1. 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.

2. 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.

3. 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.

4. The Globalization of the World Economy
Three periods of rapid globalization
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.

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

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

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

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.