CH 1

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.
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.
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
 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.

 1945-1980
 Dismantling of heavy trade protection led to
rapid increase in international trade.

 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
 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
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
FIGURE 1-1 Imports and Exports as a Percentage of GDP in
Various Countries, 2011 data.
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.
FIGURE 1-2 Growth of World Production and Trade, 2000-2011
(annual percentage changes).
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.
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.
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.
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.
Current International Economic Problems
 Deep financial and economic crisis
 Trade protectionism in advanced countries
 Excessive fluctuations and misalignments in

exchange rates and financial crises
16
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
17
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
Case Study 1-1: The Dell PCs, iPhones, and
iPads sold in the United States Are Anything
but American
Case Study 1-3: Is India’s Globalization
Harming the United States?
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.

Case Study 1-5: Major Net Exporters and Importers of
Capital
APPENDIX
APPENDIX
APPENDIX
APPENDIX
APPENDIX
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CHAPTER O N E

 Understand the relationship between international

 Describe the subject matter (trade and monetary

 Identify the major international economic problems

 A globalizing world provides opportunities

 Three periods of rapid globalization

up of new resource sources in “regions of

investments, increased production

 Three periods of rapid globalization

rapid increase in international trade.

 Three periods of rapid globalization

massive international capital movements

 Globalization is blamed for:

 Sources of potential gain for United States:

 Economic interdependence has been

 The International Flow of Labor and Capital

 In general, capital flows more freely that labor,

 International Trade Theory

 Foreign Exchange Markets

 Deep financial and economic crisis

 Trade protectionism in advanced countries

 Excessive fluctuations and misalignments in

 Deep poverty in many developing countries

 Resource scarcity, environmental degradation,

Part One (Chapters 2-7)

Part Two (Chapters 8-12)

Part Three (Chapters 13-15)

Part Four (Chapters 16-21)

FIGURE 1-3 Imports and Exports as a Percentage of U.S. GDP, 1965-2001.

 All rights reserved. Reproduction or translation of this work beyond

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