ECON 317 International Economics D. Allen Dalton Fall 2014

Information MBEB 3222 (Adjunct offices) 9:30 -11:00 am TuTh or by appointment allendalton@boisestate.edu https://cobe.boisestate.edu/allendalton/ http://www.macmillanhighered.com/launchpad/feenstrataylorintlecon3/561022

Grading Problem Sets (Homework) Learning Curve Quarterly exams (mid- midterms!) Mid-term (final over international trade) Final (final over international macroeconomics) Book review Classroom participation (experiments)

Important Dates Every Monday @ midnight – Problem Set due September 18 – 1st Quarterly Exam September 25 – Submission of Book review title October 16 – Mid-term Exam (In-class portion) October 17 – Mid-term Exam (On-line portion); Midnight November 13 – 2nd Quarterly Exam November 20 – Book review due December 16 – Final Exam (In-class portion); Noon – 2 pm December 16 – Final Exam (On-line portion); Midnight

Launchpad Intro

No class on Thursday, August 28 Go Broncos!

Trade in the Global Economy 1 Trade in the Global Economy International Trade Migration and Foreign Direct Investment © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 1 International Trade The Basics of World Trade - Terminology export import trade balance trade surplus trade deficit bilateral trade balance © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 1 International Trade Map of World Trade FIGURE 1-2 The amount of trade in goods is illustrated by the width of the lines, with the largest trade flows having the heaviest lines and the smallest having dashed lines. World Trade in Goods, 2010 ($ billions) This figure shows trade in merchandise goods between selected countries and regions of the world. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor APPLICATION Is Trade Today Different from the Past? FIGURE 1-1 (a) Foods, feeds, and beverages, and industrial supplies were 90% of imports in 1925, but were only 40% in 2010. Capital plus consumer goods plus automobiles have increased from 10% of imports in 1925 to 60% of imports in 2010. The Changing Face of U.S. Import Industries, 1925–2010 The types of goods imported by the United States has changed drastically over the past 84 years. Foods, feeds, and beverages, and industrial supplies were 90% of imports in 1925, but represented only 40% in 2010. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor APPLICATION Is Trade Today Different from the Past? FIGURE 1-1 (b) The export shares of foods, feeds, and beverages, and industrial supplies have fallen from 80% in 1925 to 40% in 2010. Exports of capital plus consumer goods plus automobiles have increased from 20% in 1925 to 60% in 2010. The Changing Face of U.S. Export Industries, 1925–2010 The types of goods exported by the United States has also changed drastically over the past 84 years. Capital plus consumer goods plus automobiles have increased from 20% of exports in 1925 to 60% of exports in 2010. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 1 International Trade Map of World Trade TABLE 1-1 Shares of World Trade, Accounted for by Selected Regions, 2010 This table shows the share of trade within each region, or the share of exports from each region, as a percentage of total world trade in 2010. Europe and the Americas combined account for about one-half (51%) of world exports, and Asia accounts for another one-third of world exports. Note: The shares of world trade are calculated from Figure 1-2, as explained in the text. The Americas includes North, Central, and South America and the Caribbean. Exports for the Middle East and Russia also include exports for the Commonwealth of Independent States, which consists of Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan, and Ukraine © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 1 International Trade Trade Compared with GDP TABLE 1-2 Trade/GDP Ratio in 2010 This table shows the ratio of total trade to GDP for each country, where trade is calculated as (Imports + Exports)/2, including both merchandise goods and services. Countries with the highest ratios of trade to GDP tend to be small in economic size. This table shows the ratio of total trade to GDP for each country, where trade is calculated as (Imports + Exports)/2, including both merchandise goods and services. Countries with the highest ratios of trade to GDP tend to be small in economic size and are often important centers for shipping goods, like Hong Kong (China) and Malaysia. Countries with the lowest ratios of trade to GDP tend to be very large in economic size, like Japan and the United States, or are not very open to trade because of trade barriers or distance from other countries. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 1 International Trade Barriers to Trade FIGURE 1-3 Trade in Goods and Services Relative to GDP This diagram shows total trade in merchandise goods and services for each country divided by GDP. There was a considerable increase in the ratio of trade to GDP between 1890 and 1913. This trend was ended by World War I and the Great Depression. Most of the industrial countries shown did not reach the level of trade prevailing in 1913 until the 1970s. Some countries—such as Australia and the United Kingdom—did not reach their earlier levels until the end of the century. The term trade barriers refers to all factors that influence the amount of goods and services shipped across international borders. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 1 International Trade “First Golden Age” of Trade Interwar Period FIGURE 1-4 The average tariff fluctuated around 15% from 1860 to 1913. After World War I, however, the average tariff rose sharply because of the Smoot-Hawley Tariff Act in the United States and the reaction by other countries, reaching 25% by 1933. Since the end of World War II, tariffs have fallen. Average Worldwide Tariffs, 1860–2010 This diagram shows the world average tariff for 35 countries. The average tariff fluctuated around 15% from 1860 to 1913. After World War I, however, the average tariff rose sharply because of the Smoot-Hawley Tariff Act in the United States and the reaction by other countries, reaching 25% by 1933. Since the end of World War II, tariffs have fallen. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

International Economics, 3e | Feenstra/Taylor 2 Migration and Foreign Direct Investment Map of Migration FIGURE 1-5 The level of migration is illustrated by the width of the lines, with the largest migrant numbers having the heaviest lines and the smallest having dashed lines. Foreign-Born Migrants, 2005 (millions) This figure shows the number of foreign-born migrants living in selected countries and regions of the world for 2005 in millions of people. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

International Economics, 3e | Feenstra/Taylor 2 Migration and Foreign Direct Investment Map of Foreign Direct Investment FIGURE 1-6 The stock of investment is illustrated by the width of the lines, with the largest flows having the heaviest lines and the smallest having dashed lines. Stock of Foreign Direct Investment, 2010 ($ billions) This figure shows the stock of foreign direct investment (FDI) between selected countries and regions of the world for 2010 in billions of dollars. The largest stocks have the heaviest lines. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 2 Migration and Foreign Direct Investment Map of Foreign Direct Investment Horizontal FDI The majority of foreign direct investment occurs between industrial countries. These flows between industrial countries are called horizontal FDI. Vertical FDI The other form of foreign direct investment occurs when a firm from an industrial country owns a plant in a developing country, which is called vertical FDI. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

The Global Macroeconomy 1 The Global Macroeconomy Foreign Exchange: Currencies and Crises Globalization of Finance: Debts and Deficits Government and Institutions: Policies and Performance © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor Introduction Unique features of international macroeconomics can be reduced to three key elements: The world has many monies (not one). Countries are financially integrated (not isolated). In this context economic policy choices are made (but not always very well). This introductory chapter briefly explains the road ahead. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 1 Foreign Exchange: Currencies and Crises How Exchange Rates Behave Based on observable differences in exchange rate behavior, economists divide the world into two groups of countries: those with fixed (or pegged) exchange rates and those with floating (or flexible) exchange rates. John T. Fowler/Alamy Steve Stock/Alamy © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

2 Globalization of Finance: Debts and Deficits Financial globalization has taken hold around the world, starting in the economically advanced countries and spreading to many emerging market countries. Deficits and Surpluses: The Balance of Payments At the national level, economic measurements such as income, expenditure, deficit, and surplus, are important barometers of economic performance, and the subject of heated policy debate. The income measure is called gross national disposable income; the expenditure measure is called gross national expenditure. The difference between the two is a key macroeconomic aggregate called the current account. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 2 Globalization of Finance: Debts and Deficits FIGURE 1-3 Global Imbalances For more than a decade, the United States current account deficit has accounted for about half of all deficits globally. Major offsetting surpluses have been seen in Asia (e.g., China and Japan) and in oil-exporting countries. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 3 Government and Institutions: Policies and Performance Three important features of the broad macroeconomic environment in the remainder of this book are: the rules that a government decides to apply to restrict or allow capital mobility, the decision that a government makes between a fixed and a floating exchange rate regime, and the institutional foundations of economic performance, such as the quality of governance that prevails in a country. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 3 Government and Institutions: Policies and Performance Independence and Monetary Policy: The Choice of Exchange Rate Regimes FIGURE 1-6 Exchange Rate Regimes The pie chart shows a classification of exchange rate regimes around the world using the most recent data for the year 2010. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

© 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor 3 Government and Institutions: Policies and Performance FIGURE 1-7 Institutions and Economic Performance The scatterplots show how an index measuring the quality of a country’s institutions is positively correlated with the level of income per capita as shown in panel (a), and is inversely correlated with the volatility of income per capita as shown in panel (b). In each case, the line of best fit is shown. © 2014 Worth Publishers International Economics, 3e | Feenstra/Taylor

No class on Thursday, August 28 Go Broncos!