Chapter 1 The United States in a Global Economy

Learning Objectives
Explain how economists measure international economic integration. List the three types of evidence to support the idea that trade supports economic growth. Discuss the differences in international economic integration at the end of the nineteenth century and the current era. Describe the major themes of international economics.
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Introduction: International Economic Integration

International integration of national economies has brought many benefits to many nations
Technological innovation Less expensive products Greater investments in scarce resource regions

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Elements of International Economic Integration

Todays major economies are more integrated than theyve been at any time in history - Instantaneous communications - Modern transportation - Relatively open trading systems

This allows most goods to move across boundaries without major obstacles and low relative costs
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Elements of International Economic Integration (cont.)

There are four criteria or measures for judging the degree of integration: 1.Trade flows 2.Capital flows 3.People flows 4.Similarity of prices in separate markets

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The Growth of World Trade

Since the end of World War II, world trade has grown much faster than world output In 1950, total world exports were estimated to be 5.5% of world gross domestic product (GDP) By 2005, total world exports were 20.5% of world GDP

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Trade to GDP ratio

The trade to GDP ratio is the ratio of trade to GDP
Trade to GDP ratio = (Exports +Imports)/GDP

The ratio does not reveal a countrys trade policies or define its barriers to trade

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FIGURE 1.1 Trade-to-GDP Ratios for Six Countries, 1913-2010

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Capital and Labor Mobility

Factor movements are indicators of economic integration As national economies become more interdependent, labor and capital generally move more easily across international borders

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Capital and Labor Mobility (cont.)

Labor is less mobile internationally than it was in 1900 Capital flows are harder to measure

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Capital and Labor Mobility (cont.)

Two types of capital flows: flows of financial capital representing paper assets such as stocks, bonds, currencies, and bank accounts, and flows of capital representing physical assets such as real estate, factories, and businesses - foreign direct investment (FDI).

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Capital and Labor Mobility (cont.)

When comparing international capital flows today to a century ago, two points to keep in mind: 1.Savings and investment are highly correlated 2.Technology improvements increase capital flows

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Capital and Labor Mobility (cont.)

Important quality differences in capital flows today: 1.Many more financial instruments available 2.Role of foreign exchange transactions 3.Costs of foreign transactions has fallen significantly (transaction costs)

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Features of Contemporary International Economic Relations

There are three features of contemporary international economic relations:
- Deeper integration (tariffs and quotas) - Multilateral organizations - Regional trade agreements

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Features of Contemporary International Economic Relations

Deeper integration (tariffs and quotas) Two trends the second half of 20th Century: 1.Lower trade barriers exposed most countries with domestic policies as obstacles to international trade 2.Labels such as Made in China or Made in the USA are less and less meaningful

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Features of Contemporary International Economic Relations

Shallow integration reduction of tariffs and the elimination of quotas Deep integration negotiations over domestic policies that impact international more contentious and harder to accomplish

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Features of Contemporary International Economic Relations

Multilateral organizations
International Monetary Fund (IMF) World Bank General Agreement on Tariffs and Trade (GATT) United Nations (UN) World Trade Organization (WTO) (grew out of the GATT) - Host of smaller organizations -

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Features of Contemporary International Economic Relations

Regional trade agreements (RTAs)
North American Free Trade Agreement (NAFTA) European Union (EU) Mercado Comn del Sur (MERCOSUR) Asia Pacific Economic Cooperation (APEC) More than 330 have been recorded by the World Trade Organization

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Trade and Economic Growth

Economists remain convinced the benefits of trade outweigh the costs pointing to three kinds of evidence:
Casual empirical evidence of historical experience Evidence based on economic models and deductive reasoning Evidence from statistical comparisons of countries

While none of these is conclusive by itself, together they provide

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Twelve Themes in International Economics

1. The Gains from Trade and New Trade Theory 2. Wages, Jobs and Protection 3. Trade Deficits 4. Regional Trade Agreements 5. The Resolution of Trade Conflicts 6. The Role of International Institutions

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Twelve Themes in International Economics (cont.)

7. Exchange Rates and the Macroeconomy 8. Financial Crisis and Global Contagion 9. Capital Flows and the Debt of Developing Countries 10. Latin America and the World Economy 11. Export-Led Growth in East Asia 12. The Integration of the BRICs into the World Economy

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