E C O N O M I C R E P O R T O F T H E P R E S I D E N T

ketplace. The discussion of the benefits of globalization that follows suggeststhat this conjuncture of globalization and prosperity is no mere coincidence.International economic integration raises living standards by improvingresource allocation, promoting innovation, encouraging technology transfer,and otherwise enhancing productivity growth. Through trade, countries canshift resources into their most internationally competitive sectors and reapthe benefits of specialization and scale economies. Their consumers alsoenjoy less expensive and more varied products. Opening domestic markets toglobal capital can help countries invest more efficiently. FDI can lead toimproved management, better technology and training, and higher wages inlocal communities.However, the same processes that bring about economic growth, includingthose that work through trade and investment, can force costly adjustmentsfor some firms and their workers. An array of U.S. domestic policies, such asthose to assist job search and training, address these issues, as do some elementsof international agreements that the United States has entered into.Both are discussed later.Globalization and Living StandardsTrade economists have long recognized the benefits of specialization inproduction and of access to markets. When a country produces and exportsthose goods and services that it can produce relatively inexpensively, andimports those that are relatively inexpensive to produce abroad, tradeimproves standards of living on both sides of the transaction. For example,the United States can produce financial services at lower cost, relative toother products that it might produce, than most developing countries can.Costa Rica, by comparison, can produce coffee at lower cost, relative to otherproducts, than can most industrialized countries. In this example, the UnitedStates would likely benefit from producing and exporting financial servicesand importing coffee. The reverse is true of Costa Rica. Through freertrade and specialization, a country’s resources can be directed more efficientlyto those uses in which they generate the most economic value, therebyraising income.Access to larger markets can also reduce costs and increase the returns toinnovation. Producing such goods as automobiles and airplanes requiresbuilding large plants and installing complex and costly equipment. Byadding exports to their domestic sales, manufacturers can lower their unitcosts by extending production runs and spreading overhead costs morebroadly. Moreover, the ability to spread fixed research and developmentcosts may allow globally competitive firms to be more innovative than thoseconfined to selling in domestic markets.214 | Economic Report of the President