Introduction
The United States has gained a lot from globalization in that trade, and the general welfare has improved in the last three decades. A wide variety of commodities has been made available to the people, which provides consumers with the ability to choose the best products in the market. Generally, the welfare of the people and the economy has been experienced after globalization took effect in the United States.
Consumers feel that the general increase in the variety of commodities in the U.S. market is a benefit to them, and that is why they are willing to pay extra prices for the products offered in the market (Broda & Weinstein, 2005). Therefore, globalization has increased consumer welfare by increasing the number of commodities available for trade and reducing the prices of commodities.
Hypothesis/Purpose
Globalization has brought about more benefits than harm to the economy of the United States. The purpose of this paper is to measure the gains that have been experienced by U.S. citizens after the introduction of globalization. This has been done by estimating the increase in the number of global products in the U.S. market from 1972 to 2001. The change in prices of products during this period has been assessed, and this has been used as another measure of the change in consumer welfare.
As such, prices have been used in determining the willingness of the consumers to pay for access to the wide range of products in the market. It has been estimated that the number of products in the market has increased approximately three times during the period 1972-2001. Additionally, it is also approximated that the prices of products declined by 1.2% for each year after the introduction of globalization (Broda & Weinstein, 2005).
The economy of the United States has improved drastically since the introduction of open trade. Customers have a wide variety of goods to select from today compared to the past periods. Also, consumers have the opportunity to purchase products made with sophisticated technologies. International trade is the main contributory factor to the availability of a wide range of products in the market. Foreign products have penetrated the market, and people enjoy products from other countries due to the introduction of globalization. The welfare of the people has been affected in various ways after the introduction of international trade. The prices of products have been favorable due to competition in the market (Broda & Weinstein, 2005).
Classical international trade theorists opined that when an economy is open, consumers can access a wide range of cheap imported products. Consumers in an open economy benefit more than those in closed economies because they have access to a wider range of products imported from other countries. There is no particular country that can provide all the products required by the consumers in that country. This calls for the need to open the boundaries of a country to increase access to commodities from other countries. Opening trade boundaries also allows a country to export excess products manufactured within the economy.
Countries import products, which are not available within their economies to improve the level of consumer satisfaction. The level of consumer satisfaction is determined by various aspects such as the price, quantity, and quantity of goods imported or manufactured within the countries (Boskin et al., 1996).
There are direct benefits/gains of the existence of a wide variety of products in the market. However, the rate at which consumers draw these benefits is different depending on several factors. The elasticity of substitution is one factor that determines the level of satisfaction that consumers get from the existence of a wide range of products in the market. Products that are not substitutable have little or no effect on the welfare of consumers.
Distinct products are more substitutable, and consumers obtain more benefits from such products. Also, the quality of products in the market also determines the number of gains obtained from the existence of a wide range of products in the market. Products with superior value create more benefits to the consumers. It is also notable that the import quantity determines the level of gains to the consumers. The imports made to a country may substitute or complement the existing products in the market (Krugman, 1980).
Methodology
Data concerning imports to the U.S. from 1972 to 2001 were collected and analyzed to determine the rate of change in the product varieties and their prices. The main source of information was secondary data. Data collection and analysis required applying theories to the real market situation for the period from 1972 to 2001. It assumed that consumers use a constant elasticity of substitution (CES) to determine the level of satisfaction gained from different commodities. The utility function used applies the same amount of weight on products imported from every country. The prices and quality of products from all countries are held constant (Broda & Weinstein, 2005). Therefore, the price index for the growth of product varieties is;
,Source: Broda & Weinstein (2005).
where Pc is the price index, ngc72 represents the number of varieties of products that country c imported in 1972. ngc01 represents the quantities imported in 2001 from country c. σg>1 refers to the elasticity of substitution.
From the above formulae, it is evident that the impact of increasing product varieties impacts the prices in the market. When the number of countries importing goods is increased, the fraction of old to new product varieties reduces. This ratio is presented as ngc72 / ngc01. This reduction in the price index is an indication that consumers prefer a wide variety of products in the market. Similarities in the varieties are determined by the σg, such that when σg is large, there is a higher demand for commodities in the market. Thus, it is evident that the two factors that determine the price index are an increase in the number of product varieties and the extent to which they are similar (Broda & Weinstein, 2005).
The variety-adjusted price index method has the advantage that splitting or merging products do not affect the index. The method appreciates the use of new high-quality goods in the global markets. This is as a result of the fact that high-quality goods claim a higher demand in the market. Holding prices constant, new goods attract more customers than old ones. However, this method of using the price index has drawbacks such that it takes into account product splits and mergers. This can affect the computation of the price index because it is determined by the product varieties in the market (Broda & Weinstein, 2004).
Findings and conclusion
From the data obtained about the U.S. imports, there are two trends in the composition and imports. First, the number of imports doubled in each decade from an initial 7,731 in 1972 to 12,822 in 1988. in 1990 and 2001 the number of imports escalated from 14,572 to 16,390. The prices of commodities declined with an increase in the number of imports. The increase in the number of imports resulted from the increase in the number of countries importing commodities to the U.S. market (Broda & Weinstein, 2005).
Secondly, the number of countries importing to the U.S. market increased during the period. It was found out that the number of countries that exported commodities to the U.S. market doubled during this period. The rapid increase in the product varieties during this period is a clear indication that the consumers’ welfare was rising as a result. High-income economies had the highest privileged in importing their products to the U.S. market compared to other low-income economies.
For example, countries like Mexico, Canada, China, Korea, and others had a higher position in the ranking of the countries importing their commodities to the U.S. Chinese firms increased the number of imports to the economy the U.S. over the three-decade period. Countries that had liberalized their economies experienced an increase in the number of products they exported to the American market. Countries like Japan and Argentina were slow in their efforts to liberalize their economies, resulting in a very low ranking in the list of countries exporting commodities to the U.S. market (Broda & Weinstein, 2005).
It is conclusive that globalization has increased consumer welfare by increasing the number of commodities available for trade and reducing the prices of commodities. The rise in international trade in the three decades has led to the introduction of a large number of products in the U.S. market. Globalization has caused a rapid increase in international trade, and a lot of gains to trade have been made out of it. It has been established that opening domestic markets to allow international trade causes prices to fall. This is an advantage to the domestic consumers because competition causes the products to be priced competitively. Globalization has brought about an increase in the overall welfare of consumers in the market by improving the quality of goods as well as pricing products favorably. It is evident that consumers have gained a lot from the increased globalization effect.
Recommendations
- The federal government should improve international trade by reducing the barriers that may hinder the free flow of commodities into and out of the economy.
- Trade liberalization should be effected so that more countries can participate in international trade.
- Globalization has brought about many advantages, and the government should emphasize improving trade between countries by promoting the products being marketed in the country.
- Consumer welfare should be protected by ensuring that the quality of products is good. The rapid increase in imports should compromise the quality of products sold in the global markets.
References
Broda, C. and Weinstein, D. (2004). “Globalization and the Gains from Variety.” NBER Working Paper, no. 10314.
Broda, C. Weinstein, D. (2005). Are We Underestimating the Gains from Globalization for the United States? NBER Working Paper. 11(4).
Boskin, Michael J., Ellen R. Dulberger, Robert J. Gordon, Zvi Griliches, and Dale Jorgensen. (1996). Toward a More Accurate Measure of the Cost of Living. Final Report to the Senate Finance Committee from the Advisory Commission to Study the Consumer Price Index.
Krugman, P. (1980). “Scale Economies, Product Differentiation, and the Pattern of Trade.” American Economic Review 70(5). p. 950-9.