International Economics

By Robert J. Carbaugh
7th Edition
Chapter 1:
The international economy
 Elements of interdependence
 Trade: goods, services, raw materials, energy
 Finance: foreign debt, foreign investment, exchange
rates

 Business: multinational corporations, global production

Carbaugh, Chap. 1
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Economic interdependence

Exports of goods and services as percent of

Gross Domestic Product, 1997
Country Exports as percent of GDP
Netherlands 55%
Norway 41
Canada 39
Mexico 31
South Korea 31
United Kingdom 29
Germany 25
France 25
United States 12
Japan 10
Carbaugh, Chap. 1
3
Economic interdependence

Leading trading partners of the United

States, 1997
Value of US Value of US
Country exports ($ bill.) imports ($ bill.)
Canada $133 $160
Japan 68 118
Mexico 55 76
United Kingdom 31 31
South Korea 27 18
China (incl. Hong Kong) 25 64
Germany 23 40
Singapore 17 21
Belgium/Luxembourg 13 7

Carbaugh, Chap. 1
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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

Carbaugh, Chap. 1
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 Interdependence: Impact
(cont’d)

 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
6
 The US & the Asian economic
crisis
 Who could be hurt by the
Asian crisis of 1997-98:
 US creditors & investors in
Asia
 US exporters to Asia
 US firms that compete with
Asian imports
 US workers who compete
with Asian workers
Carbaugh, Chap. 1
 US firms that sell imports from
Asia
 US multinationals wanting
markets in Asia
 US firms manufacturing in Asia
 US firms using components
from Asia
 US consumers of imports
7
 The US & the Asian economic
crisis
 Potential macroeconomic effects of the Asian crisis
 US trade balance hurt as exports to the region suffer and
imports become cheaper
 US economic growth might suffer as a result of Asia’s
economic decline

Carbaugh, Chap. 1
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Comparative advantage

Competitiveness & trade

 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
9
 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

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