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Introduction to International Economics
Lecture 1

 

International Economics

 

  1. International economics – different and unique branch

    • Interaction of sovereign countries

    • Country has

      1. A currency; its own money

      2. Unique laws

      3. Fiscal policies – Greece cannot control its gov. spending

      4. Factor mobility – movement of labor, resources, land, etc.

      5. Example – Kazakhstan – foreigners cannot own land; difficult to get work permit

      6. Relations with other nations, etc.

    • International trade – countries trade goods and services among themselves

    • Note – money flows in opposite direction of products

  1. Economic Interdependence

    • Exports/Imports become a larger share of a country's economy

    • International Investment

    • Globalization - countries are more interdependent on each other

    • Impacts a country's political and economic systems, culture, and technology level

    • Reasons

      1. Transportation costs are decreasing

      2. Communications costs are falling for email, fax, etc.

      3. Countries reduced tariffs and other trade barriers

      4. Foreign countries have pro-business legal system; businesses do not invest in countries with bad legal systems

  2. Inverse relationship between trade protection and economic growth

    • An isolated country is more likely to have low economic growth

    • Exports are important

    • People obtain foreign currencies, so they buy more foreign products

    • Exports/Imports grow together

    • Openness (%) = 100 (Exports + Imports) / GDP

    • Gross Domestic Product (GDP) - a measure of the total amount of final goods and services produce in an economy per year

2006 Exports
(%)
Imports
(%)
Exports + Imports
(%)
Netherlands 71 63 134
Canada 46 40 86
South Korea 43 40 83
Germany 40 35 75
Norway 45 28 73
United Kingdom 26 30 56
France 26 27 53
United States 11 15 26
Japan 11 10 21
Malaysia - - 210.5

Openness over time

Did you notice the rapid dropoff in trade between 2008 and 2009?

Country 1960 1990 2008 2009
Netherlands 91.1 103.9 134.4 120.7
Canada 34.9 51.5 69.0 59.2
South Korea 15.8 57.5 107.2 95.7
Germany - 49.6 88.5 76.7
Norway 73.6 73.9 78.1 69.9
United Kingdom 42.0 50.3 61.1 57.8
France 27.0 43.8 55.6 48.2
United States 9.45 20.5 30.4 25.1
Japan 20.3 19.1 33.3 23.5
Malaysia 82.6 140.3 184.1 172.3
  1. Is outsourcing international trade?

    • Outsourcing - companies have two choices

      • Produce internally or outsource part of production

      • U.S. firms outsource to India, Philippines, Russia, Central Europe, etc.

    • Benefits

      • Reduces costs which lowers prices and benefits the consumers

      • Boost incomes in foreign countries; consumers can buy more products and services from the U.S.

      • U.S. companies outsource jobs to reduce costs and increases profits; they bring the profits to the U.S.

    • Problems

      • U.S. lost factory jobs to overseas outsourcing; reduced incomes for people with a high school education and less

      • U.S. firms are outsourcing professional jobs; may reduce earnings of college graduates

      • Some large retailers like Walmart encourage U.S. companies to outsource as a means to drive down prices and costs

    • Types of jobs

      • White collar jobs

      • Call centers

      • Accounting

      • Medical diagnostics

      • Software

    • How can a country stop outsourcing?

  1. Terrorism - September 11, 2001

    • Increased transportation costs

    • More security guards

    • More government security, checks, inspections, etc.

    • Could hamper free trade. Countries use free trade to prosper and grow

  1. Developing countries

    • Poor working conditions

    • Low wages relative to developed countries

    • International corporations and banks dominate international trade

    • China and Mexico – companies hire single, young women in factories

    • May use child labor

    • Is globalization to blame for this?

      • Foreign companies usually pay better than local companies

      • Corporations rarely hire child labor

  2. Immigration

    • Contentious issue

    • 2007 Great Recession - aftermath still felt today

    • United States and Europe have an unemployment crisis

    • Approximately 200 million people migrated (approximately 3% of world's population)

Country Foreign born
(%)
United States 13
Germany 13
Canada 19
Great Britain 10
Australia 23

 

  • Illegal immigration was always a problem in the U.S.

    • Many U.S. state and local governments passed laws, cracking down on illegal immigration

    • Arizona - a business could lose its license if illegal immigrants are caught working there

    • Arizona sheriffs are aggressive about arresting illegal immigrants

    • Malaysia approximately has one million legal workers, and possibly another million illegal

  • Is there an economic impact, if a country expels its immigrants?

    • Immigrants could have special skills or higher education

    • Many educated Indians left the U.S. to establish computer companies in India

    • A community loses a family who buys or rents a home, shops in local stores, pays taxes, etc.

Exchange Rates

Exchange Rate – price of a currency relative to another currency

  1. Exchange rates

    • Example: $1 U.S. = 0.8 euros

    • You exchanged $200, then you get ( 0.8 euros / 1$) * $200 = 160 euros

    • Bought two slices of pizza and a drink for 7 euros

    • You paid $8.75

  1. Currency appreciates

    • Money can buy more foreign currency

    • Consumers buy more imports, because they are less expensive

    • Exporters export less, because they are more expensive

    • Example: $1 U.S. = 0.9 euros

      • Dollar appreciates; buys more euros

      • Euro depreciates; buys fewer U.S. Dollars

    • Note – strong means currency is compared to a basket of currencies

  2. Currency depreciates

    • Money is “weaker”

    • Consumers buy less imports (more expensive)

    • Exporters export more (less expensive)

    • Example - $1 U.S. = 0.5 euros

      • Dollar depreciates; buys less euros

      • Euro appreciates; buys more dollars

    • Note – Weak means currency is compared to a basket of foreign currencies

  1. Why do the Asian tigers and China weaken their currencies?

    • Causes a trade surplus, i.e. exports exceeds imports

    • Although domestic consumers are hurt, the weak currencies boosts the export industries

    • Creates manufacturing jobs, causing rapid industrialization

    • Government could accumulate foreign currencies, such as U.S. dollars and euros.

  2. Why does the U.S. government and other countries maintain a strong U.S. dollar?

    • U.S. dollar is the international currency

    • Accepted in most countries

    • Investors and people hold onto to strong currencies

      • Strong currencies keep their value

      • Boosts investing in the U.S. and U.S. government debt

      • Note – investments in foreign countries with a depreciating currency lowers a project's return

    • Helps U.S. consumers, but harms the U.S. exporting industries

 

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