International Economics Li Yumei Economics & Management School of Southwest University

International Economics Chapter 1 Introduction

Organization 1.1 Importance of International Economics 1.2 International Trade and the Nation’s Standard of Living 1.3 The Subject Matter of International Economics 1.4 Purpose of International Economic Theories and Policies 1.5 Current International Economic Problem 1.6 Organization and Methodology of the Text Chapter Summary Exercises

1.1 Importance of International Economics Economic Interdependence Globalization of Economic Activities International Competition Consequences of Increased Openness

Economic Interdependence It means that in today’s world, no nation exists in economic isolation. All aspects of a nation’s economy-its industry, service sectors, levels of income and employment , living standard-are linked to the economics of its trading partners. This linkage takes the form of international movements of goods and services, labor, business enterprise, investment funds, and technology. Facts: After World War Ⅱ,USA was economically and politically the most powerful nation in the world, a situation expressed in the saying, “When USA sneezes, the economies of other nations catch a cold.” Then EEC was formed in 1950s, international corporations in 1960s, OPEC in 1970s. Conclusion: In recent years, the character of global economic interdependence has become much more sophisticated.

Globalization of Economic Activities It means that national economies rely on international trade in overall economic activity . World trade expand faster than world output in the last 50 years by a significant margin. Reasons: Technological Change Technological innovation led to the increase of productivity, and the advances in transport technology brought people and enterprises closer together so that the boundary of tradable goods and services has been greatly extended. Continuing liberalization of trade and investment It led to more and more companies to globalize production structure through investment abroad.

Globalization of Economic Activities Present Situation: Slower global economic growth in 2007; continued robust growth in developing countries; insufficient employment growth; higher oil price crisis; current-account Imbalances; merchandise trade imbalance; global imbalance widening further; term of trade. In addition: net financial transfer; net international investment. China foreign trade relationship: more dispute with EU and USA; FDI in China.

Slower global economic growth

continued robust growth in developing countries

Current-account imbalances have widened further in 2006

Higher oil prices on the impact of welfare costs

current-account Imbalances

Global imbalance widening further

Net Financial Transfer

Net International Investment

2005 foreign trade relationship

2001-2005 real used FDI and growth rate

International Competition International Competitiveness: It is a hot issue these days. Intense debate has focused on how firms based in a particular nation can create and maintain competitiveness against the world’s leaders in a particular industry. Firm (Industry) Competitiveness Competitiveness refers to the extent to which the goods of a firm or industry can compete in the market place; this competitiveness depends on the relative prices and qualities of products. A Nation’s Competitiveness National competitiveness refers to the achievement of high productivity of its employed resources and the increasing of living standard for its people.

Consequences of Increased Openness To curtail inflationary pressures at home (e.g. U.S.dollar) To increase constraints on those sectors which facing intense foreign competition (e.g. Wage concession) To reduce or eliminate the crowding out of private investment To make the domestic economy vulnerable to disturbances initiated overseas (e.g. Skyrocketing gasoline prices of 2000)

Conclusion: Need for macroeconomic coordination policy International policy coordination can facilitate an orderly adjustment of the global imbalances while minimizing the economic growth costs (United Nations, International Monetary Fund, World Bank). -A new Plaza agreement: the Group of Twenty(20Group, including industrial and emerging-market economies) -Cross-country effects of national policies: The national policies can’t be considered in isolation but need to be seen in the context of the cross-border spillover effects they give rise to by decreasing the barriers to trade and capital flows.

Conclusion: Obstacles for macroeconomic coordination policy the urgency of adjusting the imbalance the current position of economies domestic interest groups perceived lack of effective policy instrument Reading materials: 1. World Economic Situation and Prospects 2007 2. World Economic Situation and Prospects 2006

Conclusion: What can be done? To develop a consensus on common goals through international consultations with outside mediation To enhance the context for mediation and the perceived legitimacy of the mediator To address commitment problems by using multi-year schedules for policy adjustment To initiate systemic reforms in the field of international monetary and financial affairs for a long-run solution

1.2 International Trade and the Nation’s Standard of Living Measure of the economic relationship among nations Close relationship between international trade and the Nation’s standard of living Conclusion: International trade is of very importance either for small countries or large countries. (see the following data)

Measure of the economic relationship among nations Interdependence Degree: it is given by the ratio of their imports and exports of goods and services to their gross domestic product (GDP). GDP: It refers to the total value of all goods and services produced in the nation. The economic interdependence among nations are in general measured by the more rapid growth of world trade than world production.

Close relationship between international trade and the Nation’s standard of living Higher interdependence among small countries FIGURE 1-1 Imports and Exports as a Percentage of GDP in Various Countries in 2001.

Close relationship between international trade and the Nation’s standard of living World trade growth rate more rapid than world production FIGURE 1-2 Growth of World Production and Trade, 1990-2001 (annual percentage changes).

Close relationship between international trade and the Nation’s standard of living The importance of foreign trade in a large country FIGURE 1-3 Imports and Exports as a Percentage of U.S. GDP, 1965-2001.

1.3 The Subject Matter of International Economics International Trade Theory International Trade Policy International Monetary Theory International Monetary Policy Major Economists’ Theory in International economics ( Adam Smith, David Ricardo, John Stuart Mill, Alfred Marshall, John Maynard Keynes, and Paul Samuelson)

International Trade Theory and Policy International trade theory: it analyzes the basis of trade , the gains from trade, the patterns of trade. International trade policy: It examines the reasons for and the effects of trade restrictions and new protectionism. International economics: It deals with the economic and financial interdependence among nations. It analyzes the flow of goods, services, payments, and monies between a nation and the rest of the world, the policies directed at regulating these flows, and their effect on the nation’s welfare. At the same time the economic and financial interdependence is affected by the political, social, cultural and military relations among nations.

1.4 Purpose of International Economic Theories and Policies Theories are used to examine the basis for and the gains from trade, the reasons for and the effects of trade restrictions; also examine the effectiveness of macroeconomic policies under different types of international monetary arrangements or monetary systems. Policies are used to direct at regulating the flows of international payments and receipts, and the effects of these policies on a nation’s welfare and on the welfare of other nations.

1.5 Current International Economic Problem Trade Protectionism in Industrial Countries Excessive Fluctuations and Large Disequilibria in Exchange Rates Financial Crisis in Emerging Market Economies High Structure Unemployment and Slow Growth in Europe and Stagnation in Japan Job Insecurity from Restructuring and Downsizing in the United States Restructuring Problems of Transition Economies Deep Poverty in Many Developing Countries

1.6 Organization and Methodology of the Text Part Ⅰ(Chapter 2-7) It deals with international trade theory. Chapter 2 comparative advantage theory, Chapter 3 basis and gains from trade, Chapter 4 equilibrium –relative prices, Chapter 5 Heckscher- Ohlin theory, Chapter 6 new trade theories, Chapter 7 growth and Trade. Part Ⅱ(Chapter 8-12) Chapter 8 tariffs, Chapter 9 non-tariffs trade restrictions, Chapter 10 economic integration, Chapter 11 international trade on the impacts of economic development, Chapter 12 international resource movements and multinational corporations.

Part Ⅲ (Chapters 13-15) It deals with the balance of payments, foreign exchange markets, and exchange rate determination. A clear grasp of these three chapters is crucial for understanding Part Four, which focuses on the adjustment to balance-of-payments disequilibria and open-economy macroeconomics. Chapter 13 deals with the measurement of a nation’s balance of payments. Besides presenting the theory, Chapter 14 also examines the actual operation of foreign exchange markets and therefore is of great practical relevance to students of international economics, particularly business majors. Chapter 15 deals more closely with some of the monetary and financial determinants of exchange rates and the reason for exchange rate volatility

Part Ⅳ(Chapter 16-21) It examines the various mechanisms for adjusting balance-of- payments disequilibria, which are often referred to as open- economy macroeconomics. Chapter 16 covers the adjustment mechanism that operates by changing the relationship between domestic and foreign prices, while Chapter 17 examines the income adjustment mechanism and presents a synthesis of the automatic adjustment mechanisms. Chapter 18 and 19 deal with adjustment policies and open-economy macroeconomics proper. Chapter 20 compares fixed versus flexible exchange rates, it examines the European Monetary System, and it discusses international macroeconomic policy coordination. Finally, Chapter 21 examines the operation of the international monetary system over time, especially its present functioning , and it offers possible solutions for the major international economic problems facing the world today.

International trade statistics 2009 World Trade Developments Merchandise trade and GDP

Overview

2008 international crisis

International trade by products

Chapter Summary Some Knowledge of International Economics The Importance of International Trade and Finance Among Countries The Purpose of International Economics The Present Major Problems of International Economics The Organization and Methodology of the Text Present Situation of International Economy

Exercises How do international economic relations differ from interregional economic relations? In what way are they similar? Nations usually impose restrictions on the free international flow of trade, services and factors. Differences in language, customs and laws also hamper these international flows. In addition, international flows may involve receipts and payments in different currencies, which may change in value in relation to one another through time. This is to be contrasted with the interregional flow of goods, services and factors which face no such restrictions as tariffs and are conduced in terms of the same currency, usually in the same language, and under basically the same set of customs and laws.

(2) Both international and interregional economic relations involve the overcoming of space or distance. Indeed, they both arise from the problems created by distance. This distinguishes them from the rest of economics, which abstracts from space and treats the economy as a single point in space, in which production, exchange, and consumption take place.

Exercises Can you think of some ways of by which a nation can gain at the expense of other nations from trade restrictions? A nation can subsidize exports of the commodity to other nations until it drives the competing nation’s industry out of business, after which it can raise its price and benefit from its newly acquired monopoly power.

Exercises When the value of the U.S. dollar falls in relation to the currencies of other nations, what do you think will happen to the quantity of U.S. (1) imports? (2) exports? (1) Imports become more expensive for Americans and so they would purchase a smaller quantity of imports. (2) U.S. exports become cheaper for foreigners and so they would purchase a greater quantity of U.S. exports.

Exercises Additional Reading: 1. World Economic Situation and Prospects 2007 2. World Economic Situation and Prospects 2006 3. World Trade Report 2007, 2008

Internet Materials http://www.imf.org http://www.wto.org http://www.oecd.org http://www.worldbank.org http://www.un.org/depts/unsd/mbsreg.htm http://www.census.gov/statab/www http://www.bea.doc.gov http://www.federalreserve.gov http://www.iie.com