chap 01a - introduction to interdependence

8/10/2019 Chap 01A - Introduction to Interdependence

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Chapter 1: Introduction toInternational Economics

Part A

Interdependence!

Warning: This PowerPoint lecture supplements, but

does not substitute for, the textbook.

The technical parts of the lecture are

more thoroughly explained in the

textbook.

There is much additional material in

the textbook that gives you a more

complete perspective of the issues

covered in this lecture.

Material covered in the text, but not

covered in this lecture, is included

on your assignments and exams.

There are three fundamental

advantages from expanding the number

of people in a society:

1. The gain from specialization

Interdependence!


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of people in a society:1. The gain from specialization

Interdependence!





Interdependence!

Economies of scale





Interdependence!

Economies of scale

2. The potential for risk r eduction


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of people in a society:1. The gain from specialization

Interdependence!

ompara ve a van age

Economies of scale

2. The potential for risk reduction

3. The expansion o f know ledge





Interdependence!

Economies of scale

2. The potential for risk reduction

3. The creation of knowledge

These three advantages are mutually

reinforcing!

Interaction with strangers has many dangers.

The survival of the human species and the

maximization of individual welfare has always

required a careful balance between

interaction and isolation.

Interdependence!

The recent improvements in human welfare,

longevity, and quality of life are the result of

our improved ability to reduce the propensity

for humans to exploit, steal, and kill.

It seems to have become easier and safer to

deal with strangers.


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Paul Seabright (2004) describes the great

experiment.

Human evolution during the extended periodof hunters and gatherers has only partially

Interdependence!

.

To manage the hazards imposed on us by

the actions of strangers has required us to

deploy a different skill bequeathed to us by

evolution for quite different purposes, the

capacity for abstract symbolic thought

In order to capture the gains fromspecialization, risk sharing, and knowledgecreation, we must create institutions thatmake human beings, who are hard-wired tobe suspicious of strangers, willing to deal with

Interdependence!

almost all of the institutions of modernsociety can be understood as dedicated to anutterly unnatural division of labor betweenstrangers.

Humans have struggled to get the institutions

right.

If the objectives of those players in aposition to shape their destiny are met,it is possible to say that society hascreated a consistent set of institutions.

Interdependence!

process of change with lots of errors,endless losers, and no guarantee thatwe will continue to get it right in spite ofthe enormous accretion of knowledgeover those centuries.


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Douglass North suggests that the

frequent inconsistencies between

peoples objectives and societys actualoutcomes are caused by:

Interdependence!

(1) the lack of accurate information on

how the world actually is and how it

functions

Douglass North suggests that the

frequent inconsistencies between

peoples objectives and societys actual

outcomes are caused by:

Interdependence!

(1) the lack of accurate information on how

the world actually is and how it functions

(2) the resistance to change by certain

people and groups of people because

they prefer the status quo to further

change.

Douglass North suggests that the frequent

inconsistencies between peoples objectives

and societys actual outcomes are caused by:

(1) the lack of accurate information on how the world

actually is and how it functions

Interdependence!

(2) the resistance to change by certain people and

groups of people because they prefer the status

quo to further change.

The acceleration of economic growth over

the past several centuries suggests that we

have been getting it right more often.


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Many problems remain, however.

The differences in the rates of change of r eality,

knowledge, formal legal inst itutions, cul ture, andhuman instinct m ean that when economic and

social environments change more rapidly,

Interdependence!

-

behavioral systems often fall behind.

Historical evidence shows episodes of expanding

international economic integration are often

reversed because institutional support i s not

sufficient to handle the complex international

economic interactions.

Interdependence!

Our knowledge of our natural and socialenvironments is incomplete. This North writes:

Throughout human history there has always been alarge residual that defied rational explanationaresidual to be explained partly by non-rationalexplanations embodied in witchcraft, magic, religions;but partly by more prosaic non-rational behaviorcharacterized by dogmas, prejudices, half-bakedtheories. Indeed despite the . . . assertion by eminenttheorists that it is not possible to theorize in the faceof uncertainty, humans do it all the time; their effortsrange from ad hoc assertions and loosely structuredbeliefs such as those encompassed in the labelsconservative and liberal to elegant systematic

ideologies such as Marxism or organized religions.

Institutions are both formal and informalarrangements and guidelines.

Culture is an informal institution.

Culture includes the stories, myths,

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re g ons, ra ons, r ua s, an w e y

accepted beliefs that give meaning to our

social existence.

Culture changes slowly.

Culture may clash with reality and other

cultures.


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The purpose of this textbook i s to advance the

understanding of international economics.

International economics has, traditionally, focused

on four different components of internationaleconomic integration:

International trade

Interdependence!

International investment

International finance

International migration

The chapters that f ollow explain i nternational trade,

international investment, international finance, and

international migration.




on four different components of international

economic integration:

International trade

Interdependence!












International trade

Interdependence!








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on four different components of internationaleconomic integration:

International trade

Interdependence!












International trade

Interdependence!












International trade

Interdependence!








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Note, however, that the four components ofinternational economic integration arerelated.

Trade often involves financing.

Investment impli citly always involvesfinancing.

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grat on s o ten re ate to nvestment.

Investment is related to trade.

We often focus on one of thesecomponents, but the international economyis a complex sy stem in whi ch allcomponents are tightly linked in a greatvariety of ways.




Interdependence!



We often focus on one of thesecomponents, but the international economyis a complex sy stem in whi ch allcomponents are tightly linked in a great

variety of ways.



Investment impli citly always involves

financing.

Interdependence!





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Interdependence!







Interdependence!



We often focus on one of thesecomponents, but the international economyis a complex sy stem in whi ch allcomponents are tightly linked in a great

variety of ways.



Investment impli citly always involves

financing.

Interdependence!





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The purpose of this textbook is to advance

the understanding of international

economics.

International trade


Interdependence!



This textbook provides you w ith a variety of

perspectives, what economists call a

heterodox approach.

chap 01a - introduction to interdependence

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