An Introduction to International Economics Second Edition

1. CHAPTER O N E An Introduction to International EconomicsSecond Edition Introduction Dominick Salvatore John Wiley & Sons, Inc.

2. Globalization • What is globalization? • The increasing integration of economies around the world, particularly through: • Goods and services flows • Financial flows • Movement of ideas and people • Globalization is facilitated by revolutions in telecommunications and transportation.

3. Globalization • What is globalization? • Increasing international economic connections • Increasing role of international organizations in constraining domestic policies • Increasing cultural homogeneity • Increased domestic economic growth caused by expanded international connections • Potential harm?

4. Globalization • The Anti-Globalization movement • A loose coalition of groups opposed to globalization • Concerns • Environmental damage • Loss of domestic labor protections • Erosion of domestic sovereignty

5. Standard of Living • The International Economy generates interdependence • Economic growth in the United States spurs increased demand for imports • Increased import demand by the United States generates economic growth in other countries

6. Standard of Living • The International Economy generates interdependence • Sources of potential gain: • Access to items not available domestically • Coffee • Bananas • Tin • Tungsten • Access to lower cost products • Access to greater product variety

7. Standard of Living • Is it always a gain? • Import competing sectors may experience production and job losses • This loss is at least partially (and potentially, completely) offset by gains in the exporting sectors

8. International Flow of Labor and Capital • People migrate for primarily economic reasons, such as improvement of standard of living and to seek more opportunities for their children. • Most nations impose restrictions on immigration to reduce the inflow of low-skilled people, while often encouraging the immigration of highly-skilled, technical workers. • Migration is generally more regulated than the international flow of goods, services and capital.

9. International Flow of Labor and Capital • Capital flows more freely across borders than people. • Financial capital moves to nations and markets where interest rates are higher • Foreign direct investment in plants and firms flows toward higher expected profits. • These capital movements lead to more efficient use, and generally benefit both borrower and lender.

10. Subjects in International Economics • International Trade Theory • Analyzes the basis of and the gains from international trade • Focuses on the microeconomic aspects of the international economy

11. Subjects in International Economics • International Trade Theory • International Trade Policy • Examines the reasons for and the effects of restrictions on international trade • Analyzes the implications for International Trade Theory of such restrictions

12. Subjects in International Economics • International Trade Theory • International Trade Policy • Balance of Payments • A summary statement of all the international transactions of the residents of a nation with the rest of the world during a particular period of time, usually a year. • Provides a statistical summary of the size of international trade and international asset ownership for a country

13. Subjects in International Economics • International Trade Theory • International Trade Policy • Balance of Payments • Foreign Exchange Markets • The institutional framework for the exchange of one national currency into another • Part of the study of International Finance (or Open-Economy Macroeconomics) that is concerned with the macroeconomic implications of the International Economy

14. Subjects in International Economics • International Trade Theory • International Trade Policy • Balance of Payments • Foreign Exchange Markets • Adjustments in the Balance of Payments • Focuses on the relationship between internal and external aspects of the economy • Examines how disequilibria lead to macroeconomic adjustment under difference international monetary systems

15. Current International Economic Problems • Trade Protectionism in Industrial Countries • What are the reasons for this protection? • What are the implications of this protection for the industrial countries? • What are the implications of this protection for the rest of the world? • How do regional trade blocks (NAFTA, the European Union, etc.) complicate efforts to reduce this protection?

16. Current International Economic Problems • Trade Protectionism in Industrial Countries • Excessive Fluctuations and Large Disequilibria in Exchange Rates • Large exchange rate fluctuations may disrupt international trade and harm economic growth • What is the source of these fluctuations? • How can the international financial system be reformed to eliminate these fluctuations?

17. Current International Economic Problems • Trade Protectionism in Industrial Countries • Excessive Fluctuations and Large Disequilibria in Exchange Rates • Financial Crises in Emerging Market Economies • The causes and consequences of a sudden collapse in the value of a currency of an emerging economy

18. Current International Economic Problems • Trade Protectionism in Industrial Countries • Excessive Fluctuations and Large Disequilibria in Exchange Rates • Financial Crises in Emerging Market Economies • High Structural Unemployment and Slow Growth in Europe and Stagnation in Japan

19. Current International Economic Problems • Trade Protectionism in Industrial Countries • Excessive Fluctuations and Large Disequilibria in Exchange Rates • Financial Crises in Emerging Market Economies • High Structural Unemployment and Slow Growth in Europe and Stagnation in Japan • Job Insecurity from Restructuring and Downsizing in the United States

20. Current International Economic Problems • Trade Protectionism in Industrial Countries • Excessive Fluctuations and Large Disequilibria in Exchange Rates • Financial Crises in Emerging Market Economies • High Structural Unemployment and Slow Growth in Europe and Stagnation in Japan • Job Insecurity from Restructuring and Downsizing in the United States • Restructuring Problems of Transition Economies

21. Current International Economic Problems • Trade Protectionism in Industrial Countries • Excessive Fluctuations and Large Disequilibria in Exchange Rates • Financial Crises in Emerging Market Economies • High Structural Unemployment and Slow Growth in Europe and Stagnation in Japan • Job Insecurity from Restructuring and Downsizing in the United States • Restructuring Problems of Transition Economies • Deep Poverty in Many Developing Countries

22. International Institutions and the World Economy • World Trade Organization (WTO) • Authority over international trade in goods and services. • Deals with rules of trade between nations • Negotiates and implements new trade agreements • Adjudicates over trade disputes among members • In charge of policing member countries’ adherence to all WTO agreements.

23. International Institutions and the World Economy • World Trade Organization (WTO) • World Bank • Internationally supported bank that provides loans to developing countries for development programs. • Goal is to reduce poverty. • Loans also made for post-conflict reconstruction, recovery from natural disasters, humanitarian emergencies, and post-conflict rehabilitation in needy developing and transition economies.

24. International Institutions and the World Economy • World Trade Organization (WTO) • World Bank • International Monetary Fund (IMF) • Ensures member nations follow set of agreed-upon rules of conduct in international finance. • Provides borrowing facilities for nations in temporary balance of payments difficulties. • Oversees global financial system by following the macroeconomic principles of member countries. • International lender of last resort.

25. International Institutions and the World Economy • World Trade Organization (WTO) • World Bank • International Monetary Fund (IMF) • United Nations (UN) • International organization whose stated aims are to facilitate cooperation in international law, international security, economic development, social progress, and human rights issues. • Founded in 1945 to replace League of Nations, to stop international wars and to provide a platform for peacefully resolving international disagreements.

26. Organization of the Text • Part One: Chapters 2-4 • International Trade Theory • Part Two: Chapters 5-6 • International Trade Policies • Part Three: Chapters 7-9 • International Asset Ownership • Part Four: Chapters 10-12 • Balance of Payments and Exchange Rate Markets • Part Five: Chapters 13-14 • Open-Economy Macroeconomics • Part Six: Chapters 15-16 • The International Economy in Operation