Download Lecture 1 International Economics Introduction and Overview

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My Contact
Email: [email protected]
Tel: 017 388 989
Website: www.chanrithysok.com

Currently, Pursuing PhD at Panassatra University

Name: Sok Chanrithy, IMBA from National Cheng
Kung University
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1-2
Bachelor of Science Economic at Royal University of
Laws and Economics (1999-2003)
Bachelor of Hotel and Tourism at National
University of Management (2000-2004)
Lectured by: SOK Chanrithy
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1-3
Currently: Monitoring and Evaluation
Specialist, STVET Project (ADB Grant 0178
CAM0
2009 - 2010: Part-time Country Manager at
Connect Education (Australia Company)
2007-2009: General Manager at a Hotel in
Siem Reap
Teaching and Research Assistant with
Economic Professor in Taiwan in 2005-2007
Lectured by: SOK Chanrithy
[email protected]
◦ Website: www.chanrithysok.com
◦ Email:
◦ Tel: 017388989
Grading Policy
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◦
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1-4
Case Analysis and Presentation 15%
Attendance 10%
Mid-Term exam 25%
Final exam 50%
Lectured by: SOK Chanrithy
• The growth of market day to day
• The effect: the growth in economic and develop
of nations
• Eg: GDP’s Cambodia 1997-2007-2011
• => 302- 459-850
• The flow of goods and service of one country
and not only local
• Effect on Consumers, Suppliers, Government…
Globalization



more formally refers to the economic, social,
cultural or environmental changes that tend
to interconnect peoples around the world.
Global marketplace on consumers,
businesses and governments.
That is where the study of international
economics begins.
International economics is growing in
importance as a field of study because of
the rapid integration of international
economic markets.
 International economics is a field of study
which assesses the implications of
◦ international trade in goods and
services and
◦ international investment.



International trade - applies microeconomic
models to help understand the international
economy.
Its content includes:
◦ supply and demand analysis,
◦ firm and consumer behavior,
◦ perfectly competitive,
◦ oligopolistic and monopolistic market
structures,
◦ the effects of market distortions.


International trade is the exchange of goods and
services across international boundaries or
territories. In most countries, it represents a
significant share of GDP.
Industrialization, advanced transportation,
globalization, multinational corporations, and
outsourcing are all having a major impact.
Increasing international trade is the primary
meaning of "globalization".
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International finance applies macroeconomic
models to help understand the international
economy.
Interrelationships between aggregate economic
variables: GDP, unemployment rates, inflation rates,
trade balances, exchange rates, interest rates, etc.
International exchanges rate
trade imbalances, the determinants of exchange rates
and the aggregate effects of government monetary and
fiscal policies.
pros and cons of fixed versus floating exchange rate
systems
1.


GATT
1947: USA+23 countries- General
Agreement on Tariff and Trade( GATT) which
is now more than 100 countries.
Purpose:
◦ foster equal (nondiscriminatory treatment
for all member nations)
◦ Promote the reduction of tariff by
multilateral negotiation
◦ Foster the elimination of import Quotas




Now begin to liberalize agriculture and services
market.
They would eliminate the many quota systems - like
the multi-fiber agreement in clothing - that had
sprouted up in previous decades.
minimum standards to protect intellectual property
rights such as patents, trademarks and copyrights.
The WTO:
◦ created to manage this system of new agreements,
◦ to provide a forum for regular discussion of trade
matters
◦ process for settling trade disputes that might arise
among countries.
As of 2006, 149 countries were members
of the WTO "trade liberalization club" and
many more countries were still negotiating
entry.
 latest round of trade liberalization
discussion called the Doha round
concludes with an agreement, world
markets will become increasingly open to
trade and investment.
[Note: the Doha round begun in 2001 and
remains uncompleted as of 2006]

2. USA+Canada+Mexico – North American Free Trade
Agreement (NAFTA) in 1994
◦ To compete effectiveness with EEC( European
Economic Commodity) and other trading blocs
that might develop in future.
3. IMF: International Monetary Fund mission provide
loan to country that are in financial trouble.
 IMF: dictates the term of the loans, including
cutting domestic subsidies, privatizing government
industries, and moderation trade policies.
4. World Bank: 157- help less developed countries
achieve economic growth through improved trade. (
provide laon, guaranteeing, insuring private loans
to nation in need financial assistant.


In trade policy discussions terms such as:
◦ protectionism
◦ free trade,
◦ trade liberalization are used repeatedly.
One other term is commonly used in the
analysis of trade models:
◦ namely national autarky, or just autarky.
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Some countries, Singapore and (formerly)
Hong Kong, highly free trade oriented.
Others, like North Korea and Cuba, have long
been relatively closed economies and thus are
closer to the state of autarky.
The rest of the world lies somewhere in
between.
“Globalization”

Means different things to different people
◦
My definitions:

1. The increasing world-wide integration of markets for
goods, services and capital.
2. Also role of MNCs, IMF, WTO, World Bank.
3. Elsewhere: domination by United States.
Some see good, others bad
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

Bad: reading by powell
Good: reading by Bhagwati
Both make valid
points. Read to
see what they are.
International Economics

◦
◦
Is NOT about countries
It is about interactions among countries
World Economy consists of

◦
◦
◦
Countries: a few hundred
(CIA lists about 230)
(WTO has 153 members)
People: getting close to 7 billion
(6.79 b. 1/4/10, compare 308 m. US)
Land: about 15 times the US
An excellent source
of information
about countries is
the CIA World Fact
Book
(Just Google “fact
book”)
World Economy consists of

◦
GDP (per CIA World Fact Book, 2008 est.)


World:
Total =
$70.14 trillion
per capita =
$10,500
US: Total =
$14.44 trillion
per capita =
$47,500
Implication

◦
US is very unusual

Very rich


US has less than 5% of world population but more
than 20% of world income
Also very free?


Not necessarily, according to some. See Eiras
reading.
In 2004, US had dropped to #10 in economic
freedom, according to the Heritage Foundation, due
to


Increased government spending
Increased barriers to trade and investment
Ways that countries interact economically
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◦
Trade (per CIA, 2008 est.)


World exports: $16.0 trillion
(compare world GDP of $70 trillion)
World trade has grown faster than world GDP most
years


But not during the last year, due to world recession
See Economist article, “Barriers to Entry”

See tables below for
◦
◦
◦
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Who trades most?
Who trades with whom?
Compare trade in services with trade in goods
Share of trade in GDP
US: What do we export/import? To/from whom?
Exporters
Importers
Value
EU-27*
China
US
Japan
Canada
World
Share
15.9 US
11.8 EU-27*
10.6 China
782.0
6.5 Japan
456.5
3.8 Canada
12096.0 100.0 World
1924.9
1428.3
1287.4
Value
Share
2282.2
2169.5
1132.5
18.3
17.4
9.1
762.6
418.3
12449.0
6.1
3.4
100.0
*EU external only
Source: WTO, International Trade Statistics, 2009, Table I.9
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
Developed countries are the biggest traders
China is catching up, in trade volume
◦ It was the #3 exporter two years ago when I taught
the course; now it’s #2.
Destination:
Origin:
North
Amer.
Latin
Amer.
Eur.
Asia
Africa
Other
North Amer.
1015
165
369
376
34
76
Latin Amer.
169
159
121
101
17
21
Europe
475
96
4695
487
186
429
Asia
775
127
801
2181
121
305
Africa
122
19
218
114
53
16
Other
153
17
531
645
47
289
World
2708
583
6736
3903
458
1135
Source: WTO, International Trade Statistics, 2009, Table I.4
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North America, Europe, and Asia trade mostly
within their group
Poorer regions – Latin America, Africa – trade
mostly with the richer regions
This reflects what is not so clear in the table:
◦ Rich countries trade most with each other
◦ Poor countries trade most with rich countries
All Products
Agriculture
Fuels and Mining
Manufactures
Value
15,330
1342
3530
10,458
Source: WTO, International Trade Statistics, 2009, Table II.1
Growth
13
12
19
11
Biggest traded category: manufactures
Fastest growing: “fuels & mining”
Why?
Because this is the value of trade, and prices of oil
and other raw materials were rising.
(Since mid-2008, though, they have fallen.)
All Products
Manufactures
Iron and steel
Chemicals
Office & telecom equip.
Automotive products
Textiles & clothing
Value
15,330
10,458
587
1705
1561
1234
250
Growth
13
11
19
14
6
10
6
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Almost 10% of all trade is automotive
Fastest growing, lately, is iron and steel, and
chemicals (which includes pharmaceuticals)
Total
Agriculture
Petroleum
Industrial supplies
Capital goods, exc. auto
Automotive
Other non-ag
Other non-petrol
Exports
1,148.5
92.1
Imports
1,967.9
302.3
447.4
121.0
185.6
Source: Economic Report of the President, Feb 2009, Table B-104.
331.0
308.4
444.5
258.9
625.1
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
US imports are much larger than US exports
US is a big…
◦ Exporter of agricultural products
◦ Importer of oil
◦ Exporter and importer of capital goods (i.e.,
machines for making things)
GDP
United States
Exports/GDP
1277.0
9%
746.5
15%
1498.0
41%
Canada
459.1
31%
India
187.9
16%
Mexico
291.3
27%
Netherlands
531.7
61%
Singapore
342.7
188%
Philippines
48.2
29%
0.9
7%
Japan
Germany
Nepal
Source: CIA World Fact Book
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Even though we trade more than most, US
trade is a smaller part of US GDP than for
many other countries
Others that are low: India, Nepal (even lower
than US)
Note Singapore: Exports can be more than
GDP.
◦ Reason: Exports are made using imports.
Ways that countries interact economically

◦
Capital Flows

Financial (holdings of financial assets abroad)

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Currency
Bank deposits
Bonds – private and government
Stocks
Bank loans
Real (international ownership of real assets)
Ways that countries interact economically
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◦
Capital Flows


Financial (holdings of financial assets abroad)
Real (international ownership of real assets)

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Real estate
Capital assets (plant and equipment)
Stocks (equities) if ownership share is large
Other
Data, below, are stocks (i.e, amounts at a point in
time)
We “Own” US We “Owe” For.
Assets Abroad Assets in US
Total
17.64
20.08
US Gov’t
0.37
2.50
Private financial
11.65
15.16
Private real
3.33
2.42
Compare: US GDP in 2008 = $14.4 trillion
Source: Economic Report of the President, Feb 2009, Table B-107
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(Qualification: “Owe” isn’t quite right. This
includes all assets in the US owned by
foreigners, including land, buildings, etc. Not
just what we’ve borrowed.)
Lessons:
◦ US is a large net “debtor” (result of our spending
more than we earn)
◦ Part of this is government, but most is private
Ways that countries interact economically
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◦
Migration

Temporary

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

Guest workers
Day workers
Permanent
In practice, most (all?) countries limit migration
severely
Ways that countries interact economically

◦
Policies that affect other countries

Direct






Trade policies (tariffs, quotas)
Foreign aid
Capital controls
Exchange rate management
Immigration restrictions
Indirect
Aside on Tariffs

◦
◦
We will be dealing a lot with these
See reading by Hufbauer and Grieco:



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US tariffs are much lower than they used to be
(average 4% now, vs. 40% in 1946)
US has gained a great deal from lowering tariffs
US still has much to gain from further lowering
But there are also severe costs for some people
and firms who compete with imports
Aside on Tariffs

Tariffs could go up: See Economist article
◦



WTO enforces only upper limits on tariffs
Actual tariffs are below these limits, and could
legally rise
The current world recession could push countries
to do that
Aside on Tariffs

◦
See also reading from CGD (Center for Global
Development)


45% of US exports go to developing countries
US tariffs are much higher against developing
countries than against developed countries
Ways that countries interact economically

◦
Policies that affect other countries


Direct
Indirect

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Subsidies (esp. agriculture)
 US farm subsidies > foreign aid (see CGD reading)
Macro policies (monetary, fiscal)
Environmental policies
Standards
 Labor
 Health & safety
 Norms
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International economics is about how nations
interact through trade of goods and services,
through flows of money and through investment.
International economics is an old subject, but it
continues to grow in importance as countries
become tied to the international economy.
Nations are more closely linked through trade in
goods and services, through flows of money, and
through investment than ever before.


International trade as a fraction of the
national economy has tripled for the U.S. in
the past
40 years.
Compared to the U.S., other countries are
even more tied to international trade.
Source: U.S. Bureau of Economic Analysis
Source: Organization for Economic Cooperation and Development

Several ideas underlie the gains from trade
1. When a buyer and a seller engage in a voluntary
transaction, both receive something that they
want and both can be made better off.


Norwegian consumers could buy oranges through
international trade that they otherwise would have a
difficult time producing.
The producer of the oranges receives income that it
can use to buy the things that it desires.
2.
How could a country that is the most (least)
efficient producer of everything gain from trade?
◦
With a finite amount of resources, countries can use
those resources to produce what they are most
productive at (compared to their other production
choices), then trade those products for goods and
services that they want to consume.
◦
Countries can specialize in production, while consuming
many goods and services through trade.
3.
4.
5.
Trade is predicted to benefit a country by making
it more efficient when it exports goods which use
abundant resources and imports goods which use
scarce resources.
When countries specialize, they may also be more
efficient due to large scale production.
Countries may also gain by trading current
resources for future resources (lending
and borrowing).

Trade is predicted to benefit countries as a
whole in several ways, but trade may harm
particular groups within a country.
◦ International trade can adversely affect the
owners of resources that are used intensively in
industries that compete with imports.
◦ Trade may therefore have effects on the
distribution of income within a country.
◦ Conflicts about trade should occur between
groups within countries rather than between
countries.
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
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Differences in climate and resources can explain
why Brazil exports coffee and Australia exports
iron ore.
But why does Japan export automobiles, while the
U.S. exports aircraft?
Differences in labor productivity may explain why
some countries export certain products.
How relative supplies of capital, labor and land are
used in the production of different goods and
services may also explain why some countries
export certain products.

Policy makers affect the amount of trade through
◦ tariffs: a tax on imports or exports,
◦ quotas: a quantity restriction on imports or exports,
◦ export subsidies: a payment to producers that export,
◦ or through other regulations (ex., product specifications)
that exclude foreign products from the market, but still
allow domestic products.

What are the costs and benefits of these policies?

Economists design models that try to measure the
effects of different trade policies.

If a government must restrict trade, which policy
should it use?

If a government must restrict trade, how much
should it restrict trade?

If a government restricts trade, what are the costs
if foreign governments respond likewise?

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Governments measure the value of exports and imports, as
well as the value of financial assets that flow into and out of
their countries.
Related to these two measures is the measure of official
settlements balance, or the balance of payments: the balance
of funds that central banks use for official international
payments.
All three values are measured in the government’s national
income accounts.

Besides financial asset flows and the official
settlements balance, exchange rates are also an
important financial issue for most governments.
◦ Exchange rates measure how much domestic currency can
be exchanged for foreign currency.
◦ They also affect how much goods that are denominated in
foreign currency (imports) cost.
◦ And they affect how much goods denominated in domestic
currency (exports) cost in foreign markets.

International trade focuses on transactions
of goods and services across nations.
◦ These transactions usually involve a physical movement
of goods or a commitment of tangible resources like
labor services.

International finance focuses on financial or
monetary transactions across nations.
◦ For example, purchases of U.S. dollars or financial assets
by Europeans.

The Three Main Institutions (IMF, World Bank, WTO)

Other Institutions

What’s Happening Now?
◦ Why They Were Created, and When
◦ How They Have Changed
◦ Their Reputations Today
◦ United Nations
◦ OECD = Organization for Economic Cooperation and
Development
◦ Preferential Trading Arrangements
◦
◦
◦
◦
The World Financial Crisis
The Doha Round
PTAs
Trade Disputes

Functions
◦ IMF (International Monetary Fund): Financial
Assistance
◦ World Bank: Development Assistance
◦ WTO (World Trade Organization): Trade Policy
Regulation and Negotiation

History
◦ Before World War II
 Great Depression
 High Tariffs on trade
 Competitive Devaluations
of currencies
“Beggar Thy
Neighbor Policies”
(we’ll see why later)

History
◦ End of World War II
 Bretton Woods Meeting (Bretton Woods, NH)
 IMF
 World Bank
 ITO (International Trade Organization)
 Never ratified
 Instead: GATT (General Agreement on Tariffs and Trade)

History
◦ Changes since 1940s
 IMF
 Originally enforced pegged exchange rates
 Purpose: To prevent “beggar-thy-neighbor” exchangerate policies
 Major currencies switched to floating in 1970s
 IMF still provides financial assistance
 Mostly to developing countries
 Subject to “conditionality” = required policy changes
 In 21st century, many countries have been paying off their
loans, until recently
 IMF was wondering about its income, but now is lending
to countries in crisis

History
◦ Changes since 1940s
 World Bank
 =IBRD (International Bank for Reconstruction and
Development)
 Originally intended for reconstruction from war
 Now just assists development
 Much of it by funding and assisting with projects

History
◦ Changes since 1940s
 GATT
 Rules of international trade policy
 “Rounds” of negotiation
 Uruguay Round
 Created WTO in 1995
 Currently is/was doing Doha Round
Begun 2001 in Doha, Qatar
Stumbled in 2003 (Cancún) and 2005 (HK)
Suspended July 2006, but restarted 2007
Suspended again in 2008
 Future uncertain: Much more on this later

Reputation Today:

Reputation Today: Criticized by
◦ Opponents of globalization
◦ Opponents of corporations
◦ Some in Developing Countries for dominance
 by US
 by rich countries
 by corporations
◦ Some in US for undermining US power

Reputation Today: Criticized by
◦ Scholars for institutional flaws
 IMF: Has imposed misguided policies
 World Bank: Wastes resources on corrupt elites
 WTO: Dominated by rich countries, corporations

G-7, G-8, G-20: These are Groups of
countries
◦ G-7 = US, Canada, Japan, Britain, France, Germany,
Italy
 Finance ministers meet
◦ G-8 = G-7 + Russia (since 1998)
 Heads of state met annually, until recently
◦ G-20 = G-8 + Australia & EU, + 10 major EMEs
(Emerging Market Economies)
= 19
Countries
+ EU

G-20
◦ Used to meet regularly, but only the finance
ministers
◦ First G-20 summit (i.e., heads of state) met
November 2008, London
◦ Met again September 2009, Pittsburgh
◦ Now looks like G-20 summits will be the main
regular meeting, probably twice a year
 Next in Toronto, Canada, June 2010, and then Seoul, S.
Korea, November 2010

UN = United Nations
◦ UNCTAD (United Nations Conference on Trade and
Development)
◦ ILO (International Labor Organization)
◦ WIPO (World Intellectual Property Organization)



EU = European Union
NAFTA = North American Free Trade Area
OECD = Organization for Economic
Cooperation and Development
◦ Club of high-income countries
◦ Does research, collects data, drafts policies

Started in US with burst of housing bubble
◦ Loans had been made, counting on rising house
prices
◦ With burst, loans went bad
◦ Banks and other institutions were interlinked via
 Bad loans
 Complex financial instruments whose value fell and/or
was uncertain

Crisis spread
◦ To most other developed countries through
financial institutions
◦ To some developing countries too

Income and expenditure fell, causing worldwide recession
◦ Falling house prices alone reduced wealth
◦ Failures in financial markets made it worse
◦ Banks stopped lending

Recession caused immediate drop in
international trade
◦ This made matters worse
◦ It spread the recession to countries that had not
been exposed to financial markets
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
World GDP, annual, 1970=100
500
Source: IMF & IndexQ.org
Est.
450
400
350
300
250
200
150
100
50
0
1600
1400
1200
1000
800
600
400
200
0
Source: IMF
World Exports, monthly, $billion
July 2008
Mar 2009
In Recession
Moderating
Recovering
Expanding
Source: Dismal Scientist

What was done about it?
◦ Central banks, cut interest rates and extended
credit.
◦ Banks were rescued.
◦ Countries used “Stimulus Packages” (tax cuts and
spending increases) to stimulate economies.
◦ G-20 met, first in London, then in Pittsburgh (see
Schmitz and Suominen)

What was done about it?
◦ IMF back in business making loans.
 Packages already in hand for




Iceland
Hungary
Ukraine.
Many more
 G-20 promised more funds to IMF

What will prevent future problems?
◦ Financial regulation
 restraints on bank lending
 reform of credit rating agencies
◦ Managed currency policies? (US concern with
China’s currency.)

IFIs = International Financial Institutions
◦ IMF and World Bank
◦ See Lachman article:
 Reputations have suffered
 IMF from financial crises and mis-management
 WB from leadership of Paul Wolfowitz
 Roles have been reduced by private lending, but their
staffs have grown, by 50% over last 10 years
 What should they be doing?
 IMF: surveillance over exchange systems and imbalances
 WB: alleviate poverty, especially in Africa

Doha Round (of multilateral trade
negotiations under the WTO)
◦ Began at Doha, Qatar, 2001
◦ Negotiations
 Take place at WTO Headquarters in Geneva, Switzerland
 But periodically occur at “Ministerial Meetings” (meetings
of trade ministers) in other cities

Doha Round starts and stops

Doha Round starts and stops
◦ Cancún Ministerial, 2003: Failed to agree
◦ Cancún Ministerial, 2003: Failed to agree
◦ Hong Kong Ministerial, 2005: Only minimal
agreement

Doha Round starts and stops
◦ Cancún Ministerial, 2003: Failed to agree
◦ Hong Kong Ministerial, 2005: Only minimal
agreement
◦ Negotiations suspended July 2006, restarted
2007
◦ US, EU, Brazil and India met in Potsdam,
Germany, but ended in deadlock June 21, 2007
◦ June 30, 2007: US negotiating authority expired
◦ July 29, 2008: Negotiations broke down over
agriculture
◦ Future uncertain; don’t know when, & whether,
talks will resume

Doha Round
◦ Objective was: Doha Development Agenda
 To achieve substantial further reduction in trade
barriers,
 In both developed and developing countries,
 While for the first time providing meaningful benefits
to developing countries
◦ Conflicts:
 US and EU agricultural subsidies and tariffs
 Developing-country import barriers in manufactures
and services

Doha Round
◦ Reasons for failure of Doha Round:
 All countries wanted
 other countries to reduce trade-distorting policies,
 but not to change their own policies
 WTO requires agreement by all of its member
countries (now 153); that’s hard to achieve!

Doha Round
◦ Reason for collapse in 2008 : Disagreement in
agriculture
 US trade distorting subsidies: US would “cap” these,
but not at a low enough level to satisfy India and China
 “Special safeguards” for India: Permission to raise
tariffs if imports rise above some threshold

Doha Round: What will happen next?
◦ The Round may be able to restart. This will
require leadership, probably from U.S.
◦ Likely to be a flurry of trade disputes taken to the
WTO for resolution
 Countries were waiting to file complaints, hoping that
Doha Round would solve their problems
◦ Likely also to be increased move toward
PTAs/RTAs among pairs and small groups of
countries
◦ Who loses? Developing countries (see Blustein
article)

PTAs (Preferential Trade Agreements)
◦ Most countries are in some of these and are
negotiating to form more
◦ Typical PTA is “Free Trade Area” (FTA) such as
 NAFTA (North American Free Trade Area)
◦ We’ll study the effects of these later in the course
 They are not necessarily economically beneficial
Recent United States Free Trade Agreements
Completed since 2001
Being Negotiated
Australia, Bahrain, Chile, Colombia, Ecuador,
Costa Rica, Dominican Korea, Malaysia, Oman,
Republic, El Salvador, Panama, Peru,
Guatemala, Honduras, Thailand, United Arab
Jordan, Morocco,
Emirates, + SACU
Nicaragua, Singapore (Southern African
Customs Union)
Done, but not yet ratified in either country.
Regional Trade Agreements (RTAs) Notified to GATT/WTO

Most recently:
◦ On January 1, China and ASEAN announced a new
Free Trade Agreement
◦ ASEAN = Association of Southeast Asian Nations:
Indonesia, Philippines, Viet Nam, Thailand, &
Singapore, + 5 more
ASEAN + CHINA

Trade Disputes
◦ China’s currency (the yuan)
 Was pegged to US $ at 8.2765 ¥/$ and considered
undervalued
 Allowed to rise as of July 21, 2005. It rose 2.1%
 Since then it has risen steadily until July 2008, to
6.8363 ¥/$ about 20%
 In July 2008, dollar itself started to rise, and yuan has
stayed the same
 Many, in US and especially in EU, think yuan should
rise much more. China says no!

Comparative Advantage and the Gains from
Trade
◦ What causes countries to export and import?
◦ Why do they gain from trading?
◦ The “Ricardian Model” of International Trade