Chapter 1: Introduction

Part 1: Questions for review.

No. Question Answer

1. What is the meaning of Globalization

globalization? What is its advantage
and disadvantage? Why is there an The increasing integration of economies around
anti- globalization movement? the world, particularly through trade and
financial flows, but also through the movement
of ideas and people, facilitated by renovations
through many periods, especially the
improvement in telecommunication and
transportation.

Benefits of globalization:

Labor force

- Wider labor pool and jobs lead to more

efficient utilization of labor.

Finance

- More efficient use of capital throughout

the world.

- Provide opportunities for higher returns

and risk diversification for individuals
and corporations.

Trade

- Lower prices for consumers and a greater

choice of goods.

- Greater competition for firms.

-> Greater economic growth for all nations

involved.
Drawbacks of globalization

Labor force

- Job losses and lower wages for less-

skilled labor in advanced nations.

- Poorer countries can be harmed (“brand

drain”) for their labor and physical &
intellectual resources.

Finance

- Lead to periodic international final crisis

(Such as IMF crises in Asia in 1997, the
US crises in 2007 affected to the entire
world in 2008 and 2009).

Trade

- Threads to local companies:

Multinational companies may drive local
companies out of business and are
sometimes more powerful than the
governments of the countries in which
they invest.

- Over- exploitation leads to the scarcity of

resources like petroleum, coal, mineral
water, etc. headed for a climate disaster.

Causes of anti-globalization movement

- World poverty and child labor in poor

countries.

- Job losses and lower wages in rich

countries.

- Environmental issues and climate chance

- Sacrificing human and environmental

well-being to the corporate profits of

2. What are some of the most
important current events that are
part of the general subject matter of
international economics? Why are
they important? How do they affect
the economic and political relations
between the United States and other
nations?
multinationals.
Current events that are related to
international economics:
1. Global economic growth will slow even
more in 2024 (due to high interest rates,
increased energy prices).
2. The FED is likely to start lowering its
benchmark interest rate in March and
make a total of five cuts in 2024.
3. Technological developments — such as
digitalization and automation — will play
a major role in driving inclusive and
long-term growth, will interact with
demographic changes, and may reshape
entire industries and sectors.
4. Deep structural imbalances in the United
States, slow growth in Europe and Japan,
and insufficient restructuring in the
transition economies of Central and
Eastern Europe reduce the volume of
international trade.
5. The deep poverty in many developing
countries and the widening international
inequalities pose serious moral, political,
and developmental problems for the
United States and other advanced
countries.
6. Resource scarcity, environmental
degradation, and climate change put at
risk continued growth in the United
States and other advanced countries and
sustainable development in developing
countries.
These events are crucial because:
- Influence policy decisions at both
 domestical and international levels in
one nation. For instance, changes in
global economic trends can lead to shifts
in monetary policy, fiscal policy, and
trade policy.

- Have a significant impact on corporate

strategy to make decisions about
production, investment, selling, etc.

- Affect global economic stability. For

instance, a financial crisis in one country
can spread to other countries through
the interconnectedness of the global
financial system.

These events can significantly affect the

economic and political relations between the
United States and other nations in several
ways.

1. Trade Policies: Economic events can

influence trade policies. For example, the
ongoing trade war between the U.S. and
China has led to increased tensions and
changes in trade relations.

2. Foreign Direct Investment (FDI): The

economic performance of the U.S. and its
policies can affect FDI. For instance, the
U.S.'s strong economic performance and
focus on supply-side measures have
been attributed to expanding its
productive capacity, thereby attracting
more FDI.

3. Global Economic Stability: The U.S.'s

economic resilience is an important
source of global economic strength. This
can influence the economic and political
relations between the U.S. and other
nations.

4. Climate Change Policies: Climate

 change is expected to have a huge
impact on world trade. This can lead to
new alliances and conflicts between the
U.S. and other nations.

5. Influence on Global Economic

Outlook: The U.S.'s economic
performance can influence the global
economic outlook. For example, the
enhanced global outlook has been partly
attributed to the strength of the U.S.
economy.

Relationship between the US & Vietnam

Comprehensive Strategic Partnership: The US

and Vietnam agreed on a “comprehensive
strategic partnership” agreement in 2023, that
includes corporation in economic, technology,
medical, cultural, etc.

3. How is international trade related to International trade plays a vital role in standard
the standard of living of the United of living in various nations, including the U.S,
States? of other large industrial large industrial nations, small industrial nations
nations? of small industrial nations? & developing nations in some ways:
of developing nations? For which of
these groups of nations is 1. The US: Trade is critical to America's
international trade most crucial? prosperity. They rely on relies on
international trade to obtain many
products that it does not produce and
some minerals of which it has no
deposits or dwindling domestic
reserves. More important quantitatively
for the nation’s standard of living are
the many products that could be
produced domestically but only at a
higher cost than abroad.

2. Large industrial nations (such as: the

UK, Japan, Germany): rely crucially on
international trade, it fuels economic
growth, supports jobs, raises living
standards, and provides consumers with
 affordable goods and services.

3. Small industrial nations (such as

Switzerland, Austria): Because these
nations have a few very specialized
resources and produce and export a
much smaller range of products and
import all the rest, international trade
allow these countries to utilize abundant
raw materials and gain benefits from
economies of scale.

4. Developing nations: Inter-trade

provides employment opportunities and
earnings to pay for the many products
that many of them cannot now produce
at home and for the advanced
technology that they need. Additionally,
it can help these countries attract foreign
direct investment, increase their gross
national income per capita, and improve
their standard of living.

-> International trade is crucial for all these

groups of nations as it helps raise living
standards, provide employment, and
enable consumers to enjoy a greater
variety of goods. However, it might be
most crucial for developing nations as it
can play a significant role in their
economic development and poverty
reduction.

4. How can we get a rough measure of 1. A rough measure of the interdependence

the interdependence of each nation of each nation with the rest of the world
with the rest of the world? What can be expressed as follows:
does the gravity model postulate? ( EX + ℑ)
Trade openness = ∗100 %
GDP

In which, EX stands for total exports of

one nation in the year, IM stands for
imports of one nation in the year. This
looks past the pure number of goods
 traded, but the amount that traded
goods makeup of the total economy.
Countries with a higher ratio are more
active in international trade and
therefore more interdependent.

2. In its simplest form, the gravity model

postulates that (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 to be smaller, the
greater the distance between the two
countries ( just like in Newton’s law of
gravity in physics). That is, the larger (and
the more equal in size) and the closer the
two countries are, the larger the volume
of trade between them is expected to be.

The formula of the gravity model can be

expressed as follows.
Y 1Y 2
T =C
D

In which:

T= the value of the international trade

between 2 countries (1 and 2)

C= a constant

Y = GDP

D = the distance between countries 1

and 2.

5. What does international trade theory International trade theory analyzes the basis
study? International trade policy? and the gains from trade while international
Why are they known as the trade policy examines the reasons for and the
microeconomic aspects of effects of trade restrictions.
international economics?
International trade theory and policies are the
microeconomic aspects of international
economics because they deal with individual

6. What is the balance of payments,
and what are foreign exchange
markets? What is meant by
adjustment in the balance of
payments? Why are these topics
known as the macroeconomic
aspects of international economics?
What is meant by open-economy
macroeconomics and international
finance
7. What is the purpose of economic
theory in general? Of international
economic theories and policies in
particular?
nations treated as single units and with the
(relative) price of individual commodities.
The balance of payments measures a nation’s
total receipts from and the total payments to the
rest of the world,
Foreign exchange markets are the institutional
framework for the exchange of one national
currency for others.
Adjustment in the balance of payments is the
operation and effects of the mechanisms for
correcting balance-of-payments disequilibria
(surplus and deficits)
Since the balance of payments deals with total
receipts and payments, as well as with
adjustment and other economic policies that
affect the level of national income and the
general price level of the nation as a whole, they
represent the macroeconomic aspects of
international economics. These are often
referred to as open-economy macroeconomics
or international finance.
The purpose of economic theory in general is to
explain and predict.
International economic theory examines the
basis for and the gains from trade, the reasons
for and the effects of trade restrictions, policies
directed at regulating the flows of international
payments and receipts, and the effects of these
policies on a nation’s welfare and on the welfare
of other nations.
International economic theory also examines the
effectiveness of macroeconomic policies under
different types of international monetary
arrangements or monetary systems.
8. What simplifying assumptions do we
make in studying international
economics? Why are these
assumptions usually justified?
9. Why does the study of international
economics usually begin with the
presentation of international trade
theory? Why must we discuss
theories before examining policies?
Which aspects of international
economics are more abstract?
Which are more applied in nature?
10. Which are the most important The most important of international
international economic challenges economic challenges facing the world today:
facing the world today? What are the
benefits and criticisms of Resource
International economic theory usually assumes a
two-nation, two-commodity, and two-factor
world. It further assumes no trade restrictions to
begin with perfect mobility of factors within the
nations but no international mobility, perfect
competition in all commodity and factor
markets, and no transportation costs.
These assumptions may seem unduly restrictive.
However, most of the conclusions reached on
the basis of these simplifying assumptions hold
even when they are relaxed to deal with a world
of more than two nations, two commodities, and
two factors and with a world where there is
international mobility of factors, imperfect
competition, transportation costs, and trade
restrictions.
 International economics begins with
trade theory because it provides the
foundation for understanding trade and
its impacts.
 Theories are discussed before policies
because they provide the conceptual
framework that guides policy analysis.
 The more abstract aspects of
international economics involve the
development and application of
economic models and theories.
 The more applied aspects involve
empirical analysis of trade data, policy
analysis, and the study of real-world
trade issues.
Scarcity, Environmental
globalization? Degradation, Climate Change, and
Unsustainable Development: Growth in rich
countries and development in poor countries
are now threatened by resource scarcity,
environmental degradation, and climate change.

Over the years, rapidly growing demand for

goods and services, particularly by China and
India, and supply rigidities in many producing
nations led to sharp increases in the price of
petroleum and other raw materials, as well as
food. With recession and slow growth as a result
of the recent global financial crisis, the demand
and prices of raw materials and food have
moderated or declined, but resource scarcity
persists and will surely be back in the future.
Also, in many leading emerging market
economies, protection of the environment takes
a backseat to the growth imperative.
Environmental pollution is dramatic in some
parts of China and India, and the Amazon Forest
is rapidly being destroyed. And we are
witnessing very dangerous climate changes that
may have increasingly dramatic effects on life on
the earth. These problems can be only
adequately analyzed and addressed by a joint
effort of all the sciences together, major
worldwide cooperation, and a change in world
governance.

Benefits of globalization:

Labor force

- Wider labor pool and jobs lead to more

efficient utilization of labor.

Finance

- More efficient use of capital throughout

the world.

- Provide opportunities for higher returns

and risk diversification for individuals

11. From your previous course(s) in
economics, do you recall the
concepts of demand, supply, and
equilibrium? Do you recall the
meaning of the elasticity of demand?
perfect competition? factor markets?
the production frontier? the law of
diminishing returns? the marginal
productivity theory? (If you do not
remember some of these concepts,
quickly review them from your
principles of economics text
or class notes.)
and corporations.
Trade
- Lower prices for consumers and a greater
choice of goods.
- Greater competition for firms.
- Specialize in the production of
commodities that can be produced
efficiently.
-> Greater economic growth for all nations
involved.
Criticism of globalization
- World poverty and child labor in poor
countries.
- Job losses and lower wages in rich
countries.
- Environmental issues and climate chance
- Sacrificing human and environmental
well-being to the corporate profits of
multinationals.
Concepts of demand:
- Quantity demanded: the amount of a
good that buyers are willing and able to
purchase.
- Law of demand: other things being
equal, the quantity demanded of a good
falls when the price of the good rises.
- The demand curve shows what happens
to the quantity demanded of a good
when its price varies, holding constant all
the other variables that influence buyers.
When one of these other variables
 changes, the demand curve shifts.

- Variables that can shift the demand

curve: income, price of related goods,
tastes, expectations, number of buyers.

Concepts of supply:

- Quantity supplied: the amount of a good

that sellers are willing and able to sell.

- Law of supply: other things being equal.

The quantity supplied of a good rises
when the price of a good rises.

- The supply curve shows what happens to

the quantity supplied of a good when its
price varies, holding constant all the
other variables that influence sellers.
When one of these other variables
changes, the supply curve shifts.

- Variables that can shift the supply curve:

input prices, technology, expectations,
number of sellers.

Equilibrium

- A situation in which various forces are

balance

- At the equilibrium price, the quantity of

the good that buyers are willing and able
to buy exactly balances the quantity that
sellers are willing and able to sell (the
quantity supplied equals the quantity
demanded)

The Price Elascity of Demand

- measures how much the quantity

demanded responds to a change in
price. Demand for a good is said to be
elastic if the quantity demanded
responds substantially to changes in the
 price. Demand is said to be inelastic if
the quantity demanded responds only
slightly to changes in the price

- Computing the Price Elasticity of Demand

Price elasticity of demand = % change in

quantity demaned/ % change in price.

The midpoint method:

Q2−Q1
Price elasticity of demand ¿ ¿
¿¿

Perfect competition

- Many buyers and many sellers in the

market

- Goods offered by the various sellers are

largely the same

- Firms can freely enter or exit the market.

"Factor market"

a term economists use for all of the resources

that businesses use to purchase, rent, or hire
what they need in order to produce goods or
services. Those needs are the factors of
production, which include raw materials, land,
labor, and capital.

Four components of markets

- The labor market

- Capital, money

- The land market.

- Entrepreneurship (the creators or the

leader of companies or organizations)

The production frontier (or the PPF)

- Illustrates the combinations of output

 that can be produced using available
resource and technology —in this case,
cars and computers—that the economy
can possibly produce. The economy can
produce any combination on or inside
the frontier. Points outside the frontier
are not feasible given the economy’s
resources. The slope of the production
possibilities frontier measures the
opportunity cost of a car in terms of
computers. This opportunity cost varies,
depending on how much of the two
goods the economy is producing.

- An outcome is said to be efficient if the

economy is getting all it can from the
scarce resources it has available. Points
on (rather than inside) the production
possibilities frontier represent efficient
levels of production. When the economy
is producing at such a point, say point A,
there is no way to produce more of one
good without producing less of the
other. Point D represents an inefficient
outcome. For some reason, perhaps
widespread unemployment, the
economy is producing less than it could
from the resources it has available: It is
producing only 300 cars and 1,000
computers. If the source of the
inefficiency is eliminated, the economy
can increase its production of both
goods. For example, if the economy
moves from point D to point A, its
production of cars increases from 300 to
600, and its production of computers
increases from 1,000 to 2,200.

The law of diminishing return

- Holds that as additional increments of

resources are added to a certain
purpose, the marginal benefit from those
 additional increments will decline. When
the government spends a certain
amount more on reducing crime, for
example, the original gains in reducing
crime could be relatively large. But
additional increases typically cause
relatively smaller reductions in crime, and
paying for enough police and security to
reduce crime to nothing at all would be
tremendously expensive.

Marginal productivity theory

- Aims to elaborate on how the input of

the production functions is valued. In
other words, it aims to define how much
should a worker be paid according to
their capacity to produce.

- Suggests that the amount paid to each

factor in the production process is equal
to the value of the extra output the
factor of production produces.

- For instance, if you have someone who

has 20 years of experience in covering
news about Politics, they will spend less
time writing an article than someone
who has a year of experience in the field.
This means that the first one has higher
productivity and generates more output
(articles) with the same time constraint.

12. From your previous course(s) in

economics, do you recall the
concepts of inflation, recession,
growth? Marginal propensity to
consume, multiplier, accelerator?
Monetary policy, budget deficit,
fiscal policy? (If you do not
remember some of these concepts,
quickly review them from your
principles of economics text or class
notes.)