Transcript Document

The World Economy:
Trade and Finance
by
Yarbrough & Yarbrough
PowerPoint Presentation Slides prepared by
Kerk Phillips
Brigham Young University
Copyright © 2003 South-Western/Thomson Learning
Chapter One
Introduction to The
World Economy
Copyright © 2003 South-Western/Thomson Learning
Chapter One Outline
1. Introduction
2. Why study international
economics?
3. International interdependence
4. Economic significance of political
boundaries
5. Studying international economics
3
Introduction
• International trade
– World Trade Organization (WTO)
• Emerged as an international forum for trade
discussions and conflict resolution.
– North American Free Trade Agreement
(NAFTA)
• Trade bloc created in 1995 for USA, Canada,
and Mexico.
– Trade conflicts & upheavals continue
• U.S./Japan (photo supplies)
• U.S./European union (bananas)
• Asian financial crisis
4
Introduction
• Macroeconomic dynamics
– The world’s stock markets have grown
rapidly.
• New technologies allow fast transfer of funds.
– Currencies
• Japanese yen weakened against the dollar,
• Most EU countries adopted common currency
— the Euro.
– Global economic interdependence increased.
• Nations must be able to withstand external
shocks.
5
Why Study International
Economics?
• More important than ever before.
– You will be able to fully comprehend
statements about international economic
policies, evaluate influences on specific
industries or companies, and analyze the
linkages between your country and other
nations of the world.
– Most top macroeconomic policy makers of
the industrialized world have
See Table 1.1
economic backgrounds.
6
International Interdependence
• Demonstrated by effects of oil price
increases during the 1970s.
– In the early 1980s, oil prices declined in
response to a policy-induced recession in the
developed world.
• Decline in prices increased the debt problems of
developing-country oil exporters (Mexico).
• This generated financial uncertainty and a loss
of export markets for the developed world.
– Threatened solvency of several major U.S. banks.
7
International Interdependence
• In the 1980s, U.S. steel producers sought
barriers against cheaper imports.
– U.S. automakers had to pay more for steel
parts.
• Their competitiveness declined — they lost
market share to imports.
– Detroit requested protection against imports.
– Voluntary export restraints agreed upon with foreign
car companies.
– This increased trend for international relocation of
much of the world’s auto production.
8
International Interdependence
• Difficult today to distinguish a product’s
“nationality.”
– John Deere tractors built in
Japan…Komatsu builds in Illinois.
– The Ford Escort is assembled in Germany.
– Toyotas are built in Kentucky
9
International Interdependence
• One of the most important recent trends is
the increasing involvement of developing
countries in the world economy.
– Many nations attempted to isolate themselves
for many years (China, Brazil, and India)
– This trend produces new patterns of
international interdependence.
• For example, manufacturers produce in countries
with lower wages.
10
International Interdependence
• Interdependence in financial markets.
– Has grown faster than that in markets for
oil, steel, and cars.
– 24-hour global trading in stocks, currencies,
and bonds.
• Over $1.5 trillion in currencies traded daily.
See Figure
1.2
11
Figure 1.2: Daily Turnover in Foreign
Exchange Markets, 1986-2001
$ Trillions
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0
1986
1989
1992
1995
1998
2001
Year
12
International Interdependence
• Global financial interdependence yields
opportunities for international investment.
– Lenders fund projects regardless of the projects’
locations.
– This growth of global trade results in declines in
costs of transportation and communication.
13
Figure 1.3: Transport and Communication Cost,
1930-1990 (Index 1930 = 100)
Index
(1930 = 100)
120
Average ocean freight
and port charges
per short ton of cargo
Average
air-transport cost
per passenger mile
100
80
Cost of a
3-minute
phone call
New York
to London
60
40
20
0
1930 1940 1950 1960 1970 1980 1990
Year
14
International Interdependence
• Political Implications
– Policy makers must now understand that their
decisions in antitrust matters, regulations, and
taxes have international ramifications.
• Firms will make profits in countries with favorable
tax laws.
• Changes in monetary policy or exchange rates in
one country might affect many other countries.
– Germany’s traditionally tight monetary policy.
– Russian, Mexican, and Southeast Asian financial crises.
15
International Interdependence
• Symptoms of international
interdependence.
– Rapid expansion of international trade.
• Since 1950, trade has grown twice as fast as
production.
• Global trade improves individuals’ potential wellbeing by increasing the quantity of goods and
services available to consume.
16
Figure 1.4a: Growth in World Merchandise
Trade & Output, 1950-2000 (Percent)
Trade
12
Output
10
8
6
4
2
1950-63
1963-73
1973-90
1990-2000
17
Figure 1.5b: Growth in World Merchandise
Trade & Output, 1950-2000 (Percent)
12
10
8
6
4
2
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
World merchandise exports
World merchandise output
18
International Interdependence
– Countries continue to differ significantly in the
extent to which they engage in trade.
• Large countries like the U.S. tend to engage in less trade
(as % of production), than do smaller ones.
– Reason? Their domestic markets can efficiently satisfy many
needs.
– Figure 1.7 shows the marked increase in the U.S.’s global trade
in recent years (although it remains relatively small when
compared to our GDP).
19
Figure 1.5: Exports and Imports of Goods
and Services, 2000 (Percent of GDP)
20
Figure 1.6: U.S. Merchandise Imports and
Exports, 1946-2000 ($ Billions)
21
International Interdependence
• Global trade tends to cluster
with certain trading
partners.
– One reason…lower
transportation costs.
22
Figure 1.7: Regional Flows of
Merchandise Trade
23
International Interdependence
• Second symptom of this
global interdependence:
– Synchronized changes in
macroeconomic activity
across countries.
• Tendency toward
simultaneous booms and
recessions.
• Cautionary note: perhaps
mere coincidence produced
these patterns.
See
Figure 1.8
24
Figure 1.8 Industrial Production in the
Major Industrialized Economies, 1975-1999
25
International Interdependence
• Most economic transactions between
individuals or companies from different
U.S. states face a smaller set of barriers
than those between a U.S. resident or
company and that of a foreign country.
• National boundaries also help to define
each country’s economic policy.
26
Economic Significance of Political
Boundaries
• Major popular misconception about
global trade policy is that policy choices
pit the interests of one country against
those of the other.
– In fact, trade policy choices rarely take this
form.
• Trade policy primarily affects the distribution
of income within each country.
– If U.S. steel producers win protection against Korean
producers, then U.S. steel consumers (i.e., auto
makers or car buyers) pay higher prices.
27
Studying International Economics
• International economics usually divided
into two parts:
– 1) Theory of international trade: Expends
microeconomic analysis to global questions.
– Example: goods and services available to consumers
are maximized when each country specializes in
producing those goods that it can produce relatively
efficiently.
• Significant political pressure for protectionist
policies: Restrict global trade to “protect”
domestic producers from foreign competition.
28
Studying International Economics
– 2) International finance, balance-of-payments
theory, or open-economy macroeconomics.
• Applies macroeconomic analysis to aggregate
international problems.
• Major concerns:
– Level of employment and output
– Changes in price level, balance of payments, and
exchange rates (relative prices of different national
currencies).
– Interaction of international goals and influences with
domestic ones in determining a nation’s macroeconomic
performance and policy.
29
Studying International Economics
– Open economy
• One that engages in international transactions.
– Closed economy
• Country that engages in no international
transactions.
30
Studying International Economics
– Positive models (or analysis) describe the
way the world economy works in a
simplified way.
• Focus on explanation and prediction
– “If event X happens, then event Y will follow.”
– However, there may be disagreement about the way
the world works.
• One individual may think that “if event X happens, then
event Z will follow.”
• Analysts usually resolve such disagreements by conducting
further empirical research.
31
Studying International Economics
– Normative analysis depends on our
judgements about what is and isn’t
desirable.
• If we think that trade is desirable because it
maximizes the quantity of goods and services
available to consumers, we might conclude that
Japanese policy makers should pursue open
trade policies in agriculture, even though their
farmers strongly oppose them.
32
Key Terms in Chapter 1
• International interdependence
• International investment
• Economic significance of political
boundaries
• Theory of international trade
• Protectionist policies
• Open-economy macroeconomics
33
Key Terms in Chapter 1
• Exchange rates
• Open economy
• Closed economy
• Positive analysis
• Normative analysis
34