Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

Economics
Introduction to International
Chapter 1
 After completing the chapter, students
should be able to:

• Define economic interdependence.

• Discuss the importance of international
trade for a nation economy.
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

• Discuss the nature of competitiveness and

how it applies to firms, industries, and
nations.
• Identify the advantages and
disadvantages of international trade.
Ch01-2
 Introduction
• Economic Interdependence
– Caused due to increased integration of
market economies
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

– Reflects the evolution of global economic and

political order
• US dominance post World War II
• Formation of European Community (1950s)
• Rising importance of MNCs (1960s)
• Market power of OPEC (1970s)
• Creation of the euro

Ch01-3
 Globalization
• greater interdependence among nations
• increased integration of product and resource
markets through trade, immigration, and
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

foreign investment
• includes noneconomic elements such as
cultural and environmental factors
• occurs on political, technological, cultural and
economic levels

Ch01-4
 Forces Driving Globalization
• Technological change
– Shrinks the influence of time and geography
– Greater tradability of goods and services
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

• Liberalization of trade and investments

– Lower trade barriers
– Development of international financial
markets
• Significance of global production sharing
– Accounts for 30 percent of world trade
Ch01-5
 Waves of Globalization
• First wave: 1870-1914
– Decrease in tariff barriers and introduction of new technologies
– triggered by technological developments in transportation –
steam engine and railroads
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

– Largely driven by Europe and America

– Exports as a share of world income nearly doubled to about 8
percent
– Per capita incomes rose by an annual average of 1.3 percent as
against 0.5 percent earlier
– brought to an end by World War One
– Great Depression prompted further limitation on trade and
increase in protectionism
• Exports as a share of national income fell to about 5 percent

Ch01-6
 Waves of Globalization Continued
• Second wave: 1945-1980
– result of reaction against nationalism following WWII as well as
lower transportation costs
– Government cooperation to decrease trade barriers
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

– dominated by developed nations with developing nations largely

excluded
– Discriminated both in terms of which countries participated and
which products were included
• Developing countries faced sizable barriers in manufactured goods
– Developed countries registered productivity gains through
agglomeration economies
– Developing countries did not participate
– lead to greater increase in per capita income for developed
countries than for less developed countries
Ch01-7
 Waves of Globalization Continued
• Latest wave: began in 1980
– included some but not all developing countries
– Developing countries focus on manufacturing
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

• Tariff cuts by developed countries

• Liberalized foreign investment policies
– Significant international capital movements
– Less globalized labor flows
– outsourcing became more prevalent with both blue
collar and white collar jobs moving from the
developed nations into lower cost areas (Table 1.2)
• Example: Manufacturing at HP (Table 1.1)

Ch01-8
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

Back

Ch01-9
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

Back

Ch01-10
 An Open Economy
• Most nations have become increasingly
integrated into the world economy
– Trade of goods and services
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

– Financial markets
– Labor force
– Ownership of production facilities
– Dependence on imported material
• For Malaysia’s Trade Performance
http://www.matrade.gov.my/matrade/
Ch01-11
 Trade Patterns
• Globalization of US economy (Table 1.3)

– Increased imports as well as exports

– US ranks as the world’s greatest exporter
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

– Openness : rough measure of the importance of

international trade

– The nation’s exports and imports expressed as a

percentage of its GDP (Table 1.4)

Ch01-12
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

Back

Ch01-13
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

Back

Ch01-14
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

Back

Ch01-15
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

Back

Ch01-16
 Importance of Globalization
• Competitive advantage
– Gain by focusing on doing those things where there is a
relative advantage
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

• Gain from competitive processes

– Innovation and efficient production
– Weakening of monopolies
– Higher firm turnover
• Stability for producers
• Vulnerability to disturbances initiated overseas

Ch01-17
 Fallacies of International Trade
• Trade is a zero-sum activity
• Imports reduce employment and act as a
drag on the economy; exports promote
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

growth and employment

• Tariffs, quotas, and other import
restrictions will save jobs and promote a
higher level of employment

Ch01-18
 International Competitiveness
• Competitiveness: The extent to which goods of a
firm or industry can compete in the marketplace
– Depends on the relative price and quality of products
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

• Assessing the competitiveness of a nation:

– What criteria underlie a nation’s international
competitiveness?
– Must all of its firms and industries be competitive?
– Does a nation have to export more than it imports to
be competitive?

Ch01-19
 International Competitiveness
Continued

• Primary economic objective of a nation:

– Generate a high and increasing standard of living for its
people
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

– Depends on achieving high productivity of its employed

resources
• Channel resources from low-productivity uses to high-
productivity uses
– Both imports and exports are necessary for rising
productivity

Ch01-20
 Competition, Productivity, and
Economic Growth
• McKinsey research provides evidence that
the surest path to high productivity is to:
– Open markets to trade, investment, and ideas
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

from the most advanced nations

– Permit vigorous competition with firms that
have implemented leading-edge technologies
• Economists agree that growth rates are
closely related to:
– Openness to trade, education, and
communications infrastructure (Figure 1.2)
Ch01-21
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.
Back

Ch01-22
 International Trade:
An Opportunity
• International trade benefits many workers
– Enables them to shop for consumption goods
that are cheapest
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

– Permits employers to purchase the

technologies and equipment that best
complement their workers’ skills
– Allows workers to become more productive as
the goods they produce increase in value
– Producing goods for export generates jobs
and income for domestic workers
Ch01-23
 International Trade:
A Threat
• Not all workers gain from international trade
– Rise in unemployment and wage inequality
– Loss of jobs because of cheap exports produced by
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

lower-cost, foreign workers

– Relocation of firms abroad in search of low wages
and relax environmental standards
– Wages tend to:
• Increase for workers whose skills are more scarce
internationally than at home
• Decrease for workers who face increased competition from
foreign workers

Ch01-24
 International Trade: An Opportunity
or Threat to Workers?
• International trade is just another kind of
technology
• If international trade is squeezing the
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

wages of the less skilled, so are other

kinds of advancing technology

Ch01-25
Copyright © 2007 South-Western, a division of Thomson Learning. All rights reserved.

Back

Ch01-26