1. International Economics
By Robert J. Carbaugh
9th Edition
Chapter 1:
The International Economy
Copyright ©2004, South-Western College Publishing

2. Economic interdependence
Elements of interdependence
 Trade: goods, services, raw materials,
energy
 Finance: foreign debt, foreign investment,
exchange rates
 Business: multinational corporations, global
production
Carbaugh, Chap. 1
2

3. Economic interdependence
Forces driving globalization
 Technological change:
 Production
 Communication & information
 Transport
 Liberalization of trade & investment:
 Tariff, non-tariff barrier reductions
 Liberalized financial transactions
 International financial markets
Carbaugh, Chap. 1
3

4. Economic interdependence
Waves of Globalization
 1st wave: 1870-1914
 Falling tariff barriers
 improved transportation
 2nd wave: 1945-1980
 Agreements to lower barriers again
 Rich country trade specialization
 Poor nations left behind
 3rd wave: 1980-present
 Growth of emerging markets
 international capital movements regain importance
Carbaugh, Chap. 1
4

5. Economic interdependence
Exports of goods and services as percent of
Gross Domestic Product, 2001
Country
Netherlands
Norway
South Korea
Canada
Germany
France
United Kingdom
Mexico
United States
Japan
Carbaugh, Chap. 1
Exports (% of GDP)
Imports (% of GDP)
68%
48
46
45
35
29
28
28
11
11
62%
30
41
39
34
27
30
30
14
10
5

6. Economic interdependence
Leading trading partners of the United States,
2000
Country
Canada
Mexico
Japan
Germany
France
Italy
Netherlands
Belgium/Luxembourg
Venezuela
Australia
Carbaugh, Chap. 1
Value of US
exports ($ bill.)
$202.4
125.2
98.4
45.2
30.6
16.4
28.9
17.9
9.0
17.9
Value of US
imports ($ bill.)
$250.1
147.9
165.3
74.3
40.6
31.0
15.0
12.8
19.2
9.7
6

7. Economic interdependence
Interdependence: Impact
 Overall standard of living is higher
 Access to raw materials & energy not available
at home
 Access to goods & components made less
expensively elsewhere
 Access to financing and investment not
available at home
 International competition encourages efficiency
Carbaugh, Chap. 1
7

8. Economic interdependence
Interdependence: Impact (cont’d)
 Other impacts - good & bad
 Curtails inflationary pressures at home
 Limits domestic wage increases
 Makes economy vulnerable to external
disturbances
 Limits impact of domestic fiscal policy on
economy
Carbaugh, Chap. 1
8

9. Comparative advantage
Comparative advantage means:
 If the relative cost of making two items is
different in two countries, each can gain by
specializing in the one it makes most cheaply each has a comparative advantage in that
product
 Even countries that make nothing cheaply can
benefit from specialization
Carbaugh, Chap. 1
9

10. Economic interdependence
Common fallacies of international trade
 "Trade is zero-sum" - trade can bring
benefits to both partners
 "Imports bad, exports good" - if you buy
nothing from other countries, they have no
income to buy from you
 "Tariffs and quotas save jobs" - cutting
imports makes it harder to export, so other
jobs are lost
Carbaugh, Chap. 1
10

11. Comparative advantage
Competitiveness & trade
 Main objective of any nation is to generate
high and rising standard of living
 No nation can efficiently make everything itself
 International trade allows countries to focus on
producing what they make efficiently
 Inefficient sectors will be squeezed out
 Sectors open to competition become more
efficient and productive
Carbaugh, Chap. 1
11

12. Economic interdependence: globalization
Ups and downs of globalization
 Advantages
 Productivity increases faster when countries produce
according to comparative advantage
 Global competition and cheap imports keep prices low
and inflation at bay
 An open economy encourages technological
development and innovation with ideas from abroad
 Jobs in export industries pay more than those in
import-competing industries
 Free movement of capital gives the US access to
foreign investment and keeps interest rates low
Carbaugh, Chap. 1
12

13. Economic interdependence: globalization
Ups and downs of globalization
 Disadvantages
 Millions of US jobs lost to imports or production abroad;
those displaced find lower-paying jobs
 Millions of other Americans fear getting laid off
 Workers face pressure for wage concessions under
threat of having the jobs move abroad
 Service and white-collar jobs are joining blue-collar
ones in being vulnerable to moving overseas
 US workers can lose their competitiveness when firms
build state-of-the-art factories in low-wage countries,
making them as productive as plants in the US
Carbaugh, Chap. 1
13