Salvatore Ch01

Dale R. DeBoerUniversity of Colorado, Colorado Springs

An Introduction to International Economics

Chapter 1: Introduction

Dominick SalvatoreJohn Wiley & Sons, Inc.

1 - 2Dale R. DeBoerUniversity of Colorado, Colorado Springs

What is International Economics?

• International trade in goods and services– An example: Sony Televisions

• International trade in goods and services– A key issue – its not just imports!

• Exports of Boeing Aircraft• Exports of Microsoft Software

• International trade in goods and services– A key issue – its not just imports!– Its also not just for consumers!

• Trade in component parts• Monitors for Dell Computers

• International trade in goods and services– A key issue – its not just imports!– Its also not just for consumers!– Services, not just goods!

• Lloyd’s of London

• International trade in goods and services– A key issue – its not just imports!– Its also not just for consumers!– Services, not just goods!– International trade is expanding

Value of World Merchandise Exports (1995 = 100)

1950 1960 1970 1980 1990 2000

Source: World Trade Organization

• International trade in goods and services• International ownership of assets

– Examples• Foreign stock ownership• Automobile assembly plants

– Toyota WWW link

• US government debt

• International trade in goods and services• International ownership of assets• Currency exchange

– International transactions require conversions between currencies

– Foreign exchange markets• Federal Reserve Bank Exchange Rate Data WWW link

• International trade in goods and services• International ownership of assets• Currency exchange• International organizations

– World Trade Organization• WWW link

– International Monetary Fund• WWW link

– European Union• WWW link

Standard of Living

• The International Economy generates Interdependence– Economic growth in the United States spurs

increased demand for imports– Increased import demand by the United States

generates economic growth in other countries

Standard of Living

• The International Economy generates Interdependence

• Sources of potential gain– Access to items not available domestically

• Coffee• Bananas• Tin• Tungsten

Standard of Living

• Sources of potential gain– Access to items not available domestically– Access to lower cost products– Access to greater product variety

Standard of Living

• Sources of potential gain• Is it always a gain?

– Import competing sectors may experience production and job losses

– This loss is at least partially (and potentially, completely) offset by gains in the exporting sectors

Subjects in International Economics

• International Trade Theory– Analyzes the basis of and the gains from

international trade– Focuses on the microeconomic aspects of the

international economy

• International Trade Theory• International Trade Policy

– Examines the reasons for and the effects of restrictions on international trade

– Analyzes the implications for International Trade Theory of such restrictions

• International Trade Theory• International Trade Policy• Balance of Payments

– A summary statement of all the international transactions of the residents of a nation with the rest of the world during a particular period of time, usually a year.

– Provides a statistical summary of the size of international trade and international asset ownership for a country

• International Trade Theory• International Trade Policy• Balance of Payments• Foreign Exchange Markets

– The institutional framework for the exchange of one national currency into another

– Part of the study of International Finance (or Open-Economy Macroeconomics) that is concerned with the macroeconomic implications of the International Economy

• International Trade Theory• International Trade Policy• Balance of Payments• Foreign Exchange Markets• Adjustments in the Balance of Payments

– Focuses on the relationship between internal and external aspects of the economy

– Examines how disequilibria lead to macroeconomic adjustment under difference international monetary systems

Current International Economic Problems

• Trade Protectionism in Industrial Countries– What are the reasons for this protection?– What are the implications of this protection for the

industrial countries?– What are the implications of this protection for the

rest of the world?– How do regional trade blocks (the NAFTA, the

European Union, etc.) complicate efforts to reduce this protection?

• Trade Protectionism in Industrial Countries• Excessive Fluctuations and Large

Disequilibria in Exchange Rates– Large exchange rate fluctuations may disrupt

international trade and harm economic growth– What is the source of these fluctuations?– How can the international financial system be

reformed to eliminate these fluctuations?

• Trade Protectionism in Industrial Countries• Excessive Fluctuations and Large Disequilibria in

Exchange Rates• Financial Crises in Emerging Market

Economies– The causes and consequences of a sudden

collapse in the value of a currency of an emerging economy

Exchange Rates• Financial Crises in Emerging Market Economies• High Structural Unemployment and Slow

Growth in Europe and Stagnation in Japan

Exchange Rates• Financial Crises in Emerging Market Economies• High Structural Unemployment and Slow Growth

in Europe and Stagnation in Japan• Job Insecurity from Restructuring and

Downsizing in the United States

• Excessive Fluctuations and Large Disequilibria in Exchange Rates

• Financial Crises in Emerging Market Economies• High Structural Unemployment and Slow Growth

in Europe and Stagnation in Japan• Job Insecurity from Restructuring and Downsizing

in the United States• Restructuring Problems of Transition

Economies

• Excessive Fluctuations and Large Disequilibria in Exchange Rates

• Financial Crises in Emerging Market Economies• High Structural Unemployment and Slow Growth

in Europe and Stagnation in Japan• Job Insecurity from Restructuring and Downsizing

in the United States• Restructuring Problems of Transition Economies• Deep Poverty in Many Developing Countries

Globalization

• What is globalization?– Increasing international economic connections

• International Trade• International Asset Ownership

Globalization

• What is globalization?– Increasing international economic connections– Increasing role of International Organizations in

constraining domestic policies

Globalization

constraining domestic policies– Increasing cultural homogeneity

Globalization

constraining domestic policies– Increasing cultural homogeneity– Increased domestic economic growth caused by

expanded international connections• Potential harm?

– Environmental concerns

Globalization

• What is globalization?• The Anti-Globalization movement

– A loose coalition of groups opposed to globalization

– Concerns• Environmental damage• Loss of domestic labor protections• Erosion of domestic sovereignty

Organization of the Text

• Part One: Chapters 2-4– International Trade Theory

• Part One: Chapters 2-4• Part Two: Chapters 5-6

– International Trade Policies

• Part One: Chapters 2-4• Part Two: Chapters 5-6• Part Three: Chapters 7-9

– International Asset Ownership

• Part One: Chapters 2-4• Part Two: Chapters 5-6• Part Three: Chapters 7-9• Part Four: Chapters 10-12

– Balance of Payments and Exchange Rate Markets

• Part One: Chapters 2-4• Part Two: Chapters 5-6• Part Three: Chapters 7-9• Part Four: Chapters 10-12• Part Five: Chapters 13-14

– Open-Economy Macroeconomics

• Part One: Chapters 2-4• Part Two: Chapters 5-6• Part Three: Chapters 7-9• Part Four: Chapters 10-12• Part Five: Chapters 13-14• Part Six: Chapters 15-16

– The International Economy in Operation

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