International EconomicsBy Robert J. Carbaugh8th Edition

Chapter 1:The International Economy

Elements of interdependence Trade: goods, services, raw materials,

energy Finance: foreign debt, foreign

investment, exchange rates Business: multinational corporations,

global production

Economic interdependence

Forces driving globalization Technological change:

Production Communication & information Transport

Liberalization of trade & investment: Tariff, non-tariff barrier reductions Liberalized financial transactions International financial markets

Economic interdependence

Exports of goods and services as percent of Gross Domestic Product, 1999

Economic interdependence

Country Exports as percent of GDP

Netherlands 55%Norway 41Canada 39Mexico 31South Korea 31United Kingdom 29Germany 25France 25United States 12Japan 10

Leading trading partners of the United States, 1998

Economic interdependence

Value of US Value of USCountry exports ($ bill.) imports ($ bill.)

Canada $154 $178Japan 58 125Mexico 79 96China 14 75Germany 27 51United Kingdom 39 36France 18 25South Korea 17 25Belgium 14 9Netherlands 19 8

Common fallacies of international trade "Trade is zero-sum" - trade can bring

benefits to both partners "Imports bad, exports good" - if you buy

nothing from other countries, they have no income to buy from you

"Tariffs and quotas save jobs" - cutting imports makes it harder to export, so other jobs are lost

Economic interdependence

Interdependence: Impact Overall standard of living is higher

Access to raw materials & energy not available at home

Access to goods & components made less expensively elsewhere

Access to financing and investment not available at home

Economic interdependence

Interdependence: Impact (cont’d)

Other impacts - good & bad Curtails inflationary pressures at home Limits domestic wage increases Makes economy vulnerable to external

disturbances Limits impact of domestic fiscal policy on

economy

Economic interdependence

The US & the Asian economic crisis Macroeconomic effects during 1997-99

US exports fell and trade balance widened US income grew quickly, increasing imports Contraction in Japan and East Asia cut US exports Rising value of the dollar made US exports expensive

and imports cheaper US economic growth remained strong with low

inflation Cheap imports and low input prices, along with

investment flows into the US, fueled strong growth

Economic interdependence: case study

The US & the Asian economic crisis

Sectors of the US economy hurt by the crisis US agriculture hurt by falling exports and low

commodity prices US manufacturing sector hurt by falling exports

and cheaper import competition Commercial aircraft, steel, and textiles & apparel hurt

US financial sector markets and institutions hurt by losses on loans and investments in East Asia and other emerging markets

Economic interdependence: case study

Competitiveness & trade Main objective of any nation is to generate

high and rising standard of living No nation can efficiently make everything

itself International trade allows countries to

focus on producing what they make efficiently

Inefficient sectors will be squeezed out Sectors open to competition become more

efficient and productive

Comparative advantage

Comparative advantage means:

If the relative cost of making two items is different in two countries, each can gain by specializing in the one it makes most cheaply - each has a comparative advantage in that product

Even countries that make nothing cheaply can benefit from specialization

Comparative advantage

Ups and downs of globalization Advantages

Productivity increases faster when countries produce according to comparative advantage

Global competition and cheap imports keep prices low and inflation at bay

An open economy encourages technological development and innovation with ideas from abroad

Jobs in export industries pay more than those in import-competing industries

Free movement of capital gives the US access to foreign investment and keeps interest rates low

Economic interdependence: globalization

Ups and downs of globalization Disadvantages

Millions of US jobs lost to imports or production abroad; those displaced find lower-paying jobs

Millions of other Americans fear getting laid off Workers face pressure for wage concessions

under threat of having the jobs move abroad Service and white-collar jobs are joining blue-

collar ones in being vulnerable to moving overseas US workers can lose their competitiveness when

firms build state-of-the-art factories in low-wage countries, making them as productive as plants in the US

Economic interdependence: globalization