ECON3315 - International Economic Issues

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ECON3315 - International Economic Issues

• Chapter 2
• Introduction to the World Economy

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Preview

• What is international economics about?
• Gains from trade
• Explaining patterns of trade
• The effects of government policies on trade
• International finance topics
• International trade versus international finance
• Profile of the World Economy

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Concept map Ch. 2
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What Is International Economics About?

• International economics is about how nations
  interact through trade of goods and services,
  through flows of money and through investment.
• International economics is an old subject, but it
  continues to grow in importance as countries
  become tied to the international economy.
• Nations are more closely linked through trade in
  goods and services, through flows of money, and
  through investment than ever before.
• In the popular media, this phenomena is known as
  globalization

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What Is International Economics About?

• International trade as a fraction of the national
  economy has tripled for the US in the past 40
  years.
• Compared to the US, other countries are even more
  tied to international trade.
• What is happening here with the recent economic
  downturn? What are the longer term trends going
  to be?

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What Is International Economics About?
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US trade deficit
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What is international economics about?

• Better to look at X and M in terms of size of the
  economy. Replotting this

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What is international economics all about?
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What Is International Economics About?
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Gains from Trade

• Several ideas underlie the gains from trade
• When a buyer and a seller engage in a voluntary
  transaction, both receive something that they
  want and both can be made better off.
• Norwegian consumers could buy oranges through
  international trade that they otherwise would
  have a difficult time producing.
• The producer of the oranges receives income that
  it can use to buy the things that it desires.

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Gains from Trade (cont.)

• How could a country that is the most (least)
  efficient producer of everything gain from trade?
• With a finite amount of resources, countries can
  use those resources to produce what they are most
  productive at (compared to their other production
  choices), then trade those products for goods and
  services that they want to consume.
• Countries can specialize in production, while
  consuming many goods and services through trade.

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Gains from Trade (cont.)

1. Trade is predicted to benefit a country by making
   it more efficient when it exports goods which use
   abundant resources and imports goods which use
   scarce resources.
2. When countries specialize, they may also be more
   efficient due to large scale production.
3. Countries may also gain by trading current
   resources for future resources (lending and
   borrowing).

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Gains from Trade (cont.)

• Trade is predicted to benefit countries as a
  whole in several ways, but trade may harm
  particular groups within a country.
• International trade can adversely affect the
  owners of resources that are used intensively in
  industries that compete with imports.
• Trade may therefore have effects on the
  distribution of income within a country.
• Conflicts about trade should occur between groups
  within countries rather than between countries.

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Patterns of Trade

• Differences in climate and resources can explain
  why Brazil exports coffee and Australia exports
  iron ore.
• But why does Japan export automobiles, while the
  US exports aircraft?
• Differences in labor productivity may explain why
  some countries export certain products.
• How relative supplies of capital, labor and land
  are used in the production of different goods may
  also explain why some countries export certain
  products.

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The Effects of Government Policies on Trade

• Policy makers affect the amount of trade through
• tariffs a tax on imports or exports,
• quotas a quantity restriction on imports or
  exports,
• export subsidies a payment to producers that
  export,
• or through other regulations (e.g., product
  specifications) that exclude foreign products
  from the market, but still allow domestic
  products.
• What are the costs and benefits of these policies?

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The Effects of Government Policies on Trade
(cont.)

• Economists design models that try to measure the
  effects of different trade policies.
• If a government must restrict trade, which policy
  should it use?
• If a government must restrict trade, how much
  should it restrict trade?
• If a government restricts trade, what are the
  costs if foreign governments respond likewise?

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International Finance Topics

• Governments measure the value of exports and
  imports, as well as the value of international
  financial capital that flows into and out of
  their countries.
• Related to these two measures is the measure of
  official settlements balance, or the balance of
  payments the balance of funds that central banks
  use for official international payments.
• All three values are measured in the governments
  national income accounts.

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International Finance Topics (cont.)

• Besides international financial capital flows and
  the official settlements balance, exchange rates
  are also an important financial issue for most
  governments.
• Exchange rates measure how much domestic currency
  can be exchanged for foreign currency.
• They also affect how much goods that are
  denominated in foreign currency (imports) cost.
• And they affect how much goods denominated in
  domestic currency (exports) cost in foreign
  markets.
• How are exchange rates determined?
• Partially a choice of government of country
  concerned as there are different exchange rate
  regimes

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International Trade vs International Finance

• International trade focuses on transactions of
  real goods and services across nations.
• These transactions usually involve a physical
  movement of goods or a commitment of tangible
  resources like labor services.
• International finance focuses on financial or
  monetary transactions across nations.
• For example, purchases of US dollars or financial
  assets by Europeans.

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International institutional topics

• In addition there are the institutional aspects
  of international economics
• e.g. WTO, IMF, World Bank, BIS and supranational
  institutions
• Also regional integration fosters new cooperation
  between countries
• e.g. NAFTA, EU, ASEAN, Mercosur

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International business topics

• Also business aspects how to compete in a
  global economy
• Business decisions that rely on international
  economic considerations
• e.g. international risk exposure, international
  production chains and foreign expansion
  decisionmaking

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A Road Map

• International trade topics
• International trade theory
• International trade policy
• International finance topics
• Exchange rates and open economy macroeconomics
• International macroeconomic policy
• International institutional topics
• International institutions
• Regional integration
• International business topics
• Global competition
• Foreign expansion and risk exposure

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The World Economy

• The more developed economies are still the
  largest economies in the world
• But now China and Brazil rank among the 10
  largest economies in the world

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How much trade occurs?

•  

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Measuring development

• GDP is a useful measure of the development of an
  economy, and then by extension GDP per capita is
  a good indicator of the standard of living of the
  country. NB US was 15th

Ranking Country GDP per capita (2010-11)
1 Luxembourg 115,809
2 Qatar 98,144
3 Norway 97,607
4 Switzerland 83,073
5 Australia 66,371
6 UAE 63,626
7 Denmark 59,709
8 Sweden 57,638
9 Canada 50,496
10 Netherlands 50,216
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Measuring development

• China might have a large economy, but its GDP
  per capita is not large, although it is growing
  fast (so moving up rankings)

63 Mexico 10,146
72 South Africa 8,078
80 Iran 6,420
90 China 5,417
109 Ukraine 3,624
111 Indonesia 3,512
121 Morocco 3,084
139 India 1,514
161 Bangladesh 767
185 Democratic Republic of Congo 217

• Other countries are not moving up the rankings.
  Most of these countries tend to be in Africa

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Measuring development

• This is clearly shown in figure below. North
  America, Western Europe, Japan and Australasia
  constitute the wealthiest countries

• African and Southern Asian countries are poorest,
  while E Europe and the rest of the Americas are
  middle income countries

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Country categorization

• Developed high income countries
• Middle-income transition or industrializing
  countries
• Developing low income countries
• Give some examples of each of these

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MNEs

• Over a third of all trade is done by MNEs. Of
  this, most is done between developed countries,
  and not between developing and developed.
• Some examples of MNEs
• Exxon
• SABC
• Mitsubishi
• Samsung
• Diageo

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Intergovernmental vs international organizations

• Intergovernmental organization organization
  that has no internal structure and only exists
  when meetings occur. E.g. OPEC, G7, GATT
• International organization organization that
  has internal structure (and personnel) and acts
  on behalf of its members. E.g. UN, IMF, WTO,
  EBRD

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Chapter summary

• Outline of course
• International trade
• Interanational finance
• US trade
• Profile of world economy