The World of

International

Economics

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 1

1-2

Introduction

International trade and finance have never been

more important.

Signs of globalization are everywhere.

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International Finance Questions:

We’ll explore these questions:

• What is a country’s balance of payments? (Chap. 19)

• How are exchange rates determined? (Chaps. 20 –

22)

• What macroeconomic effects does trade cause?

(chaps. 23 -24)

• How policies differ under fixed vs. flexible rates?

(Chaps. 25 – 27)

• What policies (fixed vs. flexible exchange rate)

should countries pursue? (Chap. 28 – 29)

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Chapter Objectives

1. Why international trade?

2. Facts about world merchandise trade

Geographical Composition of Trade

Commodity Composition of Trade

3. World trade in service

4. Facts about the international trade of the United States

5. Growing importance and interdependence of trade

6. World trade in Assets

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The Nature of Merchandise Trade

The volume and value of world exports have

grown tremendously.

The value of global exports was $15.8 trillion in

2008; it was $2 trillion in 1985.

Over the past 40 years, global trade has grown

faster than global production (Table 1).

• This means that more and more of the final

goods produced are being exported

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1-9

Geographical Composition of Trade

Europe (1st), Asia (2nd), and North America (3rd),

dominate global exporting and importing.

These regions tend to trade with other countries

in the same region.

Trade flow from less developed regions to more

developed regions

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Merchandise Exports and Imports by Region, 2007 (billions of dollars)

Value of Exports Share Value of Imports Share

North America $1,853.5 13.3% 2,707.5 19.0%

South and Central America 499.2 3.6 456.0 3.2

Europe 5,772.2 41.4 6,060.8 42.5

Commonwealth of Indep. States 510.3 3.7 377.6 2.7

Africa 424.1 3.0 358.9 2.5

Middle East 759.9 5.4 479.3 3.4

Asia 4,131.0 29.6 3,804.3 26.7

World $13,950.0 100.0% $14,244.0 100.0%

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Top 10 Merchandise Exporters, 2007

Value

$, billions, Percentage

Country Share

Germany $1,326.4 9.5%

China 1,217.8 8.7

United States 1,162.5 8.3

Japan 712.8 5.1

France 553.4 4.0

Netherlands 551.3 4.0

Italy 491.5 3.5

United Kingdom 437.8 3.1

Belgium 430.8 3.1

Canada 419.0 3.0

1-13

Top 10 Merchandise Importers, 2007

Value

$, billions, Percentage

Country Share

United States $2,020.4 14.2%

Germany 1,058.6 7.4

China 956.0 6.7

Japan 621.1 4.4

United Kingdom 619.6 4.4

France 615.2 4.3

Italy 504.5 3.5

Netherlands 491.6 3.5

Belgium 413.2 2.9

Canada 389.6 2.7

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Commodity Composition of Trade

Manufactures comprise 69.8% of trade, with

agricultural and mining-related products making

up the balance.

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Composition of World Merchandise Exports

(billions of U.S. $)

Product Category Value in

2007

Share in

2007

Share in

1980

Agricultural Products $1,128 8.3% 14.7%

Mining Products $2,659 19.5% 27.7%

Manufactures $9,500 69.8% 53.9%

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Trade and the U.S.

The U.S. trades the most with our NAFTA

partner, Canada , followed by China, and then

Mexico

Top three trading (exports + imports) regions are

Asia, North America, and EU countries.

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U.S. Merchandise Trade by Area and Country, 2007

(millions of dollars and %)

Exports to Imports From

value share value share

Region or Country

European Union $242,244 24.5% $356,180 20.9%

Europe, non-EU 38,601 3.4% 54,999 2.8%

Canada 249,712 21.7% 320,323 16.3%

Mexico 135,962 11.8% 213,552 10.9%

Latin America (not

Mexico)

107,101 9.3% 134,826 6.9%

China 65,073 5.7% 321,685 16.3%

Japan 60,898 5.3% 146,037 7.4%

Other Asia 182,277 15.9% 250,840 12.7%

Middle East 43,646 3.8% 77,405 3.9%

Africa 22,966 2.0% 92,055 4.7%

Total 1,148,481 100.0% 1,967,853 100.0%

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Commodity Composition of U.S.

Trade

The U.S. tends to export capital goods and

industrial supplies.

The U.S. tends to import consumer goods and

industrial supplies.

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Commodity Composition of U.S. Trade, 2007

(billions of dollars and %)

Exports to Imports From

value share value share

Foods, feeds, beverages $84.3 7.3% $81.7 4.2%

Industrial supplies/materials 316.4 27.5% 639.4 32.5%

Capital goods (non-auto) 447.4 39.0% 444.5 22.6%

Automotive 121.0 10.5% 258.9 13.2%

Consumer goods 146.1 12.7% 478.5 24.3%

Other goods 33.3 2.9% 64.9 3.3%

Total 1,148.5 100.0% 1,967.9 100.0%

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Trade in Services

Over $3 trillion annually (2007).

About 20% of total trade (closer to 30% for

U.S.).

The industrialized countries also dominate.

Growing faster than world trade in merchandise

since the 1970s, since the major trading

countries’ economies are now more service

oriented.

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The Changing Degree on Economic

Interdependence

The relative importance of trade has grown for

most countries.

The relative importance of trade for all countries

together has also grown.

International Interdependence ratio (roughly

export of goods and services as a % of GDP)

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International Interdependence for Selected Countries and Groups of

Countries, 1970 – 2007 (exports as a % of GDP)

1970 2007

Industrialized Countries:

Australia 14% 21%

Belgium 52% 89%

Canada 23% 36%

France 16% 27%

Germany NA 47%

Italy 16% 29%

Japan 11% 16%

Netherlands 42% 75%

United Kingdom 23% 26%

United States 6% 11%

Developing Countries:

Argentina 9% 25%

Chile 15% 47%

China 3% 42%

Czech Republic NA 80%

India 4% 21%

Kenya 30% 26%

Mexico 6% 28%

Nigeria 8% 40%

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World trade in assets

World financial markets are becoming more integrated, i.e., countries become more financially interdependent (Table 2, Chapter 19)

World trade in assets (capital flows)

• Increase in banks’ international lending

• Trade in stocks and bonds, foreign direct investment (FDI)

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Chapter 19, Table 2