© 2011 Cengage Learning. All Rights Reserved.
May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected
website for classroom use 1
The International Economy
and Globalization
2
I O N
O D UCT
INT R
R 1:
A PT E
CH
Nguyen Thanh Thuy, MIB
OBJECTIVES
In this chapter, look for the answers to these questions:
• What is International Economics about?
• What are some of the major arguments for and against an open
trading system?
• What significance does growing economic interdependence have
for a country like the United States?
• When is international trade an opportunity for workers? When is it
a threat to workers?
INTRODUCTION
• The study of international economics has never
been as important as it is now.
• At the beginning of the 21st century, nations are
more closely linked through trade in goods and
services, through flows of money, and through
investment in each others’ economies than ever
before.
• Figure 1-1 shows that international trade for the
United States has roughly tripled in importance
compared with the U.S. economy as a whole.
Introduction
Figure 1-1: Exports and Imports as a Percentage of U.S. National Income
Figure 1-1
Introduction
Figure 1-2: Exports and Imports as Percentages of National Income in 1994
1. What is International Economics about?
• International economics deals with economic
interactions that occur between independent nations.
• The role of governments in regulating international trade and
investment is substantial.
• Analytically, international markets allow governments to
discriminate against a subgroup of companies.
• Governments also control the supply of currency.
• There are several issues that recur throughout the
study of international economics.
1.1. The gains from Trade
• Many people are skeptical about importing
goods that a country could produce for itself.
• When countries sell goods to one another, all
countries benefit.
• Trade and income distribution
• International trade might hurt some groups
within nations.
• Trade, technology, and wages of high and
low-skilled workers.
1.2. The Pattern of Trade (who sells what to whom?)
• Climate and resources determine the trade
pattern of several goods.
• There are two types of trade:
• Inter-industry trade refers to two-way trade in
a given sector, depends on differences across
countries.
• Intra-industry trade refers to one-way trade in
a sector, depends on market size and occurs
among similar countries.
1.3. How much Trade?
• Many governments are trying to shield certain
industries from international competition.
• This has created the debate dealing with the
costs and benefits of protection relative to free
trade.
• Advanced countries’ policies engage in
industrial targeting.
• Developing countries’ policies promote
industrialization:
• Import substitution versus export promotion
industrialization.
1.4. The Balance of Trade
Is it good to run a trade surplus and bad to
run a trade deficit?
• Some countries run large trade surpluses.
• For example, in 1998 both China and South Korea ran
trade surpluses of about $40 billion each.
United States Balance of Trade
2019-2023
13
Vietnam Balance of Trade
2014-2023
14
1.5. Exchange Rate Determination
The role of changing exchange rates is at the
center of international economics.
1.6. The International Capital Market
There are risks associated with international
capital markets:
• Currency depreciation
• National default
2. International Economics: Trade and Money
• International trade analysis focuses primarily on the real
transactions in the international economy.
• These transactions involve a physical movement of goods or a
tangible commitment of economic resources.
• Example: The conflict between the United States and Europe over
Europe’s subsidized exports of agricultural products
• International monetary analysis focuses on the monetary
side of the international economy.
• That is, financial transactions such as foreign purchases of U.S.
dollars.
• Example: The dispute over whether the foreign exchange value of the
dollar should be allowed to float freely or be stabilized by government
action
2. International Economics: Trade and Money
• International trade issues
• Part I: International Trade Theory
• Part II: International Trade Policy
• International monetary issues
• Part III: Exchange Rates and Open-Economy
Macroeconomics
• Part IV: International Macroeconomic Policy
The International Economy
• High degree of economic interdependence
• No nation exists in economic isolation
• All aspects of a nation’s economy are linked to
the economies of its trading partners
• Steps toward international cooperation
• Mutually advantageous for trading nations
• Specialization, efficiencies of large scale production
• Wider variety of products at lower cost
• Protectionist pressures
19
Globalization of Economic Activity
• Globalization
• Greater interdependence
• Countries and their citizens
• International flows
• Goods and services
• People
• Investments in equipment, factories, stocks, bonds
• Non-economic elements
• Culture and the environment
20
Globalization of Economic Activity
• What forces are driving globalization?
• Technological change
• Multilateral trade negotiations
• Widespread liberalization of trade and
investment transactions
• Development of international financial markets
21
TABLE 1.1 Manufacturing an HP Pavilion, ZD8000 laptop computer
22
TABLE 1.2 Globalization goes white collar
23
TABLE 1.3 The fruits of free trade: a global fruit basket
24
The United States as an Open Economy
• Trade patterns
• Openness
• Rough measure of the importance of international
trade in a nation’s economy
• Nation’s exports and imports as a percentage of its
gross domestic product (GDP)
(Exports + Imports )
Openness =
GDP
25
The United States as an Open Economy
• Openness
• Large countries – lower measures of openness
• Less reliant on international trade
• Many of their companies can attain an optimal
production size without having to export to foreign
nations
• Small countries – higher measures of openness
26
TABLE 1.4 Exports & imports of goods & services, percentage of GDP, 2007
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use 27
The United States as an Open Economy
• Openness of the U.S. economy, 1890 to 2007
• Less open to international trade, 1890 to 1950
• Relatively high openness in the late 1800s
• Rise in world trade: technological improvements in
transportation and communications
• Two world wars + Great Depression of the 1930s
• Reduced dependence on trade
• National security reasons
• Protect home industries from import competition
28
The United States as an Open Economy
• Openness of the U.S. economy, 1890 to 2007
• After World War II - negotiated reductions in
trade barriers
• Rising world trade
• Technological improvements in shipping and
communications
• U.S. trade
• In 1890, mostly raw materials and agricultural
products
• Today, manufactured goods and services
29
FIGURE 1.1 Openness of the U.S. economy, 1890–2007
The figure shows that for the United States the importance of international trade has
increased by more than 50 percent from 1890 to the early 2000s.
30
TABLE 1.5 Leading trade partners of the U.S., 2008
31
The United States as an Open Economy
• Labor and Capital
• Movements in factors of production
• Measure of economic interdependence
• Labor mobility in U.S.
• 1900, 14% of U.S. population: foreign born
• 1920s to 1960s
• Sharply curtailed immigration
• Foreign-born U.S. population: 6%
32
The United States as an Open Economy
• Labor mobility in U.S.
• By 2009
• 12% the U.S. population was foreign born
• Foreigners: 14% percent of the labor force
• Half – from Latin America
• One quarter – Asians
• By 2021
• 14.3% the U.S. population was foreign born
• One in seven U.S. residents — the highest
percentage in 112 years.
33
The United States as an Open Economy
• Capital flows to the U.S.
• Foreign ownership of U.S. financial assets
• Risen since the 1960s
• 1970s, OPEC - investments in U.S. financial
markets
• 1980s, major flows of investment funds to U.S.
• By late 1980s
• U.S. - consuming more than it produced
• Net borrower from the rest of the world
34
The United States as an Open Economy
• International banking
• Average daily turnover in foreign-exchange
market
• Today: almost $2 trillion
• 1986: $205 billion
• London - the largest center for foreign-
exchange trading
35
The United States as an Open Economy
• Commercial banking
• U.S. banks
• Worldwide branch networks, 1960s and 1970s
• Loans, payments, foreign-exchange trading
• Foreign banks
• Increased presence in U.S., 1980s and 1990s
• Today: 250 foreign banks
36
Why Is Globalization Important?
• Law of comparative advantage
• Citizens of each nation can gain
• Spend more of their time and resources doing
those things in which they have a relative
advantage
• If a good or service can be obtained more
economically through trade
• Trade for it instead of producing it domestically
• How the available resources can be used to
obtain each good at the lowest possible cost
37
Why Is Globalization Important?
• Open economies
• Produce a larger joint output
• Competition - essential to both innovation and
efficient production
• International competition
• Domestic producers - strong incentive to improve
the quality of their products
• Weakens monopolies
38
FIGURE 1.2 Global competition lowers inflation
World imports relative to U.S. consumption have doubled over the past four decades, making more of
what consumers purchase subject to increased competition inherent in international trade. This added
competition tends to hold down the cost of goods and services as seen for the period 1987 to 2003.
39
Why Is Globalization Important?
• Open economies
• More competition
• More firm turnover
• Improvements for the industry
• Economic growth rates - close relation to:
• Openness to trade
• Education
• Communications infrastructure
40
FIGURE 1.3 Tariff barriers versus economic growth
The figure shows the weighted average tariff rate and per-capita growth rate in GDP for 23 nations
in 2002. According to the figure, there is evidence of an inverse relationship between the level of
tariff barriers and the economic growth of nations.
41
GLOBALIZATION The Global Recession of 2007 – 2009
• Immediate cause of the global economic crisis
• Collapse of the U.S. housing market
• Resulting surge in mortgage loan defaults
• Undermined the financial institutions that
originated and invested in them
• Creditors and uninsured depositors
• Pulled their funds and cashed out of securities
issued by risky institutions
• Invested in U.S. Treasury securities
42
GLOBALIZATION The Global Recession of 2007 – 2009
• Roots of the problem
• Lack of fear - booming housing market of 2006
• Mortgage-backed securities
• Booming housing market
• Government pressured banks to serve poor
borrowers and poor regions of the country
• Community Reinvestment Act
43
GLOBALIZATION The Global Recession of 2007 – 2009
• The crisis goes global
• Europe
• Exposure to defaulted mortgages in the U.S.
• Emerging economies
• Lacked resources
• Extremely poor countries
• Decrease in foreign aid
• China - depressed its export markets
• Crisis in confidence
44
GLOBALIZATION The Global Recession of 2007 – 2009
• Combating a crisis in confidence
• Pump liquidity into troubled financial
institutions
• Provide increased or unlimited deposit
insurance
• Central banks
• Coordinated interest-rate reductions
• Purchased commercial paper & money market
instruments
45
GLOBALIZATION The Global Recession of 2007 – 2009
• Combating a crisis in confidence
• Governments
• Large fiscal stimulus packages
• Tax cuts
• Increased government spending
• International Monetary Fund
• Financial aid to emerging countries
46
Common Fallacies of International Trade
• “Trade is a zero-sum activity”
• Both partners gain from trade
• “Imports reduce employment and act as a drag
on the economy, while exports promote
growth and employment”
• Failure to consider the link between imports
and exports
47
Common Fallacies of International Trade
• “Tariffs, quotas, and other import restrictions
will save jobs and promote a higher level of
employment”
• Failure to recognize that a reduction in imports
does not occur in isolation
• When we restrict foreigners from selling to us,
we are also restricting their ability to obtain the
dollars needed to buy from us.
48
Does Free Trade Apply to Cigarettes?
• Free trade
• Increases competition, lowers prices
• Makes better products available to consumers
• Higher consumption
• Free cigarettes trade
• Higher consumption
• More smoking, disease, and death
49
Does Free Trade Apply to Cigarettes?
• Globally - 4 million people die each year from:
• Lung cancer, emphysema
• Other smoking-related diseases
• Antismoking activists
• Cigarettes are “bads”
• Require their own set of regulations
• Benefits of free trade do not apply to cigarettes
50
Does Free Trade Apply to Cigarettes?
• World Health Organization
• Some nations
• Support provisions to emphasize antismoking
measures over free-trade rules
• United States
• Promoted freer trade in cigarettes
• Challenged rules imposed to aid local cigarette
makers
• Current trade rules
• Countries can enact measures to protect the health
and safety of their citizens
51
Is International Trade an Opportunity or a
Threat to Workers?
• International trade benefits many workers
• Cheaper consumption goods
• Employers – better technologies and
equipment
• Workers - more productive
• Exports - generates jobs and income for
domestic workers
52
Is International Trade an Opportunity or a
Threat to Workers?
• Not all workers gain from international trade
• Cheap imports
• Rising competition – companies risk going out of
business
• When business shut down, people lose jobs
• Threatening to workers in the import-competing
sectors because many of them must learn new job
skills to find new employment
• Lobby to restrict imports
53
Is International Trade an Opportunity or a
Threat to Workers?
• International trade
• Wages increase
• Workers whose skills are scarce
• Wages decrease
• Workers who face increased competition
• Jobs lost in one industry
• Replaced by jobs gained in another industry
• The long-run effect of trade barriers
• Does not increase total domestic employment
54
Backlash Against Globalization
• Proponents of free trade and globalization
• Countries prosper
• New ideas and technology flow freely around
the world
• Productivity growth
• Increasing living standards
• Lower consumer prices
• Increased variety of goods and services
55
Backlash Against Globalization
• Critics of free trade and globalization
• Benefit large corporations
• Rather than average citizens
• Unions
• Unfettered trade permits unfair competition from
countries that lack labor standards.
• Human rights activists
• World Bank and International Monetary Fund
support governments that:
• Allow sweatshops
• Pursue policies that bail out governmental officials at
the expense of local economies
56
TABLE 1.6 Advantages and disadvantages of globalization
Advantages Disadvantages
•Productivity increases faster when countries •Millions of Americans have lost jobs
produce goods and services in which they because of imports or shifts in production
have a comparative advantage. Living abroad. Most find new jobs that pay less.
standards can increase more rapidly. •Millions of other Americans fear getting
•Global competition and cheap imports keep laid off, especially at those firms operating
a constraint on prices, so inflation is less likely in import-competing industries.
to disrupt economic growth. •Workers face demands of wage
•An open economy promotes technological concessions from their employers, which
development and innovation, with fresh ideas often threaten to export jobs abroad if
from abroad. wage concessions are not accepted.
•Jobs in export industries tend to pay about •Besides blue-collar jobs, service and
15 percent more than jobs in import- white-collar jobs are increasingly
competing industries. vulnerable to operations being sent
•Unfettered capital movements provide the overseas.
United States access to foreign investment •American employees can lose their
and maintain low interest rates. competitiveness when companies build
state-of-the-art factories in low-wage
countries, making them as productive as
those in the United States.
57
Terrorism jolts the Global Economy
• Continuing terrorism
• Companies – increased security costs
• Heightened border inspections
• Slow shipments of cargo
• Companies - stock more inventory
• Tighter immigration policies
• Reduce inflows of skilled and blue-collar laborers
• Greater preoccupation with political risk
• Companies – fewer investments
58
Terrorism jolts the Global Economy
• International trade
• Weapon in the war against terrorism in the
long-run
• Increasing living standards in impoverished
regions
• Eliminating an important cause of war and
terror
59
