Lecture 1Overview of the World Economy
Econ 340
Lecture 2: Institutions 2
Announcements• We will start discussing news next week, on
Monday Jan 19. You should be watching for international economic news.
• GSI: Dan Jaqua– Office: 125 Lorch– Hours:
• Tuesdays 10-11:30 AM• Wednesdays 1:30-3 PM
Lecture 1: Overview 3
Lecture 1 Outline
Overview of the World Economy• “Globalization”• Elements of the World Economy• Ways that Countries Interact
– Trade– Capital Flows– Migration
• Policies that Affect Others
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Overview of the World Economy
• “Globalization”– Means different things to different people
• My definitions (see my online Glossary):1. The increasing world-wide integration of markets for
goods, services and capital.2. Also the role of MNCs, IMF, WTO, World Bank.3. Elsewhere: domination by United States.
• Some see good, others bad– Bad: reading by powell – Good: reading by Bhagwati Both make valid
points. Read to see what they are.
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Overview of the World Economy• “Globalization”
– Some aspects of globalization declined with the world recession of 2008
– The Economist, on Nov 15, 2014, reported “Signs of Life”:
• Globalization is back• Various measures of globalization (though not
all) have risen past their previous peaks• The “depth” of trade (its volume) has increased• The “breadth” of trade (number of borders
crossed) has not fully recovered
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Overview of the World Economy
• International Economics– Is NOT about countries– It IS about interactions among countries
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Lecture 1 Outline
Overview of the World Economy• “Globalization”• Elements of the World Economy• Ways that Countries Interact
– Trade– Capital Flows– Migration
• Policies that Affect Others
Lecture 1: Overview 8
Overview of the World Economy
• World Economy consists of– Countries: a few hundred
(CIA lists about 240)(WTO has 160 members)
– People: over 7 billion(7.216 b. 1/5/15, compare 320 m. US)
– Land: about 15 times the US
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(Aside, on getting information)
An excellent source of information about countries is the CIA World Fact Book
(Just Google “fact book”)
Lecture 1: Overview 10
Overview of the World Economy
• World Economy consists of
– GDP (2013 est., per CIA, in US$)• World:Total = $87.25 trillion
per capita = $13,100• US: Total = $16.72 trillion
per capita = $52,800
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Overview of the World Economy
• Implication– US is very unusual
• Very rich – US has less than 5% of world population but almost
20% of world income
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Lecture 1 Outline
Overview of the World Economy• “Globalization”• Elements of the World Economy• Ways that Countries Interact
– Trade– Capital Flows– Migration
• Policies that Affect Others
Lecture 1: Overview 13
Overview of the World Economy• Ways that countries interact
economically– Trade (per CIA, 2013 est.)
• World exports: $18.71 trillion(compare world GDP of $87 trillion)
• World trade has grown faster than world GDP most years– But not during 2008-9, due to world recession
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Overview of the World Economy
• See tables below for– Who trades most?– Who trades with whom?– Share of trade in GDP– US:
• What do we export/import? • To/from whom?
Lecture 1: Overview 16
Who Trades the Most?($ b. & % share, 2013)
Exporters ImportersValue Share Value Share
EU-28* 2307 15.3 US 2329 15.4China 2209 14.7 EU-28* 2235 14.8US 1580 10.5 China 1950 12.9Japan 715 4.8 Japan 833 5.5Korea, S. 560 3.7 Hng Kng 622 4.1World 15047 100.0 World 15121 100.0
*EU external onlySource: WTO, International Trade Statistics, 2014, Table I.8
Lecture 1: Overview 17
Who Trades the Most?
• Developed countries are the biggest traders
• China is catching up, in trade volume – It was the #3 exporter six years ago when I
taught the course; now it’s #2 and closing in on EU.
– Others are gaining as well: Four years ago Canada was #5 exporter. Three years ago that was S Korea
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Who Trades the Most?
• See Economist from about a year ago: “Trading Up: Picking the world champion of trade”– China claimed to have surpassed US. True
only for goods, not goods + services• But with time China will pass US in both
– China’s trade per GDP is much larger than the US, but below world average
– Much of the value in China’s exports is imported inputs, thus low “value added.”
Lecture 1: Overview 19
Who Trades the Most?
• “Emerging Markets” in general are catching up to, or surpassing, the developed countries– In GDP, trade, and more– See Economics Focus from The Economist,
“Why the Tail Wags the Dog”
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Who Trades with Whom?($ b., 2013, Intra- and inter-regional merchandise trade)
Source: WTO, International Trade Statistics, 2014, Table I.4
Destination:Origin: North
Amer.Latin Amer.
Eur. Asia Africa Other
North Amer. 1189 216 368 501 40 97Latin Amer. 178 195 121 178 20 27Europe 506 129 4560 667 222 473Asia 1012 191 855 3076 188 399Africa 54 30 216 160 97 20Other 143 20 549 841 51 310World 3082 782 6669 5423 618 1326
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• North America, Europe, and Asia trade mostly within their group
• Poorer regions – Latin America, Africa – trade mostly with the richer regions
• This reflects what is not so clear in the table:– Rich countries trade most with each other– Poor countries trade most with rich countries
• But their trade with each other is growing
Lecture 1: Overview 24
What Does the World Trade?($ b. 2013 & annual % growth rates, merchandise exports)
Source: WTO, International Trade Statistics, 2014, Table II.1
Value 00-05 05-13 2009 2010 2011 2012 2013
All Products 17,590
Agriculture 1,745 9 9 –12 15 22 0 6
Fuel&Mining 3,997 16 10 –36 33 35 2 –3
Manuf. 11,848 9 6 –20 19 15 0 3
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What Does the World Trade?
• Biggest traded category: manufactures• Fastest growing, then shrinking, then
growing: “fuels & mining” Why?
• Because this is the value of trade, and prices of oil and other raw materials were rising, and then falling.
• But within Manufactures, Iron & Steel is even more volatile:
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What Does the World Trade?($ b. 2013 & annual % growth rates, merchandise exports)
Source: WTO, International Trade Statistics, 2014, Table II.1
Reason: Very sensitive to investment, thus to expansion and contraction.
Value 00-05 05-13 2009 2010 2011 2012 2013
All Products 17,590
Agriculture 1,745 9 9 –12 15 22 0 6
Fuel&Mining 3,997 16 10 –36 33 35 2 –3
Manuf. 11,848 9 6 –20 19 15 0 3
Iron & Steel 454 17 6 –45 30 25 –8 –6
Lecture 1: Overview 27
What Does the World Trade?($ b. 2013 & annual % growth rates, merchandise exports)
Source: WTO, International Trade Statistics, 2014, Table II.1
Value 00-05 05-13 2009 2010 2011 2012 2013
All Products 17,590
Agriculture 1,745 9 9 –12 15 22 0 6
Fuel&Mining 3,997 16 10 –36 33 35 2 –3
Manuf. 11,848 9 6 –20 19 15 0 3
Iron & Steel 454 17 6 –45 30 25 –8 –6
Automotive 1,348 10 5 –31 29 18 1 4
Note too: Trade in cars is more than 10% of trade in manufactures, and also volatile.
Lecture 1: Overview 28
What Does the US Trade?($ b. 2011)
Exports ImportsTotal 1,497.4 2,235.8Agriculture 140.0Petroleum 462.3Industrial supplies 496.4 319.8Capital goods, exc. auto 493.2 513.4Automotive 133.1 255.2Other non-ag 234.6Other non-petrol 685.1
Source: Economic Report of the President, Feb 2013, Table B-104.
Lecture 1: Overview 29
What Does the US Trade?
• US imports are much larger than US exports– (We’ll see what that means later in the
course.)• US is a big…
– Exporter of agricultural products– Importer of oil– Exporter and importer of capital goods (i.e.,
machines for making things)
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Importance of Trade for Countries?(GDP in US$ b., Exports % of GDP,
Selected countries, 2012)GDP Exports/GDP
United States 16720 9%Japan 5007 14%Germany 3593 42%Canada 1825 25%India 1670 19%Mexico 1327 28%Netherlands 722 80%Singapore 296 139%Philippines 272 17%Nepal 19 5%
Source: CIA World Fact Book
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Importance of Trade for Countries?
• Even though we trade more than most, US trade is a smaller part of US GDP than for many other countries
• Others that are low: Japan, Nepal (even lower than US)
• Note Singapore: Exports can be more than GDP.– Reason: Exports are made using imported
inputs, so value of exports includes imports.
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Importance of Trade for Countries?A Few More of Interest
GDP Exports/GDPChina 9330 24%Hong Kong 272 168%Korea, South 1198 47%Korea, North (2009) 28 7%Burma 59 15%Syria 65 6%Israel 273 22%
Source: CIA World Fact Book
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Lecture 1 Outline
Overview of the World Economy• “Globalization”• Elements of the World Economy• Ways that Countries Interact
– Trade– Capital Flows– Migration
• Policies that Affect Others
Lecture 1: Overview 34
Overview of the World Economy
• Ways that countries interact economically
– Capital Flows• Financial (holdings of financial assets abroad)• Real (international ownership of real assets)
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Overview of the World Economy
• Ways that countries interact economically
– Capital Flows• Financial (holdings of financial assets abroad)
» Currency» Bank deposits» Bonds – private and government» Stocks» Bank loans
• Real (international ownership of real assets)
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Overview of the World Economy
• Ways that countries interact economically
– Capital Flows• Financial (holdings of financial assets abroad)• Real (international ownership of real assets)
» Real estate» Capital assets (plant and equipment)» Stocks (equities) if ownership share is large» Other
Data, below, are stocks (i.e, amounts at a point in time)
Lecture 1: Overview 37
US Investment Position($ trillion at market value, year-end 2011)
Source: Economic Report of the President, Feb 2013, Table B-107
We “Own” US Assets Abroad
We “Owe” Foreign Assets in US
Total 16.43 20.58 US Gov’t 0.71 4.28 Private financial 11.03 13.40 Private real 4.68 2.91
Compare: US GDP in 2012 = $16.02 trillion
Lecture 1: Overview 38
US Investment Position
• (Qualification: “Owe” isn’t quite right. This includes all assets in the US owned by foreigners, including land, buildings, etc. Not just what we’ve borrowed.)
• Lessons:– US is a large net “debtor” (result of our
spending more than we earn)– Most of this today is government, but some is
private
Lecture 1: Overview 39
Lecture 1 Outline
Overview of the World Economy• “Globalization”• Elements of the World Economy• Ways that Countries Interact
– Trade– Capital Flows– Migration
• Policies that Affect Others
Lecture 1: Overview 40
Overview of the World Economy
• Other ways that countries interact economically
– Migration• Temporary
– Guest workers– Day workers
• Permanent• In practice, most (all?) countries limit migration
severely
Lecture 1: Overview 41
Lecture 1 Outline
Overview of the World Economy• “Globalization”• Elements of the World Economy• Ways that Countries Interact
– Trade– Capital Flows– Migration
• Policies that Affect Others
Lecture 1: Overview 42
Overview of the World Economy
• Other ways that countries interact economically
– Policies that affect other countries• Direct• Indirect
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Overview of the World Economy
• Other ways that countries interact economically
– Policies that affect other countries• Direct
– Trade policies (tariffs, quotas)– Foreign aid– Capital controls– Exchange rate management– Immigration restrictions
• Indirect
Lecture 1: Overview 44
Overview of the World Economy
• Aside on Tariffs– We will be dealing a lot with these– See reading by Hufbauer and Grieco:
• US tariffs are much lower than they used to be (average 4% now, vs. 40% in 1946)
• US has gained a great deal from lowering tariffs• US still has much to gain from further lowering• But there are also severe costs for some people
and firms who compete with imports
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Overview of the World Economy
• Aside on Tariffs– Tariffs could go up:
• WTO enforces only upper limits on tariffs• Actual tariffs in many countries are below these
limits, and could legally rise• There was danger that the recent world
recession would push countries to do that. – They didn’t – at least not much.
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Overview of the World Economy
• Aside on Tariffs– 45% of US exports go to developing
countries– US tariffs are much higher against
developing countries than against developed countries
Lecture 1: Overview 47
Overview of the World Economy• Other ways that countries interact
economically– Policies that affect other countries
• Indirect– Subsidies (esp. agriculture)
» US farm subsidies > foreign aid (see CGD reading)– Macro policies (monetary, fiscal)
» Exchange-rate policies– Environmental policies– Standards
» Labor» Health & safety» Norms
Lecture 1: Overview 48
Next Time
• Institutions of the International Economy– What are they?
• The WTO• The IMF• The World Bank• The OECD
– What’s happening (or not happening) now?