1. -Explain how trade/GDP (also called openness) is a measure of globalisation.
ID: 2439909 • Letter: 1
Question
1. -Explain how trade/GDP (also called openness) is a measure of globalisation. -Are there other measures you could use? -What form of globalisation are you measuring? (5 marks)
2. Using 2 graphs (one for each country), plot openness versus time for each country. Explain in up to 50 words how openness has changed for these countries from 1985 to 2005. Make sure your graph is properly labelled. (5 marks)
3. Explain in up to 100 words the relationship between openness and economic development by calculating the correlation coefficient between GDP per capita (proxy for economic development) and openness for each of the two countries, respectively. [Here you have to use the CORREL command in Excel]. DO NOT ATTACH YOUR DATA TO THE ASSIGNMENT. (10 marks)
4. Explain in up to 200 words the factors that you think drive openness in these two countries. [Note that these factors can be positive or negative]. If you use information, reference it. References do not count in the word count. (5 marks)
Explanation / Answer
Major economies of the world are more integrated today than at any time in the history. Globalization is the process of economic integration worldwide economic resources that decreases cost for both consumers and producers. The process of economic integration refers to reduction or elimination of trade barriers that allows unburdened and free exchange of capital and labor across countries.
Economists usually refer to four criteria to measure for judging the degree of integration. These are trade flows. These are: trade flows, capital flows, people flows and similarity of prices in different markets. Each of these indicators measures of the degree of international economic integration.
“Openness” is the measure of degree of integration of the domestic economy to the world economy. The index of openness is the ratio of trade to GDP, where GDP is the measure of total production of a nation during a given period of time. The “openness” is measured by index of openness, represented as follows:
[ extup{openness}=(export+imports)div GDP]
Prior to World War I most trade was consist of agricultural commodities and raw materials while now it is shifted to manufactured goods, consumer goods and producer goods. Contrary to 1900 todays producers and manufacturers are much more exposed to international competition. The growth of world trade after 1950s was due to rise and spread of multinational corporations. The ease of building of production sites and mobilization of resources including labor in affiliated countries coupled with improvement of telecommunication and transportation gave immense power to these companies development and MNCs become increasingly important in world trade scenario. This is why trade is qualitatively different now than in 1913.
The data for UK and US on trade (% GDP) and GDP per capita (constant 2010 US$) shows a correlation coefficient of 0.923361 for US and 0.376583 for UK. This imples that US become more and more open as the economy develops through the 1985-2005 period. However UK data shows weak correlation between trade (% GDP) and GDP per capita (constant 2010 US$).
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