INTERNATIONAL ECONOMICS

I.  International Monetary Relations

A.  The International Economy and Globalization

1.  Introduction

• Globalization - increasing interdependence among countries and people

- Trade - goods and services

- Finance - debt, investment, exchange rates

- Business - multinational corporations, global production

- Non-economic elements - culture, environment

• Due to:

- Technological improvements in production, communication, and transport

- Multilateral trade negotiations

- Liberalization of trade and investment

- Development of international financial markets

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2.  Waves of globalization

a.  First Wave (1870 - 1914)

• Decreases in tariff barriers

• Reduced transportation costs - railroads, steamships

• Largely European and American oriented

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b.  Second Wave (1945 - 1980)

• Continued drop in transportation costs

• Rich countries specialized in certain areas

- Economies of agglomeration - lower cost due to firms locating near one another, either same products or vertical links

• Poor countries left behind

- No barriers against agricultural products, resources

- Sizeable barriers against manufactured products

- Unfavorable investment climate and antitrade policies in developing countries

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c.  Latest Wave (1980 - present)

• Some developing countries prospered, others marginalized

Ex. - Asia vs. Africa

• International capital flows grew in importance

• Outsourcing - manufacturing and other activity sent to where it is cheapest to do

- Developing countries had competitive advantage in labor-intensive industries

Ex. - China, India, Bangladesh, Indonesia, Thailand, Philippines, Mexico

• Outsourcing of white-collar work in 2000s - accounting, software, customer service, tech support, financial analysis, engineering, basic research

- Made possible by digitization, Internet, high speed networks

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3.  The U.S. as an open economy

a.  Trade patterns

• Openness = (Exports + Imports) / GDP

Ex. - 2013

Country	Exports as % of GDP	Imports as  % of GDP	Openness
Netherlands	87	79	166
South Korea	56	54	110
Germany	52	46	98
Norway	41	27	68
United Kingdom	32	34	66
Canada	30	32	62
France	27	30	57
United States	14	18	32
Japan	15	16	31

• Less openness in larger economies - less reliant on international trade

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- Leading trading partners of the U.S. (2012)

Country	Value of U.S. Exports ($billions)	Value of U.S. Imports ($billions)	Total Value of Trade Goods ($billions)
Canada	292.5	323.9	616.4
China	110.5	425.6	536.1
Mexico	215.9	277.6	493.5
Japan	70.0	146.4	216.4
Germany	48.8	108.7	157.5
United Kingdom	54.9	55.0	109.9
South Korea	42.3	58.9	101.2
Brazil	43.8	32.1	75.9
France	30.1	41.7	71.8
Taiwan	24.4	38.9	63.3

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b.  Labor and capital

• Labor relatively stable for the U.S. - foreigners 14 percent of labor force

• Major investment flows into U.S. financial markets, real assets

• Growth in international banking

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4.  Why globalization is important

a. 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

b.  Curtails inflationary pressures at home

c.  Limits domestic wage increases

d.  Makes economy vulnerable to external disturbances

e.  Limits impact of domestic fiscal policy on economy

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5.  Fallacies of international trade

a.  "Trade is zero-sum" - one country gains at another's expense

• Trade can bring benefits to both partners

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b.  "Imports bad, exports good" - bad if you buy from overseas; sending money out of the country

• If nothing bought from other countries, they have no income to buy from you

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c.  "Tariffs and quotas save jobs" - prevent competing products from overseas from entering country

• Cutting imports makes it harder to export, so other jobs are lost

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6.  Backlash against globalization

• Benefits corporations at expense of average citizens

• Environmentalists - undemocratic decisions made by organizations like the World Trade Organization (WTO)

• Unions - trade leads to unfair competition

• Human rights activists - sweatshops, governments bailed out at expense of local economies

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7.  Advantages and disadvantages of globalization