Chapter 1 The United States in a Global Economy. Copyright ©2014 Pearson Education, Inc. All rights...

Chapter 1

The United States in a

Global Economy

Copyright ©2014 Pearson Education, Inc. All rights reserved. 1-2

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.


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


Elements of International Economic Integration

• Today’s major economies are more integrated than they’ve 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


Elements of International Economic Integration (cont.)

There are four criteria or measures for judging the degree of integration:

1.Trade flows2.Capital flows3.People flows4.Similarity of prices in separate markets


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


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 country’s trade policies or define its barriers to trade


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


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


Capital and Labor Mobility (cont.)

• Labor is less mobile internationally than it was in 1900

• Capital flows are harder to measure



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).



When comparing international capital flows today to a century ago, two points to keep in mind:1.Savings and investment are highly correlated2.Technology improvements increase capital flows



Important quality differences in capital flows today:1.Many more financial instruments available2.Role of foreign exchange transactions3.Costs of foreign transactions has fallen significantly (transaction costs)


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



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



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



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



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

Trade Organization


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


Twelve Themes in International Economics

1. The Gains from Trade and New Trade Theory

2. Wages, Jobs and Protection3. Trade Deficits4. Regional Trade Agreements5. The Resolution of Trade Conflicts6. The Role of International Institutions


Twelve Themes in International Economics (cont.)

7. Exchange Rates and the Macroeconomy8. Financial Crisis and Global Contagion9. Capital Flows and the Debt of Developing

Countries10. Latin America and the World Economy11. Export-Led Growth in East Asia12. The Integration of the BRICs into the

World Economy

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Chapter 1 The United States in a Global Economy. Copyright ©2014 Pearson Education, Inc. All rights...

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