International Economics By Robert J. Carbaugh 7th Edition

1. International EconomicsBy Robert J. Carbaugh7th Edition Chapter 1: The international economy

2. Economic interdependence Elements of interdependence • Trade: goods, services, raw materials, energy • Finance: foreign debt, foreign investment, exchange rates • Business: multinational corporations, global production Carbaugh, Chap. 1

3. Economic interdependence Exports of goods and services as percent of Gross Domestic Product, 1997 Country Exports as percent of GDP Netherlands 55% Norway 41 Canada 39 Mexico 31 South Korea 31 United Kingdom 29 Germany 25 France 25 United States 12 Japan 10 Carbaugh, Chap. 1

4. Economic interdependence Leading trading partners of the United States, 1997 Value of US Value of US Country exports ($ bill.) imports ($ bill.) Canada $133 $160 Japan 68 118 Mexico 55 76 United Kingdom 31 31 South Korea 27 18 China (incl. Hong Kong) 25 64 Germany 23 40 Singapore 17 21 Belgium/Luxembourg 13 7 Carbaugh, Chap. 1

5. Economic interdependence Interdependence: Impact • Overall 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 Carbaugh, Chap. 1

6. Economic interdependence Interdependence: Impact (cont’d) • Other impacts - good & bad • Curtails inflationary pressures at home • Limits domestic wage increases • Makes economy vulnerable to external disturbances • Limits impact of domestic fiscal policy on economy Carbaugh, Chap. 1

7. Who could be hurt by the Asian crisis of 1997-98: US creditors & investors in Asia US exporters to Asia US firms that compete with Asian imports US workers who compete with Asian workers US firms that sell imports from Asia US multinationals wanting markets in Asia US firms manufacturing in Asia US firms using components from Asia US consumers of imports Economic interdependence: case study The US & the Asian economic crisis Carbaugh, Chap. 1

8. Economic interdependence: case study The US & the Asian economic crisis • Potential macroeconomic effects of the Asian crisis • US trade balance hurt as exports to the region suffer and imports become cheaper • US economic growth might suffer as a result of Asia’s economic decline Carbaugh, Chap. 1

9. Comparative advantage Competitiveness & trade • 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 Carbaugh, Chap. 1

10. Comparative advantage 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 Carbaugh, Chap. 1