Chapter 1

The World of International Economics

McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Introduction
 International trade and finance have never been more important.  Signs of globalization are everywhere.

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International Trade: Questions

 Well explore these questions:
What are the effects of trade? What determines the basis of trade? What determines the value and volume of trade? What factors impede the flow of trade? What happens when policies impede the flow of trade?

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International Monetary Economics: Questions

 Well explore these questions:
What is a countrys balance of payments? How are exchange rates determined? What macroeconomic effects does trade cause? What makes capital flow between countries? What policies should countries pursue?

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The Nature of Merchandise Trade

 The volume and value of world exports have grown tremendously.  The value of global exports was $15.8 trillion in 2008; it was $2 trillion in 1985.  Over the past 40 years, global trade has grown faster than global production.

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Growth in World Production and Trade, 1963-2007 (average annual percentage change in volume)

1963-73 Production All commodities Agriculture Mining Manufacturing Exports All commodities Agriculture Mining Manufacturing

1970-79

1980-85

2000-07

6.0% 2.5 5.5 7.5 9.0% 14.0 7.5 11.5

4.0% 2.0 2.5 4.5 5.0% 4.5 1.5 7.0

1.7% 2.9 -2.7 2.3 2.1% 1.0 -2.7 4.5

3.0% 2.5 1.5 3.0 5.5% 4.0 3.5 6.5

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Geographical Composition of Trade

 North America, Europe, and Asia dominate global exporting and importing.  These regions tend to trade with other countries in the same region.

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Merchandise Exports and Imports by Region, 2007 (billions of dollars) Value of Exports North America $1,853.5 South and Central America 499.2 Europe 5,772.2 Commonwealth of Indep. States 510.3 Africa 424.1 Middle East 759.9 Asia 4,131.0 World $13,950.0 Share Value of Imports 2,707.5 456.0 6,060.8 377.6 358.9 479.3 3,804.3 $14,244.0 Share 19.0% 3.2 42.5 2.7 2.5 3.4 26.7 100.0%

13.3% 3.6 41.4 3.7 3.0 5.4 29.6 100.0%

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Top 10 Merchandise Exporters, 2007 Value $, billions, Country Germany China United States Japan France Netherlands Italy United Kingdom Belgium Canada $1,326.4 1,217.8 1,162.5 712.8 553.4 551.3 491.5 437.8 430.8 419.0

Percentage Share 9.5% 8.7 8.3 5.1 4.0 4.0 3.5 3.1 3.1 3.0

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Top 10 Merchandise Importers, 2007 Value $, billions, Country United States Germany China Japan United Kingdom France Italy Netherlands Belgium Canada $2,020.4 1,058.6 956.0 621.1 619.6 615.2 504.5 491.6 413.2 389.6

Percentage Share 14.2% 7.4 6.7 4.4 4.4 4.3 3.5 3.5 2.9 2.7

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Regional Structure of Exports, 2007

N. America South Europe and Central America CIS Africa Middle East Asia Total

N. America So. And C. America Europe CIS Africa Middle East Asia

51.3% 30.3% 7.9% 4.6% 21.7% 11.0% 19.9%

7.0% 24.4% 1.4% 1.3% 3.4% 0.6% 3.3%

17.7% 21.2% 73.5% 56.3% 39.5% 14.3% 43.7%

0.7% 1.3% 3.3% 20.2% 0.2% 0.6% 2.9%

1.5% 2.7% 2.6% 1.3% 9.5% 3.6% 2.4%

2.7% 1.8% 2.6% 3.2% 2.5% 12.3% 4.0%

19.0% 100% 16.1% 100% 7.5% 11.7% 19.1% 52.3% 49.7% 100% 100% 100% 100% 100%

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Commodity Composition of Trade

 Manufactures comprise 69.8% of trade, with agricultural and miningrelated products making up the balance.

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Composition of World Merchandise Exports (billions of U.S. $)

Product Category Agricultural Products Mining Products Manufactures Value in Share in Share in 2007 2007 1980 $1,128 $2,659 $9,500 8.3% 19.5% 69.8% 14.7% 27.7% 53.9%

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Trade and the U.S.

 The U.S. trades the most with our NAFTA partners (Canada and Mexico), followed by the European Union.  Trade with Asia is also very important. China is the second largest trading partner of the United States.

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U.S. Merchandise Trade by Area and Country, 2007 (millions of dollars and %)
Exports to value share Region or Country European Union Europe, non-EU Canada Mexico Latin America (not Mexico) China Japan Other Asia Middle East Africa Total $242,244 38,601 249,712 135,962 107,101 24.5% 3.4% 21.7% 11.8% 9.3% Imports From value share $356,180 54,999 320,323 213,552 134,826 20.9% 2.8% 16.3% 10.9% 6.9% 16.3% 7.4% 12.7% 3.9% 4.7% 100.0%

65,073 5.7% 321,685 60,898 5.3% 146,037 182,277 15.9% 250,840 43,646 3.8% 77,405 22,966 2.0% 92,055 1,148,481 100.0% 1,967,853

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Commodity Composition of U.S. Trade

 The U.S. tends to export capital goods and industrial supplies.  The U.S. tends to import consumer goods and industrial supplies.

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Commodity Composition of U.S. Trade, 2007 (billions of dollars and %)

Exports to value share Foods, feeds, beverages Industrial supplies/materials Capital goods (non-auto) Automotive Consumer goods Other goods Total $84.3 7.3% 316.4 27.5% 447.4 39.0% 121.0 10.5% 146.1 12.7% 33.3 2.9% 1,148.5 100.0% Imports From value share $81.7 4.2% 639.4 32.5% 444.5 22.6% 258.9 13.2% 478.5 24.3% 64.9 3.3% 1,967.9 100.0%

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Trade in Services
 Over $3 trillion annually (2007).  About 20% of total trade (closer to 30% for U.S.).

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Leading Exporters of Commercial Services, 2007

Country U.S. United Kingdom Germany France Spain Japan China Italy India Ireland Value (billions of $) $456.4 273.0 205.8 136.7 128.3 127.1 121.7 110.5 89.7 89.0 Share 13.9% 8.3% 6.3% 4.2% 3.9% 3.9% 3.7% 3.4% 2.7% 2.7%

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Leading Importers of Commercial Services, 2007

Country U.S. Germany United Kingdom Japan China France Italy Spain Ireland Netherlands Value (billions of $) $335.9 250.5 194.1 148.7 129.3 124.1 118.3 98.4 94.5 86.8 Share 10.9% 8.1% 6.3% 4.8% 4.2% 4.0% 3.8% 3.2% 3.1% 2.8%

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The Changing Degree on Economic Interdependence

 The relative importance of trade has grown for most countries.  The relative importance of trade for all countries together has also grown.

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International Interdependence for Selected Countries and Groups of Countries, 1970 2007 (exports as a % of GDP)
1970 2007 Industrialized Countries: Australia Belgium Canada France Germany Italy Japan Netherlands United Kingdom United States Developing Countries: Argentina Chile China Czech Republic India Kenya Mexico Nigeria 14% 52% 23% 16% NA 16% 11% 42% 23% 6% 9% 15% 3% NA 4% 30% 6% 8% 21% 89% 36% 27% 47% 29% 16% 75% 26% 11% 25% 47% 42% 80% 21% 26% 28% 40%

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