An Introduction to

International Economics
Dominick Salvatore
John Wiley & Sons, Inc.

Lecterer: M.A. Nguyen Thai Ha

Department: Business Administration
Office Hour:
Email: hant@uef.edu.vn
 CHAPTER 1: INTRODUCTION

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 Learning Objectives
1. Understand the meaning and importance of
globalization
2. Understand the relationship between international
trade and the nation’s standard of living
3. Describe the subject matter (trade and monetary
aspects) of international economics
4. Identify the major international economic problems
and challenges facing the United States and the
world today

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Learning Objective 1
The Nature of Globalization

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What is Globalization?

The world is toward an interdependent, integrated

global economic system

Globalization refers to the shift toward a more

integrated and interdependent world economy,
including two factors:
 Globalization of markets
 Globalization of production

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 Global Integration

Driving forces Restraining forces

• Technology • Culture
• Culture • Market differences
• Market needs • Costs
• Costs • National controls
• Free markets • Nationalism
• Economic integration • War
• Peace • Management
• Management values • Myopia
• Strategic intent • Organization
• Global strategy and • History
action • Domestic focus
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 Globalization of Markets

Globalization of markets refers to the merging of

historically distinct and separate national markets into
one huge global marketplace.
Instead, there is the “global market”
 Falling trade barriers make it easier to sell globally
 Consumers’ tastes and preferences are converging
 Firms promote the trend by offering the same basic
products worldwide

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 Globalization of Markets

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Globalization of Production
Globalization of production refers to the sourcing of
goods and services from locations around the globe to
take advantage of national differences in the cost and
quality of factors of production like land, labor, and
capital.
Company can
 Lower their overall cost structure
 Improve the quality or functionality of their
product offering

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 Drivers of Globalization
Two macro factors underlie the trend toward greater
globalization:
 Declining trade and investment barriers
 Since 1950, average tariffs have fallen significantly
and are now at about 4%
 Countries have opened their markets to FDI
 Technological change
 Microprocessors and telecommunications
 The Internet and World Wide Web
 Transportation technology

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 Implications for Business
 Lower barriers to trade & investment mean firms can
 View the world as their market
 Base production in the optimal location for that
activity
 Technological change means
 Lower transportation costs – help create global
markets
 Lower information and communication costs
 Low-cost global communications networks – help
create an electronic global marketplace
 Global communication networks and global media –
create a worldwide culture, and a global market for
consumer products
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 The Globalization Debate
 Supporters believe that increased trade and cross-border
in investment mean
 Lower prices for goods and services
 Greater economic growth
 Higher consumer income, and more jobs
 Critics worry that globalization will cause
 Job losses
 Environmental degradation
 The cultural imperialism of global media and MNEs
 Anti-globalization protesters now regularly show up at
most major meetings of global institutions
https://www.seattle.gov/cityarchives/exhibits-and-education/digital-
document-libraries/world-trade-organization-protests-in-seattle
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 Globalization, Jobs and Income
 Critics argue that falling barriers
to trade are destroying
manufacturing jobs in advanced
countries
 Supporters contend that the
benefits of this trend outweigh
the costs
 Countries will specialize in
what they do most efficiently
and trade for other goods –
and all countries will benefit
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 Globalization, Labor Policies and the
Environment
Critics
• Argue that firms avoid
costly effort to adhere to
labor and environmental
regulations by moving
production to countries
where such regulations
do not exist, or are not
enforced
Supporters
• Claim that tougher
environmental and labor
standards are associated
with economic process
– As countries get richer from
free trade, they implement
tougher environmental and
labor regulations

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Globalization & the World’s Poor
Critics Supporters
• Believe that if • Claim that the best way for
globalization was the poor nations to improve
beneficial, there should their situation is to
– Reduce barriers to trade and
not be a divergence investment
between rich and poor – Implement economic policies
nations based on free market economies
– Receive debt forgiveness for debts
incurred under totalitarian regimes

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Learning Objective 2
The relationship between international trade
and the nation’s standard of living

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What is International Economics?

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What is International Economics?

 International trade in goods and service

• Example: Sony Televisions

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What is International Economics?

 International trade in goods and service

 A key issue – It’s not just imports!
• Export of Boeing Aircraft
• Export of Microsoft Software

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What is International Economics?

 International trade in goods and service

 A key issue – It’s not just imports!
 It’s also not just for consumers!
• Trade in component parts
• Monitors for Dell computers

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What is International Economics?

 International trade in goods and service

 A key issue – It’s not just imports!
 It’s also not just for consumers!
 Service, not just goods
• Lloyd’s of London

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What is International Economics?

 InternationalValuetrade inMerchandise
of World goods and service
Exports (1995 = 100)
 A key issue – It’s not just imports!
140
 It’s120also not just for consumers!
 Service,
100 not just goods
 International
80 trade is expanding
60
40
20
0
1950 1960 1970 1980 1990 2000

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What is International Economics?

 International trade in goods and service

 International ownership of assets
 Examples:
• Foreign stock ownership
• Automobile assembly plants
• US government debt

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What is International Economics?

 International trade in goods and service

 International ownership of assets
 Currency exchange
 International transactions require conversions
between currencies
 Foreign exchange market

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What is International Economics?

 International trade in goods and service

 International ownership of assets
 Currency exchange
 International organizations
 World Trade Organization
 International Monetary Fund
 European Union

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 Standard of Living
 The International Economy generates
interdependence
 Sources of potential gain
o Access to items not available domestically
• Coffee
• Banana
• Tin
• Tungsten

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 Standard of Living

 The International Economy generates

interdependence
 Sources of potential gain
o Access to items not available domestically
o Access to lower cost products
o Access to greater product variety

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 Standard of Living

 The International Economy generates

interdependence
 Sources of potential gain
 Is it always a gain?
o Import competing sectors may experience production and
job losses
o This loss is at least partially (and potentially, completely)
offset by gains in the exporting sectors

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Learning Objective 3

The subjects
matter in
International
Economics

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Subjects in International Economics

International Trade Theory

o Analyzes the basis of and the gains from
international trade
o Focuses on microeconomic
aspects of the international
economy

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Subjects in International Economics

International Trade Theory

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

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Subjects in International Economics

International Trade Theory

International Trade Policy
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

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Subjects in International Economics

International Trade Theory

International Trade Policy
Balance of Payments
Foreign Exchange Market
– 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

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Subjects in International Economics

International Trade Theory

International Trade Policy
Balance of Payments
Foreign Exchange Market
Adjustments in the Balance of Payments
– Focuses on the relationship between internal and
external aspects of the economy
– Examines how disequilibria lead to macroeconomic
adjustment under difference international monetary
systems

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Learning Objective 4
Current International Economic Problems

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Current International Economic Problems

 Trade Protectionism in Industrial Countries

• What are the reasons for this protection?
• What are the implications of this protection for
the industrial countries?
• What are the implications of this protection for
the rest of the world?
• How do regional trade blocks (the NAFTA, the
European Union, etc.) complicate efforts to
reduce this protection?

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Current International Economic Problems

 Trade Protectionism in Industrial Countries

 Excessive Fluctuations and Large Disequilibria in
Exchange Rates
• Large exchange rate fluctuations may disrupt
international trade and harm economic growth
• What is the source of these fluctuations?
• How can the international financial system be reformed
to eliminate these fluctuations?

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Current International Economic Problems

 Trade Protectionism in Industrial Countries

 Excessive Fluctuations and Large Disequilibria in
Exchange Rates
 Financial Crisis in Emerging Market Economies
• The causes and consequences of a sudden collapse in
the value of a currency of an emerging economy

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Current International Economic Problems

 Trade Protectionism in Industrial Countries

 Excessive Fluctuations and Large Disequilibria in
Exchange Rates
 Financial Crisis in Emerging Market Economies
 High Structural Unemployment and Slow Growth
in Europe and Stagnation in Japan

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Current International Economic Problems

 Trade Protectionism in Industrial Countries

 Excessive Fluctuations and Large Disequilibria in
Exchange Rates
 Financial Crisis in Emerging Market Economies
 High Structural Unemployment and Slow Growth in
Europe and Stagnation in Japan
 Job Insecurity from Restructuring and Downsizing
in the United States

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Current International Economic Problems

 Trade Protectionism in Industrial Countries

 Excessive Fluctuations and Large Disequilibria in
Exchange Rates
 Financial Crisis in Emerging Market Economies
 High Structural Unemployment and Slow Growth in
Europe and Stagnation in Japan
 Job Insecurity from Restructuring and Downsizing
in the United States
 Restructuring Problems of Transition Economies
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Current International Economic Problems
 Trade Protectionism in Industrial Countries
 Excessive Fluctuations and Large Disequilibria in
Exchange Rates
 Financial Crisis in Emerging Market Economies
 High Structural Unemployment and Slow Growth in
Europe and Stagnation in Japan
 Job Insecurity from Restructuring and Downsizing
in the United States
 Restructuring Problems of Transition Economies
 Deep Poverty in Developing Countries
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