CHAPTER O N E

International Economics
Tenth Edition

Introduction
Dominick Salvatore
John Wiley & Sons, Inc.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

In this chapter:
The Globalization of the World Economy
International Trade and the Nations

Standard of living The International Flow of Goods, Services, Labor and Capital International Economic Theories and Policies Current International Economic Problems Organization and Methodology of the Text

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

The Globalization of the World Economy

A globalizing world provides opportunities

and challenges to nations and people in the world.

Flow of goods and services Flow of labor and jobs Flow of financial instruments, currency

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

The Globalization of the World Economy

Three periods of rapid globalization

1870-1914

Resulted from industrial revolution, opening up of new resource sources in regions of recent settlement Millions of immigrants, vast amounts of foreign investments, increased production Ended with breakout of World War I in 1914.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

The Globalization of the World Economy

Three periods of rapid globalization

1945-1980

Dismantling of heavy trade protection led to rapid increase in international trade.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

The Globalization of the World Economy

Three periods of rapid globalization

1980 to present

Most pervasive and dramatic period of globalization Fueled by improvements in telecommunications and transportation Elimination of restrictions on capital flows led to massive international capital movements Most countries in the world participated

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

The Globalization of the World Economy

Anti-Globalization Movement

Claims globalization sacrifices human and environmental well-being to corporate profits of mutinationals Globalization is blamed for:

World poverty and child labor in poor countries Job losses and lower wages in rich countries Environmental pollution and climate change

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

International Trade and the Nations Standard of Living

Interdependence

Economic relationship among nations Roughly measured as ratio of a nations imports and exports of goods and services to GDP Much larger for smaller industrial and developing countries than for United States

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

FIGURE 1-1 Imports and Exports as a Percentage of GDP in Various Countries in 2001.
Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

International Trade and the Nations Standard of Living

Sources of potential gain for United States: Access to items with limited availability domestically (such as coffee, bananas, cognac, tin,
tungsten, petroleum and copper)

Access to lower cost products Access to greater product variety

Economic interdependence has been

increasing over the years.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

FIGURE 1-2 Growth of World Production and Trade, 1990-2001 (annual percentage changes).
Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

120

Trade as a percentage of GDP

100 80 60 40 20 0 Korea, Rep.

China Japan
U.S.

1965

1970

1975

1980

1985 1990 Year

1995

2000

2005

FIGURE 1-3-1 Trade as a Percentage of GDP, 1965-2008.

slide 12

FIGURE 1-3 Imports and Exports as a Percentage of U.S. GDP, 1965-2001.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

60 50
P ercent of GDP

Imports 40 30 20 10 0 1965 1970 1975 1980 1985 1990 Year

Exports

1995

2000

2005

FIGURE 1-3-4 Koreas Imports and Exports as a Percentage of GDP, 1965-2008.

slide 14

50 45
Pe rcent of GDP

40 35 30 25 20 15 10 5 0 1970 1975 1980 1985 Year 1990 1995 2000 2005 Imports Exports

FIGURE 1-3-5 Chinas Imports and Exports as a Percentage of GDP, 1970-2008.

slide 15

20 18 16
P ercent of GDP

14 12 10 8 6 4 2 0 1965 1970 1975 1980 1985 Year 1990 1995 2000 2005 Imports Exports

FIGURE 1-3-3 Japans Imports and Exports as a Percentage of GDP, 1965-2007.

slide 16

The International Flow of Goods, Services, Labor and Capital

Gravity Model

Other things equal, the bilateral trade between two countries is proportional, or at least positively related, to the product of the two countries GDPs, and the greater the distance between the two countries, the smaller is their bilateral trade. That is, the larger (and more equal in size) and the closer two countries are, the larger the volume of trade between them is expected to be. Table 1.3. The Major Trade Partners of the U.S. in 2009

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

Table 1.3b. The Major Trade partners of Korea

1970 Rank Country

1 2 3 4 5 6 7 8 9 10 Total U.S. Japan HongKong Germany Canada Netherlands U.K. Vietnam Singapore Sweden

1980 %
47.3 28.1 3.3 3.3 2.3 1.6 1.6 1.5 1.3 0.9 91.4

1990 %
26.3 17.4 5.4 5.0 4.7 3.5 3.3 2.1 2.0 2.0 71.6

2000 %
29.8 19.4 5.8 4.4 2.8 2.7 2.7 1.9 1.7 1.7 72.9

2005 %
21.8 11.9 10.7 6.2 4.7 3.3 3.1 3.0 2.0 2.0 68.8

Country
U.S. Japan SaudiArabia Germany Hong Kong Iran U.K. Indonesia Netherlands Canada

Country
U.S. Japan HongKong Germany Singapore U.K. Canada Taiwan France Indonesia

Country
U.S. Japan China HongKong Taiwan Singapore U.K. Germany Malaysia Indonesia

Country
China U.S. Japan HongKong Taiwan Germany Singapore U.K. Indonesia Malaysia

%
21.8 14.5 8.4 5.5 3.8 3.6 2.6 1.9 1.7 1.6 65.5

Table 1.3c. The Major Trade partners of Korea in 2008

Rank 1 2 3 4 5 6 7 8 9 10

Country China Japan U.S Saudiarabia Germany United Arab Emirates Singapore Australia Taiwan Hong Koong

Export 91,389 28,252 46,377 5,253 10,523 5,749 16,293 5,171 11,462 19,772

Import 76,930 60,956 38,365 33,781 14,769 19,248 8,362 18,000 10,643 2,223

Total Trade 168,319 89,208 84,742 39,034 25,292 24,997 24,655 23,171 22,105 21,995

% 19.63 10.41 9.88 4.55 2.95 2.92 2.88 2.70 2.58 2.57

International Economic Theories and Policies

International Trade Theory

Analyzes the basis of and the gains from international trade.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

International Economic Theories and Policies

International Trade Theory
International Trade Policy

Examines the reasons for and the effects of restrictions on international trade.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

International Economic Theories and Policies

International Trade Theory
International Trade Policy Balance of Payments

Measures a nations total receipts from and total payments to rest of the world.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

International Economic Theories and Policies

International Trade Theory
International Trade Policy Balance of Payments

Foreign Exchange Markets

The institutional framework for the exchange of one national currency into another.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

International Economic Theories and Policies

International Trade Theory
International Trade Policy Balance of Payments

Foreign Exchange Markets

Adjustments in the Balance of Payments

Focuses on the relationship between internal and external aspects of the economy of a nation, and their interdependence with rest of the world economy under different international monetary systems.

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

Current International Economic Problems

Deep financial and economic crisis
Trade protectionism in advanced countries Excessive fluctuations and misalignments in exchange

rates and financial crises

Structural imbalances in US, slow growth in Europe and

Japan, and insufficient restructuring in transition economies

Deep poverty in many developing countries
Resource scarcity, environmental degradation, climate

change and sustainable development

25

Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

Organization and Methodology of the Text

Part One (Chapters 2-7) International Trade Theory
Part Two (Chapters 8-12) International Trade Policies Part Three (Chapters 13-15) Balance of Payments, Foreign Exchange Part Four (Chapters 16-21) Adjusting Balance of Payments Equilibria
Salvatore: International Economics, 10th Edition 2010 John Wiley & Sons, Inc.

Appendix
Table
1.5 Commodity Merchandise Trade, 2007 Composition of World

Table

1.6 Geographic Merchandise Trade, 2007

Exports, 2007

Composition

of

World

Table 1.7 Geographical Destination of Merchandise Table 1.8 Leading Exporters and Importers of
Merchandise, 2007

Table 1.9 Leading Exporters and Importers of

Commodity Services

Appendix

Korea in the World Economy