Chap 01A - Introduction To Interdependence

12/21/2011
Chapter 1: Introduction to
International Economics
Part A
Interdependence!
Warning: This PowerPoint lecture supplements, but

does not substitute for, the textbook.
The technical parts of the lecture are
more thoroughly explained in the
textbook.
There is much additional material in
the textbook that gives you a more
complete perspective of the issues
covered in this lecture.
Material covered in the text, but not
covered in this lecture, is included
on your assignments and exams.
Interdependence!
There are three fundamental

advantages from expanding the number
of people in a society:
1. The gain from specialization
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Interdependence!

Comparative advantage
Interdependence!

Economies of scale
Interdependence!

Economies of scale
2. The potential for risk reduction
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Interdependence!

C
Comparative
ti advantage
d
t
Economies of scale

3. The expansion of knowledge
Interdependence!

Economies of scale

3. The creation of knowledge
These three advantages are mutually
reinforcing!
Interdependence!
Interaction with strangers has many dangers.

The survival of the human species and the
maximization of individual welfare has always
required a careful balance between
interaction and isolation.
The recent improvements in human welfare,
longevity, and quality of life are the result of
our improved ability to reduce the propensity
for humans to exploit, steal, and kill.
It seems to have become easier and safer to
deal with strangers.
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Interdependence!
Paul Seabright (2004) describes the great

experiment.
Human evolution during the extended period
of hunters and gatherers has only partially
prepared us for dealing with strangers
strangers.
To manage the hazards imposed on us by
the actions of strangers has required us to
deploy a different skill bequeathed to us by
evolution for quite different purposes, the
capacity for abstract symbolic thought
Interdependence!
In order to capture the gains from

specialization, risk sharing, and knowledge
creation, we must create institutions that
make human beings, who are hard-wired to
be suspicious of strangers, willing to deal with
strangers [Douglass North]
almost all of the institutions of modern
society can be understood as dedicated to an
utterly unnatural division of labor between
strangers.
Humans have struggled to get the institutions
right.
Interdependence!
If the objectives of those players in a

position to shape their destiny are met,
it is possible to say that society has
created a consistent set of institutions.
improvement
improvement has been a trial and error
process of change with lots of errors,
endless losers, and no guarantee that
we will continue to get it right in spite of
the enormous accretion of knowledge
over those centuries.
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Interdependence!
Douglass North suggests that the

frequent inconsistencies between
peoples objectives and societys actual
outcomes are caused by:
(1) the lack of accurate information on
how the world actually is and how it
functions
Interdependence!
Douglass North suggests that the

frequent inconsistencies between
peoples objectives and societys actual
outcomes are caused by:
(1) the lack of accurate information on how
the world actually is and how it functions
(2) the resistance to change by certain
people and groups of people because
they prefer the status quo to further
change.
Interdependence!
Douglass North suggests that the frequent

inconsistencies between peoples objectives
and societys actual outcomes are caused by:
(1) the lack of accurate information on how the world
actually is and how it functions
(2) the resistance to change by certain people and
groups of people because they prefer the status
quo to further change.
The acceleration of economic growth over

the past several centuries suggests that we
have been getting it right more often.
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Interdependence!
Many problems remain, however.

The differences in the rates of change of reality,
knowledge, formal legal institutions, culture, and
human instinct mean that when economic and
social environments change more rapidly,
humans culture and evolutionary hard-wired
humans
hard wired
behavioral systems often fall behind.
Historical evidence shows episodes of expanding
international economic integration are often
reversed because institutional support is not
sufficient to handle the complex international
economic interactions.
Interdependence!
Our knowledge of our natural and social

environments is incomplete. This North writes:
Throughout human history there has always been a
large residual that defied rational explanationa
residual to be explained partly by non-rational
explanations embodied in witchcraft, magic, religions;
but partly by more prosaic non-rational behavior
characterized by dogmas, prejudices, half-baked
theories. Indeed despite the . . . assertion by eminent
theorists that it is not possible to theorize in the face
of uncertainty, humans do it all the time; their efforts
range from ad hoc assertions and loosely structured
beliefs such as those encompassed in the labels
conservative and liberal to elegant systematic
ideologies such as Marxism or organized religions.
Interdependence!
Institutions are both formal and informal

arrangements and guidelines.
Culture is an informal institution.
Culture includes the stories, myths,
religions,
li i
ttraditions,
diti
rituals,
it l and
d widely
id l
accepted beliefs that give meaning to our
social existence.
Culture changes slowly.
Culture may clash with reality and other
cultures.
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Interdependence!
International economic activity is greatly

hampered by differences in institutions across
countries.
International trade, international investment,
international financial transactions, and
international migration involve complex forms of
human interaction.
When cultures, rules, laws, and traditions differ,
people have trouble carrying out international
trade, international investment, long-term lending
and borrowing, and absorbing foreign
immigrants.
Interdependence!
International economic activity is also greatly

hampered by differences in institutions across
countries.
International trade, international investment,
international financial transactions, and
international migration involve complex forms of
human interaction.
When cultures, rules, laws, and traditions differ,
people have trouble carrying out international trade,
international investment, long-term lending and
borrowing, and absorbing foreign immigrants.
The important lesson of the past is that human
interactions with strangers have not, and still do
not, always turn out to be mutually beneficial for all
involved.
Interdependence!
The purpose of this textbook is to advance the

understanding of international economics.
International economics has, traditionally, focused
on four different components of international
economic integration:
International trade
International investment
International finance
International migration
The chapters that follow explain international trade,
international investment, international finance, and
international migration.
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Interdependence!

International trade
Interdependence!

International trade
Interdependence!

International trade
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Interdependence!

International trade
Interdependence!

International trade
Interdependence!

International trade
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Interdependence!
Note, however, that the four components of

international economic integration are
related.
Trade often involves financing.
Investment implicitly always involves
financing.
Migration
Mi
ti is
i often
ft related
l t d to
t investment.
i
t
t
Investment is related to trade.
We often focus on one of these
components, but the international economy
is a complex system in which all
components are tightly linked in a great
variety of ways.
Interdependence!

related.
financing.
Migration
Mi
ti is
i often
ft related
l t d to
t investment.
i
t
t
variety of ways.
Interdependence!

related.
financing.
Migration
Mi
ti is
i often
ft related
l t d to
t investment.
i
t
t
variety of ways.
10
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Interdependence!

related.
financing.
Migration
Mi
ti is
i often
ft related
l t d to
t investment.
i
t
t
variety of ways.
Interdependence!

related.
financing.
Migration
Mi
ti is
i often
ft related
l t d to
t investment.
i
t
t
variety of ways.
Interdependence!

related.
financing.
Migration
Mi
ti is
i often
ft related
l t d to
t investment.
i
t
t
variety of ways.
11
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Interdependence!
The purpose of this textbook is to advance

the understanding of international
economics.
International trade
This textbook provides you with a variety of
perspectives, what economists call a
heterodox approach.
12

Chap 01A - Introduction To Interdependence

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12/21/2011

Warning: This PowerPoint lecture supplements, but

There are three fundamental

There are three fundamental

There are three fundamental

There are three fundamental

2. The potential for risk reduction

There are three fundamental

2. The potential for risk reduction

There are three fundamental

2. The potential for risk reduction

Interaction with strangers has many dangers.

Paul Seabright (2004) describes the great

In order to capture the gains from

If the objectives of those players in a

Douglass North suggests that the

Douglass North suggests that the

Douglass North suggests that the frequent

The acceleration of economic growth over

Many problems remain, however.

Our knowledge of our natural and social

Institutions are both formal and informal

International economic activity is greatly

International economic activity is also greatly

The purpose of this textbook is to advance the

The purpose of this textbook is to advance the

The purpose of this textbook is to advance the

The purpose of this textbook is to advance the

The purpose of this textbook is to advance the

The purpose of this textbook is to advance the

The purpose of this textbook is to advance the

Note, however, that the four components of

Note, however, that the four components of

Note, however, that the four components of

Note, however, that the four components of

Note, however, that the four components of

Note, however, that the four components of

The purpose of this textbook is to advance

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