CHAPTER 1 International Economics

An Introduction to
International Economics
Chapter 1: Introduction
Dominick Salvatore
John Wiley & Sons, Inc.
Dale R. DeBoer 1-1

University of Colorado, Colorado Springs
What is International Economics?
International trade in goods and services

An example: Sony Televisions
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A key issue its not just imports!
Exports of Boeing Aircraft
Exports of Microsoft Software
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Its also not just for consumers!
Trade in component parts
Monitors for Dell Computers
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Services, not just goods!
Lloyds of London
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Services, not just goods!
International trade is expanding
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A key issue Value
its ofnot just
World imports!
Merchandise Exports (1995 = 100)
Source: World Trade Organization
Its also not
140
just for consumers!
Services,120not just goods!
100
International
80
trade is expanding
60
40
20
0
1950 1960 1970 1980 1990 2000
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International ownership of assets
Examples
Foreign stock ownership
Automobile assembly plants
Toyota WWW link
US government debt
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Currency exchange
International transactions require conversions
between currencies
Foreign exchange markets
Federal Reserve Bank Exchange Rate Data WWW link
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Currency exchange
International organizations
World Trade Organization
WWW link
International Monetary Fund
WWW link
European Union
WWW link
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Standard of Living
The International Economy generates

Interdependence
Economic growth in the United States spurs
increased demand for imports
Increased import demand by the United States
generates economic growth in other countries
Standard of Living

Interdependence
Sources of potential gain
Access to items not available domestically
Coffee
Bananas
Tin
Tungsten
Standard of Living

Interdependence
Access to items not available domestically
Access to lower cost products
Access to greater product variety
Standard of Living

Interdependence
Is it always a gain?
Import competing sectors may experience
production and job losses
This loss is at least partially (and potentially,
completely) offset by gains in the exporting
sectors
Subjects in International Economics
International Trade Theory

Analyzes the basis of and the gains from
international trade
Focuses on the microeconomic aspects of the
international economy

International Trade Policy
Examines the reasons for and the effects of
restrictions on international trade
Analyzes the implications for International
Trade Theory of such restrictions

Balance of Payments
A summary statement of all the international
transactions of the residents of a nation with the
rest of the world during a particular period of time,
usually a year.
Provides a statistical summary of the size of
international trade and international asset
ownership for a country

Balance of Payments
Foreign Exchange Markets
The institutional framework for the exchange of
one national currency into another
Part of the study of International Finance (or
Open-Economy Macroeconomics) that is
concerned with the macroeconomic implications
of the International Economy

Balance of Payments
Foreign Exchange Markets
Adjustments in the Balance of Payments
Focuses on the relationship between internal and
external aspects of the economy
Examines how disequilibria lead to
macroeconomic adjustment under difference
international monetary systems
Current International Economic
Problems
Trade Protectionism in Industrial Countries

What are the reasons for this protection?
What are the implications of this protection for the
industrial countries?
What are the implications of this protection for the
rest of the world?
How do regional trade blocks (the NAFTA, the
European Union, etc.) complicate efforts to reduce
this protection?
Problems

Excessive Fluctuations and Large
Disequilibria in Exchange Rates
Large exchange rate fluctuations may disrupt
international trade and harm economic growth
What is the source of these fluctuations?
How can the international financial system be
reformed to eliminate these fluctuations?
Problems

Excessive Fluctuations and Large Disequilibria in
Exchange Rates
Financial Crises in Emerging Market
Economies
The causes and consequences of a sudden
collapse in the value of a currency of an emerging
economy
Problems

Exchange Rates
Financial Crises in Emerging Market Economies
High Structural Unemployment and Slow
Growth in Europe and Stagnation in Japan
Problems

Exchange Rates
High Structural Unemployment and Slow Growth
in Europe and Stagnation in Japan
Job Insecurity from Restructuring and
Downsizing in the United States
Problems

Exchange Rates
Job Insecurity from Restructuring and Downsizing
in the United States
Restructuring Problems of Transition
Economies
Problems

Exchange Rates
Job Insecurity from Restructuring and Downsizing
in the United States
Restructuring Problems of Transition Economies
Deep Poverty in Many Developing Countries
Globalization
What is globalization?
Increasing international economic connections
International Trade
International Asset Ownership
Globalization
Increasing role of International Organizations in
constraining domestic policies
Globalization
Increasing cultural homogeneity
Globalization
Increasing cultural homogeneity
Increased domestic economic growth caused by
expanded international connections
Potential harm?
Environmental concerns
Globalization
The Anti-Globalization movement
A loose coalition of groups opposed to
globalization
Concerns
Environmental damage
Loss of domestic labor protections
Erosion of domestic sovereignty
What Is Globalization?
The world is moving away from self-contained

national economies toward an interdependent,
integrated global economic system
Globalization refers to the shift toward a more

integrated and interdependent world economy
Globalization has two facets:

1) the globalization of markets
Dale R. DeBoer
2) the globalization of production
The Globalization Of Markets
The globalization of markets refers to the merging

of historically distinct and separate national markets
into one huge global marketplace
In many industries, it is no longer meaningful to talk

about the German market or the American
market
Instead, there is only the global market
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The Globalization Of Markets
Falling trade barriers make it easier to sell

internationally
The tastes and preferences of consumers are

converging on some global norm
Firms help create the global market by offering the

same basic products worldwide
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Classroom Performance System
The shift toward a more integrated and

interdependent world economy is referred to as
a) economic integration
b) economic interdependency
c) globalization
d) internationalization
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The Globalization Of Production
The globalization of production refers to the

sourcing of goods and services from locations
around the globe to take advantage of national
differences in the cost and quality of factors of
production like land, labor, and capital
Companies compete more effectively by lowering

their overall cost structure or improving the quality
or functionality of their product offering
Dale R. DeBoer
The merging of historically distinct and

separate national markets into one huge
global marketplace is known as
a) global market facilitation

b) cross-border trade
c) supranational market integration
d) the globalization of markets
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Firms that are involved in international

business tend to be
a) large
b) small
c) medium-sized
d) large, small, and medium-sized
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Drivers Of Globalization
Two macro factors underlie the trend toward greater

globalization:
the decline in barriers to the free flow of goods,

services, and capital that has occurred since the
end of World War II
technological change
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The Globalization Debate
Is the shift toward a more integrated and

interdependent global economy a good thing?
Supporters believe that increased trade and cross-
border investment mean lower prices for goods and
services, greater economic growth, higher
consumer income, and more jobs
Critics worry that globalization will cause job
losses, environmental degradation, and the cultural
imperialism of global media and MNEs
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Anti-Globalization Protests
More than 40,000 anti-globalization protesters took

to the street at the WTO meeting in Seattle in 1999
Protesters now regularly show up at most major
meetings of global institutions
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Globalization, Jobs, And Income
Globalization critics argue that falling barriers to

trade are destroying manufacturing jobs in
advanced countries
Supporters of globalization contend that the
benefits of this trend outweigh the coststhat
countries will specialize in what they do most
efficiently and trade for other goodsand all
countries will benefit
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Globalization, Labor Policies,
And The Environment
Globalization critics argue that firms avoid costly

efforts to adhere to labor and environmental
regulations by moving production to countries where
such regulations do not exist, or are not enforced
Globalization supporters claim that tougher
environmental and labor standards are associated
with economic progress, so as countries get richer
from free trade, they get tougher environmental and
labor regulations
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Globalization And
National Sovereignty
Critics of globalization worry that todays

interdependent global economy is shifting economic
power away from national governments toward
supranational organizations like the WTO, the EU,
and the UN
Supporters of globalization contend that the power
of these organizations is limited to what nation-
states agree to grant, and that the power of the
organizations lies in their ability to get countries to
agree to follow certain actions
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Globalization And The Worlds
Poor
Critics of globalization argue that the gap between

rich nations and poor nations is getting wider
Supporters of globalization claim that the best way
for the poor nations to improve their situation is to
reduce barriers to trade and investment and
implement economic policies based on free market
economies, and to receive debt forgiveness for
debts incurred under totalitarian regimes
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Which of these is not a concern of anti-globalization

protesters?
a) globalization raises consumer income

b) globalization contributes to environmental
degradation
c) globalization is causing a loss of manufacturing
jobs in developing countries
d) globalization implies a loss of national
sovereignty
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Managing In The Global
Marketplace
An international business is any firm that engages

in international trade or investment
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Managing In The Global
Marketplace
Managing an international business differs from

managing a domestic business because:
countries are different
the range of problems confronted in an
international business is wider and the problems
more complex than those in a domestic business
firms have to find ways to work within the limits
imposed by government intervention in the
international trade and investment system
international transactions involve converting money
into different currencies
Dale R. DeBoer

CHAPTER 1 International Economics

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CHAPTER 1 International Economics

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An Introduction to

Dale R. DeBoer 1-1

International trade in goods and services

Dale R. DeBoer 1-2

International trade in goods and services

Dale R. DeBoer 1-3

International trade in goods and services

Dale R. DeBoer 1-4

International trade in goods and services

Dale R. DeBoer 1-5

International trade in goods and services

Dale R. DeBoer 1-6

International trade in goods and services

Dale R. DeBoer 1-7

International trade in goods and services

Dale R. DeBoer 1-8

International trade in goods and services

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International trade in goods and services

The International Economy generates

The International Economy generates

The International Economy generates

The International Economy generates

International Trade Theory

International Trade Theory

International Trade Theory

International Trade Theory

International Trade Theory

Trade Protectionism in Industrial Countries

Trade Protectionism in Industrial Countries

Trade Protectionism in Industrial Countries

Trade Protectionism in Industrial Countries

Trade Protectionism in Industrial Countries

Excessive Fluctuations and Large Disequilibria in

Excessive Fluctuations and Large Disequilibria in

The world is moving away from self-contained

Globalization refers to the shift toward a more

Globalization has two facets:

The globalization of markets refers to the merging

In many industries, it is no longer meaningful to talk

Instead, there is only the global market

Falling trade barriers make it easier to sell

The tastes and preferences of consumers are

Firms help create the global market by offering the

The shift toward a more integrated and

The globalization of production refers to the

Companies compete more effectively by lowering

The merging of historically distinct and

a) global market facilitation

Firms that are involved in international

Two macro factors underlie the trend toward greater

the decline in barriers to the free flow of goods,

Is the shift toward a more integrated and

More than 40,000 anti-globalization protesters took

Globalization critics argue that falling barriers to

Globalization critics argue that firms avoid costly

Critics of globalization worry that todays

Critics of globalization argue that the gap between

Which of these is not a concern of anti-globalization

a) globalization raises consumer income

An international business is any firm that engages

Managing an international business differs from

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