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The World Economy: International Trade by Yarbrough & Yarbrough Chapter One Introduction to International Trade in the World Economy Why Study International Trade? Does trade really benefit societies? By studying the differences in the economic performance of closed and open economies we can draw our own conclusions. Should Trade be completely free? What would happen to developed country wages if trade with developing countries continue to grow? Would trade mean a demise of some of our industries, like steal, apparel? What do we mean by International Interdependence? International Economic Integration International Interdependence: The degree to which economic events in one country can affect others. International Economic Integration: It is a measure of how freely goods, services, labor and capital can move freely across international borders. Countries differ in terms of their laws, customs, language, currency, etc., and these differences can generate significant barriers to the free flow of goods, services, labor and capital. The question that is addressed under international economic integration, therefore, is how to lower these barriers and promote the flow of goods, services, labor and capital across international borders. Figure 1: Honda Automobiles Produced and Exported by Region, January-September 2004 Trade Policy Implications of International Interdependence In a world which is becoming increasingly interdependent, policy makers have to be more cautious in designing and implementing policy. Symptoms of International Interdependence Figure 2: Transport and Communication Costs. 19301990 (Index: 1930=100) Figure 3a: Growth in World Merchandise Trade and Output Volume, 1950-2002 (Present) Figure 3b: Growth in World Merchandise Trade and Output Volume, 1950-2002 (Present) Figure 4: Merchandise Exports and Imports, 2002 (Percent of GDP) Figure 5: U.S. Merchandise Imports and Exports,19502002 (Billions $) Figure 6: Regional Flows of Merchandise Trade, 2002 (Billions $) The Economic Significance of Political Boundaries International Trade Theory: Microeconomic Analysis Open Economy Macro: Macroeconomic Analysis Positive Economic Models: Models that describe in a simplified way how the world economy works. Normative Economic Models: Models that suggests the path that has to be followed or policies that has to be pursued.