International Economics

Chapter 1:
The International Economy

Copyright ©2004, South-Western College Publishing

Economic interdependence

Elements of interdependence
 Trade: goods, services, raw materials,
energy
 Finance: foreign debt, foreign investment,
exchange rates
 Business: multinational corporations, global
production

Carbaugh, Chap. 1 2
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

Carbaugh, Chap. 1 3
Economic interdependence

Waves of Globalization
 1st wave: 1870-1914
 Falling tariff barriers
 improved transportation
 2nd wave: 1945-1980
 Agreements to lower barriers again
 Rich country trade specialization
 Poor nations left behind
 3rd wave: 1980-present
 Growth of emerging markets
 international capital movements regain importance
Carbaugh, Chap. 1 4
Economic interdependence

Exports of goods and services as percent of

Gross Domestic Product, 2001
Country Exports (% of GDP) Imports (% of GDP)
Netherlands 68% 62%
Norway 48 30
South Korea 46 41
Canada 45 39
Germany 35 34
France 29 27
United Kingdom 28 30
Mexico 28 30
United States 11 14
Japan 11 10
Carbaugh, Chap. 1 5
Economic interdependence

Leading trading partners of the United States,

2000
Value of US Value of US
Country exports ($ bill.) imports ($ bill.)
Canada $202.4 $250.1
Mexico 125.2 147.9
Japan 98.4 165.3
Germany 45.2 74.3
France 30.6 40.6
Italy 16.4 31.0
Netherlands 28.9 15.0
Belgium/Luxembourg 17.9 12.8
Venezuela 9.0 19.2
Australia 17.9 9.7

Carbaugh, Chap. 1 6
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
 International competition encourages efficiency

Carbaugh, Chap. 1 7
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

Carbaugh, Chap. 1 8
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 something cheaply
can benefit from specialization

Carbaugh, Chap. 1 9
Economic interdependence

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

Carbaugh, Chap. 1 10
Comparative advantage

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

Carbaugh, Chap. 1 11
Economic interdependence: globalization

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
Carbaugh, Chap. 1 12
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
Carbaugh, Chap. 1 13