International Economics

Woraphon Yamaka

Chapter 1:The International Economy and Globalization

Modified form International Economics 9th Edition byRobert J. Carbaugh

Overview In today’s world, no nation exists in economic isolation. All aspects of a nation’s economy—its industries, service

sectors, levels of income and employment, and living standard—are linked to the economies of its trading partners.

This linkage takes the form of international movements of goods and services, labor, business enterprise, investment funds, and technology.

Indeed, national economic policies cannot be formulated without evaluating their probable impacts on the economies of other countries.

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Elements of interdependence

Trade: goods, services, raw materials, energy Finance: foreign debt, foreign investment,

exchange rates

Business: multinational corporations, global production

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Economic interdependence

• This is to say the economic interdependence occurs through these elements

Forces driving globalization

Technological change: Production

Communication & information

Transport Liberalization of trade & investment:

Tariff, non-tariff barrier reductions

Liberalized financial transactions International financial markets

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Economic interdependence

Waves of Globalization 1st wave: 1870-1914

Falling tariff barriers

new technologies that improved transportation such as steamships and the advent of railways

Therefore, exports as a share of world income nearly doubled to about eight percent while per capita incomes, which had risen by 0.5 percent per year

2nd wave: 1945-1980 Falling transportation costs continued to foster increased trade.

Agreements to lower barriers again

Rich country trade specialization in manufacturing niches that gained productivity through agglomeration economies.

World inequality: Poor nations left behind as most developing countries did not participate in the growth of global trade in manufacturing and services.

poor countries are confined to dependence on agricultural and natural-resource products.Carbaugh, Chap.1

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Economic interdependence

3rd wave: 1980-present Growth of emerging markets i.e.. China, India, and Brazil

other developing countries became increasingly marginalized in the world economy and realized decreasing incomes and increasing poverty.

Of major significance for this wave of globalization is that some developing countries succeeded for the first time in controlling their labor abundance to provide them with a competitive advantage in labor-intensive manufacturing.

international capital movements regain importance

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6 Waves of GlobalizationEconomic interdependence

Example: The United States as an Open Economy It is generally agreed that the U.S. economy has

become increasingly integrated into the world economy (become an open economy) in recent decades.

Such integration involves a number of dimensions that include the trade of goods and services, financial markets, the labor force, ownership of production facilities, and the dependence on imported materials.

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Exports of goods and services as percent of Gross Domestic Product, 2001

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Economic interdependence

Country Exports (% of GDP) Imports (% of GDP)

Netherlands 68% 62%Norway 48 30South Korea 46 41Canada 45 39Germany 35 34France 29 27United Kingdom 28 30Mexico 28 30United States 11 14Japan 11 10

https://en.wikipedia.org/wiki/List_of_countries_by_trade-to-GDP_ratio

Leading trading partners of the United States, 2018

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Economic interdependence

Value of US billionCountry U.S. trade partners

China 636Canada 582.4Mexico 557Japan 204.2Germany 171.2South Korea 119.4UK 109.4France 82.5

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Economic interdependence

Why Is Globalization Important?

Because of trade, individuals, firms, regions, and nations can specialize in the production of things they do well and use the earnings from these activities to purchase from others those items for which they are high-cost producers.

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Interdependence: ConsequenceOverall 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

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Economic interdependence

Other impacts - good & bad Eliminate inflationary pressures at home

Limits domestic wage increases

Makes economy weak to external disturbances Limits impact of domestic fiscal policy on economy

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Economic interdependence

Therefore, trading partners can produce a larger joint output and achieve a higher standard of living than would otherwise be possible.

Interdependence: Consequence

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

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Comparative advantage

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15 Who is comparative advantage on cookie?

Common Fallacies(misunderstand) of international trade

"Trade is zero-sum" - trade can bring benefits to both partners activity

if one trading party gains, the other must loseIs this true? The answer is No!!! In fact, just the opposite occurs—both partners gain from tradeIf countries specialize in what they are comparatively best at producing, they must import goods and services that other countries produce best. The notion that imports are “bad” but exports are “good”—popular among politicians and the media—is incorrect.

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Economic interdependence

Another fallacy is that imports reduce employment and act as a drag on the economy, while exports promote growth and employment

For example- American imports of German machinery

- Germans buy US computer software. - If Germans are sell less when compared to Americans, then they will have fewer dollars buy from Americans.

- Thus, the volume of U.S. imports decreases.

- As a consequence, the employment will decrease in the U.S. export industries

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17 Common Fallacies(misunderstand) of international trade

Economic interdependence

“Tariffs and quotas save jobs" - cutting imports makes it harder to export, so other jobs are lost”Why don’t we use tariffs and quotas to restrict trade among the countries?

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18 Common Fallacies(misunderstand) of international trade

Economic interdependence

Free trade is no barriersAnswers Indeed, most people recognize that free trade

among the countries is a major source of prosperity (development) for each of the country.

Similarly, most recognize that “imports” from other states do not destroy jobs—at least not for long

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Economic interdependence

- Free trade among the world promotes prosperity. The sudden removal of trade barriers might harm producers and workers in protected industries.

- It can be costly to quickly transfer the protected resources to other, more productive activities.

- Gradual removal of the barriers would minimize this shock effect and the accompanying cost of relocation.

Competitiveness & tradeSummary

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

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Economic interdependence

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

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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 offWorkers 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

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Economic interdependence: globalization

Summary Throughout the post-World War II era, the world’s economies have

become increasingly interdependent in terms of the movement of goods and services, business enterprise, capital, and technology

Proponents of an open trading system contend that international trade results in higher levels of consumption and investment, lower prices of commodities, and a wider range of product choices for consumers. Arguments against free trade tend to be voiced during periods of excess production capacity and high unemployment

International competitiveness can be analyzed in terms of a firm, an industry, and a nation. Key to the concept of competitiveness is productivity, or output per worker hour.

Although international trade helps workers in export industries, workers in import-competing industries feel the threat of foreign competition. They often see their jobs and wage levels undermined by cheap foreign labor

Among the challenges that the international trading system faces are dealing with fair labor standards and concerns about the environment

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