"The production and consumption of intangible inputs and outputs, in contrast to manufacturing"

-Finance/insurance/real estate (FIRE)

-Business services (legal, advertisement)

-transportation and communications

-wholesale and retail trade

-entertainment, tourism

-government

-nonprofit

-tertiary sector

Since 1960, the greatest employment gains have come in professional services.

Manufacturing has remained relatively constant in absolute terms, but declined as a proportion of the total, while agriculture and mining employment have decined in both relative and absolute.

In part, this reflects international division of labor that shifts manufacturing to LDCs.

Physical production becomes more complicated (cars)

More work, less leisure time at household level

New services encourage people to consume.

1)Rising Incomes

Income elasticities of demand for services are high as compared with those for agricultural or manufactured goods. For example, regardless of income, we still need to eat and get to work; on the other hand, if our income declines, we can skip the movie or we may neglect a toothache.

2)Demand for Health care and Education

-Increased demand occurs in part due to aging population.

3)An increasingly complex division of labor

-more complex workplace, legal environment, financial markets

-extended labor process: work that occurs before and after goods and services are physically produced (R&D, market research, design, customer care, etc.)

4)Service Exports

Although the US runs large trade deficits in manufactured goods, it has a small surplus in services

5)The Externalization Debate ("outsourcing")

Large and vertically integrated firms downsize to be competitive

Reasons for externalization;

-transaction costs may be lower (buy vs make)

-flexibiity

-risk reduction (market fluctuations)

-concentration on core skills

-new types of services (ie web design)

-third-party objectivity (auditing, evaluation)

-new regulations

The externalization debate...

How externalization of services occurs

-product innovation: what is produced

-process innovation: how things are produced

-complex financial environment

-Proliferation of internal management tasks

When externalization of services occurs

-the firm has in-house techincal limitations

-the firm is independently owned

-the firm is more sophisticated than competitors

-service inputs are diverse, shifting and nonstandard

The Productivity Debate..

Improvements in the productivity of services industries have been slower and more difficult to measure than in other sectors of the economy.

Limits to achieve productivity growth in services..

-unique attributes of many services: care for elderly

-service producers and consumers often need to be present at the same time and place: unproductive travel time

-many services require personal proximity, contributes to monopolies which are often unproductive

-service markets may be opaque, unclear effects of services

-many services are relational, dependent on behavior of client (ie doctor-patient)

1)Labor Intensity

-uses relatively more labor per unit output than manufacturing

2)Income distribution

-different from manufacturing (normal)

-bifurcated distribution of income (some very high.. doctors/lawyers)(some very low... janitors/fast food)

-growing income inequality in the US reflects the impacts of globalization on the poor and the rapid rise in incomes of the top 5% who have benefited most from the growth of unearned income and an increasingly regressive tax structure

3)Low degree unionization

-jobs in services are rarely unionized

-exception... AFT (american federation of teachers), and AFSCME (american federation of state, county, and municipal employees)

Components of Financial Services..

Components of Financial Services..

Commercial banking

-providing capital for firm's capital projects and non-housing personal lowans

Investment Banking

-legally differentiated from above by MaFadden Act (1927) and Glass Stealgall Act (1933)

-buy and sell securities (stocks, bonds, futures)

Savings Bans (S&L)

-mortgages

Insurance

-commodification of risk

Regulation

-began in the 1930s (after depression)

-Federal Reserve stabilized interest rates

-decentralized, fragmented financial services in US

-Bretton-Woods Agreement in 1947 stabilized global financial markets (terminated in 1971)

Deregulation of Finance

-began in 1980s

-Fed Reserve changed policy to slow money growth in order to slow inflation (variable interest rates)

-led to domination of banking by a few giants.

Accounting

Design and Innovation

-industrial designers promote changes that will increase demand for a product

-integral to production, but outsideof manufacturing

Legal Services

Two of every three busness and professional services jobs in the US are located in large urban areas.

There has been a shift to suburbanization and movement to rural areas (with agglomeration).

Intraregional trade in producer services..

-producer services are thought to be nonbasic, but they perform a basic role in regional development

-Head offices generally have an export orientation

---the more specialized the service, the more likely it is to derive revenue from exports

---interregional service trade within individual countries is about 35% of total sales and rising.

Four modes through which services may be bought and sold internationally

-Cross border supply: suppliers of services in one company supply services to consumers elsewhere while living in separate countries

-Consumption abroad: consumer resident moves to another place to obtain a service

-commercial presence: services supplied through foreign affiliates

flows of naturalized persons: employee moves abroad to provide a service for the employer

Measuring international services transactions is complicated by developments in information technology.

-internet dilutes geography and location (ie downloading software)

Some services are labor-intensive, with simple tasks (ie call centers, data processing)

-other dominated by knowledge-intensive, nonroutine tasks (ie professional services)

Trade in services is designed to increase returns to scale; transnational corporations are the major players.

Globalization and electronic money had important impacts on currency markets, encouraging trading in currencies.

The world's major stock markets are linked by telecommunications networks. The total volume of electronic fund transfers worldwide exceeds 500 trillion annually.

OFFSHORE BANKING

"Stateless money"

Services

-commercial services

-foreign currency trade and speculation

-electronic funds transfer

-asset protection (insurance)

-investment consulting

-international tax planning

-trade finance (letters of credit)

Some are known for money laundering of funds from drugs, weapon sales, and other illicit activities.

There are five major world areas of offshore banking.

BACK-OFFICE RELOCATIONS

Call centers have become more globalized, including call centers in India, where English is a common second language and wages are low.

Sold to individuals and households

-Distribution of consumer services reflects affluence of local client base

-consumer services thrive where disposable incomes are high

Tourism

-growth of tourism reflects rising disposable incomes

-tourism reflects income-elastic demand for leisure

-impacts vary

"Cities lie at the heart of economic geography"

THE RISE OF THE MODERN CITY

After the decline of cities in Europe when Roman Empire collapsed, cities revived starting in the 16th century (1500s)

-Linked to rise of Capitalism

-City types:

---industrial: commercial, industrial activities most accessible

---colonial: often oriented towards coasts (for trading purposes)

-Interior cities followed

---representing the consolidation of agricultural resources and the rise of a railroad system.

Cities and regions tend to specialize in the production of some outputs and not others (comparative advantage).

Cities are part of a broader division of labor, and are always integrated into a wide environment that reflects their structure, location, and behavior in time and space. Specializations in U.S. urban hierarchy.

The urban economy has two braod segments:

-the economic sector or basic sector (B), which is export-oriented.

-the nonbasic sector (NB), which includes retail trade, eating and drinking establisments, real estate, and personal services.

Total employment (T) equals the sum of the basic (B) and nonbasic (NB) sectors [T=B+NB]

The "multiplier" drives the economy [m=T/B]

-substituting (B+NB) for T... [m=(B+NB)/B = 1+NB/B]

The idea behind the multiplier is that employment creates excess wealth that in turn generates jobs (workers in the basic sector have to eat, etc.)

Multiplier is higher when subcontracting is local.

The relative sizes of the basic and nonbasic sectors vary across the urban hierarchy. Economies of small towns are more specialized around export of a single good; hence their basic sectors are relatively large. In large metro areas, diverse economies and large internal markets reduce the relative proportion of basic sectors.

THE RESIDENTIAL LOCATION DECISION

The most important criterion in home selection is access to work.

In general, people with higher income lve further from their work.

-More prosperous people tend to live no cheaper suburban land because they can afford the cost of transportation.

-Poor people tend to live in relatively more expensive urban areas at higher levels of population density.

Other factors:nearness of services, amenities, family,etc

The Filtering Model of Housing

As incomes rise, the ability to purchase more space at higher quality also rises. Lower-income groups tend to rely on housing that has been previously occupied. Thus, the population filters up through the housing stock. Conversely, the housing supply filters downward through the population.

Rising demand (housing prices), coupled with limited supply, forces buyers to pay an even higher price. Such increases are a boon to home owners, but they make purchasing or renting a home difficult, especially for low-income residents.

Urban cores have highest population densities.. offering maximum accessibility of people to one another. Becuase the supply of land increases rapidly with distance from CBD, the population density declines in negative exponential fashion. Density not absolute highest in CBD, as most housing precluded by commercial activities.

Burgess' Concentric Ring Model reflects the decreasing cost of space with distance from CBD.

Harris & Ullman's Multiple Nuclei Model describes zones of land use around discrete centers.

Hoyt's Sector Model takes into account differences in accessibility and land value.

Suburbanization dates to late 18th century

-urban elites build county homes on outskirts of town

-immigrants to cities created a bifurcated housing pattern

PostWar Suburban Boom

-reflected pent-up demand after depression and WWII

-Gov policy, esp Interstate highway system

---strip malls developed later, folowed by large regional shopping centers, then exurbs.

-The development cycle ushered in by the Highway Trust Fund. Because federal funds are used so heavily to subsidize highways, demand increases, generting more funds through gas taxes, perpetuating the cycle of suburban growth and inner-city decline.

Exurbs are typically 50-150 miles beyond the metropolitan fringe and may be resort towns, recreational towns with high appeal.

Suburbanization and Inner City Decline

-migration of people, firms, and jobs to the suurbs helps create inner city ghettos, racial segregation

---declining property, income, sales tax revenue worsened the problem

---declining populations erode political representation

Gentrification: resurrection of growth in downtown areas, often at the expense of current residents.

The cycle of suburban migration and urban decay: People moving to the suburbs from the city create the cycle of urban blight, which continues in most US cities to this day. Most cities must fund public schools, local roads and facilities, police and fire protection, waste collection, public water and sewer, and so on through property taxes.

Poverty rates in central city are double those of suburban areas. Problems include housing, inadequate funding of inner-city public schools, health care, and crime rates.

Employment Mismatch

-spatial mismatch: jobs available in the suburbs, but workers (and potential workers) are in the inner cities.

-Reverse commuting is a problem; public transit usually set up for suburb-to-city commute

International division of labor integrates cities of the world.

Restructuring and the urban hierarchy..

-multinational firms play a role in shifts in employment and trade

-growth of "global cities" (London, New York, Tokyo)

-thse are the primary command and control centers of the world economy.

Rural to urban migration is occurring in developing regions as jobs become available in cities, while fewer people are needed on farms.

Since WWII, most national economies around he world have become more integrated.

International business includes international transmission of goods, services, information, capital.

Changes in world economy in late 20th century

-industrialized countries experienced a slowdown

-competitive rivalry among industrialized countries increased

-global financial markets changed dramatically

-massive gropolitical realignments occurred.

international integration: the specialization of different countries within a global division of labo

-world trade is over 5 trillion dollars

-firms that export are 10% LESS LIKELY to fail than others

Comparative advantage: when regions or countries specialize in the production and export of some goods and services.

David Ricardo (1772-1823) -economist

-Assumes labor theory of value [the value of goods reflects the amount of socially necessary labor time that goes into production, ignoring demand]

-"Nation will specialize in the production of a commodity that they can produce using the least labor compared to other nations"

Consequences of specialization....

-trade powerfuly shapes loal production systems

-specialization lwoers total production costs

-large markets allow exploitation of scale economies: "the division of labor is governed by the size of the market" - Adam Smith

Even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations.

But, transportation costs are crucial in determining if trade will occur.

*long-run reduction in transport costs has promoted more trade

-there is no specialization without trade, no trade without transportation.

An extended version of Ricardo's model

A country should specialize in goods that demand the least from its scarce production factors

-A country should export its specialties in order to obtain the goods that it is ill-equipped to make

-includes demand, allows for production of more than one good.

This trade will eventually allow wages to equalize as the trade pattern develops (factor-price equalization)

Controversial, as one of its basic tenants (factor price equalization) has not played out (globally)

"If a country specializes in a labor intensive good, its abundance of labor diminishes, the marginal productivity of labor rises, and wages increase. Conversely, if a different country specializes in capital-intensive goods, labor becomes less scarce, the marginal productivity of labor falls, and wages also fall"

Often based on restrictive assumptions that limit their validity

-ignore transport cost, perfect knowledge and competition, immobility of production factor, homogeneous product...

Generally ignore considerations such as scale economies

Fail to incorporate the role of firms, especially that of MNCs

-trade decisions are made at the micro scale (firm) by MNC managers, not at the macro scale (country) by gov

-MNCs operate from a multinational perspective (not national)

-intramultinational  trade: international trade that occurs b/w different affiliates of the same country

In spite of their inadequacies, trade theories inform many scholars, managers, llabor leaders, gov officials.

New theory of foreign direct investment (FDI) tries to explain both overseas production of MNCs and international trade conducted by them.

-Countries will benefit from trade if they can generate increasing returns to scale (agglomeration of scale economies)

-Increasing returns (scale economy) industries will result in productivity efficiencies in the host country, therefore enlarging global output and reducing prices worldwide

-increased competition will reduce profits and thin out companies from trade, but with higher productivity and sufficiency and lower costs and prices

-As countries increase their producivity efficiencies through increasing returns and exchange, the world will gain from increase in the variety and quantity of goods.

Free trade is best from the standpoint of efficiency

Is free trade fair given the relationship of unequal exchange between developed and developing countries?

-British colonialism  created an unfair global division of labor: "What's good for Britain is good for the world"

-Britain had initial advantage because of its lead in industrialization

-Britain opened its markets in 1849, encouraged other countries to follow

---Britain produced manufactured goods; others produced primary products and crafted items

---Britain benefited most

US, Germany, France adopted protectionist policies in 1870s to allow incubating industry to grow

After WWII, some LDCs were permitted to venture into explore-led industrialization (produce goods for MDCs)

terms of trade: prices received for exports relative to prices paid for imports

Generally, LDCs export raw and semi-processed primary goods (agricultural commodities and minerals)

-Primary commodities equal 70% and 47% of the total exports of low and middle income countries respectively (sans China, India)

Changes in relative prices of commodities change purchasing power of LDCs that rely on them for income

-At the end of 1900s, LDCs experienced worsening of trade caused by decline in prices of primary commodities and rise in prices of manufactured goods

-LDCs may respond by selling more commodities, but have little way to shift

-Firms can adjust by..

1)reducing primary content

2)use lower-quality primary products

3)produce substitutes for existing primary goods

Many underdeveloped counries annot alter the composition of exports rapidly in response to changing relative prices.

Focuses on social creation of innovation in knowledge-based economy

-debunks two myths: cheap labor and plentiful resources are necessary advantages (Germany, Japan succeeded without them)

Productivity growth is key to success

-Productivity growht increases wealth

-Productivity growth depends on education and skills of labor force, capital and technology, govt policies, scale economies

National development strategies should emphasize ove to high-wage industries, with high multiplier effects

-Determinants of competitive advantage:

1)skilled labor

2)agglomeration economies

3)rewards for innovation

4)competitive markets at home

5)adequate financing

6)public policies to encourage productivity growth, including research

FACTOR CONDITIONS

Five factors are key to competitive advantage

-Human resources - quantity/quality/cost

-Physical Resources - raw materials/cost/access

-capital resources - all aspects of money supply and availability

-knowledge based resources - R&D/scientific and techinical community

-infrastructure - all public services to help foster conditions for comparative advantage

capital markets: long-term financial markets

-components of global expansion of financial system; internationalization of..

currencies: international currency markets developed when exchange rates were allowed to float starting in 1973

Banking: international banking has ben around for centuring (Medici, Rothschilds); US banks went international in 1960s, Japanese, Europe in 70s

Capital Markets (Euromarkets): "offshort" banks, including Caribbean, Singapore, Bahrain

In international trade, the buyer country must swap its currency, in proportion to the value of the produce, for the currency of the exporting country

-the avlue of the US dollar, compared with a foreign currency, is called the dollar's exchange rate

Determinging exchange rates

-floating exchange rate: value of a currency fluctuates according to changes in supply and demand for it on the international market.

WHY EXCHANGE RATES FLUCTUATE

1)As a country becomes wealthier and increases its real output and efficiency relative to other countries, it imports more goods .The import of more goods causes the value of foreign currency to rise.

2)When a country has a high rate of inflation, its currency will depreciate, making the price of its goods drop in real terms

3)Domestic demand for imported products (specialty goods) causes their prices to rise, and raises currency value

4)Dollar may appreciate if US interest rates rise

5)Currency speculation affects exchange rates (Thai Baht)

US has trade surplus up until 1976

Causes...

-increase in value of the US dollar made US products relatively more expensive and less affordable

-rapid growth of the US economy caused increased consumption of imported products by American citizens

-Decrease in volume of goods exported to LDCs as their debt rose and their ability to afford imported goods declined

RESULTS OF DEFICIT

-reduced aggregate demand in the US for domestic goods lower becaus they are relatively more expensive than imports

-Hurt industries that depend on international trade

-US is the largest debtor nation in the world; America is living beyond its means

-US deficit is almost 800 billion/yr

FDI: investing in companies in a foreign country, with the purpose of managerial and production control

Motives to FDI

-natural or human resources

-penetrate markes (toyota in indiana)

-increase operating efficiency

Constraints

-uncertainties of investing, operating in a foreign place

-different consumer tastes in different places

-cultural differences in busines practices

-governmental differences

US leads in FDI, but its lead is slipping

-Europe remains the fav destination for US FDI, followed by Latin America, Aus, then Can

Investment of Foreign Multinationals in the US

Effects..

-raising, investing capital

-creating, managing orgs

-innovating, transferring technology

-careers for elites

-upgrading labor

-savings and taxes

-vertical organizations

-stimulate local development

Management Barriers: limited ambition, unawareness of opportunity, lack of skills, fear, inertia

Gov Barriers: Tariffs (taxes, duties), protectionist policies, international trade agreements (or lack thereof)

Tariffs, quotas, and nontariff barriers: quotas, export-restraint agreements, discretionary licensing standards, labeling, certificates-of-origin, packaging requirements

Effects of tariffs and quotas

Government Stimulants

General Agreement on Tariffs and Trade (GATT)

-est 1947 to help post-WWII recovery

-more than 100 signatories in 93

-services (about 30% of exchange) not covered

World Trade Organization (WTO)

-est in last round of GATT '93

-uses trade sanctions

-calls for free trade

-no environmental standards

Closed Japanese Markets

Governnment Barriers to Production-Factor Flows

-exchange controls: restrictions of free dealings in foreign exchange, including multiple exchange rates and rationing

capital controls: restrictions on the movement of money or capital across national borders to discourage outflow of funds

-regulation of immigration and technology

Multinational Economic Organizations

-UN, WHO, International Labor Org. (all global)

-ASEAN, NATO, NAFTA, OPEC are regional or functional

-IMF and World Bank have independent multinational authority

-EU is multi-purpose

INTERNATIONAL FINANCE INSTITUTIONS

IMF: international central bank that provides short-to medium-term loans to member countries

-IMF and World Bank designed to prevent recurrence of depression in 30s

-Countries that accept IMF and World Bank loans must uphold neoliberal policies (privitization of basic infrastructure, reduced help for the poor, elimination of tariffs and quotas) that even the IMF agrees often worsened problems of LDCs

Regional Integration: international grouping of sovereign nations to form a single economic region

-four levels of economic integration

US-Can Free Trade Agreement ('89)

-even before this, US and Can were each other's biggest trading partners

-tariffs, quotas, non-tariff barriers almost completely eliminated by 1999

NAFTA ('92)

-"A giant sucking sound"

-Maquiladora zone

-illegal immigration still an issue

-Can has done better than Mexico, and sells more cars in the US than any other

-Efforts to expand NAFTA into Free Trade Agreement of the Americas (FTAA) with 34 countries

Globalized business may be les vulnerable to normal business cycles than most national companies

-improved management of inventories

-ability to expand where appropriate

-can improve quality (US car quality improved in response to Japanese car quality and success)

-booms and busts are more difficult: its hard to raise prices

---increased access to information by consumers

-Unionization declines (34% down to 15% since 1980)

-wages lagging behind productivity