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