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ECON3315 - International Economic Issues

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Title: ECON3315 - International Economic Issues


1
ECON3315 - International Economic Issues
  • Chapter 2
  • Introduction to the World Economy

2
Preview
  • 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

3
Concept map Ch. 2
4
What Is International Economics About?
  • 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

5
What Is International Economics About?
  • 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?

6
What Is International Economics About?
7
US trade deficit
8
What is international economics about?
  • Better to look at X and M in terms of size of the
    economy. Replotting this

9
What is international economics all about?
10
What Is International Economics About?
11
Gains from Trade
  • Several ideas underlie the gains from trade
  • 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.

12
Gains from Trade (cont.)
  • 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.

13
Gains from Trade (cont.)
  1. 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.
  2. When countries specialize, they may also be more
    efficient due to large scale production.
  3. Countries may also gain by trading current
    resources for future resources (lending and
    borrowing).

14
Gains from Trade (cont.)
  • 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.

15
Patterns of Trade
  • 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.

16
The Effects of Government Policies on Trade
  • 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?

17
The Effects of Government Policies on Trade
(cont.)
  • 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?

18
International Finance Topics
  • 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 governments
    national income accounts.

19
International Finance Topics (cont.)
  • 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

20
International Trade vs International Finance
  • 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.

21
International institutional topics
  • 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

22
International business topics
  • 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

23
A Road Map
  • 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

24
The World Economy
  • 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

25
How much trade occurs?
  •  

26
Measuring development
  • 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
27
Measuring development
  • China might have a large economy, but its GDP
    per capita is not large, although it is growing
    fast (so moving up rankings)

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
  • Other countries are not moving up the rankings.
    Most of these countries tend to be in Africa

28
Measuring development
  • 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

29
Country categorization
  • Developed high income countries
  • Middle-income transition or industrializing
    countries
  • Developing low income countries
  • Give some examples of each of these

30
MNEs
  • 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

31
Intergovernmental vs international organizations
  • 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 its members. E.g. UN, IMF, WTO,
    EBRD

32
Chapter summary
  • Outline of course
  • International trade
  • Interanational finance
  • US trade
  • Profile of world economy
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