International division of labour

doc. Ing. Tomáš Dudáš, PhD.

Contact Information

doc. Ing. Tomáš Dudáš, PhD.

Office hoursTuesday – 9.30-11.00 (Tematínska 10)

Email: tomas.dudas@paneurouni.sk

Course Information Course structure

12 lectures + 6 seminars

Literature Assorted chapters from Krugman-Obstfeld-Melitz:

International Economics Assorted chapters from Carbaugh: International Economics

Slides from the presentations: http://www.slideshare.net/tamass

Grading of the course 30 points– seminar work (presentations) 70 points – final test with open questions

Course structure

Introduction – International Division of Labour

Theories of International TradeMercantilism and classical theories of ITNeo-classical theories of international tradeModern theories of international trade

Course structure

World trade– structure and trends

World economy– definition and characteristics

The current trends and challenges of the world economy

Economic integration and international economic relations

Course structure

International capital movements

Foreign direct investments in the global economy

International migration of workers

Services in the international economic relations

Structure of the presentation

• International division of labour – definition and history

• Allocation of factors of productions

• Intensity of the participation in the IDoL

• Foreign trade and its main functions

• Terms of trade

Labour divisionStarts with the division of different types of

workThis happens at a certain stage of economic

development and in interaction with the needs of the society (the process is dependent on the availability of the factors of productions)

The division of labor manifests itself in the specialization of producers (...and in their dependence...)

>>> what leads to cooperation and trade

Effects of labour division

Increasing volumes of production

Increasing productivity

Reduction in unit costs of production

International division of labour

Specifically developed form of social division of labor, which generates cooperation and exchange relations between national economies

>> It leads to an international specialization of producers determined by the abundance of factors of production

>> the results of the IDoL are traded internationally – international trade

Factors determining IDoL

Environmental, geographic and demographic factors

Historical factorsTechnological factorsEconomic factorsPolitical factors

Environmental factors

Are determined by:Geographical position,ClimateNatural resourcesQuality of agricultural land

Historical factors

Result from the traditions of production of certain goods, which time create a certain goodwill in the international markets

They are very often based on favourable factors of environment (ex. Czech crystal, Chinese silk, Scottish whiskey)

Or sometimes on unfavouable - Swiss watches

Technological factors

They depend on the level economic and social development, capital equipment and skilled labor force

Currently closely related to education, research and development

Economic factors

Economic dimension Availability of capitalLevel of economic developmentStructure of GDP creationThe sophistication of the financial system

Political factors

Can affect the territorial structure of cooperation and exchange(ex. COMECON)

Foreign political orientation of the country

Economic policy, international trade policies, pro-export policies, pro-investment policies...

Relevance of IDoLAchieving savings of national labor by

specializationMore efficient use of natural resources,

production experience, technology etc.The results are goods/services produced at

a lower cost compared to foreign producers

It is the basis for international exchange of goods

Specifies the substantive content and directions of movement of goods and services (territory and commodity structure of international trade)

Historical development of IDoLIn the early stages of economic

development IDoL was mostly determined by natural conditions, but in the later economic factors started to play a more important role

IDoL was greatly influenced by technological breakthroughs, geographical discoveries and by the advent of the modern mass production

Currently, the involvement of countries in the IDoL is determined by the abundance of capital and skilled labour

Export of capital is a very important trend that has a great effect on the IDoL

The intensity of involvement in the international division of laborThe intensity of involvement in the IDoL

(degree of openness) is currently growing on a global level

Globalization – the most important trend

Two extreme possibilities:Totally closed economy (autarky)Highly opened economy

AutarkyAutarky is the quality of being self-

sufficient. Usually the term is applied to political states or their economic systems.

Autarky exists whenever an entity can survive or continue its activities without external assistance or international trade.

In reality it is an „economic abstract“A possible example of a current attempt at

autarky is North Korea, based on the government ideology of Juche – but still has foreign trade relations

Highly opened economyEconomic development is determined by

the development trends in the global economy

Foreign trade is large compared to GDP

Involvement in the IDoL does not necessarily imply openness

Possible indicators: Foreign trade/GDP or FDI/Total investments

Foreign Trade – basic definitions

The products created by the international specialization (IDoL) are traded via foreign trade

Cross-border trade of goods and services

Has two main parts – export a import

Foreign trade - terminology

Foreign trade vs. International trade vs. World trade

Commodity structure of the foreign trade

Territorial structure of foreign trade

Balance of trade (BoT)

Is the difference between a country's total exports and total imports.

The trade balance is identical to the difference between a country's output and its domestic demand

A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap.

Balace of payments (BoP)Is an accounting record of all monetary

transactions between a country and the rest of the world

These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers.

BoP is made of:Current account (foreign trade and factor income)Capital account (short term and long term capital

movements)

The main economic functions of foreign trade

Two main functions:Transformation functionFactor of economic growth

Transformation functionForeign trade changes (transforms) the structure

of national production, resp. of national resources, into the demanded structure in the sphere of use (intermediate as well as final).

The transformation function of foreign trade is especially pronounced in the relatively small economies where the import flows are the prerequisite of overcoming the limits in production resources, respectively the efficiency of their use (with regard to the internal market scope).

Factor of economic growth

- With sales in foreign markets countries create additional sources of economic growth

- FT allows the growth of specialization and production efficiency

- Importing enables to receive products that would otherwise produced only at higher cost

- FT ultimately increases the volume and range of goods consumed

Terms of Trade (ToT)ToT refers to the relative price of

exports in terms of imports and is defined as the ratio of export prices to import prices

It can be interpreted as the amount of import goods an economy can purchase per unit of export goods

A rise in the prices of exported goods in international markets would increase the ToT, while a rise in the prices of imported goods would decrease it.

For example, countries that export oil will see an increase in their ToT when oil prices go up, while the ToT of countries that import oil would decrease.