It focuses on economic growth and business cycle issues when
the economy trades with the rest of the world and is financially open. Also introduce students to modern macroeconomics which has microeconomic foundations by presenting the intertemporal model and analyzing how the labor market works.
Introduction
Trade and financial markets integration over the last two
centuries (globalization) :
– The objective is to explore the effects of financial openness on
output per capita.
– As shown in the Figure below which plots the financial
openness ratio calculated as the the sum of foreign assets (held
by the domestic country) and domestic liabilities (held by the
rest of the world) to GDP, advanced countries financial
openness accelerated at the beginning of the 1990’s. Financial
openness is the result of globalization.
,– Globalization refers to increased integration of goods and
financial markets. Goods and capital markets have become
more integrated since 1950’s since advanced countries
progressively removed barriers of trade (fall in tariffs) and
capital controls (especially in the 1980’s).
– As can be seen in the two Figures below, over the last 50
years, both the share of international trade in world GDP and
the share of foreign capital stock into world GDP have
increased sharply. Figures below also show that movement of
globalization can be split into two waves.
, International Economics: Theory, Application, and Policy, Ch. 1; Charles van Marrewijk, 2006 8
Figure 1.8 Two waves of globalization in trade
Merchandise exports, % of GDP in 1990 prices
17.2
15
13.4
10 10.1
5
4.6
2.5
0.2
0
1870 1900 1930 1960 1990
world USA Japan
International Economics: Theory, Application, and Policy, Ch. 1; Charles van Marrewijk, 2006 9
Figure 1.9 Foreign capital stocks; assets / world GDP
Foreign capital stocks; assets / world GDP
0.6
0.4
0.2
0
1860 1880 1900 1920 1940 1960 1980 2000
– First globalization wave (1870-1914). 1st globalization
wave starts in 1870 during the industrial revolution. This steep
increase in trade and capital openness is the result of the
dramatic decline in transport and communication costs (which
, fostered international trade by easing the transport of goods)
and to a lesser extent to the fall in tariffs on goods.
– This first globalization wave has ended at the beginning of
WWI and did not restart before the end of the WWII. The
reason is that the stock market collapsed in 1929 which
triggered a fall in GDP (by 1/3 between 1929 and 1933) and
led to a sharp increase in the unemployment rate (up to 25%
of the labor force). In face of the economic depression, the
U.S. undertook protectionist policies by implementing tariff
rates on more than 20 000 products in June 1930. This
protectionist law advocated by two U.S. deputies (i.e., MP) is
known as the Smooth-Hawley law. This protection policy led
trade partners to fight back by implementing protectionist
policies as well and more than sixty countries close their
borders to international trade.
– The integration of the market of goods and services has been
associated with an integration of the capital market. During
the first wave of financial openness, half of British savings was
invested abroad while France exports one quarter of its savings.
– Second globalization wave (1950-). The 2nd wave starts at
the beginning of the 1950’s. Following the end of WWII,
advanced countries adopt free-trade policies to promote
economic growth. All advanced countries cut tariff rates on
manufactured goods as soon as 1950.
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