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CHAPTER O N E
An Introduction to International EconomicsSecond Edition
IntroductionDominick SalvatoreJohn Wiley & Sons, Inc.
1
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.2
Globalization What is globalization?
Increasing international economic connections
Increasing role of international organizations in constraining domestic policiesIncreasing cultural homogeneity Increased domestic economic growth caused by expanded international connections
Potential harm?3
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
4
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
5
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 variety6
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
7
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 lowskilled 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.
8
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.9
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
10
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
11
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 country12
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 Economy13
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 different international monetary systems
14
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?
15
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?
16
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
17
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
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 Job Insecurity from Restructuring and Downsizing in the United States
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 Restructuring Problems of Transition Economies
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 Deep Poverty in Many Developing Countries21
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.
22
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.23
International Institutions and the World Economy World Trade Organization (WTO) World Bank
International Monetary Fund (IMF)
Ensures member nations follow set of agreedupon 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.
24
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.25