Chapter 1: Windows on the
World Economy
An Introduction to International
Economics: New Perspectives on the
World Economy
© Kenneth A. Reinert, Cambridge
University Press 2012
Introduction
Task we take up in this book—discovering
the nuances of globalization
Will try to explore the world economy and
globalization in as balanced a manner as
possible
Will help us develop informed views and opinions
© Kenneth A. Reinert, Cambridge
University Press 2012
Windows on the World Economy
Will explore four windows on the world
economy
International trade
International production
International finance
International development
© Kenneth A. Reinert, Cambridge
University Press 2012
International Trade
The exchange of goods (merchandise) and
services among the countries of the world.
Goods: tangible and storable (something you
can drop on your toe).
Services: intangible and non-storable
(something you cannot drop on your toe).
Trade in services accounts for approximately
one quarter of global trade.
© Kenneth A. Reinert, Cambridge
University Press 2012
Figure 1.1 Gross Domestic Product and Exports in the World Economy, 1980
to 2013 (1980=100). Source: World Bank, World Development Indicators
700
600
500
400
300
200
100
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20
Exports of goods and services GDP
© Kenneth A. Reinert, Cambridge
University Press 2012
International Production
Production of a product in multiple countries
Can take place through
Contracts
International licensing and franchising
Foreign direct investment (FDI) undertaken by
multinational enterprises (MNEs)
Involves firms based in one country owning at least a 10
percent of firms producing in another country
© Kenneth A. Reinert, Cambridge
University Press 2012
International Production
MNEs account for approximately one fourth of
world gross domestic product (GDP) or aggregate
output.
The sales of foreign affiliates of MNEs now exceed
the volume of world trade.
MNEs are involved in approximately three fourths
of all world trade.
Approximately one third of world trade takes place
within MNEs.
MNEs account for approximately three fourths of
worldwide civilian research and development.
© Kenneth A. Reinert, Cambridge
University Press 2012
Figure 1.2 Nominal FDI Inflows to Low, Middle and High Income Countries,
1980 to 2013. Source: World Bank, World Development Indicators.
3,000
2,500
2,000
1,500
US$ billion
1,000
500
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20
-500
Low income Middle income High income
© Kenneth A. Reinert, Cambridge
University Press 2012
International Finance
Refers to the exchange of assets among
countries
Individuals and firms around the world conduct
international transactions in
Currencies
Equities
Government bonds
Corporate bonds (commercial paper)
Real estate
Plays increasingly important role in the world
economy
© Kenneth A. Reinert, Cambridge
University Press 2012
Figure 1.3. Daily Foreign Exchange Market Turnover and Annualized
Multiple of Exports. Sources: Bank of International Settlements and World
Bank, World Development Indicators
6,000 120
5,000 100
4,000 80
US $ billions
multiple
3,000 60
2,000 40
1,000 20
0 0
1989 1992 1995 1998 2001 2004 2007 2010 2013
Turnover Multiple of Exports
© Kenneth A. Reinert, Cambridge
University Press 2012
International Development
Hoped that the processes of international
trade, production and finance will contribute
to improved levels of welfare and standards
of living throughout the world
Major issues involved
How we conceptualize levels of welfare or
standards of living
How the processes help to determine international
development
© Kenneth A. Reinert, Cambridge
University Press 2012
International Development
Measure of these differences in living
standards is the human development index
(HDI)
Per capita income
Average life expectancy
Average levels of education
© Kenneth A. Reinert, Cambridge
University Press 2012
Table 1.1. Measures of Living Standards (2010). Sources: World Bank, World
Development Indicators and United Nations Development Program
Country PPP GDP Life Mean Years Human
per capita Expectancy of Development
(U.S. (years) Schooling Index (0 to 1)
dollars)
Ethiopia 358 59 1.5 0.358
India 1,375 65 4.4 0.542
China 4,433 73 7.5 0.682
Costa Rica 7,774 79 8.3 0.742
South Korea 20,540 81 11.6 0.894
United 46,702 78 12.4 0.908
States
© Kenneth A. Reinert, Cambridge
University Press 2012
Connecting Windows
Each offers a view, but each has a
frame
Each offers some insight into the world
economy
An insight that needs to be supplemented
by one or more of the other windows
© Kenneth A. Reinert, Cambridge
University Press 2012
Figure 1.4. Connecting Windows
International
Trade
International International
Development Production
International
Finance
© Kenneth A. Reinert, Cambridge
University Press 2012
Analytical Elements
Countries
Sectors
Tasks
Firms
Factors of production
Currencies
Financial assets
© Kenneth A. Reinert, Cambridge
University Press 2012
