A SURVEY OF WORLD ECONOMY

Introduction
What is WORLD ECONOMY?
WORLD ECONOMY refers to the entirety of all the national economies which are linked together
with different economic links.

What is WORLD ECONOMICS?

WORLD ECONOMICS is a branch of ECONOMICS which studies the WORLD ECONOMY.

The start of the study:

at the end of 1970s
In 1980---China World Economy Academy

The source of this branch of study:

a branch --- Economics
background and necessary conditions : International division of labour → international trade →
the world market → the world economy.

The objects of the branch of study: the international relations of production.

1. to study the national economies of the countries in the world, which are parts of the world
economy
2. to study the international economic relations.
mechanism links the national economies together
different economic links
international division of labour
goods
service
capital
transfer of technology.
3. to study the world economy as a whole.
the laws of the changes and development of the world economy
world economy studies the system of economic development
human beings--- the principal part of the system
the environment and the resources of the earth --- the base for the system

Chapter One
Productive Forces and the World Economy
1. the development of productive forces : the scientific and technological revolutions in the
history of human beings; the significance and impact of the revolutions
2. the formation and development of the world economy as a result of the scientific and
technological revolutions
bibliography:
1. Basic Economics, Hailstones & Mastrianna, 9 th edition, South-Western Publishing Co. ,
 Cincinnati, Ohio, 1992
2. Economics Today, roger Leroy Miller, 9th edition, Adisson-Wesley Education Educational
Publishes Inc., 1997
3. 《世界经济学》 张伯里 主编 中共中央党校出版社 2004 年 7 月第 1 版
4. 《当代世界经济》王广信 赵丽娜 主编 人民出版社 2002 年 3 月第 1 版
5. 《世界经济新论》 庄起善 主编 复旦大学出版社 2004 年 8 月第 1 版
6. 《世界经济概论》 池元吉 主编 高等教育出版社 2003 年 8 月第 1 版

I. the development of the Productive Forces and the Formation of the World Economy
1. the influence of the Renaissance and of the Dicovery of the new continent
the primitive economic system--- low productive forces--- no world economy

Renaissance liberated people

the beginning of the Renaissance--- Dante’s Commedia (14th century)
Renaissance: the intermediate between the Middle Ages and the modern times;
the beginning of capitalist cultural ideas
the product of the new, rising capitalist relations of production
ideological feature: humanism,
the enlightenment: in 18th century
In 1492, Columbus discovered the new continent.
the new sea route
European ports ---international trade centres: London, Antwerp, Lisbon

a solid base for the big jump of the economy.

2. the impact of the first scientific and technological revolution on the world economy
In 18th century, the first scientific and technological revolution
steam engine --- work continuously
machine makes machines
more products for the market
steam boat and steam engine train --- revolution in the transport industry
the capitalist mode of production
Industry was totally separated from farming.
object of the capitalist mode of production: profit-pursuing
markets--- raw materials
the world market--- the world economy

3. the impact of the second scientific and technological revolution on the world ecnomy
Time: in the 19th century
Germany and the United States : the heroes
Electricity : a new kind of power
Other things: radio, cable, telephone, internal combustion engine, new skills for steel-making, new
technology in chemical industry → heavy industry
automobile industry --- the oil industry
The second scientific and technological revolution started in heavy industry
Industry →the most import section in the national economies.
More industrialized countries
import raw materials and export finished products
farming countries export agricultural products and other raw materials, import industry goods
the international division of labour developed further

Science and technology acted and reacted on each other.

the study on the basic theories and the scientific research work
new inventions: new communication methods, big steel-made boat, cars and trucks, and even
airplane
transport (more quick, safe, convenient and cheep) → international exchange of goods → the
world market → the system of the international division of labour → more efficient production
→ the world market (for raw materials and finished goods ) → closer relation of the countries
tied together by the world market

4. the formation and development of the world economy

a) The development and formation of the world economy was a result of the scientific and
technological revolutions
b) The system of international division of labour
The economic ties between the suzerain states and its colonies or between the advanced
industry countries and the countries producing raw materials became more strengthened. a
world market formed.
c) the industry capital --- the banking capital → financial capital → financial oligarch → the
export of capital
d) the international monetary system established
a world currency or currencies
gold and silver acted as the world currencies
the gold standard was established
The gold standard had 3 features
First: It established a system of fixed exchange rate between participating countries. Stable
exchange rates were considered a necessary ingredient to increase trade among nations.
Second: the gold standard limited the rate of growth in a country’s money supply. This was due to
the fact that all “money” had to be backed by gold, and the supply of gold in the world increased
slowly during this period of time in history.
Third: Gold served as an automatic adjustment tool for countries experiencing balance of
payments problems. If a country was running a balance of payments deficit, gold would, by
market forces, flow out of the country, decreasing economic activity and pushing the balance of
payments back toward balance.

Conclusion:
division of labour →rise of productive forces → efficiency of the production → frequency
of exchange of goods → the early system of the capitalist international division of labour ---the
first scientific and technological revolution→ the world market, the world currency, the system of
the capitalist international division of labour →the beginning of world economy
the second scientific and technological revolution→the improvement of the system of the
capitalist international division of labour (early stage of internationalization of production) →the
world market → (barriers to trade and surplus of capital → the export of capital) →
international monetary system→ world economy
Then the world economy finally established.
Three steps for world economy: goods (international) (or the internationalization of
goods)→capital(international) (or the internationalization of capitals) →production (international,
after the 3rd scientific and technological revolution) (or the internationalization of production)

II. the third scientific and technological revolution caused great improvement in productive
forces
1. The factors which caused the third scientific and technological revolution
a. the development of science and technology
b. the motivation of capital for profits
c. the government’s support for the scientific research
d. cold war made the west and the east compete for the military equipments
2. the impact of third scientific and technological revolution
time: started at the end of 1940s
place: from the US --- the former Soviet Union, Japan, and the west Europe and then the other
countries.
Peak: at the end of 1960s.
symbols : nuclear power, computer and space technology
New power, new materials and electronic technology made the third revolution much more
remarkable than the first two ones.
nuclear power --- the shortage of energy and resources --- supports quicker development of
the science, technology and the production.
Man-made new materials
complex materials --- in the aviation or space technology, now even in car industry.
Plastic--- used in many places
Computer totally changes our life.
computer to operate machine
the improvement of the international division of labour --- the vertical one and the
horizontal one
the specialization of the multinational corporations (MNCs)
the global operative strategies : the international arrangement for the R&D projects,
production and marketing, the flow of capital and so on.
the reproduction cycle → international : production→ distribution →exchange and consume
--- international
the factors of production → international: capital, technology, raw materials and labour →
international.
The internationalization of production may push the productive forces to rise to a new
level.
 the third scientific and technological revolution→the (mature) system of the capitalist
international division of labour (internationalization of production) →the world market → world
economy
Now the world economy becomes so important that almost every country is involved in it
and has its own roles in it. Of course, some countries have more important roles in it. Others may
have less important roles in it.

III. the intenerating of the capitalist industry structure

the reproduction cycle --- the comparative decreasing input ---the comparative increasing
input
labour-intensive and resources-intensive industries →knowledge-intensive and technology-
intensive industries.
There are two kinds of intenerating of the industry:
1. Intensive intenerating : within one industry, the input of manual labour decreases, but the
input for R&D, information service and so on increase.

2. Extensive intenerating : sections which may provide other sections with services of
information and knowledge appear to be more important.
IV. the trends and laws of the scientific and technological revolution.
1. the trends:
the changes become quicker and quicker
the result of the changes provides a base for a new revolution.
2. the laws:
1) the progress of science and technology becomes quicker
e.g. steam engine: from research to putting into production--- 100 years
telephone---56 years
radio---35 years
airplane---14 years
television---12 years
transistor--- 5 years
solar cell--- 2 years
2) the leading industries:
The time for the exchange of the leading industries becomes shorter.
3) the change of scientific structure:
Scientific structure:
a) people (their number, their age, and their level)
b) their specialization (the basic theory, applying theory, natural science, social
science, hardware, and software etc. )
c) the lab and the equipments and so on
d) the information resources and education level
The scientific structure is always in a dynamic state.

Questions:
1. How do you understand “the world economy”?
 2. How the world economy was formed?
3. Please illustrate the impact of the first and the second scientific and technological
revolution on the formation of the world economy.
4. Please illustrate the impact of the third scientific and technological revolution on the
world economy.
5. How the third scientific and technological revolution promoted the globalization of the
economy?

Chapter Two
The Productive Forces and the cycle of the world economy
1. business cycle
2. the economic cycles of the world economy after the World War II the features of the cycles
3. the new economy and the cycle

bibliography:
1. Basic Economics, Hailstones & Mastrianna, 9 th edition, South-Western Publishing Co. ,
Cincinnati, Ohio, 1992
2. Economics Today, roger Leroy Miller, 9th edition, Adisson-Wesley Education Educational
Publishes Inc., 1997
3. Economics, N.Gregory Mankiw, 3rd edition, Tsinghua University Press 2006
4. 《世界经济学》 张伯里 主编 中共中央党校出版社 2004 年 7 月第 1 版
5. 《当代世界经济》王广信 赵丽娜 主编 人民出版社 2002 年 3 月第 1 版
6. 《世界经济新论》 庄起善 主编 复旦大学出版社 2004 年 8 月第 1 版
7. 《世界经济概论》 池元吉 主编 高等教育出版社 2003 年 8 月第 1 版

1. business cycle

basic problem for the capitalism--- the development of industry is always interrupted by periodic
economic crisis. This makes the economic growth in the capitalist countries unstable.
striking feature --- instability, fluctuations

Business cycle: the rise and fall of economic activity relative to the economy’s long-term growth
trend. As the cycle progresses, all parts of the economy display marked changes in activity as they
move through distinctive periods usually called trough, expansion, peak, and contraction.
Production, prices, income, and employment activities all show characteristic changes during the
cycle; in fact, no part of the economy is free from this cycle. Extensive studies have shown that
these cyclical fluctuations are found in economies throughout the world.

1. Real or physical causes :

 Innovation Theory: the theory that business cycles are caused by breakthroughs in the
form of new products, new methods, new machines, or new techniques.
 Agricultural Theories: theories of the business cycle that relate the general level of
business activity to the weather.
2. psychological causes:
  Psychological Theory: the theory that when investors and consumers react according to
some belief about future conditions, their actions tend to transform their outlook into
reality.
Rational Expectations Theory: an economic theory suggesting that individuals and business act
or react according to what they think is going to happen in the future after considering all
available information.
3. monetary causes:
Monetary Theories: theories that the business cycles is caused by the free and easy expansion of
the money supply.
4. spending and saving causes:
Under-consumption Theories: theories that the business cycle is caused by the failure to spend
all national income, resulting in unsold goods, reduced total production, and consequent
reductions in employment and income.
 The economy does not distribute enough income among the factors of
production to permit purchase of all the goods and services produced by
the economy.
 The economy does distribute enough purchasing power to buy the total
goods and services produced but that not all the income or purchasing
power is used.
Circular flow of income
 Circular flow of income is the cyclical operation of demand, production, income, and new
demand.
 Income =demand →production →distribution (enough) (income)= new demand
 Income ≠spending ( less demand) →leakages
 Leakages are flows out of the circular flow that occur when factor income is received and
not spent directly on purchases.
 Injections are added spending in the circular flow that are not paid for out of factor
income.
 Underinvestment Theory: the theory that recessions occur because of inadequate
investment in the economy.
 spending on consumption is less than total income
 the difference must take the form of investment

Phases of the Cycles

two phases: contraction 扩张 and expansion 收缩
The top: peak
The lowest point: trough
four phases:
prosperity 繁荣;
recession 衰退, 不景气;
depression 萧条;
recovery 复苏
recession: GDP ↓ continuously for two quarter (demand, investment, employment, production
output, profit, even stock price and interest rate ↓)
depression: long and continuous recession spread

A peak exists whenever an overall high level of economic activity prevail.

A contraction occurs whenever the level of business activity drops noticeably.
The trough is the period when the level of business activity has dropped as far as it is going to
drop in a particular cycle.
Expansion occurs when the level of business activity begins to rise.

Trough: low income → low demand → price down → profit low (in spite of low cost ) →
employment low → levels of investment low → interest rate down
Industries: less need to replace worn-out capital
Consumers : less need for durable goods
Expansion: Production increase → employment and income increase → demand increase →
price rise (but cost rise slower) → profit rise → levels of investment increase → interest rate rise
slowly → expansion is on its way to peak
Peak: A peak generally has favorable social and political consequences as well as a good
economic effect on society e.g. high-level prosperity.
Contraction: As production increase, the economy eventually reaches the bottleneck stage.
Downswings are certain to occur.

Pattern of cycles:
contraction → trough → expansion → peak → contraction
Once a contraction has started, a cumulative action among several elements in the economy
tends to augment the downswing. During the trough, however, other forces eventually arrest the
contraction and start an upward movement. Once this upward motion begins, reactions of
individuals and businesses tend to augment the expansion. During the peak, however, forces build
up that eventually cause a new contraction.

four forces or types of economic change affect the level of business activity:
(1) the trend,
(2) seasonal variations,
(3) random fluctuations,
(4) cyclical fluctuations.
The trend is the directional movement of the economy over an extended period of time, such as
20 to 30 years.
Seasonal variations are recurring fluctuations in business activity over a given period, usually 1
year. The cause of the fluctuations may be natural and artificial.
Random fluctuations in business activity resulted from unexpected or unusual events. A serious
flood or drought can affect certain portions of the economy or even the economy as a whole.
Cyclical fluctuations are changes in the level of business activity that come about regardless of
the trend, seasonal variations, or random forces.

internal forces of business cycles: are elements within the very sphere of business activity itself
and include such things as production, income, demand, credit, interest rates, and inventories.
external forces of business cycles: are elements outside the normal scope of business activity and
include population growth, wars, basic changes in the nation’s currency, and national economic
policies, as well as floods, droughts, and other catastrophes (disasters) that have a pronounced
effect on business activity.

Types of business cycle

the Kitchin inventory cycle (3–5 years) — after Joseph Kitchin(约瑟夫.基钦)
In 1923---article :"Review of Economic Statistics" ---outlining his discovery of a 40-month
cycle resulting from a study of U.S. and UK statistics from 1890 to 1922
--- based on a stocking /destocking cycle

Inventory--- production---economy
the early phases of a contraction---- inventories: rather high level
retailers supply goods out of inventory and cut orders from producers
production--- low level
trough--- inventories depleted
companies --- replace inventories
most current sales --- ordering goods from the producer
production increases to stimulate the economy to expand
sales increase---the size of inventories increases
production increase --- greater demand by consumers + build up inventories
price increases are anticipated--- firms build up inventories and increase the ratio of inventory to
sales--- increase in production (beyond the actual consumer demand)
the reverse situation--- contraction

the Juglar fixed investment cycle (7–11 years) — after Clement Juglar(朱格拉)
business cycle --- recovery and prosperity are associated with increases in productivity, consumer
confidence, aggregate demand, and prices.
The French economist identified four phases to each wave: prosperity, crisis, liquidation and
recession

the Kuznets infrastructural investment cycle (15–25 years) — after Simon Kuznets ( 库兹涅
茨), Nobel Laureate
Russian-born American economist who carried out research on the U.S. real-estate cycle.
analyzed and quantified the cyclical nature of production and prices in spans of fifteen to twenty
years

The Kondratiev wave or cycle (45–60 years) (grand supercycles) — after Nikolai Kondratiev
(尼古拉·康德拉季耶夫)
cycles of boom followed by depression
visible in international production data than in individual national economies
concerns output rather than prices
Kondratiev wave --- two 'seasons': the Kondratiev Fall--- and the Kondratiev Winter
a bull market is associated with 'fall' and a bear market with ‘winter’

the Forrester cycles (200 years) - after Jay Wright Forrester.

the Toffler civilization cycles (1000-2000 years) - after Alvin Toffler.

Joseph Alois Schumpeter (约瑟夫·阿洛伊斯·熊彼特) suggested a model in which the four

main cycles, Kondratiev(54 years), Kuznets (18 years), Juglar (9 years) and Kitchin (about 4
years) can be added together to form a composite waveform.
A Kondratiev wave could consist of three lower degree Kuznets waves. Each Kuznets wave could,
itself, be made up of two Juglar waves. Two (or three) Kitchin waves could form a higher degree
Juglar wave.
the four waves can be added together to form a composite waveform
Actually there was considerable professional rivalry between Schumpeter and Kuznets. The
wave form suggested above might not include the Kuznets Cycle simply because Schumpeter did
not recognize it as a valid cycle.

2. the economic cycles of the world economy after the World War II
five economic crisis since the end of World War II,
(1) the first economic crisis: 1957---1958 started from the US in April 1957 and soon spread to
Canada, countries in west Europe and Japan. It lasted for about one year.
remarkable features: at the same time; the prices did not fall but rise.
(2) the second economic crisis: 1973-1975
The first “oil shock” occurred in the last quarter of 1973.
a good example for an aggregate supply shock → a world economic crisis
(any unanticipated shift in aggregate demand or supply are called aggregate demand shocks or
aggregate supply shocks) .
features for this crisis:
a) it lasted a long time and the production fell down dramatically: 22 months for UK, 15
months for Japan, 14 months for west Germany and 9 months for France and America.
The industrial production decreased by 15.4% in the US, 11.2% in UK, 16.3% in
France.
b) bankruptcy and unemployment: about 120 thousand large firms with property more than
1 million US dollars went bankrupt. The number for jobless people even reached 18.5
million.
c) the stock market fell drastically. (stock price index ↓ 76%~32%) Investment ↓20%,
180 banks went bankrupt in America,
d) serious inflation → stagflation
trade protection → decrease of the international trade
(3) The third economic crisis: 1979~1982
features:
a) stagflation;
b) a long time and had an intricate progress:
c) bankruptcy and unemployment reached the highest record. e.g. in 1981, firms went
 bankrupt: in Britain: 14,000; in France: 20,900; in west Germany: 8,500; in 1982,
in the US 25,000 firms went bankrupt. At the end of 1982, the US and EC had 120
million people out of work.
d) the developing countries were hurt terribly.
(4) The fourth economic crisis: 1990~1993
features: a short crisis in America . a long time for the crisis in the world.
(5) The fifth economic crisis: 2001~2002 imports of the US decreased continuously from the first
quarter of 2001, which impacted on the exports of EU and Japan
(6) The six economic crisis: 2008~
 In 2007,subprime crisis occurred in US
 Sept. 15 2008, Lehman Brothers applied for bankruptcy protection.
 Sept. 16, US stock market ↓
 Crisis started

Most remarkable features about the economic crises after the Second World War
a) mild crises:
b) Stagflation
c) No very serious monetary credit crisis

mild crises: in 1929, industrial production↓46.2% in the US, ↓32.3% in UK, ↓32.9% in
France.
In 1973~1975, the industrial production↓15.4% in the US, ↓11.2% in UK, ↓16.3% in
France.
reasons for such a result: modern monetary, fiscal, and other measures
automatic stabilizers
modern scientific technology

Automatic, or built-in, stabilizers (in US): Special provisions of the tax law that cause changes
in the economy without the action of Congress and the president. In other words, automatic
stabilizers counter ups and downs in fiscal activity without the necessity for legislative action.
e.g: the progressive income tax system , Social Security system : unemployment compensation
and pension for old people.
the progressive income tax system: in US, maximum rate: 40%.
For an individual, as taxable income rises, the marginal tax rate rises, and as taxable income falls,
so does the marginal tax rate. The average tax rate falls when less is earned.
Unemployment Compensation: unemployment compensation stabilizes aggregate demand.
Stabilizing Impact: The key stabilizing impact of the progressive income tax and unemployment
compensation is their ability to mitigate changes in disposable income, consumption, and the
equilibrium level of national income.

the “visible hand”---the intervention of the government.

Fiscal policy: is defined as the discretionary change in government expenditures and /or taxes in
order to achieve such national economic goals as high employment or reduced inflation.
 (National goals may be: high employment, price stability, economic growth, and improvement in
the nation’s international payments balance)
Time lags tend to reduce the effectiveness of fiscal policy.
Time lags includes the recognition time lag (a lag between the start of a recession and the
availability of relevant data), the action time lag ( a lag between the recognition of a need for a
fiscal policy and putting one in motion), and the effect time lag (a lag between policy
implementation and tangible results).
the recognition time lag + the action time lag = the inside lag (this is how long it takes to get a
policy from inside the institutional structure of the federal government.)

Fiscal policy has typically been associated with the economic theories of John Maynard
Keynes and what is now called traditional Keynesian analysis.
Kennedy-Johnson tax cut of 1964.
In 1964, federally collected taxes were cut by $11 billion. From 1964 to 1965, the
unemployment rate fell from 5.2% to 4.5%.

Monetary policy: is defined as the discretionary change of the supply of money ( or the rate at
which it grows ) in order to achieve national economic goals. Monetary policy works in a variety
of ways to change the willingness of firms, individuals, governments and foreigners to buy
domestically produced goods and services, both directly and indirectly.
e.g. the Federal Reserve System (Fed) seeks to alter consumption, investment, and aggregate
demand as a whole by altering the rate of growth of the money supply.
The Fed uses three tools as part of its policymaking action: open market operations,
discount rate changes, and reserve requirement changes.
open market operations: the Fed changes the amount of reserves in the system by its purchases
and sales of government bonds issued by the US Treasury. Fed’s open market operation must
cause a change in the price of bonds.
discount rate changes: the discount rate is the interest rate the Fed charges depository institutions
when they borrow reserves directly from Fed. An increase in the discount rate increases the cost of
funds.
reserve requirement changes: Fed rarely uses changes in reserve requirements as a form of
monetary policy

Stagflation:
Stagflation: sluggish economic growth coupled with a high rate of inflation. Because of the
sluggish economic growth, unemployment is serious. However, at the same time, inflation exist.
Remarkable feature for stagflation: the sluggish economic growth accompanied by the high rate
of inflation and unemployment.
Phillips curve does not work
the Phillips curve : a curve showing the relationship between unemployment and inflation.
A shift of the curve indicates a change in both the price level and unemployment rates as one is
traded off against the other.
The reasons for stagflation:
(1) the monopoly price
 (2) the expansionary policies help to prevent the prices from dropping.
Reasons for no very serious monetary credit crisis:
(1) Because the economic crises after the War are mild ones and not serious enough to cause
serious monetary credit crisis.
(2) The intervention of the government
(3) Big monopoly enterprises are financially strong enough to defend themselves in the
crises.
3. new economy in the US and the cycle
new economy: The term New Economy refers to a set of qualitative and quantitative changes
that, in the last 20 years, have transformed the structure, functioning, and rules of the economy.
The New Economy is a knowledge and idea-based economy where the keys to job creation and
higher standards of living are innovative ideas and technology embedded in services and
manufactured products. It is an economy where risk, uncertainty, and constant change are the rule,
rather than the exception.
a new model of economic growth accompanied with low rates of unemployment and
inflation.
the symbols or the contents of the new economy are the internet, modern information system
and new and high technology.

Features of the new economy:

(1) the continuous economic growth within a long time
(2) low rate of unemployment combined with low rate of inflation
(3) the increase of export: better balance of international trade.
(4) Decrease of fiscal deficit: fiscal deficit in 1992: $293 billion. Clinton
Administration: increasing taxes and decreasing expenditure.
(5) The US enterprises improved their competitive power in the international
competition

Reasons for the new economy:

(1) the development of scientific technology.
policies support → the hi-tech → labor productivity →competitive power → foreign markets
e.g. hi-tech helps the commerce: Electronic Data Interchange (EDI)
In 1996: about $15.5 billion
in 1998: ↑ $300 billion
in 1999: ↑$450 billion
in 2005: ↑$1000 billion.
(2) knowledge-economy contributes a lot for the new economy in the US
(3) the government’s intervention
the Clinton Administration’s important economic task: the decrease of fiscal deficit
the fiscal policies to increase the taxes and decrease the expenditure.
e.g. in 1993, an act → increase the tax revenue by $246 billion in the following 5 years
income tax
personal income tax
annual income: $30,000 ↓ no tax.
 annual income: around $40,000 only pay about $17 each month.
annual income: ↑$180 thousand, the income tax raised from 31% to 36%.
annual income: ↑$250 thousand, another 10% additional tax was imposed.

decrease the fiscal deficit by $496 billion within 5 years

increase the tax revenue by $246 billion + decrease the expenditure by $250 billion.
in 1998 → fiscal surplus
in the following 2 years, the surplus reached $100 billion.
the Fed had the Anti-inflationary policies:
1981 ~ 1982, the inflation rate: about 15%.
in the 1980s, the interest rate was at a higher level.
Alan Greenspan’s monetary policy--- adjust the interest rate according to the inflation
rate
Examples for the adjustment of interest rate by the Fed:
in 1994, the Fed raised the interest rate for 7 times (from 3% to 6%).
from July 1995 to Jan 1996 the Fed lowered the interest rate for 3 times
in 1998, the Fed lowered the interest rate for three times and successfully resisted the Asian
financial crisis.
From May 1999, the Fed raised the interest rate for 6 time in the following year in order to be
ready for the coming inflation.

The US government often combine the fiscal policies with monetary policies to achieve its
purpose because:
(a) It needs a long time to have the decision-making for the fiscal policies because of
the legal procedures. So there will be the time lags.
(b) The decision-making for monetary policies was comparatively simpler and
quicker.
(c) The two kind of policies may impact on different objects. The fiscal policy → the
consumption expenditure or the disposable income of the people. The
monetary policy → the capital investment.
Normally the US government may have:
i. expansionary fiscal policy +expansionary monetary policy when the aggregate
demand was seriously not sufficient.
ii. contracting fiscal policy + contracting monetary policy when the economy is too
expansionary, and the aggregate demand exceeds greatly the aggregate supply.
iii. expansionary fiscal policy + contracting monetary policy
iv. contracting fiscal policy + expansionary monetary policy

(4) the reform in operation and management of the US enterprises

eg. more investment on R&D
market mechanism inside the enterprise
training of the employees
the development of MNCs
(5) globalization provide a solid base for the US economic growth
 eg import low-price raw materials,
export hi-tech products
capitals flow in to increase investment and consumption,
new immigrants

The new economy is a wonder but it still has an end and cannot get rid of the business cycle.
In 2000, the contraction came to the US.
the business cycle still works

Chapter Three
Topics:
1. population, human resources and economic growth
2. natural resources and economic growth
3. environment and economic growth
4. What should we do to encourage the harmonious and converging development of the
economy, the society and the environment?
5. How do you think about the relation between the knowledge economy and the sustainable
development?

I. the factors which limit the development of productive forces

1. the population and the human resources
Population: a population is the collection of people—or organisms of a particular species—
living in a given geographic area.
A particular geographic area of land is said to have a carrying capacity, representing the
maximum population which it can support.
When populations exceed the carrying capacity, famine and disease tend to reduce the size of
the population.
Carrying capacity also applies to human population.
the ability to increase their carrying capacity
overpopulation
Overpopulation may indicate any case in which the population of any species of animal may
exceed the carrying capacity of its ecological niche.
the relationship of human population to the planet Earth
"Malthusian catastrophe"
Malthus's theory
Early in the 19th century, Thomas Malthus argued in An Essay on the Principle of Population
that, if left unrestricted, human populations would continue to grow until they would become too
large to be supported by the available agricultural land. At a certain point, the population would be
restrained through mass famine and starvation.
Effects of unregulated population growth
natural growth will cause the population to grow to unsustainable levels
Some other characteristics of overpopulation:
Birth rate is high
Life expectancy is low
 Low level of literacy
High rate of unemployment in urban areas (leading to social problems)
Rural people are not gainfully employed (caught in cycle of poverty)
Insufficient arable land
Little surplus food
Poor diet with ill health and diet-deficiency diseases (e.g. rickets )软骨病, 佝偻病,)
GDP per capita is low (under US$765 per annum)
Many live in unhygienic(不卫生的) conditions
Human resource
human beings are creative and social beings that make contributions beyond "labor" to a
society and to civilization.
Human capital is a way of defining and categorizing peoples' skills and abilities as used in
employment and otherwise contribute to the economy.
human capital is similar to "physical means of production ", e.g., factories and machines: one
can invest in human capital (via education, training, medical treatment) and one's income depends
partly on the rate of return on the human capital one owns.
the idea of "human capital" is similar to Karl Marx's concept of labor-power
Karl Marx: under capitalism workers had to sell their labor-power in order to receive income
(wages and salaries).
The employer wants to receive an adequate rate of profit from his or her operations, so that
workers must be producing surplus value, i.e., doing work beyond that necessary to maintain their
labor-power.

2. the nature resources and the environment

Natural resources are natural capital converted to commodity inputs to infrastructural capital
processes. They include soil, timber, oil, minerals, and other goods taken more or less as they are
from the Earth.

Infrastructural capital refers to any physical means of production beyond that which can be
gathered or found directly in nature, i.e. beyond natural capital and that which is not considered as
"fluid capital". It may include tools, clothing, shelter, irrigation systems, dams, roads, boats, ports,
factories or any physical improvements made to nature.

the world is running out of the natural resources---limit the economic growth and
development
In broad terms, a natural resource is something scarce occurring in natural that we can use for
our own purposes.
Natural resources include knowledge of the use of something.
hydroelectric power--- no one knew that such a natural resource existed or, indeed, how to
make it exist several hundred years ago.
No strong correlation between the natural resources of a nation and its stage of
development.
e.g. Japan’s natural resources : poor
 Brazil’s natural resources : rich
Brazil has a much lower per capital income than Japan.
Only when we include the human element of natural resources can we say that natural
resources determine economic development

Nature or (the) (natural) environment often refers to that part of the natural world that
people deem important or valuable, for any reason — economical, aesthetic, philosophical,
hedonistic, sentimental, etc..
The word ecology is often used in this same sense.
environment --- environmentalism
Typical environmentalist goals include reducing pollution and the consumption of non-
renewable fuels such as petroleum and coal, development of renewable energy sources,
conservation and sustainable use of scarce resources such as water, land, and fish, protection of
pristine ( 质 朴 的 ) habitats, saving endangered species from extinction, establishment of nature
preserves, etc..
Sustainable use is the use of resources at a rate which will meet the needs of the present without
impairing the ability of future generations to meet their needs.
Mahatma Gandhi, a leader and philosopher from India once said: “The earth provides
enough to satisfy every person’s need but not every person’s greed... when we take more than we
need, we are simply taking from each other, borrowing from the future, or destroying the
environment and other species”.

II. the sustainable development of the world economy

1. the beginning of the topic: sustainable development
under the pressure of the increasing of population, urbanism, economic growth and resources
doubt: economic growth = economic development ?
The gross domestic product, or GDP, of a country is one of the ways of measuring the size of
its economy. GDP is defined as the total market value of all final goods and services produced
within a given country in a given period of time (usually a calendar year). It is also considered the
sum of value added at every stage of production (the intermediate stages) of all final goods and
services produced within a country in a given period of time, and it is given a money value.
The most common approach to measuring and understanding GDP is the expenditure
method:
GDP = consumption + gross investment + government spending + (exports − imports), or,
GDP = C + I + G + (X-M)

Types of GDP and GDP growth:

Current GDP is GDP expressed in the current prices of the period being measured
Nominal GDP growth is GDP growth in nominal prices (unadjusted for price changes).
Real GDP growth is GDP growth adjusted for price changes.

Economic growth is the increase in the value of goods and services produced by an economy. It is
conventionally measured as the percent rate of increase in real GDP.
The real GDP per capita of an economy is often used as an indicator of the average standard of
living of individuals in that country, and economic growth is therefore often seen as indicating an
increase in the average standard of living.
Economic development is the development of economic wealth of countries or regions for the
material well-being of their inhabitants.
The economic development process supposes that legal and institutional adjustments are made to
give incentives for innovation and for investments so as to develop an efficient production and
distribution system for goods and service.
economic growth ≠ economic development
e.g. Britain after the industry revolution (economic development)
Libya after becoming an important oil producer during the 1960's (economic growth )

1962, Rachel Carson: “The Silent Spring ”

Barbara Ward and Rene Dubos: “Only One Earth” →new idea: the sustainable development.
“The Limits to Growth” →the new concept: sustainable development.
In 1987, in a report of the UN, the new concept: sustainable development was formally put
forward.
Ecological economics or environmental economics is a new branch of study which started in the
west in 1960s.
2. What is sustainable development?
The sustainable development is a kind of development that not only should meet the need of this
generation, but also should not cause the menace of the ability of later generations to meet their
need.
It includes the controlling of national population, the discovery and use of new resource and the
protection of natural environment.

the harmonious and converging development of the economy, the society and the environment ---
the sustainable development

3. the knowledge economy and the sustainable development

knowledge-economy contributes a lot for the sustainable development
the knowledge economy
primary wealth-creating assets: land and labor → capital and energy → information and
knowledge
a defining aspect of the New Economy is the increased importance of knowledge.
wealth-creating work: physically-based → "knowledge-based."
key factors of production: Technology and knowledge
comparative advantage of a company: its process of innovation and its ability to derive value
from information

The establishment of the concept:

in 1996, OECD → “Knowledge-based Economy”

In 1997, Bill Clinton →“knowledge-economy”
Knowledge economy is the economy which is based on the generation, acquisition, diffusion,
and exploitation of knowledge and information.
The concept of knowledge-economy results from a fuller recognition by OECD of the new
leading role of knowledge, information, and technology in economic growth.

two major forces helping to shape the knowledge-economy.

First, globalization.
Second, the continuous upgrading of telecommunications and computers.
The knowledge-economy represents a strategic new era that human beings are entering.
Knowledge is becoming the most important source of growth as well as productivity. Information
means competitive advantage, and knowledge leads to progress.
The keys to the strong economic and cultural growth of a nation's future are successful generation,
acquisition, diffusion, and exploitation of knowledge.
What are the characteristics of the knowledge-economy?
two remarkable characteristics of the knowledge-economy: innovation and challenge.
Innovation refers to the ability to create the new knowledge and to apply them in the practice.

First, in the knowledge-economy, the ability to generate and use knowledge to innovate is not
only a determinant of wealth, it is also the basis of competitive advantage.
Second, adjustment challenges with implications for firms, individuals, educational institutions
and governments. These adjustment challenges may happen in the aspects of organisational
structure, management, employment, investment, training, policies and regulations.

The knowledge-economy regards human resources as a key source of development, simply

because knowledge is imbedded in people, and human beings are the creators of knowledge.
knowledge-economy favours those workers with higher skills and educational qualifications, and
requires continuous upgrading and broadening of skills and knowledge

two important types of knowledge industries to consider:

1. there are those industries whose major product is knowledge itself
2. there are industries that manage or convey information.
The first group includes industries such as software, biotechnology, and information
technology hardware; and occupations such as engineers, scientists, programmers, and designers,
whose major output is research that translates into new products and services.
driven by individuals engaged in research, design, and development
less than 7 percent of the economy's output
key drivers of the New Economy.
The second group: industries include telecommunications, banking, insurance, advertising,
law, medicine, and much of government and education; and occupations such as managers,
lawyers, bankers, sales representatives, accountants, and teachers.
In these industries, effective handling and managing of information, rather than breakthrough
knowledge generation, are the keys to success.
The increased importance of knowledge means that the net stock of intangible capital (e.g.,
education and research and development) has grown faster than tangible capital (e.g., buildings,
transportation, roads, and machinery).
 In the New Economy, intangible capital has become at least as important as tangible capital,
and a greater share of the value of tangible capital is based on intangible inputs.
the economic output of the U.S. economy, as measured in tons, is roughly the same as it was
a century ago, yet its real economic value is 20 times greater.
People have added intangible attributes to goods and services, the most important being
knowledge.
e.g. anti-lock brakes

Knowledge-economy is a new kind of economy, a new kind of economic structure and a new
phase of economic development for human beings.

the traditional economic structure is based on the consumption of the material resources and
energy.
knowledge-economy is a new kind of economic structure which is based on new and hi-tech
industries and knowledge-intensive service.
the sustainable development of the world
OECD divided knowledge into four kinds:
(a) Know-What: this kind of knowledge is about the facts or natural phenomena. It includes the
knowledge which is traditionally called as knowledge of natural science and social science.
(b) Know-Why: mainly refer to the scientific theories or laws. These theories are created or
discovered in the special research institutes or labs or in the universities. According to OECD,
this kind of knowledge support the development of technology in most of the industries.
(c) Know-How: the knowledge about techniques and skills.
(d) Know-Who: the knowledge about human resources, the relation of the people and the
management.
knowledge has the following features:
(a) it can not be depleted.
(b) It can be shared with other people: public good
(c) It is not scarce.
(d) Knowledge may increase with speedup.
Because of the special features of knowledge, knowledge-economy can support the sustainable
development, the harmonious and converging development of economy, society and environment.

Chapter Four
International division of labour and international trade relation
bibliography:
1. International Economics, 8th edition, Dominick Salvatore, 清华大学出版社, 2004
2. International Economics, 9th edition, Mordechai E. Kreinin, 北京大学出版社, 2003
3. International Business, 4th edition, Michael R Czinkota, Ilkka A. Ronkainen, Michael H.
Moffett, 机械工业出版社, 1998

1. international division of labour and the world market:

2. international trade relation and the theories:
3. From GATT to WTO:

I. international division of labour and the world market

division of labor
division of labour refers to the specialization of the functions and roles involved in production.
Division of labor is closely tied with the standardization of production, the introduction and
perfection of machinery, and the development of large-scale industry.
the different categories of division of labor:
1. territorial: geographical regions
2. temporal: separate processes
3. occupational: goods produced in the same industrial group are worked by a number of
persons, each applying one or more processes and skills.
Modern mass-production techniques are based on the last type.
classic example by Adam Smith: to make a pin → 10 men → 18 operations (with divisionh of
labour) → 48,000 pins a day
10 men → working separately → 200 pins a day

Problems created by the division of labor: monopoly,

technological unemployment,
chronic unemployment
Each variant of the division of labor has its own peculiar problems of distribution.
Inequalities in distribution: e.g. capitalist, manager, or laborer
The distribution of the world's wealth has become a major issue in international politics.
International division of labour is the underlying principle for international trade and world
market.

The history of International division of labour:

1. the start of international division of labour: from the end of 15 th century and beginning of 16 th
century ~ 1760s
the base: the geography discovery and the discovery of the new sea route.
the typical model of international division of labour: the well-known “triangle trade”
Features: production based on the farming and handcraft industry
The international division of labour is the division of labor between the suzerains and the colonies.

2. the formation of international division of labour:

time: 1760s ~ 1870s
the base for the formation of International division of labour: the first scientific and technological
revolution.
mass production.
Transport and communication
the international trade
Features: between farming and industry, or farming countries and industry countries.

3. the formation of the system of international division of labor

time: 1870s ~ 1940s
The base for the formation of the system of international division of labour: the second scientific
and technological revolution.
Features:
(1) the development of the international specialization of the production
(2) The relation between the suzerains and the colonies became more tighten. industry
----farming products and raw materials.
(3) The gap between the cities and the countryside widened.

4. changes of the international division of labor after the World War II

The base for the changes of the system of international division of labour: the third scientific and
technological revolution.
Features:
i. division of labor between developed countries plays the main role in the world
market
ii. the traditional model decreased. The new ones increase.
iii. The specialization
iv. division of labor --- regional economic integration (EU) (Trade creation and Trade
diversion)
v. MNCs

Trade creation occurs when some domestic production in a nation that is a member of the
customs union is replaced by lower-cost imports from another member nation.
Trade diversion occurs when lower-cost imports from outside the customs union are
replaced by higher cost imports from a union member.
Trade diversion worsens the international allocation of resources and shifts production away
from comparative advantage.
From the perspective of members of the customs union, the formation or expansion of the
union is only beneficial if the trade creation benefits exceed trade diversion costs.

Types of international division of labor:

(1) vertical: advanced industrial countries---developing countries
(2) horizontal: advanced industrial countries --- advanced industrial countries
The advantages: the specialization → lower cost for production: → rise of productivity
developing countries ---developing countries
advantages: mutual benefits
(3) mixed: the combination of the vertical and the horizontal.

the world market

base for the world market: the geography discovery, the scientific and technological revolutions
and development of transportation.

II. the international trade relation and the theories

theories:
(1) Mercantilist Theory (Hume & Colbert)
 Wealth consists of nation's gold & precious metals
 International trade built wealth (gold)
 Should maximize exports and minimize imports
 Nation has a Self-sustaining economy
 Colonies should not manufacture
 Government controls international trade
(2) Absolute Advantage
In order to maximize net worth, specialize and trade in that which you have an absolute advantage
Specialize in that which has the least actual cost
Absolute advantage can explain only a very small part of world trade today.
(3) comparative advantage (Ricardo & Torrens)
specialize in the production of and export the commodity in which its absolute disadvantage
is smaller ( this is the commodity of its comparative advantage ) and import the commodity in
which its absolute disadvantage is greater ( this is the commodity of its comparative
disadvantage ).
e.g.
U,S. U.K.
Wheat (bushels/man-hour) 6 1
Cloth (yard/ man-hour ) 4 2

U.S.: absolute advantage in both U.K.: absolute disadvantage in both

But advantage greater in wheat But disadvantage smaller in cloth
comparative advantage in wheat comparative advantage in cloth
specializes in production of wheat and export it specializes in production of cloth and export it

(4) Factor Proportion Theory (Heckscher-Ohlin Theorem)

According to Heckscher-Ohlin theory, each country exports the commodity that is intensive
in its relatively abundant factors.
e.g. A labor-abundant country should export a labor-intensive commodity.
A labor-abundant country (e.g. China) is one that possesses larger endowment ratio of labor to
capital than the endowment of another country ( e.g. the U.S.). The second country ( the U.S.) is
known as the capital-abundant country.
A labor-intensive commodity is one that requires a higher labor/ capital ratio for its manufacture
(e.g textile ) relative to another commodity such as wheat. The other commodity (wheat) is known
as the capital-intensive good.

(5) Raymond Vernon’s international product life cycle theory (IPLC)

Most striking was the appreciation of the role of information.
The stages of the product cycle:
Stage I: the new product Introduction of Product 引进市场阶段
Introduction of product in industrial country
the product is nonstandardized
Cost of production is quite high.
The innovator is a monopolist.
Price elasticity of demand at this time is low.
Stage II: Growth of Product 成长阶段
Product and technology becoming standardized
still in developed countries
Stage III: the maturing product
Production becomes increasingly standardized.
Competitors with slight variation develop
downward pressure on prices and profit margins
production cost becomes a critical problem
Stage IV: Decline of Product 衰退阶段
production is completely standardized in its manufacture.
cheapest unskilled labor need --- profit margins are thin
innovating country has no comparative advantage about the technology and skills → stop the
production → new product.

(6) Theory of Competitive Advantage (Porter)

Global Competitiveness determined by:
 a.Factor condition (Traditional/Advanced)
 b.Demand Condition(Large/Sophisticated)
 c.Related and Support Industries (Cooperation)
 d.Domestic Environment (Competition)
A competitive strategy takes offensive or defensive action to create a defendable position in an
industry, in order to cope successfully with competitive forces and generate a superior return on
investment.
Two basic types of competitive advantage
 1. Cost leadership (low cost)
 2. Differentiation
 more broadly or narrowly approached --- result in the third viable competitive strategy:
 3. Focus
COMPETITIVE ADVANTAGE TYPE 1: COST LEADERSHIP
--- Achieving Cost Leadership means that a firm sets out to become the low cost producer in its
industry.
--- A cost leader must achieve parity or at least proximity in the bases of differentiation even
though it relies on cost leadership for its competitive advantage.
---If more than one company try to achieve Cost Leadership, this is usually disastrous.
--- Often achieved by economies of scale.

COMPETITIVE ADVANTAGE TYPE 2: DIFFERENTIATION

--- Achieving of Differentiation means that a firm seeks to be unique in its industry along some
dimensions that are widely appreciated by buyers.
--- A differentiator can not ignore its cost position. In all areas that do not affect its differentiation
it should try to decrease its cost; in the differentiation area that the costs should at least be lower
than the price premium it receives from the buyers.
--- Areas of differentiation can be: product, distribution, sales, marketing, service, image, etc.

COMPETITIVE ADVANTAGE TYPE 3: FOCUS

---Achieving Focus means that a firm sets out to be best in a segment or group of segments.
--- 2 variants: Cost Focus and Differentiation Focus.

STUCK IN THE MIDDLE

---This is usually a recipe for below-average profitability compared to the industry.
--- Still, attractive profits are possible if and as long as the industry as a whole is very attractive.
--- Manifestation of lack of choice.
---Especially dangerous for Focusers that have been successful, and then start neglecting their
focus. They must seek other Focus niches. Rather than compromise their focus strategy.

the infant industry argument for protection:

suggests that an industry should be protected to allow it to grow in size at which point it can
compete.

III. From GATT to WTO

healthy debate after the War: the need for global trade and investment institution
International Trade Organization (ITO) --- rejected
General Agreement on Tariffs and Trade (GATT), was created
narrow goal: reducing tariffs in goods and services and setting a handful of broad trade
principles.
Aim: to reduce national trade barriers and to stop the competitive trade policies
Seven rounds of tariff reductions were negotiated under the GATT treaty
"Uruguay Round" began in 1986.
The WTO, established in January 1, 1995, is the outcome of the Uruguay Round of trade talks
the WTO is not a United Nations agency
the WTO enforces the 1993 Uruguay Round agreements: the Agreement on Agriculture
(AoA), the General Agreement on Trade in Services (GATS), the agreements on Trade-Related
Intellectual Property Rights (TRIPs) and Trade-Related Investment Measures (TRIMs).
The WTO has the official status of an international organization
on some issues, the WTO has assumed the role of global economic governance
WTO director-general Mike Moore: The WTO is an organization "that mediates trade disputes,
seeks to reduce barriers between countries and embodies the agreements."

What is the World Trade Organization?

The World Trade Organization (WTO) is the legal and institutional foundation of the
multilateral trading system. It provides the principal contractual obligations determining how
governments frame and implement domestic trade legislation and regulations. And it is the
platform on which trade relations among countries evolve through collective debate, negotiation
and adjudication.
 the GATT applied only to trade in merchandise goods;
the WTO covers trade in goods, services and "trade in ideas" or intellectual property.
functions :
(1) administering and implementing the multilateral and plurilateral trade agreements which
together make up the WTO;
(2) acting as a forum for multilateral trade negotiations;
(3) seeking to resolve trade disputes;
(4) overseeing national trade policies
(5) cooperating with other international institutions involved in global economic policy-making.
The WTO agreement contains some 29 individual legal texts
more than 25 additional Ministerial declarations, decisions and understandings

The Principles of the Trading System

1. Trade without discrimination
(1) no country is to give special trading advantages to another or to discriminate against it
(2) "national treatment"
(3) MFN and national treatment requirements relating to the provision of intellectual property
protection
(4) Other WTO agreements with non-discrimination provisions
2. Predictable and growing access to markets e.g.
(1) cut down the tariff and non-tariff trade barriers; to ensure conditions of investment and trade
(2) The key to predictable trading conditions is often the transparency of domestic laws,
regulations and practices.
3. Promoting fair competition
4.Encouraging development and economic reform
--- encouraging developing countries and transition economies to take more active and influential
role; transition periods
--- encouraging industrial countries to assist developing nation members
--- the "enabling clause", provides a permanent legal basis for the market access concessions made
by developed to developing countries under the generalized system of preferences (GSP).

IV. International Investment relations and the theories

Terms
 Foreign Direct Investment – when a firm invests directly in production or other
facilities, over which it has effective control, in a foreign country.
 Manufacturing FDI requires the establishment of production facilities.
 Service FDI requires building service facilities or an investment foothold via capital
contributions or building office facilities.
 Foreign subsidiaries – overseas units or entities.
 Host country – the country in which a foreign subsidiary operates.
 Flow of FDI – the amount of FDI undertaken over a given time.
 Stock of FDI – total accumulated value of foreign-owned assets.
 Outflows/Inflows of FDI – the flow of FDI out of or into a country.
FDI versus Foreign Portfolio Investment
  Foreign Portfolio Investment – the investment by individuals, firms, or public bodies
in foreign financial instruments.
 Stocks, bonds, other forms of debt.
 Differs from FDI, which is the investment in physical assets.
 Portfolio theory – the behavior of individuals or firms administering large amounts of
financial assets.
Types of FDI
 Horizontal FDI – the MNC enters a foreign country to produce the same products
product at home.
 Conglomerate FDI – the MNC produces products not manufactured at home.
 Vertical FDI – the MNC produces intermediate goods either forward or backward in the
supply stream.
 Liability of foreignness – the costs of doing business abroad resulting in a competitive
disadvantage.
Entry Mode
 The manner in which a firm chooses to enter a foreign market through FDI.
 International franchising
 Branches
 Contractual alliances
 Equity joint ventures
 Wholly foreign-owned subsidiaries
 Investment approaches:
 Greenfield investment (building a new facility)
 Cross-border mergers
 Cross-border acquisitions
 Sharing existing facilities
The Strategic Logic Behind FDI
 Resources seeking - looking for resources at a lower real cost.
 Market seeking - secure market share and sales growth in target foreign market.
 Efficiency seeking - seeks to establish efficient structure through useful factors, cultures,
policies, or markets.
 Strategic asset seeking - seeks to acquire assets in foreign firms that promote corporate
long term objectives.
Enhancing Efficiency from Location Advantages
 Location advantages are defined as the benefits arising from a host country’s
comparative advantages.
 Better access to resources
 Lower real cost from operating in a host country
 Labor cost differentials
 Transportation costs, tariff and non-tariff barriers
 Governmental policies
Improving Performance from Structural Discrepancies
 Structural discrepancies are the differences in industry structure attributes between
home and host countries.
  Examples include areas where:
 Competition is less intense
 Products are in different stages of their life cycle
 Market demand is unsaturated
 There are differences in market sophistication
Increasing Return from Ownership Advantages
 Ownership Advantages come from the application of proprietary tangible and intangible
assets in the host country.
 Reputation, brand image, distribution channels
 Technological expertise, organizational skills, experience
 Core competence – skills within the firm that competitors cannot easily imitate or
match.
The Impact of FDI on the Host Country
 Employment
 Firms attempt to capitalize on abundant and inexpensive labor.
 Host countries seek to have firms develop labor skills and sophistication.
 Host countries often feel like “least desirable” jobs are transplanted from
home countries.
 Home countries often face the loss of employment as jobs move.
 FDI Impact on Domestic Enterprises
 Foreign invested companies are likely more productive than local competitors.
 The result is uneven competition in the short run, and competency building
efforts in the longer term.
 It is likely that FDI developed enterprises will gradually develop local supporting
industries, supplier relationships in the host country.

Monopolistic Advantage Theory

 An MNC has and/or creates monopolistic advantages that enable it to operate subsidiaries
abroad more profitably than local competitors.
 Monopolistic Advantage comes from:
 Superior knowledge – production technologies, managerial skills, industrial
organization, knowledge of product.
 Economies of scale – through horizontal or vertical FDI
 the source for raw materials
 sales channels

Internalization Theory
 When external markets for supplies, production, or distribution fails to provide efficiency,
companies can invest FDI to create their own supply, production, or distribution streams.
 Advantages
 Avoid search and negotiating costs
 Avoid costs of moral hazard (hidden detrimental action by external partners)
 Avoid cost of violated contracts and litigation
 Capture economies of interdependent activities
  Avoid government intervention
 Control supplies
 Control market outlets
 Better apply cross-subsidization, predatory pricing and transfer pricing

The Eclectic Paradigm

 OLI Framework
 O – Ownership-specific
 L – Location-specific
 I – Internalization

 O – Ownership-specific (Firm-specific advantages (FSAs))
 Tangible assets, such natural endowments, manpower, and capital.
 Intangible assets, such as technology and information, managerial,
marketing and entrepreneurial skills.
Firm-specific advantages
Examples:
 Proprietary technology due to R &D
 Managerial, marketing, financial skills
 Product differentiation, trademarks, brand names
 Large size (scale of economies)
 Large capital requirements for plants of minimum efficient size
 control of resources, control of markets, risk diversification, knowledge advantages

 L – Location-specific (Country-specific advantages (CSAs) )

 Market structure, government policies, and political, legal, and cultural
environment.
 It must be profitable for a firm to locate abroad to use the firm-specific advantages with
some inputs outside the home country
 Examples
 Natural resources
 Efficient and skilled relatively low-cost labor force
 Trade barriers restricting imports

 I – Internationalization
 Firm’s inherent flexibility and capacity to produce and market through
its internal subsidiaries.
Internalization advantages
 Cost involved in the use of markets and in internal coordination and control
 Which option presents the best return when risks are taken into account
 Both natural and unnatural imperfections induce internationalization by MNCs, examples
government-imposed regulations, natural barriers, buyer uncertainty
 A firm possessing this advantage can either use it or sell/lease it to other firms à must be
more beneficial to internalize than to sell or lease. Other NI -alternatives must be
 considered (Franchising, management contracts, licensing, subcontracts etc.)
 Usually in the context of transaction cost and internationalization theory

 All three factors important in determining the extent and pattern of FDI.

Chapter Five
The International Monetary System and its Development
1. The International Gold Standard
2. The Bretton Woods System
3. The Jamaica Accords

bibliography:
1.International Economics, 8th edition, Dominick Salvatore, 清华大学出版社, 2004
2.International Economics, 9th edition, Mordechai E. Kreinin, 北京大学出版社, 2003
3.International Business, 4th edition, Michael R Czinkota, Ilkka A. Ronkainen, Michael H. Moffett,
机械工业出版社, 1998
4. 《国际金融英语教程》International Finance， 云红茹 禇广友 编著 中国金融出版社 1998
年6月第1版
5.《世界经济新论 习题指南》庄起善 潘烜 编著 复旦大学出版社 2002 年 12 月 第 1 版

I. The International Gold Standard

Gold Standard
The gold standard is a monetary system in which the standard economic unit of account is a
fixed weight of gold.
The gold standard may also be viewed as a monetary system in which changes in the supply
and demand of gold determine the value of goods and services in relation to their supply and
demand.

emerged around 1870-1880, and lasted until 1914

most industrial nations linked their currencies to gold
complete confidence in the convertibility
Gold was used as the monetary standard。
gold is costly to produce --- government cannot easily increase its supply
A gold standard is a commodity money standard. Money has a value that is fixed in terms of
the commodity gold.
Commodity money standard: Money has a fixed value relative to some commodity.

One aspect of a monetary standard that is based on a commodity with relatively fixed supply
is long-run price stability.
One US dollar = the value of 23.22 grains of pure gold.
One UK pound = 113 grains of pure gold
the par exchange rate between the dollar and the pound:
p£ = 113/23.22 = $4.866
In unrestricted international exchange, this availability of gold at a fixed price establishes the
upper and lower limits of fluctuation in the exchange rate, called the gold point.
cost of shipping gold: $0.026 per pound (from London to New York)
the exchange rate:
 $4.866 ± 0.026
 = $4.892 = gold export point
 = $4.84 = gold import point
gold export point: Whenever the market rate of exchange rose to a point where it would be
cheaper for importer to export gold than to buy exchange, the export point was reached.
gold import point: When the rate of exchange decline to a point where it was cheaper for foreign
importers to buy and ship gold than to remit in exchange at the lower rate per unit of the currency,
the gold import point was reached.
During the gold standard,
(1) prices were stable,
(2) so little gold actually moved from one country to another.

Problems with the Gold Standard

The discipline of gold standard.
closed economy → money supply is determined by its stock of gold.
open economy, balance of payments deficit → gold outflow
a single country's ability to expand money supply is limited by its balance of payments position.
gold standard --- provides an automatic mechanism for adjustment of international balance of
payments
David Hume : Price-Special-Flow Mechanism “价格—黄金—流动机制”
Import ﹥export --- balance of payments deficit--- gold outflow in settlement of the deficit---
deflation--- stimulate exports and reduce imports--- reversing the gold outflow
gold inflow --- inflationary effect --- reduce exports and stimulate imports--- a reversal of the
gold inflow
an international balance of payments equilibrium would be restored.
Foreign Exchange Buffering Policy ( 外 汇 缓 冲 政 策 ) ： Each country has international
reserve assets which consist of gold, SDRs and foreign exchange. These, in time, can be used to
settle short term Balance of Payment disequilibrium.

growth of money supply --- newly produced gold

No new gold production => no growth.
halt of gold production → decline in the world economy

INTERWAR PERIOD, 1918-1940

The abandonment of the gold permitted the European countries to adopt policies that resulted in
huge increases in the quantity of money which caused the inflation during and after the war.
the US experienced little inflation and thus returned to the gold standard in June 1919.
Fluctuating Exchange Rates, 1919-1926
1. between 1919 and 1924, exchange rates fluctuated wildly
2. universal expectation → return to gold standard. The main question: at what parities to restore
the gold standard.
(1) prewar parities
(2) gold parities should be adjusted.
In April 1925, Britain was back on the gold standard and reestablished the convertibility of the
pound into gold at the prewar price. Other nations followed.
the new system: a gold-exchange standard → both gold and currencies convertible into gold (UK
pound, US dollar and FF were used as international reserves.

Gold Standard restored (1925-1931)

the British pound was overvalued at $4.866 = £1,
FF was undervalued at $0.0392 = Fr 1.
Britain → balance-of-payments deficits → deflation
France → large balance-of-payments surplus → gold inflow followed
in September 1931, Britain was forced to suspend the convertibility of the pound into gold, and
devalued the pound. → the gold-exchange standard came to an end
US gold holding: 15% ↓in 1931
The US actually went off gold in 1933.
In 1930s, these countries had 3 options:
(1) countries tried to manage or stabilize the flexible exchange rates - by raising interest rate, but it
did not prevent capital outflow.
(2) Some countries devalued their currencies, but many countries already did this without success.
(3) others imposed exchange control when faced with capital flight.
Devaluation of dollar
In January 1934, US raised the price of gold from $20.67 to $35.00 per ounce. (69%
increase)

The interwar experience → international monetary system: exchange rates--- flexibility --- fixity

II. The Bretton Woods System

The Bretton Woods Conference

In Bretton Woods, New Hamshire, July 1944, delegates of 44 nations

to set forth notions of how to reorganize the world economy
establish: the International Monetary Fund (IMF), the World Bank and the General Agreement on
Tariffs and Trade (GATT)
two plans: the British plan authored by Keynes and the American plan of Harry White.
Conference opted for: a system based on the free movement of capital and goods with the US
dollar as the international currency.
The Conference drew up project: the International Bank for Reconstruction and Development
(World Bank) to make long-term capital available to countries urgently needing such foreign aid;
the International Monetary Fund (IMF) to finance short-term imbalances in international payments
in order to stabilize exchange rates
The Bretton Woods System : the system of fixed exchange rates, based on the dollar as the
anchor, intervention and reserve currency, and supervised by the newly created IMF. The system
lasted from 1944 to 1973.
IMF: US dollar was fixed in terms of gold --- all other currencies were pegged to the U.S.
dollar.
Bretton Woods system was a gold-exchange standard.
the price of gold fixed at $35 per ounce
1 percent above or below the par value
"fundamental disequilibrium" --- a "large and persistent" deficit or surplus
maintain the exchange rate
the demise of the Bretton Woods system was actually caused by the onslaught of market forces
Triffin Dilemma: If the US accommodated the increased demand fordollar reserve, it would
condemn the system to an inevitable collapse. If it resisted to this demand, it would condemned
the world to deflation.
Gresham’s law 格雷欣定律－－劣币驱逐良币
bad money will drive good money out of circulation

Rebuilding Europe (1945-1958)

first tasks of IMF and world Bank: provide the capital for the reconstruction of Europe
Marshall Plan
A dollar shortage developed.
European recovery completed by 1950
the US balance-of –payments turned into deficit
the US settled its deficits mostly in dollars.
nations willing to accept dollars because
(1) the US stood ready to exchange dollars for gold at the fixed price of $35 an ounce;
(2) dollar could be used to settle international transactions with any other nation;
(3) dollar deposits earned interest while gold did not.
starting in 1958, the US → balance-of–payments deficits → $3 billion per year
European countries → balance-of –payments surpluses → a dollar glut

By 1971 the US deficit → $30 billion, and trade deficit ($2.7 billion)
On august 15, 1971, → suspend the convertibility of dollars into gold.

On December 18, 1971, Smithsonian Agreement

the price of gold was raised from $35 to $38 an ounce (devaluation of the dollar of about 9%)
the German mark was revalued by about 17 percent,
the Japanese yen by about 14 percent,
the band of fluctuation: from 1 percent to 2.25 percent on either side of the new central rates
the dollar remained inconvertible into gold → on a dollar standard.

A system of generalized managed floats was a new exchange-rate regime.

 In 1978 the IMF → floating exchange rates indefinitely, and called for IMF surveillance
over governments’ exchange rate policies.
Flexible (Floating) Rates: The government does not announce a parity rate.
pure float (clean float): No intervention by monetary authorities
dirty (managed) float: occasional monetary intervention designed to smooth out fluctuations

III. The Jamaica Accords:

In Jan 1976 --- the members of the Group of Ten --- Jamaica --- the new floating system.
(1) The Jamaica Agreement freed countries to float their currencies “legally”
(2) Gold was officially demonetized as a reserve asset.
(3) The resources of the IMF itself were increased to provide additional aid to countries needing
assistance in the management of their balance of payments.
(4) since 1974, the IMF has measured all reserves and other official transactions in terms of SDRs
The SDR (Special Drawing Right) is an artificial "basket" currency used by the IMF for internal
accounting purposes. The SDR is also used by some countries as a peg for their own currency, and
is used as an international reserve asset.
the value of the SDR : →one US-$ ( $35/oz until 18-Dec-1971; $38/oz between 18-Dec-1971
and 11-Feb-1973; $42.22/oz between 12-Feb-1973 and 30-Jun-1974)
July 1974 the SDR has been defined in terms of a basket of currencies.
initially of 16 currencies and was reduced to 5 in 1981.
Every five years the IMF determines which five currencies will enter the basket, and which weight
will be applied to each currency.
Questions:
1. How do you understand gold standard? What features and problems it has?
2. Please illustrate the Bretton Woods System and explain why it collapsed at last.
3.What are the main contents of Jamaica Accords?

Chapter Six
The Globlization of the World Economy and the Problems
the Globlization of the World Economy
the regional economic integration
bibliography:
1. International Economics, 8th edition, Dominick Salvatore, 清华大学出版社, 2004
2. International Economics, 9th edition, Mordechai E. Kreinin, 北京大学出版社, 2003
3.International Business, 4th edition, Michael R Czinkota, Ilkka A. Ronkainen, Michael H. Moffett,
机械工业出版社, 1998
4.《世界经济新论 习题指南》庄起善 潘烜 编著 复旦大学出版社 2002 年 12 月 第 1
5. Werner Weidenfeld and Wolfgang Wessels, 1997, Europe from A to Z: Guide to European
Integration, Office for Official Publications of European Communities
6. Gabriel Glockler etc. 1998 Guide to EU Policies, Blackstone Press Ltd
7. Alex Roney, 1998 EC/EU Fact Book 5th Edition, Kogan Page Limited
8. Michael Johnson, 1998 , European Community Trade Policy and the Article 113 Committee,
The Royal Institute of Internal Affair
9. Francis Snyder, 1998 , International Trade and Customs Law of the European Union ,
 Butterworths
10. T.C. Hartley, 1998, The Foundations of European Community Law, 4th Edition, Oxford
University
11. Dominik Lasok , 1998 , The Trade and Customs Law of the European Union 3rd Ed. ,
Kluwer Law International Ltd.
12. 欧洲联盟经济概论 ，朱欣民，四川大学出版社，2000
13. 欧盟委员会：一个超国家机构的作用 , 饶蕾 , 西南财经大学出版社 , 2002
WEB: www.europa.eu.int
www.nafta-sec-alena.org

I. the Globlization of the World Economy

Globalization – the growing integration of economies and societies around the world
a positive aspect of globalization
inequality and environmental degradation

What is Globalization?
Globalization (or globalization) in its literal sense is a social change, an increased connectivity
among societies and their elements due to transculturation; the explosive evolution of transport
and communication technologies to facilitate international cultural and economic exchange. The
term is applied in various social, cultural, commercial and economic contexts.
“Globalization” can mean:
1. The formation of a global village
2. Economic globalization
3. The negative effects of for-profit multinational corporations
globalization --- internationalization: used interchangeably sometimes
globalization --- emphasize the erosion of the nation state or national boundaries.
globalization --- a real phenomenon or only a myth
internationalization → globalization
internationalization: may have the connotation that the role of the state and the importance of
nations are greater, while globalization in its complete form eliminates nation states.
the world increasingly share problems and challenges that do not obey nation state borders

Signs of globalization
globalization refers to:
(1) Increase in international trade at a faster rate than the growth in the world economy
(2) Increase in international flow of capital including foreign direct investment
(3) Greater transborder data flow, using such technologies such as the Internet,
communication satellites and telephones
(4) Greater international cultural exchange, for example through the export of Hollywood
movies.
(5) Spreading of multiculturalism and better individual access to cultural diversity, with on
the other hand, some reduction in diversity through assimilation, hybridization,
Westernisation, Americanization or Sinosization of cultures.
(6) Erosion of national sovereignty and national borders through international agreements
 leading to organizations like the WTO and OPEC
(7) Greater international travel and tourism
(8) Greater immigration, including illegal immigration
(9) Development of global telecommunications infrastructure
(10) Development of a global financial systems
(11) Increase in the share of the world economy controlled by multinational corporations
(12) Increased role of international organizations such as WTO, WIPO, IMF that deal with
international transactions
(13) Increase in the number of standards applied globally; e.g. copyright laws
(14) Creation of local clusters of competence (Porter's clusters) having a world wide
competitive advantage

WIPO: World Intellectual Property Organization

A Porter's cluster or competitive cluster is a geographical location where:

---enough resources and competences amass and reach a critical threshold,
---giving it a key position in a given economic branch of activity,
---with a decisive sustainable competitive advantage over others places, or even a world
supremacy in that field.
two types of competitive clusters, based on different kind of knowledge, are recognized:
---Techno clusters
---Historic knowhow-based clusters
The concept is named after Michael Porter, a Harvard professor who developed it. He claims
that clusters have the potential to affect competition in three ways:
---by increasing the productivity of the companies in the cluster,
---by driving innovation in the field
---by stimulating new businesses in the field
Examples
Well known examples are
the Silicon valley, in California in the field of computer technology,
Bangalore, in India, for software outsourcing,
Paris, in France, for Haute couture (high fashion),
Toulouse, in France, for aerospace.
Cambridge, in the UK, for biotechnology and electronics

History of globalization
economics and political economy: a history of increasing trade between nations based
on stable institutions that allow individuals and firms in different nations to exchange goods
with minimal friction.
The term "liberalization" came to mean the combination of laissez faire economic theory
with the removal of barriers to the movement of goods.
"The First Era of Globalization": The period of the gold standard and liberalization of
the 19th century. This era grew along with industrialization.
 The theoretical basis was Ricardo's work on comparative advantage.

The "First Era of Globalization" : broken down in stages beginning with the first World
War, and then collapsing with the crisis of the gold standard in the late 1920's and early
1930's.

Globalization driven by Trade Negotiation Rounds leads to a series of agreements to

remove restrictions on "free trade".
Uruguay round led to a treaty to create the World Trade Organization.
Other agreements: e.g. Europe's Maastricht Treaty and the North American Free Trade
Agreement
the goal of reducing tariffs and barriers to trade
lower prices, more employment and better allocation of resources
institutions involved in the system of globalization have not taken the interests of poorer
nations and labor into account

II. the regional economic integration

the economic integration --- free trade.
Free trade is an economic concept referring to the selling of products between countries
without tariffs or other trade barriers. Free trade is the absence of artificial (government-imposed)
barriers to trade among individuals and firms in different nations.
trade agreements may actually create their own barriers to a free market

Different arguments for and against free trade: e.g.

free trade increases the standard of living through the theory of comparative advantage and
economies of scale
Free trade encourages countries to rely on each other economically, meaning that they are
less likely to go to war.
free trade allows developed nations to exploit developing nations and to destroy local
industry
free trade hurts developed nations because it causes jobs from those nations to move to other
countries

implementation of free trade has been criticized by advocates of free trade itself: e.g.
developed nations → developing nations open their markets
developed nations refuse to open their markets
supports the free movement of products and employers
but not the free movement of employees

Free trade → the elimination of all market distorting mechanisms → aggregate benefit for all.

Different forms of the regional economic integration:

Free Trade Zones (FTZ) or Free Trade Areas or Export Processing Zones designate
 either parts of a country or groups of countries that have agreed to eliminate tariffs, quotas
and preferences on most goods between them. Unlike a customs union, members of a free
trade area do not have the same policies with respect to non-members. Free trade areas
include NAFTA and EFTA.

A customs union is a free trade zone with a common external tariff. That is, the same
customs duties, quotas, preferences and so forth apply to all goods entering the area,
regardless of which country within the area they are entering. A customs union shares the
revenues from tariffs on goods entering the customs union.

A single market is a customs union with common policies on product regulation, and
freedom of movement of all the factors of production (goods, services, capital and labour).

An economic and monetary union is a single market with a common currency. It is to be

distinguished from a mere monetary union (e.g. the Latin Monetary Union in the 1800s),
which does not involve a single market. The only economic and monetary union at present is
the Eurozone.

The European Union

The European Union (EU) is a family of democratic European countries, committed to
working together for peace and prosperity.
Its Member States have set up common institutions to which they delegate some of their
sovereignty so that decisions on specific matters of joint interest can be made democratically
at European level. This pooling of sovereignty is also called "European integration". 
first proposed by the French Foreign Minister Robert Schuman in a speech on 9 May
1950.
This date is celebrated annually as Europe Day. 
There are five EU institutions, each playing a specific role:
European Parliament
Council of the European Union
European Commission 
Court of Justice 
Court of Auditors

Notes: The European Council

The Council of the European Union (or 'Council of Ministers')

All EU decisions and procedures are based on the Treaties, which are agreed by all the EU
countries.

trade and the economy

citizens' rights; ensuring freedom, security and justice; job creation; regional development;
environmental protection; making globalisation work for everyone.
Pillars of the European Union

1. the Community dimension: EEC, ECSC and Euratom

2. the common foreign and security policy
3. police and judicial cooperation in criminal matters

The role of the European Community within the Union

The "European Community" is the most important one of the three pillars of the European
Union, and the only one to operate primarily through supranational institutions. The other two
pillars – Common Foreign and Security Policy, and Police and Judicial Co-operation in Criminal
Matters, are looser intergovernmental groupings.

Customs union

1. the elimination of all customs duties and restrictions among the Member States;
2. the introduction of a common customs tariff (CCT)
3. the common commercial policy

the entry into force of the single market in 1993

Common commercial policy

The Community has exclusive responsibility for the common commercial policy.
Under the policy a customs union has been established between the Member States of the
Community, with uniform principles governing changes in tariff rates, the conclusion of tariff and
trade agreements with non-member countries, import and export policy, etc.

the Treaty of Amsterdam → broaden the scope of the common commercial policy to cover
international negotiations and agreements on services and intellectual property.

North American Free Trade Agreement

NAFTA is a comprehensive trade agreement linking Canada, the U.S., and Mexico in a "free
trade" sphere. NAFTA went into effect on January 1, 1994.
The agreement immediately ended tariffs on some goods, and on other goods tariffs were
scheduled to be eliminated over a period of time.

Effects
support NAFTA
oppose NAFTA

NAFTA has caused trade diversion,

Asia-Pacific Economic Cooperation

APEC is a group of Pacific Rim countries who meet with the purpose of improving
economic and political ties. The first meeting was held in Canberra, Australia in 1989. It holds
annual meetings in each of the member countries and has standing committees on a wide range of
issues from communications, to fisheries.
aim at free and open trade and investments by cutting tariffs between zero to five percent
in the Asia-Pacific area for industrialized economies by 2010 and for developing economies by
2020

APEC's 21 members by date of membership are:

Founding members: 1989
Australia
Brunei Darussalam
Canada
Indonesia
Japan
South Korea
Malaysia
New Zealand
Philippines
Singapore
Thailand
United States
1991
People's Republic of China
Hong Kong, China
Chinese Taipei
1993
Mexico
Papua New Guinea
1994
Chile
1998
Peru
Russia
Vietnam

Chapter 7
Different Models for Different Countries in World Economy
Developed nations are countries that have achieved (currently or historically) a high degree of
industrialization, and which enjoy the higher standards of living.
 Synonyms: industrialized nations, more economically developed countries
(MEDC) and the first world.
 According to the CIA World Factbook, the following countries are
considered developed nations:
Europe: Andorra Germany Malta Sweden Austria Greece Monaco Switzerland Belgium
Iceland Netherlands United Kingdom Denmark Ireland Norway Vatican City Faroe Islands Italy
Portugal Finland Liechtenstein San Marino France Luxembourg Spain
 America: Bermuda Canada United States Asia: Israel Japan Turkey
 Oceania: Australia New Zealand
 Africa South Africa
the IMF: Hong Kong, South Korea, Singapore and Taiwan are also considered developed
nations or regions, but not Malta, South Africa or Turkey
 Developing nations are in general countries that have not achieved a
significant degree of industrialization relative to their populations, and which have a low
standard of living. There is a strong correlation between this status and high population
growth.
 "least developed countries" (LLDCs) for the very poorest nations which can in
no sense be regarded as developing.
 LLDCs are the poorest subset of LDCs ("lesser developed countries").
 LLDCs: roughly 40 countries include, among many others, Afghanistan,
Bangladesh, Botswana, Chad, Laos, Lesotho, Mali, Sierra Leone, Sudan, Somalia, and
Yemen
Typology and names of countries
 There are at least four types of nations:
 Developed nations (Canada, United States, European Union, Japan, etc.)
 Nations with a developing economy (China, India, Brazil, South Africa,
Mexico, etc.)
 Developing nations (most countries in Asia, Africa, South America, Central
America, and the Caribbean)
 Underdeveloped or mal-developed' nations (other countries in Asia, Africa,
and South America, etc.)
The category of newly industrializing countries (NICs) is a social/economic classification
status applied to several countries around the world by political scientists and economists.
 NICs are countries that are not quite yet at the status of a full-fledged capitalist
liberal democracy, but still more advanced than countries in the thirld world or in the
category of least developed countries.
 NICs usually share some common features, including:
 1. A recent industrialization (a switch from agricultural to industrial
economies)
 2. Recent reforms allowing for greater political liberalization and democracy.
 3. Increased social freedoms and civil right.
 4. An increasingly "open" economy, allowing for freer trade with its
neighbours.
 5. NICs often receive support from non-governmental organizations such as
the WTO and other internal support bodies.
 Some examples of NICs are : India, Argentina, Brazil, Mexico, and South
Africa. (import substitution development models)
 Some examples of NICs are : India, Argentina, Brazil, Mexico, and South
Africa. (import substitution development models)
Characteristics of the Tiger Economies
  pursued an export-driven model of economic development;
 singled out education as a means of improving productivity;
 had an abundance of cheap labor
 solved some agricultural problems: land reform; property rights; agricultural
workers; policies of agricultural subsidies and tariffs on agricultural products
 The common characteristics of the East Asian Tigers were:
 Focused on exports to rich industrialized nations
 Sustained rate of double-digit growth for decades
 Non-democratic and relatively authoritarian political systems during the early
years
 High tariffs on imports
 Undervalued currencies
 Trade surplus
 High level of U.S. Bond holdings
 High savings rate
Because of the success of the initial Tigers, many nations have followed similar development
models. In part, this led to the Asian Economic Crisis in the 1990s.
 The East Asian Tigers were strongly affected by the Asian Economic Crisis ,
which impacted each Tiger to varying degrees.
 Criticism: these economies focus exclusively on export-demand, at the cost of
import-demand. Thus, these economies are heavily reliant on the economic health of their
targeted export nations.