Full text of Inside the Vault : Spring 2008

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THE
An Economic Education Newsletter from the Federal Reserve Bank of St. Louis

Volume 13, Issue 1 Spring ‘08

Crossing Borders: The Globalization Debate
G
lobalization can be defined as a phenomenon of increased
economic integration among nations, characterized by the
movement of people, ideas, social customs and products across
borders. This phenomenon has a long history, dating back to the
trade routes developed during the Roman Empire, as well as those
pioneered by Marco Polo or ocean voyagers like Columbus and
Magellan.
Globalization has been crucial for economic growth over time.
In his influential study “The World Economy: A Millennial Perspective,” the noted economic historian Angus Maddison argued
that economic advancement across time was sustained by three
interactive processes:
• the conquest or settlement of relatively empty areas that had
fertile land, new biological resources or a potential to accommodate transfers of population, crops and livestock;
•

international trade and capital movements; and

•

technological and institutional innovations.

As Maddison and others have noted, technological innovations
have played a key role in spurring previous globalization episodes.
Transfers of technology from Asia and Egypt—such as silk, spices,
textiles, glass blowing and rice—helped Venice and its colonies
play a key role in the development of Europe. As economic integration spread across continents, political and financial institutions
evolved to enhance and regulate the global marketplace.
The current globalization period, which more or less began in
the late 1960s, contains many of the same aspects of earlier epiInternational Trade Exposure:
United States and the Rest of the World
World except U.S.

U.S.

% of GDP

80
70
60
50
40
30
20
10
1975

1980

1985

1990

1995

NOTE: Trade is the sum of merchandise and commercial services imports and exports.
SOURCES: World Bank World Development Indicators and author’s calculations

2000

2005

sodes. Reduced transportation costs, the opening of new markets
(such as Asia, Eastern Europe and South America), and the general lowering of tariffs worldwide have helped boost international
trade as a share of domestic economic activity. A key development behind the current globalization wave is the revolution in
information and communication technologies (ICT). Although
shipping merchandise goods is still the dominant form of trade
between countries, trade in services that takes place across transoceanic cables or by satellite is of increasing importance.
The increased openness of the United States and the rest of
the world to international trade can be seen in the figure on this
page, which shows the sum of imports and exports of goods and
services as a share of all goods and services produced annually
in the United States—a figure known as Gross Domestic Product (GDP). Whereas the U.S. share of trade is a little more than
Continued on Page 3

tional monetary cooperation, monetary
exchange stability and orderly monetary
exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial
assistance to countries to help ease
balance-of-payments adjustments.

Q.
A.

Q.
A.

Q.
A.

Q.
A.

What is the WTO?

WTO is the acronym that stands
for “World Trade Organization,” a forum
for governments to negotiate trade agreements and settle trade disputes. It operates a system of trade rules.

Q.
A.

The balance of payments is a
record of payments that one country
pays to and receives from all other foreign
countries.

structure, communications and other
purposes.
The World Bank is made up of two
development institutions—the International Bank for Reconstruction and
Development (IBRD) and the International Development Association (IDA).
Both institutions support the World
Bank’s mission to reduce global poverty
and improve living standards. The IBRD
focuses on middle income and creditworthy poor countries, while the IDA focuses
on the poorest countries in the world.

What is the IMF?

IMF is the acronym for the International Monetary Fund, an international
organization of 185 member countries.
It was established to promote interna-

What is the balance of payments?

What is the World Bank?

The World Bank is a source of
financial and technical assistance to
developing countries around the world.
It is not an actual bank by the common
definition. It provides low-interest loans,
interest-free credit and grants to developing countries for education, health, infra-

What is the OECD?

The OECD (Organisation for
Economic Cooperation and Development) is a group of 30 member countries
that share a commitment to democratic
government and a market economy. Best
known for its publications and statistics,
the OECD’s work covers economic and
Continued on back page

Economic Snapshot
Fourth Quarter 2007

What is the difference between the two pie charts
at left?

(Percent change at an annual rate from the preceding period)

Q1-’07

Q2-’07

Q3-’07

Q4-’07

Growth rate —
Real Gross Domestic Product

0.6%

3.8%

4.9%

0.6%*

Inflation rate —
Consumer Price Index

3.7%

4.6%

2.8%

5.0%

Civilian Unemployment Rate

4.5%

4.5%

4.7%

4.8%

*Preliminary estimate

Goods Export Shares, 2006
UK
4.44%

All Other
24.96%

Goods Import Shares, 2006

Mexico
13.11%

UK
2.87%
China
5.40%

Mexico
10.65%

Japan
7.96%

Other OECD
17.34%

Germany
4.78%

Germany
4.04%

France
2.37%

Canada
22.52%

France
1.99%

Canada
16.30%
Other OECD
12.50%

For 2006, what two single countries—considering
both exports and imports—are the United States’
largest trading partners?
When adding both exports and imports for each single country
listed, Canada and Mexico are the United States’ largest trading
partners. The Organisation for Economic Cooperation and Development (OECD) represents several countries; so, it does not qualify
as a “single” country. (See “Q and A” for more information.)

For 2006, to which single countries did the United
States export a greater share of goods than it
imported?

China
15.47%

All Other
27.47%

Japan
5.83%

The “Goods Export Shares, 2006” chart indicates the percentage
of total goods that the United States sells to other countries. The
“Goods Import Shares, 2006” chart shows the percentage of
goods the United States purchases from other countries.

In 2006, the United States exported a greater share of goods to
the United Kingdom, Canada, Mexico and France than the share
imported from these countries.

For 2006, from which single countries did the
United States import a greater share of goods
than it exported?
In 2006, the United States imported a greater share of goods
from China, Japan and Germany than the share it exported to
these countries.

Globalization
a quarter of GDP, the rest of the world’s
exposure to international trade is much
larger: 70 percent.

viding them access to new ideas and new
technologies; this exposure increases their
productivity and real wages. According
to Harvard professor Xavier Sala-i-Martin,
this has helped to reduce world income
inequality over the past 20 years.

The Benefits of Globalization

The Downside of Globalization

The benefits of globalization are essentially based on the benefits of free trade.
International trade is beneficial because of
the principle of comparative advantage,
which allows a country to specialize in
the activities that it does best, given its
labor, natural resources and technology.
The estimated net benefits that flow from
free trade are substantial. According to a
study by economists Bradford, Grieco and
Hufbauer, international trade has increased
real household income by between $7,000
and $13,000. Removing all existing barriers to trade, they argue, would produce
an additional real income gain of between
$4,000 and $12,000.
In addition to the fact that people and
nations can produce more goods and
services when they specialize, thereby
increasing the total amount of goods and
services produced worldwide, free trade
also increases the variety of goods and
services available to consumers. Without
trade, coffee drinkers in the United States
would pay much higher prices because
the nation’s supply would depend solely
on Hawaiian or Puerto Rican sources.
Scarce resources would need to be redirected to produce more coffee, leaving
fewer resources to produce other goods
and services.
Similarly, Honda or BMW drivers would
be forced to drive Chevrolets or Fords.
Given that technological innovation in the
automotive industry, as well as other industries, often arise from competition, the
quality of cars might also be much lower
for all car manufacturers.
The competitive forces of globalization have also been important factors in
boosting U.S. labor productivity growth
in recent years. This growth can occur in
a couple of ways. First, increased competition spurs domestic firms to invest in
equipment and software embodied with
the latest technology. Second, moving
less-skilled labor to low-wage countries
increases the relative demand for higherskilled, higher-productivity labor.
Proponents of globalization argue that
increased economic integration benefits
workers in relatively poor countries by pro-

Although free trade benefits society
because it increases the world output of
goods and services, it also creates losers in
certain industries which cannot compete
with foreign manufacturers. The biggest
losers are both the workers and the owners
(shareholders) in these industries, such as
the U.S. television manufacturing industry
which could not compete with foreign
competition. If producers can substitute a
cheaper foreign source of labor relative to
the domestic wage rate, many will choose
to move their production overseas, creating
increased unemployment.
The largest unemployment effects are
probably among less-skilled workers
employed in ordinary production processes
that can be done much cheaper overseas,
such as making products like T-shirts or
baseballs or reading service manuals at call
centers. Since high-skilled workers are
paid a premium for their labor, moving
lower-skilled work offshore increases the
domestic demand for higher-skilled workers relative to lower-skilled workers. Only
one-third of the current U.S. labor force
has graduated from college, however, and
increasing that percentage will take time.
At the end of WWII, the college-educated
share of the labor force was 6 percent. At
that rate, economists predict that reaching
50 percent of the labor force will not come
about until 2047.
One potential consequence of this is rising income inequality between low-skilled
and high-skilled workers. According to the
Organisation for Economic Cooperation
and Development (OECD), increases in
income inequality have been most pronounced in the United States, the United
Kingdom and some smaller European
countries. Increases in the demand for
skilled labor are clear market-based incentives for workers to boost their education
levels and, perhaps, for firms to increase
their workforce training. The demand for
high-skilled workers over the long run can
also be boosted by research and development, which is often the genesis of new
ideas that boost economic growth and
living standards over time.
A key difference between the current glo-

Continued from front cover

balization episode and those from the past
is the sheer magnitude of the number of
workers who have entered the labor pool.
The rise of China and India as important
exporters of goods and services means that
many of their workers are now directly
competing with workers in countries
like the United States, Japan or Mexico.
Economically, an increase in the supply of
labor puts downward pressure on wages
assuming no change in labor demand.

Conclusion
As global competition has increased, so
have the voices of protectionism. Ultimately, policymakers must decide whether
the costs of maintaining relatively free
trade—by expanding public programs to
compensate the losers of trade, or those
who perceive themselves as losers—is a
small price to pay for maintaining a global
economic system that has produced large
benefits for most parts of the world.
This article was adapted from Trading
Barbs: A Primer on Globalization, which
was written by Kevin Kliesen, an economist
at the Federal Reserve Bank of St. Louis, and
was published in the October 2007 issue of
The Regional Economist, a St. Louis Fed
publication.

Classroom Discussion
1. What are some historical examples
of globalization?
2. Explain how globalization may
increase the demand for higherskilled workers and decrease the
demand for lower-skilled workers
in the United States.
3. What are some arguments for and
some arguments against free trade?

For a lesson plan to accompany this
article, go to www.stlouisfed.org/
education/itv_lesson_plan.html.

continued from page 2

social issues from macroeconomics to
trade, education, development and science, and innovation.

Q.
A.

What is outsourcing?

Outsourcing is subcontracting a
process such as customer service, product
design or product manufacturing to a
third party. The third party might be
another organization within or outside of
the state, region or country.

Q.
A.

What are NGOs?

NGO is an acronym that stands
for “non-governmental organization.”
An NGO is an organization that is not
affiliated with the government, yet has a
significant impact on the political, social
or economic status of a region. Since the
mid-1970s the number of NGOs worldwide has increased significantly. The
World Bank describes NGOs as “private
organizations that pursue activities to
relieve suffering, promote the interests
of the poor, protect the environment,

provide basic social services or undertake
community development.”

Q.
A.

What is comparative advantage?

The principal of comparative
advantage demonstrates that countries
benefit from trade when they specialize
in producing goods and services that they
are able to produce at a lower opportunity
cost than other countries.

Q.
A.

What is the balance of trade?

Web Site Sources:

• International Monetary Fund
• Organisation for Economic Cooperation
and Development
• Virtual Economics, National Council on
Economic Education
• World Trade Organization
• World Bank

The “balance of trade” (or net
exports) is calculated by subtracting the
monetary value of imports from exports
in an economy over a certain period
of time. A positive balance of trade is
known as a “trade surplus,” which means
that the value of a country’s exports
exceeds the value of its imports. A “trade
deficit” is a negative balance of trade,
which means that the value of a country’s
imports exceeds the value of its exports.

prsrt std
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PERMIT NO. 444

Federal Reserve Bank of St. Louis
P.O. Box 442
St. Louis, Mo. 63166-0442
Inside the Vault is written by
Dawn Conner, economic
education coordinator, and
Mary Suiter, manager of
economic education, at the
Federal Reserve Bank of
St. Louis, P.O. Box 442,
St. Louis, Mo., 63166. The
views expressed are those of
the authors and are not necessarily those of the Federal
Reserve Bank of St. Louis or
the Federal Reserve System.
Please direct all comments
and questions about the publication to 314-444-4662 or
mary.c.suiter@stls.frb.org.

Bulletin Board

Summer School at the Fed
new courses for educators | june 2008
Sponsored by the Federal Reserve Bank of St. Louis, the Center for Entrepreneurship and Economic Education
(University of Missouri–St. Louis) and the Office of Economic Education and Business Research (Southern Illinois University Edwardsville)
Session 1: June 9, 10, and 11—The Global Market: Why Does It
Matter?
Session 2: June 12, 13 and 16—Making Sense of Money and Banking
Session 3: June 17, 18, and 19—Technology: Tools for Teaching
Social Studies and Personal Finance
Teachers’ choice: A
 ttend one, two or all three sessions. Take for
graduate credit or noncredit.

To register: Registration is required through either SIUE or UMSL for
both graduate credit and noncredit enrollment. One hour of graduate credit will be awarded to educators for completing each session
for which they register. To register through SIUE, contact Mary Anne
Pettit at 618-650-2583 or by e-mail mpettit@siue.edu.
To register through UMSL, contact Barbara Flowers at
314-516-5561 or by e-mail at bflowers@umsl.edu.

Where: T he Hampton Inn–Gateway Arch • 333 Washington Ave.
St. Louis, Mo. 63102

The ABCs of
Personal Finance
A ST. LOUIS FED ANNUAL CONFERENCE FOR EDUCATORS
Whether you are teaching personal finance for the first time or
you have been teaching it for awhile, join us for this one-day
conference that covers all the basics. You’ll get it all: content,
materials and classroom activities! Federal Reserve Bank
economist Michael Owyang will offer three presentations:

• A Personal Finance Primer • Understanding Assets
• Understanding Liabilities

Federal Reserve Bank of St. Louis
Memphis Branch

Personal Finance:
A Perfect Fit
This two-day workshop is designed to help educators
increase their understanding of economics and personal
finance. The Tennessee Department of Education has
approved this training for certification to teach high
school personal finance.
Dates and Locations:
April 3-4, 2008—Federal Reserve Bank of St. Louis
Memphis Branch

Dates and Locations:

April 17-18, 2008—Jackson, Tenn.

Louisville Branch
Wednesday, June 25, 2008 (5-12)

June 25-26, 2008—Dyersberg, Tenn.

Little Rock Branch
Wednesday, July 23, 2008 (K-12)

E-mail Cathy Martin at cathy.e.martin@stls.frb.org.

Little Rock Branch, Springdale, Ark.
Thursday, July 24, 2008 (K-12)
St. Louis
Tuesday, Oct. 28, 2008 (9-12)
Wednesday, Oct. 29, 2008 (5-8)
Memphis Branch
Wednesday, Nov. 5, 2008 (elementary)
Thursday, Nov. 6, 2008 (secondary)
To register: Visit www.stlouisfed.org/education/conferences.html.

To register:

Calling K-12 Educators:
We Need Your Help!
We are conducting a survey regarding economics and personal
finance curriculum. We plan to use the information to make
decisions about the curriculum and materials we develop. Help
us by completing the brief survey online at www.stlouisfed.org/
education.

Bulletin Board
Federal Reserve Bank of St. Louis—Louisville Branch

Right Start
An Institute for New and Beginning Teachers of Economics
Sponsors: Federal Reserve Bank of St. Louis—Louisville
Branch, the Kentucky Council on Economic Education and the
Foundation for Teaching Economics
When and Where: June 9-12, 2008 at
Rough River State Park in Falls of Rough, Ky.
For more information: Visit http://www.econ.org/
programs/rightstart.html or call the KCEE at 502-267-3570
or 1-800-I-DO-ECON.

Federal Reserve Bank of St. Louis—Memphis Branch

Focus on the Economy

Federal Reserve Bank of St. Louis
Little Rock Branch
What: B
 asics of Economics and

Financial Literacy: Arkansas
Frameworks Connections

When and Where:
July 1, 2008—Pine Bluff, Ark.
Aug. 1, 2008—El Dorado, Ark.
Sponsors: Federal Reserve Bank of
St. Louis—Little Rock Branch, Economics Arkansas,
and the Arkansas Securities Department
This is a program for K-12 teachers that is designed
to improve economic and personal finance content
knowledge. Teachers will learn basic economic
and financial literacy skills from speakers and will
receive activities and resources that are free or
inexpensive.
To register: Contact Julie Kerr at 501-324-8296,
or e-mail her at julie.a.kerr@stls.frb.org.

Contemporary Topics in Economics
When:

June 17-19, 2008

Where:

Mississippi State University

Sponsors: 	Federal Reserve Bank of St. Louis—Memphis Branch and the
Mississippi Council on Economic Education
To register: Visit www.mscee.org and click on “Focus on the Economy.”

Federal Reserve Bank of St. Louis
Louisville Branch
What: Personal Finance Summit

in the Bluegrass

Federal Reserve Bank of St. Louis—Little Rock Branch
Spotlight on Economics

Lessons in Personal Finance
A Financial Literacy Symposium for K-12th-grade Teachers
When:

July 22-23, 2008—Little Rock, Ark.
July 24-25, 2008—Springdale, Ark.

Sponsors: 	Hosted by the Little Rock Branch of the Federal Reserve Bank of
St. Louis, Economics Arkansas, the Arkansas Securities Department
and the Springdale Professional Development Center
To register: 	Visit www.stlouisfed.org/education/conferences.html, or
call Julie Kerr at 501-324-8296.

Bank
Contacts

Little Rock – Billy Britt 501-324-8368
Louisville – David Ballard 502-568-9257
Memphis – Jeannette Bennett 901-579-4104

When: June 25-26, 2008
Where: Marriott East Hotel, Louisville, Ky.
Sponsors: Kentucky Council on Economic Education and the Federal Reserve Bank of St. Louis—
Louisville Branch, along with other corporate and
nonprofit sponsors
This event brings educators and policymakers
together to address the need for change in policies
and practices regarding personal financial literacy
in Kentucky schools. For more information, contact
David Ballard at david.b.ballard@stls.frb.org.

St. Louis – Dawn Conner 314-444-8421
St. Louis – Mary Suiter 314-444-4662