Slide 2-1 Introduction Economics 337: The World Economy

Slide 2-2 Lecture Objectives Discuss course content Discuss evaluation Examine the relationship of the US to the world economy

Slide 2-3 Prerequisites Principles of Microeconomics (Econ 101) and Macroeconomics (Econ 102) Basic algebra and geometry.

Slide 2-4 Course Content and Goals This course offers a non-technical introduction to the analysis of international economic issues. The goal of the course is to increase your knowledge of these issues and your tools for analyzing them. While we will be primarily interested in developing standard microeconomic and macroeconomic approaches to these issues, we will also attempt to present a variety of other useful approaches from political science, sociology and less mainstream parts of economics.

Slide 2-5 Course Content The Course Has 5 Main Sections Introduction The Analysis of International Trade The Analysis of Trade Policy Open Economy Macroeconomics Issues Facing Developing Countries

Slide 2-6 Representative topics on the analysis of trade Comparative Advantage Gains from trade Directions of trade Factor endowments and trade “Modern” Trade theory Intra-industry trade Trade and geography

Slide 2-7 Representative topics in Trade Policy Tariffs and Quotas Arguments for commercial policy Linkage between trade and other issues Trade and labor (wages, employment, etc.) Labor standards (child labor etc.) Trade and the Environment

Slide 2-8 Representative Topics in Open Economy Macroeconomics Trade and the Balance of Payments Exchange Rates and Exchange Rate Systems Analyzing Models of the Open Economy (for fun and profit)

Slide 2-9 Representative topics in world economy International financial crises Globalization and reform in Latin America International aspects of East Asian Growth

Slide 2-10 Evaluation of Performance Two Examinations (100 points each) Content: 40% Short answer, 60% essay Dates: 14 October and 10 December About 12 Homeworks (100 points total) Due on date we begin a topic Homework score will be your percent correct. 300 Total Points

Slide 2-11 Current Events in the World Economy Required supplementary reading in King & King: International Economics and International Economic Policy. As part of the required reading for the course, you are expected to read the online version of the Economist magazine. The exams will contain questions drawn from supplementary reading in both of these.

Slide 2-12 General Advice Keep current on the reading Do the homework Ask (relevant) questions in class Come see me during office hours if you have questions that don’t get covered in class

Slide 2-13 Remainder of Introduction Next topic: Globalization and Its Impact on the US Next week: Globalization and Global Governance

Slide 2-14 Globalization in Perspective What Do We Mean By “Globalization”? Is the Current US Economy More “Globalised” than in the Past? What Measures Would We Use? Trade Migration Capital Flows

Slide 2-15 On Trade Openness A Long View of Trade Imports to GDP Exports to GDP Openness Index:

Slide 2-16 Imports to GDP:

Slide 2-17 Exports to GDP

Slide 2-18 Openness Index: Trade/GDP YEAR Openness Index

Slide 2-19 Trade Balance as a Percent of GDP

Slide 2-20 Other Indicators of Trade Openness Law of One Price Does it hold? Not even vaguely. Does it hold more now than in the 19 th Century? Probably. Home Market Bias and Border Effects Does the LoOP hold domestically more than internationally? Yes. Pricing to Market and Pass Through

Slide 2-21 Immigration and Openness How Global is the Market for Labor? Very large labor flows Large, and persistent, wage differentials How do we Evaluate Immigration? Wage effects Fiscal effects Other

Slide 2-22 Immigration and Openness

Slide 2-23 Foreign Direct Investment and Openness US FDI as a Share of GNP YearUS FDI AbroadFDI in US

Slide 2-24 International Financial Openness How global is the world financial market? The market is huge, BIS, Daily Transactions: 1973 $15 billion; 1998 $1.5 trillion. But how integrated is is? Do International Parity Conditions Hold? No. Portfolio nondiversification. Feldstein/Horioka Puzzle: Savings-Investment correlation.

Slide 2-25 International Financial Openness: More or Less than 19 th Century? 19 th Century Characterized by Very Open Financial Markets Gold Standard Very few restrictions After the transatlantic cable, quite good communication links

Slide 2-26 International Financial Openness: More or Less than 19 th Century? The current environment is different Many more financial instruments available today Transaction costs have dropped dramatically 24 hour, global market Better information More timely More reliable (i.e. accounting rules better) Better enforcement of contracts

Slide 2-27 Why Should We Care About Openness? It is a substantial political issue Politicians now use openness as an issue Seattle, etc. There are real benefits and costs