Introduction to The World Economy

Class Instructor Week from First launch This Event

E-mail to Office Time
Master students, School of Foreign Studies Prof. Wei Long School of Economics, WHUT 2nd to 10th Oct.,2003 Sept.2009

longwei@whut.edu.cn Mon.10:00~12:00

 The World Is Flat

---Thomas Friedman, 2006

The Emerging Markets Century

---Antonie van Agtmael, 2006

1.Syllabus Introduction
Course Objectives: Build up a framework for understanding the world economic development; Provide a specific technique to describe economic activities; Get familiar with ongoing economic events and concepts, and Bridge the your expertise with professional translation.

Outline
TOPICS
Topic 1: Measuring the world economic development Topic 2: Classic Theories of International Economy Topic 3: The Competitive Advantage of Nations Topic 4: Free Trade Vs. protectionism Topic 5: Multilateralism Vs. Regionalism Topic 6: Globalization Topic 7: The Balance of Payment Topic 8: Exchange rate system Topic 9: Research Guide

NOTE
OECD: Economic Outlook

Lect. Diamond model WTO, case study EU, NAFTA, other FTA Greenhouse effect Video play:the crash Course paper assigned

Course paper report and submit

Textbook

Introduction to Global Economic Environment

2002

Further Reading Suggestion

1. Harvard Business Review (USA) 2. Economist (UK) 3. World Development Report (IBRD) 4. World Investment Report (UNCTAD) 5. http://www.mofcom.gov.cn/ 6. Market Access Report 2005 (MOC)

http://wss.mofcom.gov.cn/column/fyyd.s html
6

Examination
Classroom participation 40% Final course paper 60% -4~5 pages, -in standard format, -entitled with theoretical and practical importance, -reported and submitted Rating: A,B,C,D

Topic 1
Measuring the Worldwide Economic Development What is Economic Development What are the most concerned issues in economic development How is the world economy integrated What are commonly used for evaluating the quality of an economy What does an index imply

Topic 1
Measuring the World Economic Development What is Economic Development?
Economic growth:increase in social welfare or output Economic Development implies that extensive changes occur in a society in line with economic growth. These changes include: Input and output structure Living standard and income distribution Human development in health and education Nature and environment improvement

Topic 1
Measuring the World Economic Development Some Statements on Economic Development
Economic growth may be achieved smoothly or temporarily disturbed. Growth may or may not lead to economic development! Economic development in open economy is always influenced by the world business cycle. Government can iron out the economic fluctuation by adopting macroeconomic policies. The route of economic development in a country differs from others The causality of economic success underlies miracles in Asia

10

Economic Development
The process of developing and maintaining suitable economic, social and political environments, in which balanced growth may be realized, increasing the wealth of the community

Economic development is a process along which the economic growth could lead to structural optimization within economy, society and political environments. This highlights the fact that economic development has a series of steps that build on each other to create a desired outcome.

11

Topic 1
Measuring the World Economic Development What are the most concerned issues in economic development?
Speed of economic growth Employment Income distribution among groups , regions and generations External balance Human development The use of natural resources Quick Question/Answer: What issues do you care most and why?

12

Topic 1
Measuring the World Economic Development
What stimulate the world economy?
In economic side: Export/import Consumption(private and public) Investment In non-economic side: Technology progress Institutional reform Management Governments role Market competition Opportunities Instant Question/Answer: How will you consider the source of Chinese economic development?

13

Topic 1
Measuring the World Economic Development
What are commonly used for evaluating the quality of an economy?
GDP Growth rate Income per capita Income gap Ratio of IPRs ownership Purchasing Power Parity Industrial Structure Inflation Budget deficit Instant Question/Answer: What is you comment on rural laborers working in cities?

14

Topic 1
Measuring the World Economic Development
What does a particular index mean?
GDI per capita China was weighted by PPP, World Bank 2003(83rd ) Year 1975 1980 1985 1990 1995 2000 2003 Current PPP$ 230 410 820 1310 2450 3770 4980 GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. This indicator measures the total output of goods and services for final use produced by residents and non-residents, regardless of allocation to domestic and foreign claims, in relation to the size of the population. It differs from gross domestic product (GDP) by further adjusting for income received from abroad for labor and capital by residents, for similar payments to non-residents, and by incorporating various technical adjustments including those related to exchange rate changes over time.

15

Topic 1
Measuring the World Economic Development What does a particular index mean?
HDI (Human Development Index) Life expectancy at birth Adult Literacy rate Combined gross enrolment ratio for primary,secondary and tertiary schools GDP per capita . Water, sanitation and nutritional status World Bank: The World Development Report, 2008 OECD: Economic Outlook,2008 http://www.oecd.org/dataoecd/47/9/41107346.pdf The End

16

Topic 2 Basic Theories of International Trade

The relations between Supply and Price ,demand and price The reasons why countries trade with each other Understanding the difference between theoretical explanation and reality The trend toward liberalization

17

Topic 2 Basic Theories of International Trade

Supply and Price
Individually, supply refers to the willingness of producers to sell a given amount of goods or services for a particular price at a particular time. As a rule, the higher the price, the more the producers wish to sell, but the response to price depends on the characters of goods or services[elasticity]. In economics, we use graph[supply curve] to illustrate the relations between the price level and supply quantity

18

Topic 2 Basic Theories of International Trade

Supply curve P

19

Topic 2 Basic Theories of International Trade

Demand and Price
Individually,demand refers to the willingness of buyers to purchase a given amount of goods or services for a given price at a given time. Also as a rule, the lower the price, the greater the demand for goods or services. But he degree to which demand responses to price[elasticity] depends on the characters of consumers. In economics, a graphic representation is used to show the general trace of demand quantity and price.

20

Topic 2 Basic Theories of International Trade

Demand curve P

21

Topic 2 Basic Theories of International Trade

Market Price Determined P

Market Price is determined by the interact of supply and demand! This is how the world competition works.
22

Topic 2 Basic Theories of International Trade

Governments can the the supply and demand and in turn the market price. Government policies include: Fiscal Polices: taxation and budget expenditures Monetary policies: interest rate, foreign exchange rate In international trade, the world price is generally determined by the world supply and demand but The world market is not perfect competitive,either supply or demand may be manipulated by economic crocodiles. In addition, various governments influence the market by controlling imports or encouraging exports

23

Topic 2 Basic Theories of International Trade

Questions: Can you tell us some examples that the prices of some goods or services in the home market or overseas market were affected by their supply and demand, or the non-market power? Do you have some ideas about the Chinese government to make a change on RMB exchange? And How will this policy change your life and job expectation?

24

Topic 2 Basic Theories of International Trade

Abraham Lincoln: I do not know much about economics, But I do know this: if I buy a Good at home for a dollar, both the good and the dollar will stay at home. But if I buy the good from a foreigner, I will get the good and he will get the dollar! True but A Humor!
25

Topic 2 Basic Theories of International Trade

Mercantilism: a zero-sum game 15-17th century Wealth=holdings of gold Exports gold inflow wealth Imports gold outflow loss Then, the world trade would be a zero-sum game Oriented to protection This is totally a warlike philosophy!

26

Topic 2 Basic Theories of International Trade

Adam Smith: The big name and his theory The Wealth of Nations,1776 Why is a positive sum game? Absolute advantage theory Each nation will specialized in the production of absolute lower cost and export them, Meanwhile, nations should import other products which are at absolute advantages of other nations. Both sides can benefit from trade due to higher productivity wine cloth Trade pattern US 10 20 w UK 15 10 c
27

Topic 2 Basic Theories of International Trade

Supplemented by David Ricardo: The theory of comparative advantage What if wine cloth Trade pattern US 10 5 c UK 15 20 w Principle for international division is: More advantageous production and less disadvantageous production and export based on comparative advantage.

28

Topic 2 Basic Theories of International Trade

H-O Theory Eli Hechscher and Bertil Ohlin Interregional and International Trade,1933 Factor of production :resources required produce a commodity or service, usually in three categories: capital, labor and land. Factor endowment: total resources a country owned for product certain products or services.

29

Topic 2 Basic Theories of International Trade

why the world trade takes place: price difference Factor endowment [k]goods or services [L] goods or services [NR] goods or services [M]Nation 2 [L]Nation 3 Different proportions of factors in different nations will create price difference of factor price and final product price,then there comes a trade flow!
[H]Nation 1

30

Topic 2 Basic Theories of International Trade

The Trade Theory of Product Life Cycle Remond Vernon,1960 Products with innovation quality Four stages: introduction growth maturity decline

31

Topic 2 Basic Theories of International Trade

The Trade Theory of Product Life Cycle Sales Mature Growth Decline

Introduction 0 Time

32

Topic 2 Basic Theories of International Trade

The Trade Theory of Product Life Cycle Introduction: home market growth: begin to export maturity: mass export and invest locally decline: no market at all New round innovation may occur!

33

Topic 3
Free Trade Versus Protectionism

34

Free Trade
Big Points What is free trade Why some nations favor free trade Is free trade credible to all nations

35

What is free trade

Trading between/among nations

without barriers. Open , transparency, un-discriminatory. These barriers include: 1. Tariff barriers 2. Non-tariff barriers

36

Non-tariff Barriers
Quota Import license Voluntary export control Discriminatory public procurement Procedure TBT Antidumping
37

Why some nations favor free trade

Gains from trade: more consumption and production Greater variety of products to be

produced and consumed Structural upgrading System reform

38

Is free trade credible to all nations?

No. The rule is always taking the following

shape: Free Trade is forever the voice of the extremely developed economy. the case of UK,US--------

39

Protectionism
Inward looking idea for a government

to implement protective policies to provide safeguard for domestic industry and market. Traditional measures used: import duties; license; quota; Co-existing with WTO: Import duties(to be cut-off); TBT.
40

Why Protectionism
Protection of home infant industry Correct the market distortion To retaliate others

41

Organize a debating
Support Free trade Support protectionism

?
42

Classroom Work
Oral debating over the topic Translation

43

Topic 4
Multilateralism Vs. Regionalism

44

Main Points
A Movement against Isolation Economic Integration The major motives of trade

liberalization Vision for the future

45

1.A Movement against Isolation

No country can survive without
Examples: who were involved in Food supply through trade Crude oil Weapon Information Tour ------

depending on the rest of the world.

46

A Movement against Isolation

From Autarky to Open Economy Autarky means self-sufficient society
Open economy creates external resources and

market.Therefore, the efficient production and economy of scale can be reached.But The problem is that how the members on the earth would manage to achieve that goal-- The world should create a peaceful philosophy for a global open system!
47

The World wars gave lessons to Human

No longer for a colony system All countries should be organized under

an international recognition They should start with economic development in prior to all other objectives. All peoples are to be internationally minded.

48

2. Economic Integration
Early appeared in Benelux in 1930s. UN

was funded at the end of World War to lead the global integration politically.

49

2. Economic Integration
the IMF was then at the center of the

world monetary coordination.

Now is an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.
50

2. Economic Integration
At the same time, the World Bank established
a vital source of financial and technical assistance to developing countries around the world. We are not a bank in the common sense. We are made up of two unique development institutions owned by 184 member countriesthe International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). Each institution plays a different but supportive role in our mission of global poverty reduction and the improvement of living standards. The IBRD focuses on middle income and creditworthy poor countries, while IDA focuses on the poorest countries in the world. Together we provide low-interest loans, interest-free credit and grants to developing countries for education, health, infrastructure, communications and many other purposes.

to provide

51

2. Economic Integration
Later on, The GATT appeared to
deal with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.

52

2. Economic Integration
Economic UN

Economic UN

IMF

The World Bank GATT/WTO

53

Miss IMF in Thailand

Thanchanok Mekkeaw, 25, weighing 182 kg May 1, 2005

54

How the economic integration works

The integration Circles
FTA: Free Trade Area CU: Customs Union CM: Common Market EU: Economic Union EU CM CU FTA

Types of Integration Organization

55

How the economic integration works

Motives of Economic Integration

In term of scope:
Multilateral Stimulation: UN, IMF, WB, GATT/WTO Regional Stimulation: regional integration organizations:

EU: NAFTA: ASEAN: APEC: G-7: CEPA:

56

How the economic integration works

In term of factors Trade Liberalization: trade barriers reduce or remove. Capital Flow: TRIMS, capital market Free Mobility of Labor: Immigrants

57

3. Vision for the Future

A multi-pole world can be expected. Move From regionalism to

multilateralism. Go through the regionalism with nondiscriminatory policy. A lawful economic world is needed.

58

Reading suggestion
http://www.imf.org/ http://www.worldbank.org/ http://www.wto.org/ Purpose: Find something new to your understanding.
59

Topic 5
World Output and Trade Structure

60

Topic 5
Main purposes: Indicators and their measurement Illustration of world economic performance Learn to use economic logic

61

Topic 5
The recognition of World Output

By indicators:
Value added VA is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources. The origin of value added is determined by the International Standard Industrial Classification (ISIC).

62

By indicators:
final goods and services produced within a nation in a given year. GDP dollar estimates for all countries are derived from purchasing power parity (PPP) calculations rather than from conversions at official currency exchange rates. PPP estimates for OECD countries are quite reliable, PPP estimates for developing countries are often rough approximations. GDP - per capita: This entry shows GDP on a purchasing power parity basis divided by population

GDP:the gross domestic product (GDP) or value of all

Most of the GDP estimates are based on extrapolation of PPP numbers published by the UN International Comparison Program (UNICP) and by Professors Robert Summers and Alan Heston of the University of Pennsylvania and their colleagues.

63

Where is China
GDP GDP Per Capita

64

Where is China
HD

Human Development

is about much more than the rise or fall of national incomes. It is about creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests. People are the real wealth of nations. Development is thus about expanding the choices people have to lead lives that they value. And it is thus about much more than economic growth, which is only a means if a very important one of enlarging people s choices. Fundamental to enlarging these choices is building human capabilities the range of things that people can do or be in life. to lead long and healthy lives, to be knowledgeable, to have access to the resources needed for a decent standard of living and to be able to participate in the life of the community.
65

Where is China
HDI

Human Development Index is a composite of three basic components of human development: longevity, knowledge, and standard of living.It has been designed by UNDP to reflect the condition of an average person in a country and includes index values for 174 member countries. China HDI Rank:104 in 2003 see pdf
66

Trade Performance
Present Development

World total trade is US$18,648 billion of 2004 WTO:Despite the sharp rise in oil prices the volume of world
trade is likely to grow by 8.5% in real terms by the end of 2004, a significant improvement over 2003. While the price increases for oil and other commodities may dampen growth in trade and overall output in 2005, these effects are being outweighed in 2004 by vigorous trade expansion in many countries and stronger than expected.

67

Trade Growth
The statistics show that world merchandise

trade increased in nominal terms by 16% to $7.3 trillion in 2003. In real terms, merchandise trade grew by 4.5% in 2003, compared with 3% in 2002 and a decline in 2001. Trade in commercial services grew by 13% to $1.8 trillion in nominal terms.

Go PDF
68

International Cargo
Ships and ports

an important medium for trade and commerce for thousands of years. Todays maritime shipping industry carries 90 percent of the worlds 5.1 billion tons of international trade. Shipping is an efficient means of transport, and becoming more so. World freight payments as a fraction of total import value were 5.24% in 1997, down from 6.64% in 1980. Modern container ships carry a forty-foot container for less than 10 cents per mile. Bulk shipping: is economically efficient and competitive. Container shipping: has advanced technologically, but economic stability remains elusive. Segments of the shipping industry exhibit varying degrees of technological sophistication and economic efficiency. Today, more than 70% of general cargo moves in containers.
69

International Cargo
Dry bulk trades include iron ore, coal, grain, bauxite, sand and
gravel, and scrap metal. Liquid bulk or tanker cargos include crude oil and petroleum products, chemicals, liquefied natural gas (LNG), and vegetable oil. General cargo may be containerized, break-bulk (noncontainer packaging), or neo-bulk (automobiles, paper, lumber, etc.) The modern container was first used in U.S. domestic trades in the 1950s. By the 1970s, intermodal services were developed, integrating maritime and land-based modes (trains and truck) of moving containers.

70

Commercial Services
"modes of supply" cross-border supply:services supplied from one country to
another (e.g. international telephone calls); consumption abroad: consumers from one country making use of a service in another country (e.g. tourism); commercial presence: a company from one country setting up subsidiaries or branches to provide services in another country (e.g. a bank from one country setting up operations in another country); and movement of natural persons: individuals travelling from their own country to supply services in another (e.g. an actress or construction worker).

71

Commercial Services
services are the largest and most dynamic component of both

developed and developing country economies. Important in their own right, they also serve as crucial inputs into the production of most goods.

Their inclusion in the Uruguay Round of trade negotiations led

to the General Agreement on Trade in Services (GATS). Since January 2000, they have become the subject of multilateral trade negotiations.

72

Trade Structure
Composition Trade in Goods, services Interact with growth
GDP:C+I+G+(X+M) Trade dependence rate: (X+M)/GDP ELG model:Export Led Growth

Quality and Competitiveness

Industrial structure and trade structure: data for analysis First Industry,Secondary Industry and Tertiary Industry; Labor and NR intensive exports, Capital and Tech Intensive exports

This is for homework!

73

Reading Suggestion
1. The World Bank: World Economic

Report 2. UNCTAD: World Investment Report

74

Topic 6
The Balance of Payment

75

Topic 7 The Financial Crisis

THE Crash(1997)
Financial Stress and Economic Downturn(2008-)
http://www.imf.org/external/pubs/ft/weo/2008/02/pdf/c4.pdf

76

Topic 8 The Competitive Strategy

The Background National Advantage diamond as a system Industrial clustering

77

1. The Background Introduction

Why do some social groups,economic

institutions and nations advance and prosper?

Portrait of Queen Victoria (reigned 1837 - 1901) The sun never set on the British Empire because the sun sets in the West and the British Empire was in the East.

Great Britain in Victorian era

78

Why was Great Britain so powerful

The British Empire was at its height in the early 1900s, it included over 20 percent of the world's land area and more than 400 million people The single largest empire in the history of the world since time began. This remarkable achievement by a country half the size of France, was a tribute to the superb organizational skills of the White empire builders of that nation. The saying that the "sun never set on the British Empire" was very close to the truth: because of its geographic spread, some territory, somewhere, was always in the daylight hours.

79

The United States

Ever was a colony of UK
The British hit upon a novel use for its North American colonies; they presented ideal dumping grounds for convicted felons from England, and in 1718, the Transportation Act became law which subsidized the moving of convicted criminals from Britain to North America. Georgia, originally a refuge for debtors, became the 13th American colony in 1732, and the colony of New England then began to fill out and extend further into the interior.

The winner of the two world wars The unique super empire after the cold war
80

Japan: the first one outside of the white

The Kansei reforms (17891801). To Reject Tanuma's administration and

instituted a policy of retrenchment in the spirit of Yoshimune's reforms half a century earlier. To combat the frustration against Tanuma's regime, Sadanobu sought to restore morale, revive the economy, and reinvigorate the social system. Economic Myths(1955-1973)
Sustainable growth mountain exports
81

Nations in Success
ten nations with their national competitive

advantage

Germany:chemical,luxury cars and printing industry Switzerland:textile equipment, chocolate and pharmaceuticals Sweden:mining equipment and truck manufacturing Italy:fabric and home appliances UAS:computer software and movies Denmark: Korea: Singapore: Japan:consumer electronnics Great Britain:
82

Michael E.Porter: the authority of Competitive Studies

Competitive Strategy,1980 Competitive Advantage,1985 Competition in Global Industries,1986 The Competitive Advantage of Nations,1990 Michael E.Porter on Competition,1998 Think tank of Reagan Administration HBS professor

83

A Nations Success is often denoted by a particular industry; This industry is often taking a shape of clustering in which related groups of successful firms and industries emerged in one nation to gain leading position in the world market.

84

Ports Diamond
Nations are most likely to succeed in industries or industry segments where the national Diamond is most favorable Diamond refers to the determinants as a system---usually a reinforcing system

85

Four Broad Attributes

Factor Conditions
The nations position in factor of production necessary in a certain industry

Demand Conditions
Home demand for the industrys products and service

Related and Supporting Industries

The presence or absence of supplier industries and related industries that are internationally competitive

Firm Strategy,Structure and Rivalry

How companies are created,organized managed and rivalry nature

86

Two Variables
Chance
Chance events are developments outside the control of firms,such as a pure invention, breakthroughs in basic tech,wars,external political developments and major shifts in foreign market demand.

Government
It, at all levels, can improve and detract from national advantage. For example, antitrust policy affects the domestic rivalry.

87

Chance

Firm Strategy, Structure and Rivalry

Factor Condition

Demand Condition

Related and Supporting Industries

Government

88

Its Meaning to the World

A blueprint for the government policy to

enhance national competitive advantage A guide to companies to tap and extend its nations advantages in international competition A standard for all further discussion of global competition and sources of the new wealth of nations

89