BECON 3101 International Economics PDF

BECON 3101 INTERNATIONAL ECONOMICS CHAPTER 1 INTRODUCTION Faizah Bt Shahudin Faculty of Business Management & Globalization Tel : 603 8317 8833 (Ext 8404) Email: [email protected] Chapter Organization Intro...

BECON 3101 INTERNATIONAL ECONOMICS CHAPTER 1 INTRODUCTION Faizah Bt Shahudin Faculty of Business Management & Globalization Tel : 603 8317 8833 (Ext 8404) Email: [email protected] Chapter Organization Introduction The Scope of International Economics The Output of the World Economy Imports and Exports of Goods in the World Economy International Trade in Services Capital flows in the World Economy Trends in International Production and Trade Globalization Summary BECON3101 International Economics 2 International economics As countries have become more interdependent, the need for an understanding of international economics has increased. International economics explains the benefits and costs of the patterns of international trade, investment, and other cross-border transactions that are currently observed in the world economy. The Internet search engine used by the student will determine the number of hits he/she will receive. The Google search engine yielded more than 697,000 hits. BECON3101 International Economics 3 Introduction Until 1970, interdependence among nations was perceived as a “one-way street” by U.S. – Foreign countries were greatly influenced by what occurred in the U.S. – Trade restrictions by U.S. were made without effects of retaliation – U.S. was immune to world events - emphasizing the interdependence of economies of the world - What your lives would be if the U.S did not interact with any other economies? BECON3101 International Economics 4 Introduction Interdependence becomes a “two-way street” for U.S. – 1975 – 2002 global trade in goods increased 266% – Firms realize international transactions are as or more important than domestic transactions International Economics helps explain patterns of international transactions BECON3101 International Economics 5 The Scope of International Economics Microeconomics – studies the production and consumption of various goods and services and how particular industries and markets work Macroeconomics – studies the operation of the entire economy and the factors that determine the economy’s total output reviewing the concepts of micro & macro e.g DD, SS, Import, Export, Balance of Payments and etc. BECON3101 International Economics 6  International economics is the study of allocation of resources to production, distribution, and consumption of goods and services on a worldwide basis. International economics is a blend of microeconomics and macroeconomics. It extends the study of microeconomics by examining the differences between domestic trade and international trade. In addition, international economics is an extension of macroeconomics. This is done by allowing foreign economic conditions to affect the domestic economy and by allowing changes in government policies to affect sectors of the economy related to international trade. BECON3101 International Economics 7 The Scope of International Economics International Economics – studies the production, distribution and consumption of goods, services, and capital on a worldwide basis – National and political boundaries of countries determine legal, linguistic, social and currency barriers to trade as well as different economic policies. – International Economics requires Micro and Macro economic analysis BECON3101 International Economics 8 Economics concept What is Economics? = study of mankind in the ordinary business of life (Alfred Marshall) = economics studies about human behaviour deal with the allocation of scarce resources (limited) among alternative uses to satisfy human wants (unlimited). How economics is conceptually like medicine - International economics is one of the branches of eco. - Used to develop concepts in other parts of the discipline - Major branch of medicine like internal medicine BECON3101 International Economics 9  The Output of the World Economy Gross Domestic Product (GDP) – The market value of all final goods and services produced within a country in a given period of time – World economy measured as sum of GDP for each country – Estimated at $32.3 trillion in 2002 BECON3101 International Economics 10 The Output of the World Economy World Bank – A multi-lateral institution, which makes loans to developing countries to enhance economic development It classifies each country of the world into low income, middle-income, and high- income economies – This classification is based on GDP per capita BECON3101 International Economics 11 The Output of the World Economy GDP measures – Total production – Total income (with adjustment) The distribution of world income affects the study of international trade BECON3101 International Economics 12 The Output of the World Economy Weaknesses in GDP measure – All economic activity is not sold in a market For example, homemaker services. – Some economic activity is not reported Black market Illegal drugs Escape taxation or regulation BECON3101 International Economics 13 The Output of the World Economy Table 1.1: Distribution of World Population and Economic Output, 2002 GDP Population % of World Total GDP % of World per Capita (millions) Population (millions of $) GDP Low-Income $451 2,494.6 40.2% $1,123,865 3.5% Economies Middle-Income $1,877 2,737.8 44.2% $5,139,306 15.9% Economies High-Income $26,964 966.2 15.6% $26,052,812 80.6% Economies Source: World Bank, 2004 BECON3101 International Economics 14 Economic output The economic output of the world is not evenly distributed. - The high-income countries produce approximately 81% of the world’s output. - The middle- and low-income countries produce approximately 16% and 3% of the world’s output, respectively. BECON3101 International Economics 15  The distribution of merchandise trade - income economies is not evenly distributed. - High-income countries account for approximately 76% (world’s imports) and 77% (world’s exports) - Middle-income countries, 21% (world’s imports) and 23% (world’s exports) - The low-income countries provide approximately 3% (world’s exports and import) BECON3101 International Economics 16 Distribution of world output The distribution of merchandise trade mirrors the distribution of world output. Why there is a major differences between output and trade in middle-income countries and high- income countries?? This can be explained by international trade in crude oil, as some middle-income countries are also major exporters of oil. BECON3101 International Economics 17 Imports and Exports of Goods in the World Economy Exports – The part of domestic production sold to residents of other countries Imports – The part of foreign production and/or investment that a country purchases from foreign producers BECON3101 International Economics 18 Imports and Exports of Goods in the World Economy Table 1.2: Distribution of Imports and Exports of Merchandise in the World Economy (2002) Imports % of World Exports % of World (millions of $) Total (millions of $) Total Low-Income $197,606 3.0% $211,197 3.3% Economies Middle-Income $1,364,003 20.7% $1,447,025 22.4% Economies High-Income $5,028,663 76.3% $4,796,707 74.3% Economies World Total $1,364,003 $6,454,929 Source: World Bank, 2004 BECON3101 International Economics 19 Imports and Exports of Goods in the World Economy Figure 1.1: Real World Exports and Real GDP, 1975-2002 1975 = 100 BECON3101 International Economics 20 International Trade Becoming an increasingly important part of the world economy. Product = goods & services Goods = tangible (import/export of cars) Services = intangible (banking, education, tourism) International trade in services is growing faster than international trade in goods Many of us working in service sector and our careers are likely to be influenced by this type of trade. BECON3101 International Economics 21 International Trade in Services Types of International Trade – Visible Trade Trade in goods – Service Trade (Invisible trade) Transportation, insurance, and tourism It is more difficult to measure compared to trade in goods. (measurement problem) BECON3101 International Economics 22  International Trade in Services Table 1.3: Distribution of International Trade in Services in the World Economy, 2002 Imports % of World Exports % of World (millions of $) Total (millions of $) Total Low-Income $52,561 3.6% $40,966 2.7% Economies Middle-Income $240,179 16.3% $225,630 14.9% Economies High-Income $1,182,565 80.2% $1,244,630 82.4% Economies World Total $1,475,405 $1,511,226 Source: World Bank, 2004 BECON3101 International Economics 23 International Trade in Services Figure 1.2: U.S. Exports as a Percentage of U.S. Output and U.S Output as a Percentage of World Output BECON3101 International Economics 24 World largest economies The world’s three largest economies are the U.S., Japan, and Germany. However, the U.S. economy is more than twice the size of Japan’s. And more than four times the size of Germany (economy exports approximately) U.S. = $976 billion Japan = $400 billion Germany = $200 billion BECON3101 International Economics 25 Capital Flows in the World Economy Multinational Corporations (MNCs) – Companies that own, control, or manage production and distribution facilities in several countries Portfolio Capital (investment) – The purchase of financial assets For example, stock and bonds, in a foreign country Foreign Direct Investment (FDI) – A domestic corporation’s purchase of real assets For example, plant and equipment, in a foreign country BECON3101 International Economics 26  Capital Flows in the World Economy Table 1.4: Distribution of International Capital Flows in the World Economy, 2002 Net Private Foreign Direct % of World Capital Flows Investment (millions of $) Total (millions of $) Low-Income $7,151 $12,941 2.1% Economies Middle-Income $146,679 $134,145 21.3% Economies High-Income - $483,741 76.7% Economies World Total - $630,827 Source: World Bank, 2004 BECON3101 International Economics 27 Capital Flows in the World Economy Foreign Exchange Market – The market where currencies are bought and sold Exchange Rate – The price of one currency in terms of another currency BECON3101 International Economics 28  Capital Flows in the World Economy Figure 1.3: Daily Global Foreign Exchange Trading ($ Billions) BECON3101 International Economics 29 Trends in International Production and Trade Table 1.5: Rates of Growth of GDP, Exports, and Population Export of Goods GDP Growth Population Growth and Services Growth 1980-1990 1990-2000 1980-1990 1990-2000 1980-1990 1990-2000 Low-Income 4.5% 3.2% 3.3% 5.3% 2.3% 2.0% Economies Middle-Income 3.3% 3.6% 7.3% 8.8% 1.7% 1.2% Economies High-Income 3.3% 2.5% 5.0% 6.5% 0.6% 0.7% Economies World 3.3% 2.7% 5.2% 6.9% 1.7% 1.4% Source: World Bank, 2003 BECON3101 International Economics 30 Globalization Globalization is the term used to convey the idea that international factors are becoming a more important part of the world economy. (Open & closed economy) The simplest measure of globalization is the ratio of exports to GDP. – Countries with a high ratio of exports to GDP are generally more open to the world economy than countries with a low ratio. BECON3101 International Economics 31 Ranking of top 20 countries The Foreign Policy Magazine Globalization Index - Has incorporates 16 key indicator of global integration - The index quantifies economic integration by considering data of Trade,FDI, Portfolio capital flow, tourism, income earned and paid abroad & etc. BECON3101 International Economics 32  Globalization Table 1.6: Country Exports as a Percentage of GDP Exports Singapore 143.9% as a Percentage Hong Kong, China 124.5% of GDP for Malaysia 98.3% Selected Belgium 91.4% Countries, 2002 Ireland 72.6% Netherlands 58.5% Thailand 54.3% Hungary 52.1% Taiwan, China 47.6% Philippines 46.5% Austria 38.6% (Table continued over next 2 slides) BECON3101 International Economics 33  Globalization Table 1.6: Country Exports as a Percentage of GDP Exports Finland 34.1% as a Percentage Korea, Rep. 34.1% of GDP for Sweden 33.8% Selected Indonesia 33.0% Countries, 2002 - Denmark. 33.0% continued Switzerland 32.9% Germany 30.9% Russian Federation 30.8% Chile 28.6% South Africa 28.5% Israel 28.5% China 25.7% BECON3101 International Economics 34  Globalization Table 1.6: Country Exports as a Percentage of GDP Exports Mexico 25.2% as a Percentage Argentina 24.8% of GDP for New Zealand 24.5% Selected France 23.2% Countries, 2002 - Italy 22.8% continued Portugal 21.1% Spain 18.2% U.K. 17.9% Australia 15.9% Brazil 13.3% Japan 10.4% US 6.7% BECON3101 International Economics 35 Globalization Figure 1.4: World Exports as a Percentage of World Output, 1975-2002 BECON3101 International Economics 36 Summary International economics – The study of the production, distribution, and consumption of goods, services, and capital on a worldwide basis – Important to domestic economic activity World economic output is not evenly distributed among the world’s economies – High-income economies account for almost 80% of world's output, imports, and exports. – Low-income economies account for only 3% of the world’s economic output and international trade. BECON3101 International Economics 37 Summary International trade in services is nearly one-quarter (25%) the size of international trade in goods. The simplest measure of globalization is the ratio of exports to total economic activity. BECON3101 International Economics 38