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Introduction

Economics 337:The World Economy

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Lecture Objectives Discuss course content Discuss evaluation Examine the relationship of the US to the

world economy

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Prerequisites Principles of Microeconomics (Econ 101)

and Macroeconomics (Econ 102) Basic algebra and geometry.

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Course Content and Goals This course offers a non-technical introduction to

the analysis of international economic issues. The goal of the course is to increase your

knowledge of these issues and your tools for analyzing them.

While we will be primarily interested in developing standard microeconomic and macroeconomic approaches to these issues, we will also attempt to present a variety of other useful approaches from political science, sociology and less mainstream parts of economics.

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Course Content

The Course Has 5 Main Sections Introduction The Analysis of International Trade The Analysis of Trade Policy Open Economy Macroeconomics Issues Facing Developing Countries

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Representative topics on the analysis of trade

Comparative Advantage Gains from trade Directions of trade

Factor endowments and trade “Modern” Trade theory

Intra-industry trade Trade and geography

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Representative topics in Trade Policy

Tariffs and Quotas Arguments for commercial policy Linkage between trade and other issues

Trade and labor (wages, employment, etc.) Labor standards (child labor etc.) Trade and the Environment

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Representative Topics in Open Economy Macroeconomics

Trade and the Balance of Payments Exchange Rates and Exchange Rate

Systems Analyzing Models of the Open Economy

(for fun and profit)

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Representative topics in world economy

International financial crises Globalization and reform in Latin America International aspects of East Asian Growth

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Evaluation of Performance Two Examinations (100 points each)

Content: 40% Short answer, 60% essay Dates: 14 October and 10 December

About 12 Homeworks (100 points total) Due on date we begin a topic Homework score will be your percent correct.

300 Total Points

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Current Events in the World Economy Required supplementary reading in King &

King: International Economics and International Economic Policy.

As part of the required reading for the course, you are expected to read the online version of the Economist magazine.

The exams will contain questions drawn from supplementary reading in both of these.

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General Advice Keep current on the reading Do the homework Ask (relevant) questions in class Come see me during office hours if you

have questions that don’t get covered in class

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Remainder of Introduction Next topic: Globalization and Its Impact on

the US Next week: Globalization and Global

Governance

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Globalization in Perspective What Do We Mean By “Globalization”? Is the Current US Economy More

“Globalised” than in the Past? What Measures Would We Use?

Trade Migration Capital Flows

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On Trade Openness A Long View of Trade

Imports to GDP Exports to GDP Openness Index:

Imports + Exports: .

GDPOpenness

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Imports to GDP: 1821-2001

1800 1850 1900 1950 2000 2050YEAR

0.00

0.05

0.10

0.15

Impo

rts

to G

DP

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Exports to GDP

1800 1850 1900 1950 2000 2050YEAR

0.00

0.05

0.10

0.15

Exp

orts

to G

DP

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Openness Index: Trade/GDP

1800 1850 1900 1950 2000 2050YEAR

0.00

0.05

0.10

0.15

0.20

0.25

Ope

nnes

s In

dex

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Trade Balance as a Percent of GDP

1800 1850 1900 1950 2000 2050YEAR

-50

0

50

100

Tra

de B

alan

ce to

GD

P

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Other Indicators of Trade Openness

Law of One Price Does it hold? Not even vaguely. Does it hold more now than in the 19th Century?

Probably. Home Market Bias and Border Effects

Does the LoOP hold domestically more than internationally? Yes.

Pricing to Market and Pass Through

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Immigration and Openness How Global is the Market for Labor?

Very large labor flows Large, and persistent, wage differentials

How do we Evaluate Immigration? Wage effects Fiscal effects Other

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Immigration and Openness

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Foreign Direct Investment and Openness

US FDI as a Share of GNP

Year US FDI Abroad FDI in US

1914 7 3-4

1929-1930 9 1

1960 6 1

1996 20 16

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International Financial Openness

How global is the world financial market? The market is huge, BIS, Daily Transactions:

1973 $15 billion; 1998 $1.5 trillion.

But how integrated is is? Do International Parity Conditions Hold? No. Portfolio nondiversification. Feldstein/Horioka Puzzle: Savings-Investment

correlation.

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International Financial Openness: More or Less than 19th Century?

19th Century Characterized by Very Open Financial Markets Gold Standard Very few restrictions After the transatlantic cable, quite good

communication links

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International Financial Openness: More or Less than 19th Century?

The current environment is different Many more financial instruments available

today Transaction costs have dropped dramatically

24 hour, global market Better information

More timely More reliable (i.e. accounting rules better)

Better enforcement of contracts

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Why Should We Care About Openness?

It is a substantial political issue Politicians now use openness as an issue Seattle, etc.

There are real benefits and costs