CHAPTER O N E

An Introduction to International Economics

Second Edition

Introduction
Dominick Salvatore
John Wiley & Sons, Inc.

Globalization
What is globalization?

The increasing integration of economies around the world, particularly through:

Goods and services flows Financial flows Movement of ideas and people

Globalization is facilitated by revolutions in telecommunications and transportation.

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Globalization
What is globalization?

Increasing international economic connections

Increasing role of international organizations in constraining domestic policies

Increasing cultural homogeneity Increased domestic economic growth caused by expanded international connections

Potential harm?
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Globalization
The Anti-Globalization movement

A loose coalition of groups opposed to globalization Concerns

Environmental damage Loss of domestic labor protections Erosion of domestic sovereignty

Standard of Living
The International Economy generates

interdependence

Economic growth in the United States spurs increased demand for imports Increased import demand by the United States generates economic growth in other countries

Standard of Living
The International Economy generates

interdependence Sources of potential gain:

Access to items not available domestically

Coffee Bananas Tin Tungsten

Access to lower cost products Access to greater product variety

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Standard of Living
Is it always a gain?

Import competing sectors may experience production and job losses This loss is at least partially (and potentially, completely) offset by gains in the exporting sectors

International Flow of Labor and Capital

People migrate for primarily economic

reasons, such as improvement of standard of living and to seek more opportunities for their children. Most nations impose restrictions on immigration to reduce the inflow of lowskilled people, while often encouraging the immigration of highly-skilled, technical workers. Migration is generally more regulated than the international flow of goods, services and capital.

International Flow of Labor and Capital

Capital flows more freely across borders than

people.
Financial capital moves to nations and

markets where interest rates are higher

Foreign direct investment in plants and firms

flows toward higher expected profits.

These capital movements lead to more

efficient use, and generally benefit both borrower and lender.

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Subjects in International Economics

International Trade Theory

Analyzes the basis of and the gains from international trade Focuses on the 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 Markets

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 Markets 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 different international monetary systems

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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 (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 Crises 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 Crises 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 Crises 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 Crises 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 Crises 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 Many Developing Countries
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International Institutions and the World Economy

World Trade Organization (WTO)

Authority over international trade in goods and services.

Deals with rules of trade between nations Negotiates and implements new trade agreements Adjudicates over trade disputes among members In charge of policing member countries adherence to all WTO agreements.

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International Institutions and the World Economy

World Trade Organization (WTO) World Bank

Internationally supported bank that provides loans to developing countries for development programs. Goal is to reduce poverty. Loans also made for post-conflict reconstruction, recovery from natural disasters, humanitarian emergencies, and post-conflict rehabilitation in needy developing and transition economies.
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International Institutions and the World Economy

World Trade Organization (WTO) World Bank

International Monetary Fund (IMF)

Ensures member nations follow set of agreedupon rules of conduct in international finance. Provides borrowing facilities for nations in temporary balance of payments difficulties. Oversees global financial system by following the macroeconomic principles of member countries. International lender of last resort.

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International Institutions and the World Economy

World Trade Organization (WTO) World Bank

International Monetary Fund (IMF)

United Nations (UN) International organization whose stated aims are to facilitate cooperation in international law, international security, economic development, social progress, and human rights issues. Founded in 1945 to replace League of Nations, to stop international wars and to provide a platform for peacefully resolving international disagreements.
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