International Economics

By Robert J. Carbaugh 10th Edition

Chapter 1: The International Economy and Globalization

Copyright 2005, Thomson/South-Western

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

Economic interdependence

Globalization
The process of greater interdependence between countries and their citizens Involves increased integration of product and resource markets
Trade Labor (immigration) Investment

Globalization is political, economic technological and cultural

Carbaugh, Chap. 1 3

Economic interdependence

Forces driving globalization

Technological change:
Production Communication & information Transport

Liberalization of trade & investment:

Tariff, non-tariff barrier reductions Liberalized financial transactions International financial markets
Carbaugh, Chap. 1 4

Economic interdependence

Waves of Globalization
1st wave: 1870-1914
Falling tariff barriers Improved transportation

2nd wave: 1945-1980

Agreements to lower barriers again Rich country trade specialization; growth of agglomeration economies Poor nations left behind

3rd wave: 1980-present

Growth of emerging markets International capital movements regain importance Less immigration, more foreign outsourcing
Carbaugh, Chap. 1 5

Economic interdependence

Globalization goes white collar

U.S. Company
Accenture Conseco Delta Air Lines service Fluor General Electric Intel Microsoft Philips Procter & Gamble

No. of Workers & Country

5,000 in the Philippines 1,700 in India 6,000 in India, Philippines

Type of Work Moving

Accounting, software, office work Insurance claim processing Airline reservations, customer

700 in Philippines 20,000 in India 3,000 in India 500 in China, India 700 in China 800 in Philippines, China

Architectural blueprints Finance, information technology Chip design, tech support Software design Consumer electronics, R&D Accounting, tech support

Source: Drawn from Is Your Job Next? Business Week, February 3, 2003, pp. 5060.

Carbaugh, Chap. 1

Economic interdependence

Trade in goods and services as percent of Gross Domestic Product, 2002

Country
Netherlands Canada Germany South Korea Norway France United Kingdom United States Japan
Carbaugh, Chap. 1

Exports (% of GDP)
53% 37 31 27 31 22 18 9 10

Imports (% of GDP)
46% 33 25 26 18 21 21 13 8
7

Economic interdependence

Openness of the US economy, 1890-2002

Source: U.S. Census Bureau, Foreign Trade Division, U.S. Trade in Goods and Services, 19602002 at http://www.census.gov/foreign-trade/statistics, and Economic Report of the President, 2002.

Carbaugh, Chap. 1

Economic interdependence

Leading trading partners of the United States, 2002

Country
Canada Mexico Japan China Germany France Italy Netherlands Venezuela Australia Belgium/Luxembourg
Carbaugh, Chap. 1

Value of US exports ($ bill.)

$160.8 97.5 51.4 22.1 26.6 19.3 10.1 18.3 4.5 13.1 13.8

Value of US imports ($ bill.)

$213.9 136.1 124.6 133.5 63.9 29.0 25.4 10.3 15.8 6.8 4.4
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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 International competition encourages efficiency
Carbaugh, Chap. 1 10

Economic interdependence

Interdependence: Impact (contd)

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

11

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
12

Carbaugh, Chap. 1

Economic interdependence

Common fallacies of international trade

"Trade is zero-sum" - trade can bring benefits to both partners "Imports bad, exports good" - if you buy nothing from other countries, they have no income to buy from you "Tariffs and quotas save jobs" - cutting imports makes it harder to export, so other jobs are lost
Carbaugh, Chap. 1 13

Comparative advantage

Competitiveness & trade

Competitiveness can be assessed at the level of a firm, an industry, or a whole nation 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 14

Economic interdependence: globalization

Ups and downs of globalization

Advantages
Productivity increases faster when countries produce according to comparative advantage Global competition and cheap imports keep prices low and inflation at bay An open economy encourages technological development and innovation with ideas from abroad Jobs in export industries pay more than those in import-competing industries Free movement of capital gives the US access to foreign investment and keeps interest rates low
Carbaugh, Chap. 1 15

Economic interdependence: globalization

Ups and downs of globalization

Disadvantages
Millions of US jobs lost to imports or production abroad; those displaced find lower-paying jobs Millions of other Americans fear getting laid off Workers face pressure for wage concessions under threat of having the jobs move abroad Service and white-collar jobs are joining blue-collar ones in being vulnerable to moving overseas US workers can lose their competitiveness when firms build state-of-the-art factories in low-wage countries, making them as productive as plants in the US
Carbaugh, Chap. 1 16