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Chapter IIMeasures of GlobalizationGlobalizationDefinition: A process ofemergence of interdependent relationships among people from different parts of the worldPut in simple terms, globalization refers to processes to promote interaction between people from different countries of national and cultural resources.

Importance of measuring globalizationTo know acceptabilityTo explore the process of entering target countryTo mould policies, products and employees to suit the level of openness and customization.The list of trade indicators 4Trade as % of GDPWorld Export Market SharesWorld Exp. Market Sh. by Type of GoodsImport Penetration of G & SMerchandise Trade with the Rest of WorldIntra-Industry TradeSensitivity of Trade flows to Price and Income ChangesGlobalization IndexMeasurement of economic globalization focuses on variables such astrade,Foreign Direct Investment(FDI),portfolio investment

One index of globalization is the KOF Index, which measures the three main dimensions of globalization: economic, social, and political2010 List by the KOF Index of GlobalizationRank: 1Belgium 2Austria 3Netherlands 4Switzerland 5Sweden KOF Index of globalizationKOF Swiss Economic Institute of technology, ZurichProject LeaderProf. Dr. Axel Dreher

Data are available on a yearly basis for 208 countries over the period 1970 - 20011. The KOF Index of Globalization measures the three main dimensions of globalization:economicsocialand political.

Top Globalised CountriesGlobalization Top 3: Ireland, Belgium, Netherlands, Austria, Singapore

Economic: Singapore, Ireland , Luxembourg, Malta, Netherlands, BelgiumG

KOF IndexIn addition to three indices measuring these dimensions, one calculate an overall index of globalization and sub-indices referring to actual economic flows

http://globalization.kof.ethz.ch/query/ for self comparison of any or a group countries

KOF Indexthe three dimensions of the KOF index are defined as: economic globalization- characterized as long distance flows of goods, capital and services as well as information and perceptions that accompany market exchanges; political globalization:characterized by a diffusion of government policies social globalization:expressed as the spread of ideas, information, images and people.economic globalization-Actual FlowsRestriction

economic globalization-Actual FlowsThe sub-index on actual economic flows includes data on trade, FDI and portfolio investment.

Data on trade are provided by the World Bank (2011), stocks of FDI (normalized by GDP) are provided by UNCTAD STAT (2011). Portfolio investment is derived from the IMFs International Financial Statistics (December 2011).

economic globalization-Actual FlowsTrade is the sum of a countrys exports and imports andportfolio investment is the sum of a countrys stock of assets and liabilities (all normalized by GDP).

While these variables are straightforward, income payments to foreign nationals and capitalare included to proxy for the extent that a country employs foreign people and capital in itsproduction processes.

economic globalization- Restrictions:The second index refers to restrictions on trade and capital using hidden import barriers, mean tariff rates, taxes on international trade (as a share of current revenue) and An index of capital controls.

Given a certain level of trade, a country with higher revenues from tariffs is less globalized.economic globalization- RestrictionsTo proxy restrictions of the capital account, an index based on databy Gwartney et al. (2012) is employed. This index is based on the IMFs Annual Report onExchange Arrangements and Exchange Restrictions and includes 13 different types of capital controls. The index is constructed by subtracting the number of restrictions from 13 andmultiplying the result by 10.economic globalization- RestrictionsThe indices on mean tariff rates and hidden import barriers arealso derived from Gwartney et al. (2012). Mean tariff rates originate from various sources.Gwartney et al. allocated a rating of 10 to countries that do not impose any tariffs. As themean tariff rate increases, countries are assigned lower ratings. The rating will decline towardzero as the mean tariff rate approaches 50 percent (which is usually not exceeded by mostcountries among their sample). The original source for hidden import barriers, finally, is theWorld Economic Forums Global Competitiveness Report (various issues).Method of CalculationIn constructing the indices of globalization, each of the variables introduced above istransformed to an index on a scale of one to hundred, where hundred is the maximum valuefor a specific variable over the 1970-2010 period and one is the minimum value. Highervalues denote greater globalizationSocial GlobalizationThe KOF index classifies social globalization in three categories. -The first covers personal contacts, -the second includes data on information flows and -the third measures cultural proximity.Sources of Information: 1.ContactsThis index is meant to capture direct interaction among people living in different countries. The first covers personal contacts, It includes international telecom traffic (traffic in minutes per person) andthe degree of tourism (incoming and outgoing) a countrys population is exposed to.2. Data on information flows Government and workers transfers received and paid (in percent of GDP) measure whetherand to what extent countries interact

3. Cultural Proximity.while the stock of foreign population is included to capture existing interactions with people from other countries. The number of international letters sent and received also measure direct interaction among people living in differentcountries.Cultural ProximityImported and exported books(relative to GDP), as suggested in Kluver and Fu (2004). Traded books proxy the extent towhich beliefs and values move across national borders, taken from the UNESCO (various years), and the United Nations Commodity Trade Statistics Database (2011).

Where to get information from:Telecom traffic is provided by the International Telecommunication Union (2011),while the number of letters is taken from the Universal Postal Unions Postal StatisticsDatabase. The remaining three variables are from the World Bank (2011, 2013)Political GlobalizationTo proxy the degree of political globalization we employ the number of embassies /high commissions in a country and, the number of international organizations to which the country is a member and the number of UN peace missions a country participated in.(w.e.f. 1945)Data CollectionThese data are taken from: the Europa World Yearbook (various years), the CIA World Factbook (various years), the UN Department of Peacekeeping Operations, and the United Nations Treaties Collection.5.How to make Index using above information:Step i: rate on scale 1-100Club sub index into 1: taking weighted avg.. Principal component analysis..Do the same to all 3 indicesTake average of the 3 as indicator of globalizationAffects of GlobalizationIn 2000, theInternational Monetary Fund(IMF) identified four basic aspects of globalization: trade and transactions, capital and investment movements, migration and movement of people and the dissemination of knowledgeFurther, environmental challenges such asclimate change, cross-boundary water and air pollution, and over-fishing of the ocean are linked with globalizationGlobalizing processes affect and are affected by business and work organization, economics, socio-cultural resources, and the natural environment.