Lesson 1

18/09/2020
International Economics:
Session I: Introduction
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Lecturer: Phan Vũ Ngọc Lan, M.A

Email: lanpvn@uef.edu.vn
University of Economic and Finance
© AD 1
Grading Policy
 Grades will be based on
 the final exam (50%)
 Economic Event/Issue Assignment
 Individual written assignment = 20%
 Team based presentation + bonus: 20 %
 Attendence: In-class 10%
Textbook
 Dominick Salvatore, International Economics,
11th edition, John Wiley & Sons, 2013.
 International Economics, Paul Krugman, Maurice
Obstfeld
and Marc Melitz , 9th edition, 2013
Other Source:
© Palmatier
 Economic daily news papers. 2
Video clip
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International Economic Theories

and Policies
 Purpose of International Economic
Theories and Policies
The purpose of economic theory in general
is to predict and explain.
 The Subject Matter of International
Economics
International economics deals with the
economic and financial interdependence
among nations.
© Palmatier
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Subject Matter of International Economics

International Economics can be divided into
two major branches:
o International Trade:
International trade theory: Microeconomic
Why and What is traded? aspects
Trade flows…
International Trade policy
Economic integration
International factor movements
Immigration (movement of labor)
o International Finance
Financial flows between countries
Foreign direct investments Macroeconomic
Foreign Exchange markets aspects
Balance of payments © Palmatier
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open-economy macroeconomics
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What is International Economics?
 Main Topics 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
© Palmatier
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 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
© Palmatier
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 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
© Palmatier
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 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
© Palmatier
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Why Study International Economics?
 Importance of International Economics:

 International economics has become more important with
increasing globalization and its backlash
 Both international trade and international direct investments &
capital flows have increased dramatically during the past few
decades
 At the beginning of the 21st century, nations are more closely

linked through trade in goods and services, through flows of
money, and through investment in each others’ economies than
ever before
 Globalization has made citizens of all countries much more

aware than ever before of the worldwide economic forces that
influence their fortunes, and globalization is here to stay!
© Palmatier
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Why Study International Economics?
 Importance of International Economics:

 Give me an example of the
interdependency of todays world
economies.
 Some Popular Sayings
 "When America sneezed, Japan and Europe used to catch a
cold”
 "No nation is immune to economic events that occur in far

away places”
 "Surely there is no closed economy in the real-world, except

the world economy!”
© Palmatier
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CHAPTER O N E
1 International Economics
Eleventh Edition
Introduction
Dominick Salvatore
John Wiley & Sons, Inc.
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
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Learning Goals:
 Understand the meaning and importance of
globalization.
 Understand the relationship between international

trade and the nation’s standard of living.
 Describe the subject matter (trade and monetary

aspects) of international economics.
 Identify the major international economic problems

and challenges facing the U.S. and the world today.
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What is Globalization?
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What is Globalization?
 Globalization is generally defined as the
move to eliminate [remove] barriers to the
international movement of goods, services,
securities, and factors of production (land,
labor, and physical capital).
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The Globalization of the World

Economy
 We Live in a Global Economy
 The Globalization Challenge
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Case Study 1-1: The Dell PCs, iPhones, and

iPads sold in the United States Are Anything
but American
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The Globalization of the World Economy
 A globalizing world provides opportunities

and challenges to nations and people in the
world.
 Flow of goods and services
 Flow of labor and jobs
 Flow of financial instruments, currency
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 Three periods of rapid globalization

 1870-1914
 Resulted from industrial revolution, opening
up of new resource sources in “regions of
recent settlement”
 Millions of immigrants, vast amounts of
foreign investments, increased production
 Ended with breakout of World War I in 1914.
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 1945-1980
 Dismantling of heavy trade protection led to
rapid increase in international trade.
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 1980 to present
 Most pervasive and dramatic period of
globalization
 Fueled by improvements in telecommunications
and transportation
 Elimination of restrictions on capital flows led to
massive international capital movements
 Most countries in the world participated
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Globalization Challenge
 As all revolutions, however, today’s
globalization brings many benefits and
advantages but also has some disadvantages
or harmful side effects.
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 Anti-Globalization Movement
 Claims globalization sacrifices human and
environmental well-being to corporate profits
of mutinationals
 Globalization is blamed for:

 World poverty and child labor in poor countries
 Job losses and lower wages in rich countries
 Environmental pollution and climate change
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 a) Which special-interest groups, (e.g.

particular industries, consumers, workers, the
poor, etc.) might be opposed to policies that
promote globalization?
 b) What special-interest groups might favor
globalization?
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International Trade and the

Nation’s Standard of Living
 a) As an intellectual exercise, try to imagine
how a nation's standard of living would be
affected if each nation decided to isolate itself
from international trade and become self
sufficient.
 b) Now extend the exercise in part a) to
yourself as an individual. How would your
standard of living be affected if you were
completely self sufficient and using goods
that only you produced?
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International Trade and the Nation’s

Standard of Living
 Interdependence
 Economic relationship among nations
 Roughly measured as ratio of a nation’s
imports and exports of goods and services to
GDP
 Much larger for smaller industrial and
developing countries than for United States
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FIGURE 1-1 Imports and Exports as a Percentage of GDP in

Various Countries, 2011 data.
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International Trade and the Nation’s

Standard of Living
 Sources of potential gain for United States:

 Access to items with limited availability
domestically (such as coffee, bananas, cognac, tin,
tungsten, petroleum and copper)
 Access to lower cost products
 Access to greater product variety
 Economic interdependence has been

increasing over the years.
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 In general, the economic interdependence

among nations has been increasing over the
years as measured by the more rapid growth
of world trade than world production
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The economic interdependence among

nations has been increasing
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 For developing nations, exports provide

employment opportunities and earnings to
pay for the many products that they cannot
now produce at home and for the advanced
technology that they need.
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The International Flow of Goods,

Services, Labor, and Capital
 Interdependence in the world economy is
reflected in the flow of goods, services, labor,
and capital across national boundaries.
 Those flows are measures/indicators of
economic integration and globalization in the
world economy
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The International Flow of Goods, Services,

Labor and Capital
 Gravity Model
 Other things equal, the bilateral trade between
two countries is proportional, or at least
positively related, to the product of the two
countries’ GDPs, and the greater the distance
between the two countries, the smaller is their
bilateral trade.
 That is, the larger (and more equal in size) and

the closer two countries are, the larger the
volume of trade between them is expected to be.
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Gravity model
=
 T= the value of trade between Nation 1 and
Nation 2, as measured by exports plus
imports.
 Y1=GDP of Nation 1
 Y2 = GDP of Nation 2
 D = the distance between Nations 1 and 2
 C = a constant.
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Gravity model - Exercise

 Two nations share a border and the average
distance between the commercial centers of
the two nations is 200 miles. The GDP of the
two nations are Y1 = 300b and Y2 = 700b.
 a) Calculate the value of exports plus imports
between the two nations if C=0.1
 b) If the GDP of Nation 1 increases by 10%,
calculate the percentage change in the value
of trade between the two nations.
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Gravity model
 This model predicts that we would expect the
value of trade in goods and services to be
higher between large nations, given
geographical distance, and higher with
geographically close nations, given the size of
the nations.
 we would expect more trade between the
large neighboring economies of the U.S. and
Canada than between the U.S. and another
large but distant economy, like Russia.
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The International Flow of Goods, Services,

Labor and Capital
 The International Flow of Labor and Capital

 About 190 million people live in a country other
than where they were born.
 Migration is primarily for economic reasons,

although nations place many restrictions on
migration.
 In general, capital flows more freely that labor,

particularly financial capital.
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International Economic Theories and Policies
 International Trade Theory

 Analyzes the basis of and the gains from
international trade.
 International Trade Policy
 Examines the reasons for and the effects of
restrictions on international trade.
 Balance of Payments
 Measures a nation’s total receipts from and
total payments to rest of the world.
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International Economic Theories and Policies
 Foreign Exchange Markets

 The institutional framework for the exchange of
one national currency into another.
 Adjustments in the Balance of Payments
 Focuses on the relationship between internal and
external aspects of the economy of a nation, and
their interdependence with rest of the world
economy under different international monetary
systems.
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What are some of the major

international problems facing the
world today?
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Current International Economic Problems
 Deep financial and economic crisis
 Trade protectionism in advanced countries
 Excessive fluctuations and misalignments in

exchange rates and financial crises
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Current International Economic Problems,

Continued
 Structural imbalances in US, slow growth in
Europe and Japan, and insufficient restructuring
in transition economies
 Deep poverty in many developing countries
 Resource scarcity, environmental degradation,

climate change and sustainable development
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Organization and Methodology of the Text
Part One (Chapters 2-7)

 International Trade Theory
Part Two (Chapters 8-12)

 International Trade Policies
Part Three (Chapters 13-15)

 Balance of Payments, Foreign Exchange
Part Four (Chapters 16-21)

 Adjusting Balance of Payments Equilibria
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Case Study 1-3: Is India’s Globalization

Harming the United States?
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Case Study 1-4: Rising Importance of International

Trade to the United States
FIGURE 1-3 Imports and Exports as a Percentage of U.S. GDP, 1965-2001.

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Case Study 1-5: Major Net Exporters and Importers of

Capital
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APPENDIX
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APPENDIX
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APPENDIX
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APPENDIX
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APPENDIX
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 Copyright 2013 John Wiley & Sons, Inc.
 All rights reserved. Reproduction or translation of this work beyond

that permitted in section 117 of the 1976 United States Copyright Act
without express permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may
make back-up copies for his/her own use only and not for distribution
or resale. The Publisher assumes no responsibility for errors, omissions,
or damages caused by the use of these programs or from the use of the
information herein.
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18/09/2020

All Customers All Customers All All Resources

Lecturer: Phan Vũ Ngọc Lan, M.A

International Economic Theories

Subject Matter of International Economics

What is International Economics?

 Main Topics in International Economics:

 Focuses on the microeconomic aspects of the

What is International Economics?

 Main Topics in International Economics:

 Analyzes the implications for International

What is International Economics?

 Main Topics in International Economics:

What is International Economics?

 Main Topics in International Economics:

Why Study International Economics?

 Importance of International Economics:

 At the beginning of the 21st century, nations are more closely

 Globalization has made citizens of all countries much more

Why Study International Economics?

 Importance of International Economics:

 "No nation is immune to economic events that occur in far

 "Surely there is no closed economy in the real-world, except

 Understand the relationship between international

 Describe the subject matter (trade and monetary

 Identify the major international economic problems

The Globalization of the World

 The Globalization Challenge

Case Study 1-1: The Dell PCs, iPhones, and

The Globalization of the World Economy

 A globalizing world provides opportunities

The Globalization of the World Economy

 Three periods of rapid globalization

The Globalization of the World Economy

 Three periods of rapid globalization

The Globalization of the World Economy

 Three periods of rapid globalization

The Globalization of the World Economy

 Globalization is blamed for:

 a) Which special-interest groups, (e.g.

International Trade and the

International Trade and the Nation’s

FIGURE 1-1 Imports and Exports as a Percentage of GDP in

International Trade and the Nation’s

 Sources of potential gain for United States:

 Economic interdependence has been

 In general, the economic interdependence

The economic interdependence among

 For developing nations, exports provide

The International Flow of Goods,

The International Flow of Goods, Services,

 That is, the larger (and more equal in size) and

Gravity model - Exercise

The International Flow of Goods, Services,

 The International Flow of Labor and Capital

 Migration is primarily for economic reasons,

 In general, capital flows more freely that labor,

International Economic Theories and Policies

 International Trade Theory

International Economic Theories and Policies

 Foreign Exchange Markets

What are some of the major

Current International Economic Problems

 Deep financial and economic crisis