Lecture 1 Overview of the World Economy Econ 340

Lecture 2: Institutions2 Announcements We will start discussing news next week, on Monday Jan 19. You should be watching for international economic news. GSI: Dan Jaqua –Office: 125 Lorch –Hours: Tuesdays 10-11:30 AM Wednesdays 1:30-3 PM

Lecture 1: Overview3 Lecture 1 Outline Overview of the World Economy “Globalization” Elements of the World Economy Ways that Countries Interact –Trade –Capital Flows –Migration Policies that Affect Others

Lecture 1: Overview4 Overview of the World Economy “Globalization” –Means different things to different people My definitions (see my online Glossary): 1. The increasing world-wide integration of markets for goods, services and capital. 2. Also the role of MNCs, IMF, WTO, World Bank. 3. Elsewhere: domination by United States. Some see good, others bad –Bad: reading by powell –Good: reading by Bhagwati Both make valid points. Read to see what they are.

Lecture 1: Overview5 Overview of the World Economy “Globalization” –Some aspects of globalization declined with the world recession of 2008 –The Economist, on Nov 15, 2014, reported “Signs of Life”: Globalization is back Various measures of globalization (though not all) have risen past their previous peaks The “depth” of trade (its volume) has increased The “breadth” of trade (number of borders crossed) has not fully recovered

Lecture 1: Overview6 Overview of the World Economy International Economics –Is NOT about countries –It IS about interactions among countries

Lecture 1: Overview7 Lecture 1 Outline Overview of the World Economy “Globalization” Elements of the World Economy Ways that Countries Interact –Trade –Capital Flows –Migration Policies that Affect Others

Lecture 1: Overview8 Overview of the World Economy World Economy consists of –Countries: a few hundred (CIA lists about 240) (WTO has 160 members) –People: over 7 billion (7.216 b. 1/5/15, compare 320 m. US) –Land: about 15 times the US

Lecture 1: Overview9 (Aside, on getting information) An excellent source of information about countries is the CIA World Fact Book (Just Google “fact book”)

Lecture 1: Overview10 Overview of the World Economy World Economy consists of –GDP (2013 est., per CIA, in US$) World:Total = $87.25 trillion per capita =$13,100 US:Total = $16.72 trillion per capita =$52,800

Lecture 1: Overview11 Overview of the World Economy Implication –US is very unusual Very rich –US has less than 5% of world population but almost 20% of world income

Lecture 1: Overview12 Lecture 1 Outline Overview of the World Economy “Globalization” Elements of the World Economy Ways that Countries Interact –Trade –Capital Flows –Migration Policies that Affect Others

Lecture 1: Overview13 Overview of the World Economy Ways that countries interact economically –Trade (per CIA, 2013 est.) World exports: $18.71 trillion (compare world GDP of $87 trillion) World trade has grown faster than world GDP most years –But not during , due to world recession

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Lecture 1: Overview15 Overview of the World Economy See tables below for –Who trades most? –Who trades with whom? –Share of trade in GDP –US: What do we export/import? To/from whom?

Lecture 1: Overview16 Who Trades the Most? ($ b. & % share, 2013) ExportersImporters ValueShareValueShare EU-28* US China EU-28* US China Japan Japan Korea, S Hng Kng World World *EU external only Source: WTO, International Trade Statistics, 2014, Table I.8

Lecture 1: Overview17 Who Trades the Most? Developed countries are the biggest traders China is catching up, in trade volume –It was the #3 exporter six years ago when I taught the course; now it’s #2 and closing in on EU. –Others are gaining as well: Four years ago Canada was #5 exporter. Three years ago that was S Korea

Lecture 1: Overview18 Who Trades the Most? See Economist from about a year ago: “Trading Up: Picking the world champion of trade” –China claimed to have surpassed US. True only for goods, not goods + services But with time China will pass US in both –China’s trade per GDP is much larger than the US, but below world average –Much of the value in China’s exports is imported inputs, thus low “value added.”

Lecture 1: Overview19 Who Trades the Most? “Emerging Markets” in general are catching up to, or surpassing, the developed countries –In GDP, trade, and more –See Economics Focus from The Economist, “Why the Tail Wags the Dog”

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Lecture 1: Overview22 Who Trades with Whom? ($ b., 2013, Intra- and inter-regional merchandise trade) Source: WTO, International Trade Statistics, 2014, Table I.4 Destination: Origin:North Amer. Latin Amer. Eur.AsiaAfricaOther North Amer Latin Amer Europe Asia Africa Other World

Lecture 1: Overview23 North America, Europe, and Asia trade mostly within their group Poorer regions – Latin America, Africa – trade mostly with the richer regions This reflects what is not so clear in the table: –Rich countries trade most with each other –Poor countries trade most with rich countries But their trade with each other is growing

Lecture 1: Overview24 What Does the World Trade? ($ b & annual % growth rates, merchandise exports) Source: WTO, International Trade Statistics, 2014, Table II.1 Value All Products17,590 Agriculture1,74599– Fuel&Mining3, – –3 Manuf.11,84896–

Lecture 1: Overview25 What Does the World Trade? Biggest traded category: manufactures Fastest growing, then shrinking, then growing: “fuels & mining” Why? Because this is the value of trade, and prices of oil and other raw materials were rising, and then falling. But within Manufactures, Iron & Steel is even more volatile:

Lecture 1: Overview26 What Does the World Trade? ($ b & annual % growth rates, merchandise exports) Source: WTO, International Trade Statistics, 2014, Table II.1 Reason: Very sensitive to investment, thus to expansion and contraction. Value All Products17,590 Agriculture1,74599– Fuel&Mining3, – –3 Manuf.11,84896– Iron & Steel454176– –8–6

Lecture 1: Overview27 What Does the World Trade? ($ b & annual % growth rates, merchandise exports) Source: WTO, International Trade Statistics, 2014, Table II.1 Value All Products17,590 Agriculture1,74599– Fuel&Mining3, – –3 Manuf.11,84896– Iron & Steel454176– –8–6 Automotive1,348105– Note too: Trade in cars is more than 10% of trade in manufactures, and also volatile.

Lecture 1: Overview28 What Does the US Trade? ($ b. 2011) ExportsImports Total1,497.42,235.8 Agriculture140.0 Petroleum462.3 Industrial supplies Capital goods, exc. auto Automotive Other non-ag234.6 Other non-petrol685.1 Source: Economic Report of the President, Feb 2013, Table B-104.

Lecture 1: Overview29 What Does the US Trade? US imports are much larger than US exports –(We’ll see what that means later in the course.) US is a big… –Exporter of agricultural products –Importer of oil –Exporter and importer of capital goods (i.e., machines for making things)

Lecture 1: Overview30 Importance of Trade for Countries? (GDP in US$ b., Exports % of GDP, Selected countries, 2012) GDPExports/GDP United States % Japan % Germany % Canada % India % Mexico % Netherlands 72280% Singapore % Philippines 27217% Nepal 195% Source: CIA World Fact Book

Lecture 1: Overview31 Importance of Trade for Countries? Even though we trade more than most, US trade is a smaller part of US GDP than for many other countries Others that are low: Japan, Nepal (even lower than US) Note Singapore: Exports can be more than GDP. –Reason: Exports are made using imported inputs, so value of exports includes imports.

Lecture 1: Overview32 Importance of Trade for Countries? A Few More of Interest GDPExports/GDP China % Hong Kong % Korea, South % Korea, North (2009) 287% Burma 5915% Syria 656% Israel 27322% Source: CIA World Fact Book

Lecture 1: Overview33 Lecture 1 Outline Overview of the World Economy “Globalization” Elements of the World Economy Ways that Countries Interact –Trade –Capital Flows –Migration Policies that Affect Others

Lecture 1: Overview34 Overview of the World Economy Ways that countries interact economically –Capital Flows Financial (holdings of financial assets abroad) Real (international ownership of real assets)

Lecture 1: Overview35 Overview of the World Economy Ways that countries interact economically –Capital Flows Financial (holdings of financial assets abroad) »Currency »Bank deposits »Bonds – private and government »Stocks »Bank loans Real (international ownership of real assets)

Lecture 1: Overview36 Overview of the World Economy Ways that countries interact economically –Capital Flows Financial (holdings of financial assets abroad) Real (international ownership of real assets) »Real estate »Capital assets (plant and equipment) »Stocks (equities) if ownership share is large »Other Data, below, are stocks (i.e, amounts at a point in time)

Lecture 1: Overview37 US Investment Position ($ trillion at market value, year-end 2011) Source: Economic Report of the President, Feb 2013, Table B-107 We “Own” US Assets Abroad We “Owe” Foreign Assets in US Total US Gov’t Private financial Private real Compare: US GDP in 2012 = $16.02 trillion

Lecture 1: Overview38 US Investment Position (Qualification: “Owe” isn’t quite right. This includes all assets in the US owned by foreigners, including land, buildings, etc. Not just what we’ve borrowed.) Lessons: –US is a large net “debtor” (result of our spending more than we earn) –Most of this today is government, but some is private

Lecture 1: Overview39 Lecture 1 Outline Overview of the World Economy “Globalization” Elements of the World Economy Ways that Countries Interact –Trade –Capital Flows –Migration Policies that Affect Others

Lecture 1: Overview40 Overview of the World Economy Other ways that countries interact economically –Migration Temporary –Guest workers –Day workers Permanent In practice, most (all?) countries limit migration severely

Lecture 1: Overview41 Lecture 1 Outline Overview of the World Economy “Globalization” Elements of the World Economy Ways that Countries Interact –Trade –Capital Flows –Migration Policies that Affect Others

Lecture 1: Overview42 Overview of the World Economy Other ways that countries interact economically –Policies that affect other countries Direct Indirect

Lecture 1: Overview43 Overview of the World Economy Other ways that countries interact economically –Policies that affect other countries Direct –Trade policies (tariffs, quotas) –Foreign aid –Capital controls –Exchange rate management –Immigration restrictions Indirect

Lecture 1: Overview44 Overview of the World Economy Aside on Tariffs –We will be dealing a lot with these –See reading by Hufbauer and Grieco: US tariffs are much lower than they used to be (average 4% now, vs. 40% in 1946) US has gained a great deal from lowering tariffs US still has much to gain from further lowering But there are also severe costs for some people and firms who compete with imports

Lecture 1: Overview45 Overview of the World Economy Aside on Tariffs –Tariffs could go up: WTO enforces only upper limits on tariffs Actual tariffs in many countries are below these limits, and could legally rise There was danger that the recent world recession would push countries to do that. –They didn’t – at least not much.

Lecture 1: Overview46 Overview of the World Economy Aside on Tariffs –45% of US exports go to developing countries –US tariffs are much higher against developing countries than against developed countries

Lecture 1: Overview47 Overview of the World Economy Other ways that countries interact economically –Policies that affect other countries Indirect –Subsidies (esp. agriculture) »US farm subsidies > foreign aid (see CGD reading) –Macro policies (monetary, fiscal) »Exchange-rate policies –Environmental policies –Standards »Labor »Health & safety »Norms

Lecture 1: Overview48 Next Time Institutions of the International Economy –What are they? The WTO The IMF The World Bank The OECD –What’s happening (or not happening) now?