Lecture 1 Introduction Expanding Horizons
The bigger picture: GE in Major 5.2
Gains of trade
The world output is higher if every
country produces and trades the
good in which it has a comparative
advantage. Comparative advantage
occurs when it focuses on producing
the good in which the opportunity
cost of production is lowest.
Opportunity costs = how many
products of B must be sacrificed to
produce a unit of product A?
- International specialisation: productivity gains.
- International competition: lowers pricing power, creates more choice and stimulates
innovation.
- Internalisation of sales (by export):
economies of scale.
A self-reinforcing process?
Globalisation breeds globalisation.
Some trends in global trade
- The nature of merchandise trade.
- A third is intra-firm trade.
o Trade between MNEs and their foreign affiliates and between those affiliates.
- A third is long-term-contract trade.
o Trade between MNEs and independent suppliers on a long-term contract.
- A third is ‘Textbook-Style’ trade.
o Trade between independent buyers and sellers.
Trade in Value-Added: technological advances in transportation and communication and trade
liberalisation reduced transaction costs and facilitated the unbundling of production across borders.
The concept of value-added, is useful to understand where economic activity and jobs are generated.
Apart of that, export partners of the Netherlands are often intermediate trading partners (e.g.
navigation software in German cars for the Chinese market).
Global investment trends
FDI mode of entry: Greenfield or M&A (mergers and acquisitions).
FDI component: equity outflow; reinvested earnings, other capital such as intra company loans.
FDI outflows: in 2015, MNEs from developed economies invested abroad 1.1 trillion, a 33 per cent
increase from the previous year, with MNEs from Europe and Japan contributing to the growth.
Summary sheets Economics 1
Major 5.2
The bigger picture: GE in Major 5.2
Gains of trade
The world output is higher if every
country produces and trades the
good in which it has a comparative
advantage. Comparative advantage
occurs when it focuses on producing
the good in which the opportunity
cost of production is lowest.
Opportunity costs = how many
products of B must be sacrificed to
produce a unit of product A?
- International specialisation: productivity gains.
- International competition: lowers pricing power, creates more choice and stimulates
innovation.
- Internalisation of sales (by export):
economies of scale.
A self-reinforcing process?
Globalisation breeds globalisation.
Some trends in global trade
- The nature of merchandise trade.
- A third is intra-firm trade.
o Trade between MNEs and their foreign affiliates and between those affiliates.
- A third is long-term-contract trade.
o Trade between MNEs and independent suppliers on a long-term contract.
- A third is ‘Textbook-Style’ trade.
o Trade between independent buyers and sellers.
Trade in Value-Added: technological advances in transportation and communication and trade
liberalisation reduced transaction costs and facilitated the unbundling of production across borders.
The concept of value-added, is useful to understand where economic activity and jobs are generated.
Apart of that, export partners of the Netherlands are often intermediate trading partners (e.g.
navigation software in German cars for the Chinese market).
Global investment trends
FDI mode of entry: Greenfield or M&A (mergers and acquisitions).
FDI component: equity outflow; reinvested earnings, other capital such as intra company loans.
FDI outflows: in 2015, MNEs from developed economies invested abroad 1.1 trillion, a 33 per cent
increase from the previous year, with MNEs from Europe and Japan contributing to the growth.
Summary sheets Economics 1
Major 5.2
