Transcript Economic interdependence: globalization

International Economics
By Robert J. Carbaugh
8th Edition
Chapter 1:
The International Economy
Copyright ©2002, South-Western College Publishing
Economic interdependence
Elements of interdependence
 Trade: goods, services, raw materials,
energy
 Finance: foreign debt, foreign investment,
exchange rates
 Business: multinational corporations, global
production
Carbaugh, Chap. 1
2
Economic interdependence
Forces driving globalization
 Technological change:
 Production
 Communication & information
 Transport
 Liberalization of trade & investment:
 Tariff, non-tariff barrier reductions
 Liberalized financial transactions
 International financial markets
Carbaugh, Chap. 1
3
Economic interdependence
Exports of goods and services as percent of
Gross Domestic Product, 1999
Country
Netherlands
Norway
Canada
Mexico
South Korea
United Kingdom
Germany
France
United States
Japan
Carbaugh, Chap. 1
Exports as percent of GDP
55%
41
39
31
31
29
25
25
12
10
4
Economic interdependence
Leading trading partners of the United States,
1998
Country
Canada
Japan
Mexico
China
Germany
United Kingdom
France
South Korea
Belgium
Netherlands
Carbaugh, Chap. 1
Value of US
exports ($ bill.)
$154
58
79
14
27
39
18
17
14
19
Value of US
imports ($ bill.)
$178
125
96
75
51
36
25
25
9
8
5
Economic interdependence
Common fallacies of international trade
 "Trade is zero-sum" - trade can bring
benefits to both partners
 "Imports bad, exports good" - if you buy
nothing from other countries, they have no
income to buy from you
 "Tariffs and quotas save jobs" - cutting
imports makes it harder to export, so other
jobs are lost
Carbaugh, Chap. 1
6
Economic interdependence
Interdependence: Impact
 Overall standard of living is higher
 Access to raw materials & energy not available
at home
 Access to goods & components made less
expensively elsewhere
 Access to financing and investment not
available at home
Carbaugh, Chap. 1
7
Economic interdependence
Interdependence: Impact (cont’d)
 Other impacts - good & bad
 Curtails inflationary pressures at home
 Limits domestic wage increases
 Makes economy vulnerable to external
disturbances
 Limits impact of domestic fiscal policy on
economy
Carbaugh, Chap. 1
8
Economic interdependence: case study
The US & the Asian economic crisis
 Macroeconomic effects during 1997-99
 US exports fell and trade balance widened
 US income grew quickly, increasing imports
 Contraction in Japan and East Asia cut US exports
 Rising value of the dollar made US exports
expensive and imports cheaper
 US economic growth remained strong with low
inflation
 Cheap imports and low input prices, along with
investment flows into the US, fueled strong growth
Carbaugh, Chap. 1
9
Economic interdependence: case study
The US & the Asian economic crisis
 Sectors of the US economy hurt by the crisis
 US agriculture hurt by falling exports and low
commodity prices
 US manufacturing sector hurt by falling exports and
cheaper import competition
 Commercial aircraft, steel, and textiles & apparel hurt
 US financial sector markets and institutions hurt by
losses on loans and investments in East Asia and other
emerging markets
Carbaugh, Chap. 1
10
Comparative advantage
Competitiveness & trade
 Main objective of any nation is to generate
high and rising standard of living
 No nation can efficiently make everything itself
 International trade allows countries to focus on
producing what they make efficiently
 Inefficient sectors will be squeezed out
 Sectors open to competition become more
efficient and productive
Carbaugh, Chap. 1
11
Comparative advantage
Comparative advantage means:
 If the relative cost of making two items is
different in two countries, each can gain by
specializing in the one it makes most cheaply each has a comparative advantage in that
product
 Even countries that make nothing cheaply can
benefit from specialization
Carbaugh, Chap. 1
12
Economic interdependence: globalization
Ups and downs of globalization
 Advantages
 Productivity increases faster when countries produce
according to comparative advantage
 Global competition and cheap imports keep prices low
and inflation at bay
 An open economy encourages technological
development and innovation with ideas from abroad
 Jobs in export industries pay more than those in
import-competing industries
 Free movement of capital gives the US access to
foreign investment and keeps interest rates low
Carbaugh, Chap. 1
13
Economic interdependence: globalization
Ups and downs of globalization
 Disadvantages
 Millions of US jobs lost to imports or production abroad;
those displaced find lower-paying jobs
 Millions of other Americans fear getting laid off
 Workers face pressure for wage concessions under
threat of having the jobs move abroad
 Service and white-collar jobs are joining blue-collar
ones in being vulnerable to moving overseas
 US workers can lose their competitiveness when firms
build state-of-the-art factories in low-wage countries,
making them as productive as plants in the US
Carbaugh, Chap. 1
14