bars represent the effect of religious affiliation on trust in percent of the sample
mean of trust relative to “no religious affiliation.” Effects are obtained from a regression where
the dependent variable is “trust in others,” which equals 1 if participants report that most
people can be trusted. Besides religious affiliation dummies, the regression also includes
demographic controls (health, male, age, education, social class, income), a dummy variable
equal to 1 if a person does not believe in God, country fixed effects, and survey-year dummies.
227. Source: General Social Survey
Note: The bars represent the effect of different ethnic background on trust in percent of the
sample mean of trust and relative to “people with ancestors from Great Britain,” the excluded
group. Effects are obtained from a regression where the dependent variable is “trust in others,”
which is a dummy variable equal to one if the respondent answered that most people can be
trusted. Besides the ethnic origin dummies, the regression also includes demographic controls
(health, gender, age, education, race), and religious affiliations (the omitted category is no religion
and atheists). To identify the origin of the ancestors we use the answer to the question “From
what countries or part of the world did your ancestors come?” and grouped together several
countries of origin, as listed in the figure.
228.
229.
230. Research 2
Erzo Luttmer and Monica Singhal of Harvard, “Culture,
Context, and the Taste for Redistribution” May 2009
“In the blood: Attitudes towards redistribution have a
strong cultural component”, Jun 4th 2009, The
Economist
This paper hypothesizes that (1) cross-country
differences in redistributive preferences may have an
important cultural component and (2) examines the
determinants of preferences among immigrants across
32 countries.
Immigrants from pro-redistribution places, and their
children too, are much more likely to vote for political
parties that champion greater redistribution of wealth.
231.
232. Research 3: Culture and
Unemployment
“Does Culture Affect Unemployment? Evidence from the
Röstigraben”
Brügger, Lalive and Zweimüller July 2009 IZA
(1) The duration of unemployment is 7 weeks longer in the Latin regions.
(2) It also find the attitudes toward work are rather shared with those you
live with rather than those you grew up with.
233. 3. Political and Economic
systems
'Arab Spring' Gives Way to an Uncertain Autumn
8/23/2011 WSJ
236. It was liberalization and democratization
that brought the regime to crisis point.
(Reform, Coup and Collapse: The End of
the Soviet State, by Professor Archie
Brown)
www.bbc.co.uk/history/war/coldwar/soviet_end_01.shtml
237.
238. Russian Exports
Percentage of total exports
Fuel products 57.8
Oil and oil products 40.3
Natural gas 15.3
Other 2.2
Metals 13.8
Machines, equipment and
instruments 8.6
Other 19.8
Total 100
SOURCE: International Monetary Fund, Russian
Federation: Statistical Appendix, September 2004.
239. Oil's Crash Stirs Unrest in Russia as Slump
Hits Home 12/19/2008 WSJ
240. Protesters turn up the heat
on Putin in Moscow 2-4-2012
http://www.youtube.com/watch?v=WkvxsgFqxlE
243. 1978 Deng Xiaoping started privatization and
open door policy
1989 Massacre in Tiananmen Square
December 11, 2001 China entered the WTO
July 21, 2005 Yuan revaluation
8-8-2008 Olympic
249. Effect of revaluation: Example of 7/21/2005
How the revaluation of the Chinese yuan could affect trade in various
hypothetical scenarios, assuming the initial 2.1% shift to 8.11 yuan per
dollar, from 8.28 yuan. (6.8540 as of 9/16/08)
1. U.S. exporters become slightly more competitive: American
company sells potato chips in China for the equivalent of $1.80 a bag.
Pre-revaluation price: 14.9 yuan
Post-revaluation price: 14.6 yuan
2. Chinese exporters make less (in yuan): Chinese garment-maker
sells men's corduroy pants for $100 a dozen to U.S. retailer.
Pre-revaluation revenue: 828 yuan
Post-revaluation revenue: 811 yuan
250. 3. Outsourcing to China costs more: U.S. business pays 100 yuan
an hour for Chinese labor.
Pre-revaluation cost: $12.08 an hour
Post-revaluation cost: $12.33 an hour
4. U.S. importers pay more (in dollars): American toy maker buys a
dollfrom a Chinese factory for 36.5 yuan.
Pre-revaluation cost: $4.41
Post-revaluation cost: $4.50
5. Would-be Chinese merger partner spends less: Cnooc offers
$18.5 billion for Unocal, a U.S. oil company.
Pre-revaluation value: 153.18 billion yuan
Post-revaluation value: 150.04 billion yuan
251. China’s Three Development-related Issues:
(1) Decoupling
China Growth Fantasy Beijing should focus on household incomes, not
GDP. Yasheng Huang of MIT, WSJ Asia 12/21/2008
Decoupling? China had become a powerful economic center
of its own, able not only to drive its own growth independent
of the US but also to power the global economy forward.
The decoupling theory ignores what's causing China’s
growth and whether it's self-sustained.
Chinese development strategy privileges production at the
expense of consumption (especially the rural households)
and uses political power to suppress costs rather than
relying on market mechanisms to boost income.
http://www.youtube.com/watch?v=L9lKcajBv2E
252. China Seeks a New Market in Its Own Backyard, As
Western Export Markets Languish, Beijing
Encourages Consumption by Rural Residents to Help
Revive Economic Growth
2-10-2009 WSJ
254. (2) China's dubious earnings numbers
May 28, 2009 The Economist
Investors appear to have little faith in company accounts
Long term implications?
255. (3) The Incredible Shrinking
Surplus Economist 9/5/2009
Facts: Surplus with the U.S. in the first 6 months in 2009: $62b vs.
$103b; Surplus with all trading partners in 2008: $295b vs. $650b
Factors: (1) HK (2) cif vs. fob
257. Perspiration theory--Krugman’s
comment on Asian economies
“WHAT EVER HAPPENED TO THE ASIAN MIRACLE?”
Fortune Aug. 18, 1997
http://web.mit.edu/krugman/www/perspire.htm
Al Young and Larry Lau
1.high savings rates
2.good education
3.movement of underemployed peasants into the modern
sector
The "perspiration theory" of Asian growth upsets two
cherished beliefs held by both Asian leaders and their
admirers.
1.government’s role
2.growth will slow
259. Three Issues Related to
Political and Economic
System
(1) Economic freedom
The 10 Heritage Foundation Economic Freedoms
• Business Freedom
• Trade Freedom
• Fiscal Freedom
• Government Size
• Monetary Freedom
• Investment Freedom
• Financial Freedom
• Property Rights
• Freedom from Corruption
• Labor Freedom
260.
261.
262.
263.
264.
265. A Related Measure: The Ease of
Doing Business
World Bank, Doing Business 2012
266. Is China turning against
foreign businesses?
10-24-2011 USA Today
US companies reported as top five business challenges in 2011 and 2010 surveys:
Issue 2011 2010
Bureaucracy 31% 23%
Mgmt-level human resources constraints 30% 28%
Unclear laws, regulations 29% 23%
Inconsistent regulatory interpretation 28% 31%
Intellectual property rights infringement 24% 19%
Corruption 22% 20%
Obtaining required licenses 21% 24%
Non-mgmt-level human resources constraints 20% 14%
National protectionism 20% 23%
Local protectionism 18% 17%
Difficulty enforcing contract terms 18% 14%
Source: 2011 Business Climate Survey, American Chamber of Commerce in China.
267. Research: INSTITUTIONAL DISTORTIONS, ECONOMIC
FREEDOM, AND GROWTH Abdiweli M. Ali and W. Mark Crain, Cato
Journal, winter 2002
(1) Y = constant + βi I + βm M + βz Z + u,
where
Y = real per capita GDP growth, or the share of investment
in GDP;
I = a set of core variables always included in the
regressions;
M= the variable of interest (i.e., the Economic Freedom
Index, Civil Liberty Index, or the Gastil Political Freedom
Indices);
Z = a subset of variables identified by Levine and Renelt
(1992) as potentially important explanatory variables of
growth; and
u = a random disturbance term.
268. Core regression
Y = constant + βi I + u
GDP = −0.45 + 17.16 INV −0.15 GDP75 + 0.3 SEC −0.88 GPOP
(−0.42) (5.69) (−1.75) (0.02) (−3.07)
T-statistics are in parentheses.
R-squared = 0.36
F-statistic = 15.4
Obs. = 114
The findings indicate that the Economic
Freedom Index is robust and that the Civil
Liberty Index and the Political Freedom Index
are fragile.
270. Three Issues related to the system
(2) Country risk
Country risk relates to the likelihood that
changes in the business environment will occur
that reduce the profitability of doing business in
a country.
Country risk is a broad concept that comprises
an underlying combination of economics,
finance, geopolitics, sociology, and history
issues.
271. January 22, 2007 WSJ
In a move that may hint
at growing economic
problems in Venezuela,
the country's president,
Hugo Chávez ordered
his telecommunications
minister to seize control
of a Verizon-controlled Population: 27,635,743 (July
telecommunications 2011 est.)
company before paying GDP per capita: $12,400
(2011 est.)
compensation to its U.S. Inflation: 28.9% (2011 est.)
owners.
272. Colgate in Venezuela
On Friday, January 8, 2010 the Venezuelan
government announced its intention to devalue
its currency (Bolivar) and move to a two tier
exchange structure. The official exchange rate is
expected to move from 2.15 to 2.60 for essential
goods and 4.30 for non-essential goods and
services.
Colgate’s products are expected to fall into the
non-essential classification.
Colgate expects charges of 4 cents to 6 cents
per share in each quarter of 2010 as money it
earns there will translate back into fewer dollars.
273. Path to India's Market Dotted
With Potholes Sept 12, 2006 WSJ
274. EU Shows Its Cards Behind Intel
Case 9/22/2009 WSJ
The European Union levied a record €1.06
billion ($1.56 billion) fine against Intel in May,
alleging the computer chip giant abused its
dominant position in the microprocessor
market.
The EU outlined the evidence behind its record
antitrust fine against Intel, including PC
makers' emails.
275. Types of country risk
(1) Political change (due to elections, revolution,
secession, etc.): expropriation, higher taxes,
higher tariffs, elimination of FDI incentives,
domestic ownership requirements, local content
requirements, currency inconvertibility
Oil Companies Plan
Evacuations From Libya
2-21-2011 NYT
276. Types of country risk (cont.)
(2) Macroeconomic mismanagement
inflation, high interest rates
(3) Others
wars, labor unrest (strikes)
Chávez Takes Toll on
Multinationals 5/3/2010 WSJ
The U.S. SEC declared Venezuela a
hyperinflationary economy, requiring
companies that do business there to
account for the change as a charge to
earnings.
277. Information sources of
country risk assessment
International financial organizations
Regional development banks
National sources and central banks
Risk rating agencies
Private commercial and investment
banks
278. Measuring country risk
The qualitative approach: the Institute of
International Finance
The quantitative approach: econometric
models
The rating approach: Moody's, S&Ps,
Credit Risk International, BERI (Business
Environment Risk Index), International
Country Risk Guide (ICRG), AM Best,
OECD Country Risk Classification.
279. ICRG’s rating (International Country Risk Guide)
Composite Composite 03/05
Risk Risk versu
Rank in Rating Rating s Rank in
03/05 Country 03/05 04/04 04/04 04/04
1 Norway 92.0 92.3 -0.3 1
2 Luxembourg 90.0 90.3 -0.3 3
2 Switzerland 90.0 91.0 -1.0 2
4 Sweden 88.5 87.0 1.5 7
5 Singapore 88.3 87.8 0.5 5
6 Finland 87.8 87.3 0.5 6
7 Denmark 87.0 86.5 0.5 9
10 Ireland 86.0 86.5 -0.5 9
280. BERI's rating (Business Environment Risk
Intelligence) system permits comparisons
between countries for the past, the present, and
for one- and five-year forecast periods. The
components are
(1) the Operations Risk Index (ORI),
(2) the Political Risk Index (PRI), and
(3) the Remittance and Repatriation Factor (R-
Factor).
281. A.M. Best’s Rating
A.M. Best uses country risk analysis to determine how the factors
outside an insurer's control affect its ability to meet its obligations
to its policyholders. These analyses include, amongst others, the
assessment of local accounting rules, government policies and
regulation, economic growth and social stability.
Examples:
Canada Tier I
India Tier IV
Japan Tier II
Russia Tier III
United Kingdom Tier I
United States of America Tier I
Why is Japan in Tier II?
282. 2010 Standard & Poor’s Rating
on Credit Risk (2/3/2010 NYT)
284. Responses to country risk
1. Project evaluation
2. Insurance: The
Overseas Private
Insurance Corporation OPIC: insurance,
(OPIC) (U.S.) and the financing, investment
Economic Development
funds.
Corporation (EDC)
(Canada)
3. Maintain alternatives
4. Maintain control over
intangible assets
285. Research 1
Erb, Harvey and Viskanta, "Political Risk,
Economic Risk and Financial Risk,"
Financial Analysts Journal, Nov./Dec. 1996
(http://faculty.fuqua.duke.edu/~charvey/Res
earch/Published_Papers/P38_Political_risk_
economic.pdf)
286. Rt = c0 + c1At-1 + et
where R represents a vector of six-month
equity returns from July 1984 to June 1995 for
all of the countries in the sample.
A represents the risk attribute which is lagged
and matched to the country.
The results suggest that
(1)The country risk measures are correlated with
future equity returns.
(2)The country risk measures are correlated with
each other.
(3)Financial risk measures contain the most
information about future equity returns.
287. Research 2
Ian Bremmer’s “The J-Curve”
Locate nations on the J Curve - left for
authoritarian, right for democratic.
Western governments should
encourage manageable change before
the country breaks apart.
http://www.youtube.com/watch?v=L9lKcajBv2E
288. Three Issues related to the
system
(3) Corruption
Corruption is defined by the World Bank and Transparency
International (TI) as “the misuse of public office for private
gain.”
(1) Petty corruption: practiced by public servants
(2) Grand corruption: high-level public officials and politicians
make decisions involving large public contracts or projects
financed by external donors.
(3) Episodic corruption: honest behavior is the norm,
corruption the exception, and the dishonest public servant
is disciplined when detected.
(4) Systemic corruption: channels of malfeasance extend
upwards from the bribe collection points, and systems
depend on corruption for their survival.
289. U.S. Opens Probe of Las
Vegas Sands 3-2-2011 WSJ
US law: the Foreign
Corrupt Practices Act
Las Vegas Sands and
its operations in
Macau. http://
www.lasvegassands.com/LasVegasSands/Our_Properties/At_a_Glance.aspx
SEC, the Justice
Department and The
Nevada Gaming
Control Board
290. U.S. Joins H-P Bribery
Investigation 4/16/2010 WSJ
The U.S. has joined
German and Russian
authorities in investigating
whether HP executives paid
€8 million in bribes to
Russian officials to win a
€35 million contract in
Russia. The Foreign
Corrupt Practices Act, bars
American companies from
bribing foreign-government
officials anywhere in the
world.
291. Time Magazine Loses Suit Against Suharto
9/10/07 NYT
Indonesia's highest court ordered Time
magazine to pay $106 million in damages
for defaming former dictator Suharto in
May 1999 by alleging his family amassed
15 billions of dollars.
Suharto ruled 31 years until May 1998.
Time filed an appeal in Feb. 2008
Indonesian Supreme Court (4-16-2009):
“The story in Time magazine is still within
the press code of conduct so it is not
acting against the law.
292. In Afghanistan, fighting a
legacy of corruption 11-23-2009 USA Today
A way of doing business
Safi, a real estate broker, gave $200 to a clerk at the district office,
$3,000 to be shared among three workers at the central municipal
office and $500 to a Finance Ministry official. Then he carried the
paperwork to the municipal court, where a judge demanded $2,500 to
file it.
After three weeks, and more than $6,000, he had his title. "This is our
way of doing business," Safi said. "It's frustrating."
293. Chinese Attitudes on
Generosity Are Tested 9-24-2010 NYT
Mr. Buffett and Mr. Gates, the Rockefeller and Carnegie
of this age, announced plans last month to invite about
50 of China’s superrich to discuss their concept of
philanthropy. Only two tycoons had accepted the
invitation.
In the last decade, 17 members of an annual list of
China’s 50 richest people had been convicted of
economic crimes.
294. Causes or factors of corruption: demand (by the
public) and supply (by public officials).
Graph
Demand side factors
(1) regulations and authorizations;
(2) certain characteristics of the tax systems;
(3) certain spending decisions;
(4) provision of goods and services at below-
market prices.
295. Supply side factors
(1) the bureaucratic tradition;
(2) the level of public sector wages;
(3) the penalty systems;
(4) institutional controls;
(5) the transparency of rules, laws, and
processes;
(6) the examples set by the leadership.
296.
297. Consequences of corruption
1. Paolo Mauro, “Corruption: Causes, Consequences,
and Agenda for Further Research,” Finance &
Development
http://www.worldbank.org/fandd/english/0398/articles/0
10398.htm
(1) lowering incentives to invest
(2) reduce growth (by lowering the quality of public
infrastructure and services, decreasing tax revenue,
causing talented people to engage in rent-seeking
rather than productive activities, and distorting the
composition of government expenditure.)
298. 2. Habib and Zurawicki, "Corruption and
Foreign Direct Investment," Journal of
International Business Studies, Vol. 33,
No. 2, 2002
Sample: 7 x 89 x 3
7: Germany, Italy, Japan, Korea, Spain,
UK, and US
3: 1996-1998
Conclusion: McDonald’s, 3M in Russia
299. 3. N. Charron, “Exploring the Impact of Foreign Aid on
Corruption: Has the “Anti-Corruption Movement” Been
Effective?”
The Developing Economies 49, no. 1 (March 2011): 66–88
1. From 1997 onward, the impact of multilateral aid is
strongly and robustly associated with lower
corruption levels, while bilateral aid is shown to be
an insignificant determinant.
2. An increase in any official development assistance
(ODA) pre-1997 is associated with higher levels of
corruption or has no impact at all.
304. Share of North American Economy &
Population
MEX 7.7%
MEX 24%
USA 84.8%
USA 68%
CDA 7.5% CDA 8%
GDP Population
GDP (Gross Domestic Product): Total final output of national
economy.
305. Relative Standard of Living
USA
$41,789
CDA
$34,058
MEX
$10,627
GDP per Capita
GDP per Capita: Total final output of national economy divided by
total population.
306. The entire document of NAFTA is available at
http://www-tech.mit.edu/Bulletins/nafta.html
NAFTA was set to be completely phased in in
2009.
Restrictions on trade and investment were to be
removed, including those on motor vehicles and
automotive parts, computers, textiles, and
agriculture.
The treaty also protected intellectual property
rights (patents, copyrights, and trademarks)
and outlined the removal of restrictions on
investment among the three countries.
307. Examples
Automobile: NAFTA immediately decreased Mexican
tariffs on automobiles from 20 to 10 percent in 1994
and was set to drop them to zero by 2004.
Textiles and Apparel: NAFTA immediately eliminated
trade barriers on more than 20 percent of Mexican -
U.S. trade in textiles and apparel.
Agriculture: NAFTA immediately reduced tariffs to zero
for half of U.S. agricultural exports to Mexico.
Financial Service: Canadian and U.S. financial firms
are allowed to establish wholly owned subsidiaries in
Mexico and to engage in the same range of activities
as similar Mexican firms.
308. The NAFTA Debate in the United States
(1) Labor Issues
Blue-collar industrial labor unions were the most vocal opponents
of NAFTA. Why? Wage and job concerns.
Result: North American Agreement on Labor Cooperation.
(2) Environmental Issues
Two concerns: (1) firms may relocate to Mexico and (2) pollution
along the U.S.-Mexico border.
Result: North American Agreement on Environmental
Cooperation.
(3) Immigration
Three factors are involved in the determination of the number of
migrants:
(1) demand-pull factors,
(2) supply-push factors, and
(3) social networks.
309. Supply-push Factors
Better Lives for Mexicans Cut Allure of Going
North 2011-7-6 NYT
Economic, demographic and social changes in Mexico
are suppressing illegal immigration as much as the poor
economy or legal crackdowns in the United States
310. Supply-push Factors
The birth rate in Mexico has dropped
from roughly eight children per woman of
child-bearing age in 1960 to 2.4 in 2009.
Each decline in the birth rate leads to a
reduction in young adults looking for
work in subsequent decades, so fewer
will need to cross the border.
311. NAFTA TRUCKING DISPUTE
Under the NAFTA, the US and Mexico agreed to
phase-out restrictions on cross-border trucking
services.
In 1995, the US announced it would not lift
restrictions on Mexican trucks.
In 2001, a NAFTA dispute settlement panel found
the U.S. restrictions to be in breach of its NAFTA
obligations.
In 2007 Mexico agreed to the Trucking Pilot
Program.
312. March 16, 2009. Mexico announced retaliation,
raising tariffs on 99 agricultural products worth
more than $2 billion annually.
Mexico cut the tariffs in half in summer 2011 after
Obama and Mexican President Felipe Calderon
approved an inspection and monitoring program
for the companies that had been approved in 2009.
1st Mexican truck to will enter Texas on 10/21.
(10/19/2011 Wichita Eagle)
313. CAFTA-DR
The U.S. Congress approved the CAFTA-DR in July 2005
and the President signed the implementation legislation on
August 2, 2005.
Implemented on a rolling basis.
El Salvador, March 1, 2006.
Honduras and Nicaragua, April 1, 2006.
Guatemala, July 1, 2006.
Dominican Republic, March 1, 2007.
Costa Rica, January 1, 2009.
314. 80% of U.S. exports of consumer and industrial
products to Central America will be duty-free
"immediately" and over 15 years all tariffs on
these goods will be eliminated.
More than half of U.S. farm exports to the
region will become duty-free immediately and
tariffs on most U.S. farm products will be
phased out within 15 years.
Government procurement contracts will also be
open for bidding by U.S. contractors.
Limitations on sugar and textile industry
315. 4. Regional Integration
EU and the Euro
The road to European Union began with three separate
treaties dating from the 1950s:
(1) the European Coal and Steel Community (ECSC),
(2) the European Atomic Energy Community (Euratom), (3) the
European Economic Community (EEC).
Collectively, they became known as the European
Community.
The Maastricht Treaty on European Union, which took
effect in November 1993, was a major overhaul of the
founding treaties.
316. Copenhagen criteria
To join the Union, they need to fulfill the economic
and political conditions known as the Copenhagen
criteria:
(1) be a stable democracy, respecting human rights,
the rule of law, and the protection of minorities;
(2) have a functioning market economy;
(3) adopt the common rules, standards and policies
that make up the body of EU law.
318. How is the EU Run?
European Parliament (elected by the peoples of
the Member States);
Council of the European Union (representing the
governments of the Member States);
European Commission (driving force and
executive body);
Court of Justice (ensuring compliance with the
law);
Court of Auditors (controlling sound and lawful
management of the EU budget).
319. European Commission:
(1) EU's antitrust battles with Microsoft
Corp.
March 24, 2004: EU says Microsoft broke antitrust law
by denying technical information to competitors and
bundling its Media Player software with Windows,
levies €497 million fine.
July 12, 2006: Microsoft is fined €280.5 million for non-
compliance with the ruling.
Sept. 17, 2007: EU's Court of First Instance upholds
the 2004 ruling, in a blow to Microsoft.
Oct. 22, 2007: Microsoft agrees to drop any further
appeal.
320. Dec. 13, 2007: Norwegian browser maker Opera
Software ASA files complaint over the ties between
Internet Explorer and Windows.
Feb. 27, 2008: Microsoft is fined €899 million for non-
compliance with the 2004 ruling.
Jan. 15, 2009: EU sends preliminary charges to
Microsoft, saying it believes the inclusion of Internet
Explorer in Windows is illegal.
3/1/2010 Microsoft makes ballot for browser available.
321. (2) European Commission against
Coke
• Feb 1987: European Commission opens investigation into Coke's
rebate practices.
• Dec 1989: European Commission closes investigation after Coke
agrees to end payments for stocking Coke exclusively and to halt
other sales incentives.
• May 1999: Coke scales back acquisition of Cadbury Schweppes
PLC's soft-drinks business after clashing with EU over jurisdiction.
• July 1999: EU raids Coke's offices in Austria, Denmark, Germany
and U.K. -- investigation continuing.
• May 2000: EU raids Coke's offices in Belgium and U.K. --
investigation continuing.
• Dec 2003: European Commission focuses case on Germany and
Belgium.
June 2005: Coke and EU reached an antitrust settlement forcing
Coke to change its practices
322. Reasons for Anti-trust
“What's mine is yours: When should firms be required to share
their intellectual property with rivals?” 5/28/2009 The Economist
Professor John Vickers of Oxford University makes the
case for intervention on three counts:
(1) A rival is less likely to develop new products if it
cannot share in the profits from the dominant firm’s
invention.
(2) The contest to innovate tends to be keenest where
there is a neck-and-neck battle to be the dominant firm.
(3) The dominant firm may use “property rights” to stifle
“follow-on” innovation.
323. (3) Banana Trade War
6/29/2007 WSJ
The disputes on bananas have lasted for more than 20
years.
US Trade Representative requested the WTO panel to
review whether the EU’s banana import regime
breaches the EU’s WTO obligations.
EU failed to implement the WTO rulings in a 1996
proceeding initiated by Ecuador, Guatemala,
Honduras, Mexico and the United States. That ruling
said the EU’s banana regime discriminates against
bananas originating in Latin American countries and
against distributors of such bananas, including several
U.S. companies.
324. The EU-Latin America Bananas Agreement
12-15-2009
EU will cut its import tariff on bananas in
eight stages, from the current rate of
€176/tonne to €114/tonne in 2017 at the
earliest.
325. (4) EU Officials Raid Book Publishers
3-3-2011 WSJ
Searching for
evidence that
publishers had acted
illegally to keep prices
high in the nascent
electronic-book
market.
U.S. companies
involved: Apple and
Amazon
326. History of the Euro
The Single European Act (1986) and the
Treaty on European Union (1992)
introduced Economic and Monetary
Union (EMU) and laying the foundations
(
for the single currency.
On January 1, 1999, the exchange rates
of the participating currencies were
irreversibly set.
327. EMU Economic Convergence Criteria
(1) Harmonized indices of consumer prices
The average rate of inflation, observed over a period of
one year before examination, should not exceed by
more than 1.5 percentage points that of, at most, the
three best performing member states.
(2) general government deficit
The government deficit should not exceed 3% of gross
domestic product (GDP) unless the ratio has declined
substantially and continuously and reached a level that
comes close to 3%, or alternatively, if the excess over
3% is only exceptional and is temporary and the ratio
remains close to 3%.
328. (3) General government gross debt
The public debt should not exceed 60% of GDP,
unless the ratio is sufficiently diminishing and
approaching 60% at a satisfactory pace.
(4) Nominal long-term interest rates
The average nominal long-term interest rate, observed
over a period of one year before the examination,
should not exceed by more than 2 percentage points
that of, at most, the three best performing member
states in terms of price stability.
(5) Participation in the Exchange Rate Mechanism (ERM)
The observance of the normal fluctuation margins
provided for by the exchange rate mechanism of the
European Monetary system (EMS) for at lest two
years, without severe tensions.
329. Estonia (since 1/1/2011)
The euro is not the currency of all EU Member States. It
includes 17 countries.
Denmark and the United Kingdom opt-out, while the remainder
(many of the newest EU members plus Sweden) have yet to
meet the conditions for adopting the single currency.
331. Germany's economy
Angela in Wunderland, What Germany’s got right, and what
it hasn’t 2-3-2011 Economist
Wirtschaftswunder (see next page)
3.6% in 2010
What’s Germany’s secret? --Exports
How? Germany has been a big winner on
both the supply side (wage and exchange
rate) and the demand side (China) of
globalization.
334. Two important implications
1. Economic structural effect: If the economies
of America and China slow sharply,
Germany's economy will be much more
vulnerable than France's. Germany needs to
find more growth at home.
2. Policy asymmetric effect: The monetary policy
of the European Central Bank (ECB), which
sets a single interest rate for the whole euro
area, is currently probably not ideal for
Germany and other Euro nations.
335. Robert Mundell’s Theory of Optimum Currency
Areas
To join or not to join?
Monetary efficiency gain: the
joiner’s savings from avoiding the
uncertainty, confusion, and
calculation and transaction costs
that arise when exchange rates
float.
Economic stability loss: a country
that joins an exchange rate area
gives up its ability to use the
exchange rate and monetary
policy for the purpose of
stabilizing output and
employment.
* NAFTA is a huge economy, slightly larger than the EU. 2005 POP GDP($US) Mex 105 MN 10,627 Canada 33 MN 34,058 USA 296MN 41789 Ttl 433 million people and a $14 Trillion economy. Mexico’s pop has grown by about 20% since 94, the U.S. & Canada have grown by half that. Although mexico’s pop is growing faster its Gdp is growing more slowly than its northern neighbors.
* Standard of Living . Lucky for us that we are all here in a country with one of the highest living standards ever recorded in history. Economists like to talk about standard of living because it is a good way to understand how well society is making choices about tradeoffs. By this one somewhat narrow measure, GDP per Capita , the U.S. enjoys the highest standard of living in North America. There are other measures. Other measures of living standards take a more comprehensive approach that includes other things like life expectancy , infant mortality rates and so forth. One of these is the United Nations’ Human Development Index . By this measure (an index that includes GDP per cap and numerous other measures) we see Canada ranks higher than its richer neighbor . The Canadian economy and therefore Canadian std of living is extraordinarily dependent on its trade with the U.S. Nearly ¾ of Canadian GDP is attributable to trade with US. Thus if U.S. performance is off so goes Canada, “If the U.S. sneezes Canada catches a cold.” The reverse is true to a lesser degree.
