Download Financial Performance

The World Economy:
Trade and Finance
by
Yarbrough & Yarbrough
Chapter One
Introduction to The World
Economy
Chapter One Outline
1. Why study International Economic
Issues?
2. International Interdependence and
the Economic significance of
political boundaries
3. Studying International Economics
3
Introduction
 International Economic Issues
 World Trade Organization (WTO)
 Emerged as an international forum for trade
discussions and conflict resolution.
 North American Free Trade Agreement (NAFTA)
 Trade bloc created in 1995 for USA, Canada, and
Mexico.
 Trade conflicts & upheavals continue
 U.S./Japan (photo supplies)
 U.S./European union “Banana War)
 Asian financial crisis
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Introduction
 International Finance
 The world’s stock markets have grown
rapidly; and development of New
technologies allowing fast transfer of funds.
 Currencies
 Most EU countries adopted common currency
— the Euro.
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Why Study International Economics?
 More important than ever before.
 Allows us to fully comprehend
statements about international
economic policies; evaluation of the
influences on specific industries or
companies, and analysis of the linkages
between nations of the world.
 Most top macroeconomic policy makers of
the industrialized world have
economic backgrounds.
See Table 1.1
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International Interdependence
 Rapid Increase in the volume of trade:
 Demonstrated by effects of oil price
increases during the 1970s.
 In the early 1980s, oil prices declined in
response to a policy-induced recession in the
developed world.
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Growth in World Merchandise Trade & Output,
1950-2000 (Percent)
12
10
8
6
4
2
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
World merchandise exports
World merchandise output
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Growth in World Merchandise Trade & Output,
1950-2000 (Percent)
Trade
12
Output
10
8
6
4
2
1950-63
1963-73
1973-90
1990-2000
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International Interdependence
 Production Fragmentation has made it
difficult to distinguish a product’s
“nationality.”
 John Deere tractors built in
Japan…Komatsu builds in Illinois.
 The Ford Escort is assembled in
Germany.
 Toyotas are built in Kentucky
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International Interdependence
 Increasing involvement of developing
countries in the world economy.
 Many nations attempted to isolate
themselves for many years (China, Brazil,
and India)
 This trend is producing new patterns of
international interdependence. For
example, manufacturers produce in
countries with lower wages.
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International Interdependence
 Increased Interdependence in
financial markets.
 Has grown faster than that in markets
for oil, steel, and cars.
 24-hour global trading in stocks,
currencies, and bonds.
 Over $1.5 trillion in currencies traded
daily.
See Figure
1.2
12
Daily Turnover in Foreign Exchange Markets, 1986-2001
$ Trillions1.75
1.50
1.25
1.00
0.75
0.50
0.25
0
1986
1989
1992
1995
1998
2001
Year
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International Interdependence
 Increased opportunities for international
investment (FDI).
 Lenders fund projects regardless of the projects’
locations.
 And the growth of global trade is resulting
in a declines in the costs of transportation
and communication.
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Transport and Communication Cost, 1930-1990 (Index 1930 = 100)
Index
(1930 = 100)
Average ocean freight
and port charges
120
per short ton of cargo
100
Average
air-transport cost
per passenger mile
80
Cost of a
3-minute
phone call from
New York
60
40
to London
20
0
1930 1940 1950 1960 1970 1980 1990
Year
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International Interdependence
 Political Implications
 Policy makers need to understand that their
decisions in antitrust matters, regulations,
and taxes have international ramifications.
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International Interdependence
 Despite Increased flow of goods and financial
services, countries continue to differ
significantly in the extent to which they engage
in cross border trade.
 Large countries like the U.S. tend to engage in less
trade (as % of production), than do smaller ones.
 E.g., The next Figure shows a marked increase in the U.S.’s
global trade in recent years (yet it remains relatively small
when compared to the GDP).
17
U.S. Merchandise Imports and Exports, 19462000 ($ Billions)
18
Exports and Imports of Goods and Services,
2000 (Percent of GDP)
19
International Interdependence
 Despite Increased flow of goods and financial
services, countries continue to differ
significantly in the extent to which they engage
in cross border trade.
 Large countries like the U.S. tend to engage in less
trade (as % of production), than do smaller ones.
 The figure shows marked increase in the U.S.’s
global trade in recent years (yet it remains
relatively small when compared to the GDP).
 Reason?
 The domestic markets can efficiently satisfy many needs.
20
International Interdependence
 Global trade tends to cluster with certain
trading partners. Why?
 One reason…lower transportation costs; the other
being regional integration.
21
Regional Flows of Merchandise Trade
22
International Interdependence
 Synchronized changes in macroeconomic
activity across countries.
 Tendency toward simultaneous booms and
recessions.
 Cautionary note: perhaps mere coincidence
produced these patterns.
See
Figure 1.8
23
Industrial Production in the Major Industrialized
Economies, 1975-1999
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Economic Significance of Political
Boundaries
1. Major popular misconception about global trade
policy is that policy choices pit the interests of
one country against those of the other.
 However, trade policy choices rarely take this
form.
 If U.S. steel producers win protection against Korean
producers, then U.S. steel consumers (i.e., auto
makers or car buyers) pay higher prices.
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Economic Significance of Political
Boundaries
2. Most economic transactions between
individuals or companies from different
U.S. states face a smaller set of barriers
than those between a U.S. resident or
company and that of a foreign country.
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Studying International Economics
 International economics has two parts:
(I) International trade (theory):
Extends microeconomic analysis to global
questions.
 Example: goods and services available to
consumers are maximized when each country
specializes in producing those goods that it can
produce relatively efficiently.
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Studying International Economics
(II) International finance, balance-ofpayments theory, or open-economy
macroeconomics.
 Applies macroeconomic analysis to
aggregate international problems.
 Level of employment and output
 Changes in price level, balance of payments,
and exchange rates (relative prices of different
national currencies).
 Interaction of international goals and influences
with domestic ones in determining a nation’s
macroeconomic performance and policy.
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Studying International Economics
 Does trade do less harm than good
to residents of a country?
 Two approaches to answer this
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Studying International Economics
 Normative Analysis: a judgment of what is and
isn’t desirable.
 If we think that trade is desirable because it
maximizes the quantity of goods and services
available to consumers, we might conclude that
Japanese policy makers should pursue open trade
policies in agriculture, even though their farmers
strongly oppose them.
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Studying International Economics
 Positive Analysis: describe the way the
world economy works in a simplified way.
 Focus on explanation and prediction
 “If event X happens, then event Y will follow.”
 However, there may be disagreement about the
way the world works.
 One individual may think that “if event X
happens, then event Z will follow.”
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