Extra Capital

If workers are more skilled, then extra capital will generate more output. If firms have better processes in place, then extra capital will generate more output. If a country is free of corruption, then extra capital will generate more output. This suggests that one good yet simple indicator of national competitiveness is the marginal product of capital. Country A is more competitive than country B if capital investment in country A is more productive than in country B. More exactly, a country is more competitive if it has a higher marginal product of capital. Globalization: Another Look Whenever a good or service is produced and sold, economic value is created. The amount of value is given by the difference between the value to the buyer and the value to the seller. For example, suppose a toy car is produced in a factory in Kansas at a cost of $5. Imagine that a potential buyer in California values the car at $20—that is, she is willing to pay up to this amount for the toy. Then the value created if the buyer and seller trade is $20 − $5 = $15. In a globalized world, toy cars can be transported around the world. This means two things. First, goods can go to where buyers value them the most. There might be a buyer in Germany who values the car at $25. If he buys the car, then the trade creates $20 worth of value (= $25 − $5). Second, goods can be manufactured where production costs are lowest. Perhaps the toy car can be manufactured in China for $2. If the toy is produced in China and sold in Germany, then the total value created by the trade increases to $23 (= $25 − $2). Globalization thus contributes to a more efficient global economy because goods—and many services—can be shipped around the world to create more value. They can be produced where it is most efficient to produce them and sold where they are valued the most. We have also seen that capital (and to a lesser extent labor) moves around the world. Capital moves to competitive economies—that is, to the places where its marginal product is highest. This again contributes to economic efficiency because it means that we (that is, the world as a whole) get more output from a given amount of capital input. This brief description paints a rosy picture of globalization as a force that makes the world a more productive place. Yet globalization has vehement critics. Protesters have taken to the streets around the world to complain about it. And the recent era of globalization has seen mixed results in terms of economic success. Some economies—particularly in East Asia—have exploited the opportunities of globalization to their advantage. But other countries—most notably in sub-Saharan Africa—remain stuck in poverty. So what is our story missing? What is wrong with the idea that the free movement of goods and capital can encourage prosperity everywhere? There are some reasons why we should temper our optimism about the process of globalization, including the following:

 There are winners and losers. There is a strong presumption from economic theory

that globalization will increase overall economic efficiency, but there is no guarantee that everyone will gain. Investors are winners from globalization because they can send their funds to wherever capital earns the highest return. Workers in countries that attract capital will, in general, be winners because they will obtain higher real wages.