International Economics

By Robert J. Carbaugh
10th Edition

Chapter 1:
The International Economy and
Globalization

Copyright 2005, Thomson/South-Western

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

Economic interdependence

Globalization
The process of greater interdependence
between countries and their citizens
Involves increased integration of product
and resource markets
Trade
Labor (immigration)
Investment

Globalization is political, economic

technological and cultural
Carbaugh, Chap. 1

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

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; growth of agglomeration
economies
Poor nations left behind

3rd wave: 1980-present

Growth of emerging markets
International capital movements regain importance
Less immigration, more foreign outsourcing
Carbaugh, Chap. 1

Economic interdependence

Globalization goes white collar

U.S. Company

No. of Workers & Country

Type of Work Moving

Accenture
Conseco
Delta Air Lines
Fluor
General Electric
Intel
Microsoft
Philips
Procter & Gamble

5,000 in the Philippines

1,700 in India
6,000 in India, Philippines
700 in Philippines
20,000 in India
3,000 in India
500 in China, India
700 in China
800 in Philippines, China

Accounting, software, office work

Insurance claim processing
Airline reservations, customer service
Architectural blueprints
Finance, information technology
Chip design, tech support
Software design
Consumer electronics, R&D
Accounting, tech support

Source: Drawn from Is Your Job Next? Business Week, February 3, 2003, pp. 5060.

Carbaugh, Chap. 1

Economic interdependence

Trade in goods and services as percent of

Gross Domestic Product, 2002
Country
Netherlands
Canada
Germany
South Korea
Norway
France
United Kingdom
United States
Japan
Carbaugh, Chap. 1

Exports (% of GDP)

Imports (% of GDP)

53%
37
31
27
31
22
18
9
10

46%
33
25
26
18
21
21
13
8
7

Economic interdependence

Openness of the US economy, 1890-2002

Source: U.S. Census Bureau, Foreign Trade Division, U.S. Trade in Goods and Services, 19602002 at
http://www.census.gov/foreign-trade/statistics, and Economic Report of the President, 2002.

Carbaugh, Chap. 1

Economic interdependence

Leading trading partners of the United States,

2002
Country
Canada
Mexico
Japan
China
Germany
France
Italy
Netherlands
Venezuela
Australia
Belgium/Luxembourg
Carbaugh, Chap. 1

Value of US
exports ($ bill.)
$160.8
97.5
51.4
22.1
26.6
19.3
10.1
18.3
4.5
13.1
13.8

Value of US
imports ($ bill.)
$213.9
136.1
124.6
133.5
63.9
29.0
25.4
10.3
15.8
6.8
4.4
9

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

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Economic interdependence

Interdependence: Impact (contd)

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

11

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

12

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

13

Comparative advantage

Competitiveness & trade

Competitiveness can be assessed at the level of
a firm, an industry, or a whole nation
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

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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 importcompeting industries
Free movement of capital gives the US access to
foreign investment and keeps interest rates low
Carbaugh, Chap. 1

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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

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