1. International Economics By Robert J. Carbaugh 9th Edition
Chapter 1:
The International Economy

2. Elements of interdependence
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

3. Forces driving globalization
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

4. Waves of Globalization
Economic interdependence
Waves of Globalization
1st wave:
Falling tariff barriers
improved transportation
2nd wave:
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

5. 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
South Korea
Canada
Germany
France
United Kingdom
Mexico
United States
Japan
Carbaugh, Chap. 1

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

7. Interdependence: Impact
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

8. Interdependence: Impact (cont’d)
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

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
Carbaugh, Chap. 1

10. Common fallacies of international trade
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

11. Competitiveness & trade
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

12. Ups and downs of globalization
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

13. Ups and downs of globalization
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