Copyright ©2004, South-Western College Publishing International Economics By Robert J. Carbaugh 9th Edition Chapter 1: The International Economy

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

Carbaugh, Chap. 1 3 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

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

Carbaugh, Chap. 1 5 Exports of goods and services as percent of Gross Domestic Product, 2001 Economic interdependence CountryExports (% of GDP)Imports (% of GDP) Netherlands68%62% Norway4830 South Korea4641 Canada4539 Germany3534 France2927 United Kingdom2830 Mexico2830 United States1114 Japan1110

Carbaugh, Chap. 1 6 Leading trading partners of the United States, 2000 Economic interdependence Value of US Countryexports ($ bill.)imports ($ bill.) Canada$202.4$250.1 Mexico Japan Germany France Italy Netherlands Belgium/Luxembourg Venezuela Australia

Carbaugh, Chap. 1 7 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 Economic interdependence

Carbaugh, Chap. 1 8 Interdependence: Impact (contd) 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

Carbaugh, Chap. 1 9 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

Carbaugh, Chap 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

Carbaugh, Chap 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

Carbaugh, Chap 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

Carbaugh, Chap 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