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International Economics
By Robert J. Carbaugh
7th Edition
Chapter 1:
The international economy
Copyright ©2000, South-Western College Publishing
Economic interdependence
Elements of interdependence
 Trade: goods, services, raw materials,
energy
 Finance: foreign debt, foreign investment,
exchange rates
 Business: multinational corporations, global
production
Carbaugh, Chap. 1
2
Economic interdependence
Exports of goods and services as percent of
Gross Domestic Product, 1997
Country
Netherlands
Norway
Canada
Mexico
South Korea
United Kingdom
Germany
France
United States
Japan
Carbaugh, Chap. 1
Exports as percent of GDP
55%
41
39
31
31
29
25
25
12
10
3
Economic interdependence
Leading trading partners of the United States,
1997
Country
Canada
Japan
Mexico
United Kingdom
South Korea
China (incl. Hong Kong)
Germany
Singapore
Belgium/Luxembourg
Carbaugh, Chap. 1
Value of US
exports ($ bill.)
$133
68
55
31
27
25
23
17
13
Value of US
imports ($ bill.)
$160
118
76
31
18
64
40
21
7
4
Economic interdependence
Interdependence: Impact
 Overall standard of living is higher
 Access to raw materials & energy not available
at home
 Access to goods & components made less
expensively elsewhere
 Access to financing and investment not
available at home
Carbaugh, Chap. 1
5
Economic interdependence
Interdependence: Impact (cont’d)
 Other impacts - good & bad
 Curtails inflationary pressures at home
 Limits domestic wage increases
 Makes economy vulnerable to external
disturbances
 Limits impact of domestic fiscal policy on
economy
Carbaugh, Chap. 1
6
Economic interdependence: case study
The US & the Asian economic crisis
 Who could be hurt by
the Asian crisis of
1997-98:
 US creditors &
investors in Asia
 US exporters to Asia
 US firms that compete
with Asian imports
 US workers who
compete with Asian
workers
Carbaugh, Chap. 1
 US firms that sell imports
from Asia
 US multinationals
wanting markets in Asia
 US firms manufacturing
in Asia
 US firms using
components from Asia
 US consumers of imports
7
Economic interdependence: case study
The US & the Asian economic crisis
 Potential macroeconomic effects of the
Asian crisis
 US trade balance hurt as exports to the region
suffer and imports become cheaper
 US economic growth might suffer as a result of
Asia’s economic decline
Carbaugh, Chap. 1
8
Comparative advantage
Competitiveness & trade
 Main objective of any nation is to generate
high and rising standard of living
 No nation can efficiently make everything itself
 International trade allows countries to focus on
producing what they make efficiently
 Inefficient sectors will be squeezed out
 Sectors open to competition become more
efficient and productive
Carbaugh, Chap. 1
9
Comparative advantage
Comparative advantage means:
 If the relative cost of making two items is
different in two countries, each can gain by
specializing in the one it makes most cheaply each has a comparative advantage in that
product
 Even countries that make nothing cheaply can
benefit from specialization
Carbaugh, Chap. 1
10