Chapter 1

1. Chapter 1 The United States in a Global Economy

2. Learning Objectives • Explain how economists measure international economic integration. • List the three types of evidence to support the idea that trade supports economic growth. • Discuss the differences in international economic integration at the end of the nineteenth century and the current era. • Describe the major themes of international economics.

3. Introduction: International Economic Integration • International integration of national economies has brought many benefits to many nations • Technological innovation • Less expensive products • Greater investments in scarce resource regions

4. Elements of International Economic Integration • Today’s major economies are more integrated than they’ve been at any time in history - Instantaneous communications - Modern transportation - Relatively open trading systems • This allows most goods to move across boundaries without major obstacles and low relative costs

5. Elements of International Economic Integration (cont.) There are four criteria or measures for judging the degree of integration: • Trade flows • Capital flows • People flows • Similarity of prices in separate markets

6. The Growth of World Trade • Since the end of World War II, world trade has grown much faster than world output • In 1950, total world exports were estimated to be 5.5% of world gross domestic product (GDP) • By 2005, total world exports were 20.5% of world GDP

7. Trade to GDP ratio • The trade to GDP ratio is the ratio of trade to GDP Trade to GDP ratio = (Exports +Imports)/GDP • The ratio does not reveal a country’s trade policies or define its barriers to trade

8. FIGURE 1.1 Trade-to-GDP Ratios for Six Countries, 1913-2010

9. Capital and Labor Mobility • Factor movements are indicators of economic integration • As national economies become more interdependent, labor and capital generally move more easily across international borders

10. Capital and Labor Mobility (cont.) • Labor is less mobile internationally than it was in 1900 • Capital flows are harder to measure

11. Capital and Labor Mobility (cont.) Two types of capital flows: • flows of financial capital representing paper assets such as stocks, bonds, currencies, and bank accounts, and • flows of capital representing physical assets such as real estate, factories, and businesses - foreign direct investment (FDI).

12. Capital and Labor Mobility (cont.) When comparing international capital flows today to a century ago, two points to keep in mind: • Savings and investment are highly correlated • Technology improvements increase capital flows

13. Capital and Labor Mobility (cont.) Important quality differences in capital flows today: • Many more financial instruments available • Role of foreign exchange transactions • Costs of foreign transactions has fallen significantly (transaction costs)

14. Features of Contemporary International Economic Relations • There are three features of contemporary international economic relations: • Deeper integration (tariffs and quotas) • Multilateral organizations • Regional trade agreements

15. Features of Contemporary International Economic Relations Deeper integration (tariffs and quotas) Two trends the second half of 20th Century: • Lower trade barriers exposed most countries with domestic policies as obstacles to international trade • Labels such as “Made in China” or “Made in the USA” are less and less meaningful

16. Features of Contemporary International Economic Relations Shallow integration • reduction of tariffs and the elimination of quotas Deep integration • negotiations over domestic policies that impact international • more contentious and harder to accomplish

17. Features of Contemporary International Economic Relations Multilateral organizations • International Monetary Fund (IMF) • World Bank • General Agreement on Tariffs and Trade (GATT) • United Nations (UN) • World Trade Organization (WTO) (grew out of the GATT) • Host of smaller organizations

18. Features of Contemporary International Economic Relations Regional trade agreements (RTAs) • North American Free Trade Agreement (NAFTA) • European Union (EU) • Mercado Común del Sur (MERCOSUR) • Asia Pacific Economic Cooperation (APEC) • More than 330 have been recorded by the World Trade Organization

19. Trade and Economic Growth Economists remain convinced the benefits of trade outweigh the costs pointing to three kinds of evidence: • Casual empirical evidence of historical experience • Evidence based on economic models and deductive reasoning • Evidence from statistical comparisons of countries While none of these is conclusive by itself, together they provide

20. Twelve Themes in International Economics • The Gains from Trade and New Trade Theory • Wages, Jobs and Protection • Trade Deficits • Regional Trade Agreements • The Resolution of Trade Conflicts • The Role of International Institutions

21. Twelve Themes in International Economics (cont.) • Exchange Rates and the Macroeconomy • Financial Crisis and Global Contagion • Capital Flows and the Debt of Developing Countries • Latin America and the World Economy • Export-Led Growth in East Asia • The Integration of the BRICs into the World Economy