1. Chapter Two The Global Economy

2. Copyright © Houghton Mifflin Company. All rights reserved.2 - 2 * Source: “Imports and Exports as a Percentage of GDP, 1998 Estimates” adapted from WTO Report 2000, and the U.S. Embassy, Riyadh, Key Economic Data

3. Copyright © Houghton Mifflin Company. All rights reserved.2 - 3 Figure 2.1: Growth of World Trade and GNP Source: From “World Trade: Runaway Success” The Economist, October 3, 1998, Survey, p. 4. Copyright © 1998 The Economist Newspaper Ltd. Reprinted with permission. Further reproduction prohibited. www.economist.com

4. Copyright © Houghton Mifflin Company. All rights reserved.2 - 4 The Basis for Trade: Absolute vs. Comparative Advantage Absolute Advantage Comparative Advantage

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7. Copyright © Houghton Mifflin Company. All rights reserved.2 - 7 Balance of Payments (cont’d) Balance of Payments Measures Exchange Rates –The Foreign Exchange Market

8. Copyright © Houghton Mifflin Company. All rights reserved.2 - 8 Balance of Payments Record of all economic transactions between the residents of a country and the rest of the world –Current account – record of all recurring trade in merchandise and services, private gifts, and public aid between countries trade deficit trade surplus –Capital account – record of all long-term direct investment, portfolio investment, and capital flows

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10. Copyright © Houghton Mifflin Company. All rights reserved.2 - 10 Balance of Payments U.S. balance of payments statistics for the period 1999 to 2003

11. Copyright © Houghton Mifflin Company. All rights reserved.2 - 11 Figure 2.2: Structure of the Foreign Exchange Market

12. Copyright © Houghton Mifflin Company. All rights reserved.2 - 12 Balance of Payments (cont’d) –Causes of Exchange Rate Movements Traders Speculators Investors Governments

13. Copyright © Houghton Mifflin Company. All rights reserved.2 - 13 International Agencies for Promoting Economic and Monetary Stability International Monetary Fund World Bank (International Bank for Reconstruction and Development)

14. Copyright © Houghton Mifflin Company. All rights reserved.2 - 14 International Agencies for Promoting Economic and Monetary Stability (cont’d) Group of Seven European Monetary System

15. Copyright © Houghton Mifflin Company. All rights reserved.2 - 15 International Trade: Does It Deserve Special Treatment? Comparative Advantage Can Be Applied to Any Type of Trade –International –Intranational –Interpersonal

16. Copyright © Houghton Mifflin Company. All rights reserved.2 - 16 International Trade: Does It Deserve Special Treatment? (cont’d) International Trade Has Varying –Currencies –Culture –Language –Traditions

17. Copyright © Houghton Mifflin Company. All rights reserved.2 - 17 Protectionism and Trade Restrictions Tariffs Quotas Orderly Marketing Arrangements and Voluntary Export Restrictions

18. Copyright © Houghton Mifflin Company. All rights reserved.2 - 18 Protectionism and Trade Restrictions (cont’d) Formal and Administrative Nontariff Trade Barriers General Agreement on Tariffs and Trade (GATT) World Trade Organization

19. Copyright © Houghton Mifflin Company. All rights reserved.2 - 19 Economic Integration as a Means of Promoting Trade Free Trade Areas Customs Unions Common Markets Monetary Unions

20. Copyright © Houghton Mifflin Company. All rights reserved.2 - 20 The Global Economy Recent Acceleration World is Moving Toward a Single Global Economy World Economies Are Becoming Increasingly Interlinked