International Economics Tenth Edition CHAPTER O N E 1 International Economics Tenth Edition Introduction Dominick Salvatore John Wiley & Sons, Inc. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

In this chapter: The Globalization of the World Economy International Trade and the Nation’s Standard of living The International Flow of Goods, Services, Labor and Capital International Economic Theories and Policies Current International Economic Problems Organization and Methodology of the Text Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

The Globalization of the World Economy A globalizing world provides opportunities and challenges to nations and people in the world. Flow of goods and services Flow of labor and jobs Flow of financial instruments, currency Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

The Globalization of the World Economy Three periods of rapid globalization 1870-1914 Resulted from industrial revolution, opening up of new resource sources in “regions of recent settlement” Millions of immigrants, vast amounts of foreign investments, increased production Ended with breakout of World War I in 1914. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

The Globalization of the World Economy Three periods of rapid globalization 1945-1980 Dismantling of heavy trade protection led to rapid increase in international trade. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

The Globalization of the World Economy Three periods of rapid globalization 1980 to present Most pervasive and dramatic period of globalization Fueled by improvements in telecommunications and transportation Elimination of restrictions on capital flows led to massive international capital movements Most countries in the world participated Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

The Globalization of the World Economy Anti-Globalization Movement Claims globalization sacrifices human and environmental well-being to corporate profits of mutinationals Globalization is blamed for: World poverty and child labor in poor countries Job losses and lower wages in rich countries Environmental pollution and climate change Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

International Trade and the Nation’s Standard of Living Interdependence Economic relationship among nations Roughly measured as ratio of a nation’s imports and exports of goods and services to GDP Much larger for smaller industrial and developing countries than for United States Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

FIGURE 1-1 Imports and Exports as a Percentage of GDP in Various Countries in 2001. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

International Trade and the Nation’s Standard of Living Sources of potential gain for United States: Access to items with limited availability domestically (such as coffee, bananas, cognac, tin, tungsten, petroleum and copper) Access to lower cost products Access to greater product variety Economic interdependence has been increasing over the years. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

FIGURE 1-2 Growth of World Production and Trade, 1990-2001 (annual percentage changes). Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

FIGURE 1-3 Imports and Exports as a Percentage of U.S. GDP, 1965-2001. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

The International Flow of Goods, Services, Labor and Capital Gravity Model Other things equal, the bilateral trade between two countries is proportional, or at least positively related, to the product of the two countries’ GDPs, and the greater the distance between the two countries, the smaller is their bilateral trade. That is, the larger (and more equal in size) and the closer two countries are, the larger the volume of trade between them is expected to be. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

International Economic Theories and Policies International Trade Theory Analyzes the basis of and the gains from international trade. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

International Economic Theories and Policies International Trade Theory International Trade Policy Examines the reasons for and the effects of restrictions on international trade. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

International Economic Theories and Policies International Trade Theory International Trade Policy Balance of Payments Measures a nation’s total receipts from and total payments to rest of the world. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

International Economic Theories and Policies International Trade Theory International Trade Policy Balance of Payments Foreign Exchange Markets The institutional framework for the exchange of one national currency into another. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

International Economic Theories and Policies International Trade Theory International Trade Policy Balance of Payments Foreign Exchange Markets Adjustments in the Balance of Payments Focuses on the relationship between internal and external aspects of the economy of a nation, and their interdependence with rest of the world economy under different international monetary systems. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

Current International Economic Problems Deep financial and economic crisis Trade protectionism in advanced countries Excessive fluctuations and misalignments in exchange rates and financial crises Structural imbalances in US, slow growth in Europe and Japan, and insufficient restructuring in transition economies Deep poverty in many developing countries Resource scarcity, environmental degradation, climate change and sustainable development Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

Organization and Methodology of the Text Part One (Chapters 2-7) International Trade Theory Part Two (Chapters 8-12) International Trade Policies Part Three (Chapters 13-15) Balance of Payments, Foreign Exchange Part Four (Chapters 16-21) Adjusting Balance of Payments Equilibria Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.