1. Copyright ©2000, South-Western College Publishing International Economics By Robert J. Carbaugh 7th Edition Chapter 1: The international economy

2. Carbaugh, Chap. 1 2 Elements of interdependence  Trade: goods, services, raw materials, energy  Finance: foreign debt, foreign investment, exchange rates  Business: multinational corporations, global production Economic interdependence

3. Carbaugh, Chap. 1 3 Exports of goods and services as percent of Gross Domestic Product, 1997 Economic interdependence CountryExports as percent of GDP Netherlands55% Norway41 Canada39 Mexico31 South Korea31 United Kingdom29 Germany25 France25 United States12 Japan10

4. Carbaugh, Chap. 1 4 Leading trading partners of the United States, 1997 Economic interdependence Value of US Countryexports ($ bill.)imports ($ bill.) Canada$133$160 Japan68118 Mexico5576 United Kingdom3131 South Korea2718 China (incl. Hong Kong) 2564 Germany2340 Singapore1721 Belgium/Luxembourg137

5. Carbaugh, Chap. 1 5 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

6. Carbaugh, Chap. 1 6 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

7. Carbaugh, Chap. 1 7 The US & the Asian economic crisis  Who could be hurt by the Asian crisis of 1997-98:  US creditors & investors in Asia  US exporters to Asia  US firms that compete with Asian imports  US workers who compete with Asian workers  US firms that sell imports from Asia  US multinationals wanting markets in Asia  US firms manufacturing in Asia  US firms using components from Asia  US consumers of imports Economic interdependence: case study

8. Carbaugh, Chap. 1 8 The US & the Asian economic crisis  Potential macroeconomic effects of the Asian crisis  US trade balance hurt as exports to the region suffer and imports become cheaper  US economic growth might suffer as a result of Asia’s economic decline Economic interdependence: case study

9. Carbaugh, Chap. 1 9 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

10. Carbaugh, Chap. 1 10 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