A01_The World Economy.pdf

9/9/2024 International Economics Seventh Edition, Global Edition Chapter 1 An Introduction to the World Economy...

9/9/2024 International Economics Seventh Edition, Global Edition Chapter 1 An Introduction to the World Economy 1 Learning Objectives 1.1 Discuss historical measures of international economic integration with data on trade, capital flows and migration. 1.2 Compute the trade-to-GDP ratio and explain its significance. 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization. 1.4 List the three types of evidence that trade supports economic growth. 2 2 1  9/9/2024 1. Elements of International Economic Integration § Globalization has many components, including culture, language, economics, politics and more. § Globalization in the economic sphere is also called international economic integration. § Int’l economic integration has occurred rapidly § since approximately 1950 § Reduction of trade barriers § but especially since the early 1970s § Financial integration & ICT (Info. and Com. Tech) Multinational firms developed int’l production networks 3 3 1. Elements of International Economic Integration § The current wave of international economic integration is not the first. § A major wave of globalization occurred between app. 1870 and 1913 § New technologies like transatlantic cables, steam- powered ships, railroads, etc. § This earlier wave was destroyed by World War I & II and the worldwide Great Depression of the 1930s. 4 4 2  9/9/2024 1. Elements of International Economic Integration § Measures of the degree of international economic integration 1. World trade Trade flows 2. International capital flows Capital movements 3. International migration Labor movements 4. Convergence of prices in different markets Similarity of prices in separate mkts § Integrated economies have relatively small price differences due to transportation costs § Goods move from a low- to a high-cost region 5 5 1) The Growth of World Trade § Since the end of World War II in 1945, world trade has grown much faster than world production. § In 1950, world trade was about 5.5% of world GDP. § In 2013, world trade was about 30% of world GDP. 6 6 3  9/9/2024 1) The Growth of World Trade § The important measure of international trade in a national economy à trade-to-GDP ratio § Trade-to-GDP ratio: exports plus imports divided by GDP § Trade-to-GDP ratio = (exports + imports) ÷ GDP § Large countries less dependent on Int’l trade § Small countries high ratios of trade-to-GDP 7 7 Figure 1.1 Trade-to-GDP Ratios for Four Countries, 1913-2013 200 Trade to GDP Ratio 150 100 50 0 1913 1950 1973 2013 Netherlands United Kingdom Japan United States ü The trade-to-GDP ratio fell between 1913 & 1950, but has risen since then. ü Each country shows the same pattern over time. 8 8 4  9/9/2024 2) International Capital Flows § There are many types of capital flows: § Flows of financial capital: representing paper assets such as stocks, bonds, currencies, and bank accounts § Flows of capital: representing physical assets such as real estate, factories, and businesses § FPI and FDI § FPI (Foreign Portfolio Investment): Investment financed with foreign money but operated by domestic residents § FDI (Foreign Direct Investment): Capital investment that is owned and operated by a foreign entity 9 9 2) International Capital Flows § Capital flows today: § Are much larger than during the earlier wave of globalization mainly because economies are larger § Include many more types of financial instruments; stocks & bonds, derivatives, currency swaps 10 10 5  9/9/2024 2) International Capital Flows § Capital flows today: § Capital flows are frequently devoted to protecting against currency fluctuations fixed vs. flexible exchange rates § Capital flows have lower transaction costs than in previous eras less expensive to move capital across int’l boundaries § Transaction costs: The costs of obtaining mkt info, negotiating, and enforcing the agreement 11 11 3) International Migration of Labor § Labor movements across international boundaries are part of international economic integration. § International migration was larger, relative to population before World War I than it is today. § Before World War I, most countries did not require passports and visas, and there were few border controls. 12 12 6  9/9/2024 3) International Migration of Labor § In 1890, about 14.5% of the U.S. population was immigrants. § In 2010, it is around 13%. § Migration has increased since the 1960s, § but Immigrants as a percentage of the total population is less than it was in 1900. 13 13 4) Convergence of Prices in Different Markets § Integrated economies have relatively small price differences due to transportation costs § Goods move from a low- to a high-cost region § Low transaction costs è More of international arbitrage 14 14 7  9/9/2024 2. Three Features of Contemporary International Economic Relations 1) Deeper integration, moving beyond shallow integration. 2) The presence of multilateral organizations such as the World Trade Organization (WTO) 3) The growth of regional trade agreements, such as the European Union or the North American Free Trade Agreement (NAFTA was renamed the USMCA in Dec. 2018). 15 15 1) Deeper Economic Integration § Shallow integration: consists of the removal of tariffs and quotas § As tariffs and quotas come down, other policies begin to limit trade. ü Environmental policies ü Labor policies ü Safety standards, etc. § Deep integration: occurs when countries try to reform domestic policies that limit trade à labor, environmental and consumer safety standards, investment restrictions, industry policy favoring local firms, buy national programs, etc. § Deep integration is much more controversial à reduce (and/or infringe on) national sovereignty ü Global Value Chain (GVC): More and more products are “Made in the World” rather than made in just one economy 16 16 8  9/9/2024 2) Multilateral Organizations § Multilateral organizations are open to all countries to maintain int’l economic & political stability § They are new since World War II and prominent examples include: ü United Nations (UN) ü World Bank (WB) ü International Monetary Fund (IMF) ü GATT and World Trade Organization (WTO) 17 17 3) Regional Trade Agreements § Regional trade agreements (RTAs) are composed of countries that give special market access to each other. ü Examples: the North American Free Trade Agreement (NAFTA à USMCA) and the European Union (EU), among many others. § Significant increase in the number of RTAs since 1980s. § Regionalism vs. multilateralism 18 18 9  9/9/2024 3) Regional Trade Agreements § Regional trade agreements (RTAs) are not new. § Free-trade agreements & other forms of preferential trade have existed § RTAs are controversial among economists. § Some economists think RTAs hurt world trade (regionalism) by focusing a country’s attention on just a few trade partners à Bhagwati (1989) § Others believe RTAs help world trade (multilateralism) by loosening some barriers and trying out new agreements à Krugman (1991) 19 19 3. Trade and Economic Growth u Economists favor more open trade because it enables countries to grow faster and its people live better à the benefits of trade outweigh the costs ü Greater variety of goods with lower prices ü Benefits of increased innovation ü Access to new technologies & ideas ü Competitive pressure to raise productivity u Evidence comes in three forms: ü Historical examples of countries. ü Statistical comparisons of countries. ü Economic models and deductive reasoning (Liberalization - Trade - Productivity - Economic growth). u Trade benefits a nation but not necessarily every individual in the nation. ü Winners and losers (consumers vs. producers) ü Severe competition for firms ü More competition in labor markets and social tensions/conflicts ü Risk of spreading financial crises internationally 20 20 10  9/9/2024 Commodity Classification: SITC and HS code 1. SITC code (The Standard International Trade Classification by United Nations Statistics Division: https://unstats.un.org/unsd/trade/sitcrev4.htm 0 - Food and live animals 1 - Beverages and tobacco 2 - Crude materials, inedible, except fuels 3 - Mineral fuels, lubricants and related materials 4 - Animal and vegetable oils, fats and waxes 5 - Chemicals and related products 6 - Manufactured goods classified chiefly by material 7 - Machinery and transport equipment 8 - Miscellaneous manufactured articles 9 - Commodities and transactions not classified elsewhere in the SITC I - Gold, monetary II - Gold coin and current coin 21 21 Commodity Classification: SITC and HS code ※ An Example of the SITC code 7 - Machinery and transport equipment ‒ 78: Road vehicles ‒ 781: Motor cars and other motor vehicles principally designed for the transport of persons à781.2: Motor vehicles for the transport of persons ‒ 782: Motor vehicles for the transport of goods and special-purpose motor vehicles 2. HS code (The Harmonized Commodity Description and Coding System) ‒ 10 to 12 digits for imposing tariff ‒ Passenger automobiles: HS 8703.24-1000 22 22 11