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Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Chapter 1 An Introduction to International Trade.

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1 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Chapter 1 An Introduction to International Trade

2 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-2 Topics to be Covered Branches of International Economics Characteristics of National Economies Characteristics of World Trade Characteristics of U.S. Trade

3 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-3 Examples of International Trade Questions What impact will the global financial crisis have on world trade? Has the recent growth of world trade and capital flows exacerbated the impact of the financial crisis? Does reliance on international trade lead to a loss of jobs for Palestinian? Can Palestinian firms compete against firms in low-wage countries? Is the large palestine trade deficit harmful? What is the appropriate value of the dollar? International Economics helps explain patterns of international trade, investment, and other cross-border transactions

4 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-4 What Is International Economics About? International economics is about how nations interact through trade of goods and services, through flows of money and through investment. International economics is an old subject, but it continues to grow in importance as countries become tied to the international economy. Nations are more closely linked through trade in goods and services, through flows of money, and through investment than ever before. International economics is a blend of micro and macro economic analysis

5 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-5 Branches of International Economics Trade (international microeconomics) –Why do nations engage in international trade? –What goods and services do nations trade? –How does international trade affect national income, welfare, and jobs? –How do trade barriers affect national welfare? –How are countries affected by international movements of labor and capital?

6 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-6 Branches of International Economics (cont.) Finance (international macroeconomics) –What is the balance of payments? –What is an exchange rate and what factors determine the exchange rate? –What is the relationship between exchange rates, prices, and interest rates? –How are countries affected by foreign direct investment and lending? –How effective are domestic policies given the global economy?

7 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-7 Patterns of Trade Differences in climate and resources can explain why Brazil exports coffee and Australia exports iron ore. But why does Japan export automobiles, while the U.S. exports aircraft? Differences in labor productivity may explain why some countries export certain products. How relative supplies of capital, labor and land are used in the production of different goods and services may also explain why some countries export certain products.

8 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-8 The Effects of Government Policies on Trade Policy makers affect the amount of trade through –tariffs: a tax on imports or exports, –quotas: a quantity restriction on imports or exports, –export subsidies: a payment to producers that export, –or through other regulations (ex., product specifications) that exclude foreign products from the market, but still allow domestic products. What are the costs and benefits of these policies?

9 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-9 The Effects of Government Policies on Trade (cont.) Economists design models that try to measure the effects of different trade policies. If a government must restrict trade, which policy should it use? If a government must restrict trade, how much should it restrict trade? If a government restricts trade, what are the costs if foreign governments respond likewise?

10 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-10 Characteristics of National Economies Over 190 countries in the world today Population Land area Gross National Product (GNP)—value of final goods and services produced by domestic factors of production. Gross Domestic Product (GDP)—value of final products produced within a country. Per capita GNP (GDP)

11 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-11 International Trade Exports—goods and services produced in one country and sold to other countries. Imports—goods and services consumed in a country but which have been purchased from other countries. Trade Deficit (Surplus)—a country has a trade deficit (surplus) if its imports (exports) exceeds its exports (imports).

12 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-12 IMPORTS AND EXPORTS OF GOODS IN THE WORLD ECONOMY Table 1.2Distribution of Imports and Exports of Merchandise in the World Economy 2005 Imports (millions of $) % of World Total Exports (millions of $) % of World Total Low-Income Economies $316,5593.0%$261,8532.5% Middle-Income Economies $2,552,08923.9%$2,795,18126.8% High-Income Economies $7,816,29773.2%$7,376,99070.7% World Total$10,684,945–$10,434,024–

13 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-13 GLOBALIZATION Globalization is the term used to convey the idea that international factors are becoming a more important part of the world economy The simplest measure of globalization is the ratio of exports to GDP –Countries with a high ratio of exports to GDP are generally more open to the world economy than countries with a low ratio

14 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-14 Index of Openness Index of Openness—a measure of how much a country participates in international trade; defined as the ratio of a country’s exports to its GDP (or GNP). Open Economy—a country with a high value of the index of openness. Closed Economy—a country with a relatively low index of openness.

15 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-15 GLOBALIZATION Table 1.6Exports Plus Imports as a Percentage of GDP for Selected Countries CountryReal Export plus Imports as a Percent of GDP Singapore462.9% Hong Kong334.4 Luxembourg282.0 Hungary180.0 Ireland176.7 Belgium174.0 Netherlands146.9 Taiwan118.1 Honduras109.7 Philippines107.7 Austria103.0 Costa Rica96.4 Korea95.5

16 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-16 GLOBALIZATION Table 1.6Exports Plus Imports as a Percentage of GDP for Selected Countries CountryReal Export plus Imports as a Percent of GDP Denmark94.5 Switzerland90.7 Sweden88.9 Canada81.8 Indonesia81.7 Portugal79.9 Nicaragua79.3 Iceland78.9 Israel78.3 Finland77.9 Ecuador76.9 Germany76.6 Norway76.4

17 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-17 GLOBALIZATION Table 1.6Exports Plus Imports as a Percentage of GDP for Selected Countries CountryReal Export plus Imports as a Percent of GDP Turkey71.2 Chile71.1 Poland69.5 Mexico66.8 Spain65.1 U.K.59.9 France57.5 Italy54.5 China54.4 South Africa54.4 Greece54.3 Australia48.9 U.S.26.6 Japan23.4

18 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-18 Developing Country vs. Developed Country Developing (poor) countries vs. developed (rich) countries – classified by per capita GNP The poorest countries tend to be located in Africa and Asia. The richest countries are industrialized countries of Western Europe, North America, and the Pacific Rim.

19 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-19 Developing Country vs. Developed Country World Bank –A multi-lateral institution, which makes loans to developing countries to enhance economic development –It classifies each country of the world into low income, middle-income, and high-income economies based on GDP per capita –With minor adjustments, GDP measures both the total production and total income of a country

20 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-20 THE OUTPUT OF THE WORLD ECONOMY GDP per capita Population (millions) % of World Population Total GDP (millions of $) % of World GDP Low-Income Economies $6022,35236.5%$1,416,2123.2% Middle-Income Economies $2,7823,07547.8%$8,553,7211.2% High-Income Economies $34,3161,01115.7%$34,687,05877.7% The distribution of world income affects the study of international trade because the production of goods and income is unevenly distributed among the world economies Table 1.1Distribution of World Population and Economic, 2005

21 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-21 TABLE 1.1 Basic Characteristics of Selected Countries

22 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-22 TABLE 1.1 Basic Characteristics of Selected Countries (cont.)

23 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-23 TABLE 1.1 Basic Characteristics of Selected Countries (cont.)

24 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-24 Causes of Differences in Economic Growth of Countries Quantity and quality of resource endowments, particularly human capital Investment in plant and equipment Political and socioeconomic environment that is stable and conducive to competition

25 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-25 Characteristics of World Trade Value and growth of world merchandise trade Largest exporters and importers Geographic patterns or direction of world trade Commodity composition – What goods do countries trade?

26 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-26 Growth of World Exports Refer to Figure 1.1 (next slide) What has caused the explosion of world trade? –Reduction in trade barriers –Advances in transportation, communication and technology –Proliferation of trade agreements

27 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-27 FIGURE 1.1 World Exports and Output in Real Terms: 1950–2007

28 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-28 Geographic Trade Patterns Developed countries account for the bulk of world trade (largest exporters and importers). Developed countries trade primarily with each other. Developing countries rely on developed countries for their export markets. Countries trade mainly with neighbors.

29 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-29 FIGURE 1.2 Geographic Pattern of Merchandise Trade: 1965 and 2007

30 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-30 FIGURE 1.2 Geographic Pattern of Merchandise Trade: 1965 and 2007 (cont.)

31 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-31 TABLE 1.2 Top Ten Trading Partners of Selected Countries, 2007

32 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-32 Commodity Composition What kinds of products do nations currently trade, and how does this composition compare to trade in the past? Today, most of the volume of trade is in manufactured products such as automobiles, computers, clothing and machinery. –Services such as shipping, insurance, legal fees, and spending by tourists account for 20% of the volume of trade. –Mineral products (ex., petroleum, coal, copper) and agricultural products are a relatively small part of trade.

33 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-33 The Composition of World Trade, 2005

34 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-34 In the past, a large fraction of the volume of trade came from agricultural and mineral products. –In 1910, Britain mainly imported agricultural and mineral products, although manufactured products still represented most of the volume of exports. –In 1910, the U.S. mainly imported and exported agricultural products and mineral products. –In 2002, manufactured products made up most of the volume of imports and exports for both countries.

35 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-35 TABLE 1.3 World Trade in Major Products: 1994, 1999, 2003, 2006 (Rank, value in billions of $, percent share)

36 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-36 TABLE 1.3 World Trade in Major Products: 1994, 1999, 2003, 2006 (Rank, value in billions of $, percent share) (cont.)

37 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-37 TABLE 1.4 Broad Categories of Exports of Selected Countries, 2006

38 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-38 TABLE 1.5 Broad Categories of Imports of Selected Countries, 2006

39 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-39 World Trade in Services $3.3 trillion in 2007 (or 25% of international trade) U.S. is the largest exporter and importer of services Most traded services: transportation, travel, other services (banking, medicine, consulting, insurance & education)

40 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. 1-40 Characteristics of U.S. Trade U.S. is the largest participant and a trading partner of many countries. Top trading partners of the U.S. – primarily its neighbors, Canada and Mexico (Refer to Table 1.2, ONLY U.S. DATA) Major U.S. exports and imports – primarily exports and imports machines and transport equipment (Refer to Tables 1.4 and 1.5, ONLY U.S. DATA)


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