An Introduction to

International Economics
Chapter 1-p1: Introduction

Nguyen The Lan

 Syllabus

• Preparation:
– Completion of micro- and macro-economics
macro
• Textbooks:
– Krugman and Obstfeld, International Economics:
Theory and Policy, 8th edition
– Dominick Salvatore, International Economics, 11th
edition

1-2
 Syllabus (cont.)

• Assessment:
– Presentation and other groupworks (20%): Teams of
4 or 5 students; 20-30
30 min analysis of a current topic
using PPT slides
– Class attendance (10%)
– Midterm (20%)
– Final (50%)
• Exams contain T/F, multiple choice, and essay questions

1-3
 Syllabus (cont.)

• Contact:
– Email your questions: [email protected]
• Classes:
– 15 meetings: lectures, mid-term
mid exam, and student
presentations

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 Syllabus (cont.)

Date Topic Chapters

Part 1 & 2 –
International Trade issues
KO or Salvatore
Student Presentations on Trade
---
Topics
Midterm Exam ---
Part 3 & 4 –
International Monetary issues
KO or Salvatore
(Student Presentations on
---
International Monetary Topics)
Final Exam ---
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 What is International Economics?

• International trade in goods and services

– An example: Sony Televisions

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 What is International Economics?

• International trade in goods and services

– A key issue – its not just imports!
• Exports of Boeing Aircraft
• Exports of Microsoft Software

1-7
 What is International Economics?

• International trade in goods and services

– A key issue – its not just imports!
– Its also not just for consumers!
• Trade in component parts

1-8
 What is International Economics?

• International trade in goods and services

– A key issue – its not just imports!
– Its also not just for consumers!
– Services, not just goods!

1-9
 What is International Economics?

• International trade in goods and services

– A key issue – its not just imports!
– Its also not just for consumers!
– Services, not just goods!
– International trade is expanding

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 What is International Economics?
World Merchandise Trade, 1960-2020
1960

Source: World Trade Organization and World Bank

The value of global exports first exceeded $US 1 trillion in

1977, and by 2029, more than 17 trillion current US dollars of
merchandise were exported. 1 - 11
What is International Economics?

1 - 12
 What is International Economics?

• International trade in goods and services

• International ownership of assets
– Examples
• Foreign stock ownership
• US government debt

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 What is International Economics?

• International trade in goods and services

• International ownership of assets
• Currency exchange
– International transactions require conversions
between currencies
– Foreign exchange markets

1 - 14
 What is International Economics?

• International trade in goods and services

• International ownership of assets
• Currency exchange
• International organizations
– World Trade Organization
– International Monetary Fund
– European Union

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 International trade
and the nation’s 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.

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 Standard of Living

• The International Economy generates

Interdependence
• Sources of potential gain
– Access to items not available domestically
• Coffee
• Bananas
• Tin
• Tungsten

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 Standard of Living

• The International Economy generates

Interdependence
• Sources of potential gain
– Access to items not available domestically
– Access to lower cost products
– Access to greater product variety

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 Standard of Living

• The International Economy generates

Interdependence
• Sources of potential gain
• 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.

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 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

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 Subjects in International Economics

 Mercantilism
 Absolute advantage
 Comparative advantage
 Opportunity cost theory

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 Subjects in International Economics

• International Trade Theory

• 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

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 Subjects in International Economics

• International Trade Policy

 Tariffs
 Quota
 Export subsidy
 Technical restrictions

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 Subjects in International Economics

• International Trade Theory

• International Trade Policy
• 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.

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 Subjects in International Economics

• International Trade Theory

• International Trade Policy
• 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 that is
concerned with the macroeconomic implications
of the International Economy.

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 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?

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 Current International Economic
Problems

• Trade Protectionism in Industrial Countries

• 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?

1 - 27
 Current International Economic
Problems

• Trade Protectionism in Industrial Countries

• 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

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 Current International Economic
Problems

• Trade Protectionism in Industrial Countries

• Excessive Fluctuations and Large Disequilibria in
Exchange Rates
• Financial Crises in Emerging Market Economies
• High Structural Unemployment and Slow
Growth in Europe and Stagnation in Japan

1 - 29
 Current International Economic
Problems

• Trade Protectionism in Industrial Countries

• Excessive Fluctuations and Large Disequilibria in
Exchange Rates
• Financial Crises in Emerging Market Economies
• High Structural Unemployment and Slow Growth
in Europe and Stagnation in Japan
• Job Insecurity from Restructuring and
Downsizing in the United States

1 - 30
 Current International Economic
Problems

• Excessive Fluctuations and Large Disequilibria in

Exchange Rates
• Financial Crises in Emerging Market Economies
• High Structural Unemployment and Slow Growth
in Europe and Stagnation in Japan
• Job Insecurity from Restructuring and Downsizing
in the United States
• Restructuring Problems of Transition
Economies

1 - 31
 Current International Economic
Problems

• Excessive Fluctuations and Large Disequilibria in

Exchange Rates
• Financial Crises in Emerging Market Economies
• High Structural Unemployment and Slow Growth
in Europe and Stagnation in Japan
• Job Insecurity from Restructuring and Downsizing
in the United States
• Restructuring Problems of Transition Economies
• Deep Poverty in Many Developing Countries
1 - 32
 Current International Economic
Problems
• Financial Crises in Emerging Market Economies
• High Structural Unemployment and Slow Growth
in Europe and Stagnation in Japan
• Job Insecurity from Restructuring and Downsizing
in the United States
• Restructuring Problems of Transition Economies
• Deep Poverty in Many Developing Countries
• Resource Scarcity, Environmental
Degradation, Climate Change, and
Unsustainable Development
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 Globalization

• What is globalization?
– Increasing international economic connections
• International Trade
• International Asset Ownership

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CASE STUDY 1-1 1 The Dell PCs, iPhones, and iPads Sold in the
United States Are Anything but American!
(P.2 Salvatore)

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 Globalization

• What is globalization?
– Increasing international economic connections
– Increasing role of International Organizations in
constraining domestic policies

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 Globalization

• What is globalization?
– Increasing international economic connections
– Increasing role of International Organizations in
constraining domestic policies
– Increasing cultural homogeneity

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 Globalization

• What is globalization?
– Increasing international economic connections
– Increasing role of International Organizations in
constraining domestic policies
– Increasing cultural homogeneity
– Increased domestic economic growth caused by
expanded international connections
• Potential harm?
– Environmental concerns

1 - 38
 Globalization

• What is globalization?
• The Anti-Globalization
Globalization movement
– A loose coalition of groups opposed to
globalization
– Concerns
• Environmental damage
• Loss of domestic labor protections
• Erosion of domestic sovereignty

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Chapter 1 – p.2

World Trade:
An Overview

1 - 40
 Preview

• The largest trading partners of the US

• Gravity model:
– influence of an economy’s size on trade
– distance and other factors that influence trade

• Borders and trade agreements

• Globalization, then and now
• Changing composition of trade
• Multinational corporations and outsourcing

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 Who Trades with Whom?

• In
n 2015, the world as a whole produced goods and
services worth about $74 trillion. Of this total, about 30
percent was sold across national borders: World trade in
goods and services exceeded $21 trillion.
• The 5 largest trading partners with the
US in 2015 were China , Canada, Mexico, Japan and
Germany.
• The total value imports from and exports
to China in 2015 was almost $600 billion dollars.
• Taken together, these 15 countries accounted for 75
percent of the value of U.S. trade in that year.
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Who Trades with Whom? (cont.)

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 Size Matters: The Gravity Model

• 3 of the top 10 trading partners with the US

in 2015 were also the 3 largest European economies:
Germany, UK and France.
• These countries have the largest gross domestic product
(GDP) in Europe.
– GDP measures the value of goods and services
produced in an economy.

• Why does the US trade most with these European countries

and not other European countries?

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 Size Matters: The Gravity Model
(cont.)

• In fact, the size of an economy is directly related to

the volume of imports and exports.

– Larger economies produce more goods and services, so

they have more to sell in the export market.

– Larger economies generate more income from the goods

and services sold, so people are able to buy more
imports.

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Size Matters: The Gravity Model
(cont.)

1 - 46
 The Gravity Model

Other things besides size matter for trade:

1. Distance between markets influences transportation costs
and therefore the cost of imports and exports.
– Distance may also influence personal contact and communication,
which may influence trade.
2. Cultural affinity:: if two countries have cultural ties, it is
likely that they also have strong economic ties.
3. Geography:: ocean harbors and a lack of mountain barriers
make transportation and trade easier.

1 - 47
 The Gravity Model (cont.)

4. Multinational corporations:: corporations spread across

different nations import and export many goods between
their divisions.
5. Borders:: crossing borders involves formalities that take
time and perhaps monetary costs like tariffs.
– These implicit and explicit costs reduce trade.
– The existence of borders may also indicate the existence of
different languages or different currencies, either of which may
impede trade more.

1 - 48
 The Gravity Model (cont.)

• In its basic form, the gravity model assumes that only size
and distance are important for trade in the following way:
Tij = A x Yi x Yj /Dij
• where
Tij is the value of trade between country i and country j
A is a constant
Yi the GDP of country i
Yj is the GDP of country j
Dij is the distance between country i and country j

1 - 49
 The Gravity Model (cont.)

• In a slightly more general form, the gravity model that is

commonly estimated is

Tij = A x Yia x Yjb /Dijc

where a, b, and c are allowed to differ from 1.

• Perhaps surprisingly, the gravity model works fairly well in

predicting actual trade flows.

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 Distance and Borders

• Estimates of the effect of distance from the gravity

model predict that a 1% increase in the distance
between countries is associated with a decrease in
the volume of trade of 0.7% to 1%.

1 - 51
 Distance and Borders (cont.)

• Besides distance, borders increase the cost and time

needed to trade.
• Trade agreements between countries are intended to
reduce the formalities and tariffs needed to cross borders,
and therefore to increase trade.
• The gravity model can assess the effect of trade
agreements on trade: does a trade agreement lead to
significantly more trade among its partners than one would
otherwise predict given their GDPs and distances from one
another?

1 - 52
 Distance and Borders (cont.)

• The US has signed a free trade agreement with Mexico

and Canada in 1994, the North American Free Trade
Agreement (NAFTA or USMCA now).
now

• Because of NAFTA and because Mexico and Canada

are close to the US, the amount of trade between the US
and its northern and southern neighbors as a fraction of
GDP is larger than between the US and European
countries.
1 - 53
Distance and Borders (cont.)

1 - 54
 Distance and Borders (cont.)

• Yet even with a free trade agreement between the

US and Canada, which use a common
language, the border between these countries still
seems to be associated with a reduction in trade.

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Distance and Borders (cont.)

1 - 56
Distance and Borders (cont.)

1 - 57
 Has the World Become “Smaller”?

• The negative effect of distance on trade according to the

gravity models is significant, but it has grown smaller over
time due to modern transportation and communication.
– Wheels, sails, compasses, railroads, telegraph, steam
power, automobiles, telephones, airplanes, computers, fax
machines, internet, fiber optics,… are technologies that
have increased trade.

• But history has shown that political factors, such as wars,

can change trade patterns much more than innovations in
transportation and communication.

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 Has the World Become “Smaller”?
(cont.)

• There were two waves of globalization.

– 1840–1914:
1914: economies relied on steam power, railroads,
telegraph, telephones. Globalization was interrupted and
reversed by wars and depression.

– 1945–present:
present: economies rely on telephones, airplanes,
computers, internet, fiber optics,…

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 Changing Composition of Trade

• What kinds of products do nations currently trade,

and how does this composition compare to trade in the
past?

• Today, most of the volume of trade is in manufactured

products such as automobiles, computers, clothing and
machinery.
– Services such as shipping, insurance, legal fees and spending by
tourists account for 20% of the volume of trade.

– Mineral products (e.g., petroleum, coal, copper) and agricultural

products are a relatively small part of trade.

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 Changing Composition of Trade
(cont.)

The composition
of world trade,
2017
Most world trade
is in manufactured
goods
But minerals –
mainly oil –
remain important

1 - 61
 Changing Composition of Trade
(cont.)

• In the past, a large fraction of the volume of trade came

from agricultural and mineral products.
– In 1910, Britain mainly imported agricultural and mineral products,
although manufactured products still represented most of the volume
of exports.
– In 1910, the US mainly imported and exported agricultural products
and mineral products.
– In 2002, manufactured products made up most of the volume of
imports and exports for both countries.

1 - 62
Changing Composition of Trade
(cont.)

1 - 63
 Changing Composition of Trade
(cont.)

• Developing countries, or low and middle-income

middle
countries, have also changed the composition of
their trade.
– In 2001, about 65% of exports from developing countries
were manufactured products, and only 10% of exports
were agricultural products.

– In 1960, about 58% of exports from developing countries

were agricultural products and only 12% of exports were
manufactured products.
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Changing Composition of Trade
(cont.)

1 - 65
 Multinational Corporations
and Outsourcing

• Before 1945, multinational corporations played a

small role world trade.

• But today about one third of all US exports and

42% of all US imports are sales from one division
of a multinational corporation to another.

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 Multinational Corporations
and Outsourcing (cont.)

• Outsourcing occurs when a firm moves business

operations out of the domestic country.
– The operations could be run by a subsidiary of a
multinational corporation.
– Or they could be subcontracted to a foreign firm.

• Outsourcing of either type increases the amount of

trade.

1 - 67