3. Interdependence and the Global Economy
Lecture Notes
1. The modern economic system is no longer the closed (i.e., U.S. only) system
upon which the debates surrounding isolationalism occurred prior to World War
II.
a. Imports and Exports are increasingly important
b. Foreign investment versus U.S. investment abroad
1. Outsourcing
2. Technological transfers
c. Balance of trade issues.
1. Current accounts (import v. exports)
2. Capital accounts (foreign investment)
2. Capitalist Ideology - The characteristics of a capitalist economy and the ideology
that has developed concerning this paradigm are not necessarily the same thing.
The elements of a capitalist ideology are:
a. freedom of enterprise
b. self-interest
c. competition
d. markets and prices
12
, e. a very limited role for government
f. different countries with different views of these matters B i.e., equity v.
efficiency again.
3. Market System Characteristics - the following characteristics are typical of a
system that relies substantially on markets for allocation of resources. These
characteristics are:
a. division of labor & specialization
b. capital goods
c. comparative advantage - is concerned with cost advantages.
1. Comparative advantage is the motivation for trade among nations and
persons.
2. Terms of trade are those upon which the parties may agree and
depends on the respective cost advantages and bargaining power.
4. Trade among nations
a. the reliance upon comparative advantage to motivate trade B assuming
barter:
Belgium Holland
Tulips 400 4000
Wine 4000 400
The data above show what each country could produce if all of their
resources were put into each commodity. For example, if Holland put all
13
Lecture Notes
1. The modern economic system is no longer the closed (i.e., U.S. only) system
upon which the debates surrounding isolationalism occurred prior to World War
II.
a. Imports and Exports are increasingly important
b. Foreign investment versus U.S. investment abroad
1. Outsourcing
2. Technological transfers
c. Balance of trade issues.
1. Current accounts (import v. exports)
2. Capital accounts (foreign investment)
2. Capitalist Ideology - The characteristics of a capitalist economy and the ideology
that has developed concerning this paradigm are not necessarily the same thing.
The elements of a capitalist ideology are:
a. freedom of enterprise
b. self-interest
c. competition
d. markets and prices
12
, e. a very limited role for government
f. different countries with different views of these matters B i.e., equity v.
efficiency again.
3. Market System Characteristics - the following characteristics are typical of a
system that relies substantially on markets for allocation of resources. These
characteristics are:
a. division of labor & specialization
b. capital goods
c. comparative advantage - is concerned with cost advantages.
1. Comparative advantage is the motivation for trade among nations and
persons.
2. Terms of trade are those upon which the parties may agree and
depends on the respective cost advantages and bargaining power.
4. Trade among nations
a. the reliance upon comparative advantage to motivate trade B assuming
barter:
Belgium Holland
Tulips 400 4000
Wine 4000 400
The data above show what each country could produce if all of their
resources were put into each commodity. For example, if Holland put all
13
