Copyright ©2002, South-Western College Publishing International Economics By Robert J. Carbaugh 8th 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 Exports of goods and services as percent of Gross Domestic Product, 1999 Economic interdependence CountryExports as percent of GDP Netherlands55% Norway41 Canada39 Mexico31 South Korea31 United Kingdom29 Germany25 France25 United States12 Japan10

Carbaugh, Chap. 1 5 Leading trading partners of the United States, 1998 Economic interdependence Value of US Countryexports ($ bill.)imports ($ bill.) Canada$154$178 Japan58125 Mexico7996 China1475 Germany2751 United Kingdom3936 France1825 South Korea1725 Belgium149 Netherlands198

Carbaugh, Chap. 1 6 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. 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 Economic interdependence

Carbaugh, Chap. 1 8 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

Carbaugh, Chap. 1 9 The US & the Asian economic crisis  Macroeconomic effects during  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

Carbaugh, Chap 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

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 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 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