Transcript Lecture 2 - Patrick Crowley

ECON5335 - International Economics
Chapter 2
Introduction to the World
Economy
What is international economics about?
Gains from trade
Explaining patterns of trade
The effects of government policies
on trade
International finance topics
International trade versus international finance
Profile of the World Economy
2
International economics is about how nations interact through
trade of goods and services, through flows of money and
through investment.
International economics is an old subject, but it continues to
grow in importance as countries become tied to the
international economy.
Nations are more closely linked through trade in goods and
services, through flows of money, and through investment than
ever before.
In the popular media, this phenomena is known as
“globalization”
4
International trade as a fraction of the national
economy has tripled for the US in the past
40 years.
Compared to the US, other countries are even more
tied to international trade.
What is happening here with the recent economic
downturn? What are the longer term trends going to
be?
5
6
Better to look at X and M in terms of size of the
economy. Replotting this:
10
Several ideas underlie the gains from trade
1. When a buyer and a seller engage in a voluntary
transaction, both receive something that they want
and both can be made better off.
Norwegian consumers could buy oranges through
international trade that they otherwise would have a
difficult time producing.
The producer of the oranges receives income that it can
use to buy the things that it desires.
11
2. How could a country that is the most (least) efficient producer
of everything gain from trade?
With a finite amount of resources, countries can use those resources to
produce what they are most productive at (compared to their other
production choices), then trade those products for goods and services
that they want to consume.
Countries can specialize in production, while consuming many goods
and services through trade.
12
3. Trade is predicted to benefit a country by making it more
efficient when it exports goods which use abundant resources
and imports goods which use scarce resources.
4. When countries specialize, they may also be more efficient due
to large scale production.
5. Countries may also gain by trading current resources for future
resources (lending
and borrowing).
13
Trade is predicted to benefit countries as a whole in
several ways, but trade may harm particular groups
within a country.
International trade can adversely affect the owners of
resources that are used intensively in industries that
compete with imports.
Trade may therefore have effects on the distribution of
income within a country.
Conflicts about trade should occur between groups within
countries rather than between countries.
14
Differences in climate and resources can explain why Brazil
exports coffee and Australia exports iron ore.
But why does Japan export automobiles, while the US exports
aircraft?
Differences in labor productivity may explain why some
countries export certain products.
How relative supplies of capital, labor and land are used in the
production of different goods may also explain why some
countries export certain products.
15
Policy makers affect the amount of trade through
tariffs: a tax on imports or exports,
quotas: a quantity restriction on imports or exports,
export subsidies: a payment to producers that export,
or through other regulations (e.g., product specifications)
that exclude foreign products from the market, but still allow domestic
products.
What are the costs and benefits of these policies?
16
Economists design models that try to measure the effects of
different trade policies.
If a government must restrict trade, which policy should it use?
If a government must restrict trade, how much should it restrict
trade?
If a government restricts trade, what are the costs if foreign
governments respond likewise?
17
Governments measure the value of exports and imports, as well
as the value of international financial capital that flows into and
out of their countries.
Related to these two measures is the measure of official
settlements balance, or the balance of payments: the balance of
funds that central banks use for official international payments.
All three values are measured in the government’s national
income accounts.
18
Besides international financial capital flows and the official
settlements balance, exchange rates are also an important
financial issue for most governments.
Exchange rates measure how much domestic currency can be
exchanged for foreign currency.
They also affect how much goods that are denominated in foreign
currency (imports) cost.
And they affect how much goods denominated in domestic currency
(exports) cost in foreign markets.
How are exchange rates determined?
Partially a choice of government of country concerned as there
are different exchange rate regimes
19
International trade focuses on transactions
of real goods and services across nations.
These transactions usually involve a physical movement
of goods or a commitment of tangible resources like
labor services.
International finance focuses on financial or monetary
transactions across nations.
For example, purchases of US dollars or financial assets
by Europeans.
20
In addition there are the institutional aspects of
international economics
e.g. WTO, IMF, World Bank, BIS and
supranational institutions
Also regional integration fosters new
cooperation between countries
e.g. NAFTA, EU, ASEAN, Mercosur
Also business aspects – how to compete in a
global economy
Business decisions that rely on international
economic considerations
e.g. international risk exposure, international
production chains and foreign expansion
decisionmaking
International trade topics
International trade theory
International trade policy
International finance topics
Exchange rates and open economy macroeconomics
International macroeconomic policy
International institutional topics
International institutions
Regional integration
International business topics
Global competition
Foreign expansion and risk exposure
23
The more developed economies are still the
largest economies in the world
But now China and Brazil rank among the 10
largest economies in the world
GDP is a useful measure of the development of
an economy, and then by extension GDP per
capita is a good indicator of the standard of
living of the country. NB US was 15th
Ranking
Country
GDP per capita (2010-11)
1
Luxembourg
115,809
2
Qatar
98,144
3
Norway
97,607
4
Switzerland
83,073
5
Australia
66,371
6
UAE
63,626
7
Denmark
59,709
8
Sweden
57,638
9
Canada
50,496
10
Netherlands
50,216
China might have a large economy, but it’s GDP per
capita is not large, although it is growing fast (so
moving up rankings)
• Other countries
are not moving
up the rankings.
Most of these
countries tend
to be in Africa
63
Mexico
10,146
72
South Africa
8,078
80
Iran
6,420
90
China
5,417
109
Ukraine
3,624
111
Indonesia
3,512
121
Morocco
3,084
139
India
1,514
161
Bangladesh
767
185
Democratic Republic of Congo
217
This is clearly shown in figure below. North America, Western
Europe, Japan and Australasia constitute the wealthiest
countries
African and
Southern
Asian
countries are
poorest,
while E
Europe and
the rest of
the Americas
are middle
income
countries
Developed = high income countries
Middle-income = “transition” or industrializing
countries
Developing = low income countries
Give some examples of each of these…
Over a third of all trade is done by MNEs. Of
this, most is done between developed
countries, and not between developing and
developed.
Some examples of MNEs:
Exxon
SABC
Mitsubishi
Samsung
Diageo
Intergovernmental organization – organization
that has no internal structure and only exists
when meetings occur. E.g. OPEC, G7, GATT
International organization – organization that
has internal structure (and personnel) and acts
on behalf of it’s members. E.g. UN, IMF, WTO,
EBRD
Outline of course
International trade
Interanational finance
US trade
Profile of world economy