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Chapter 1

Introduction and Institutions

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Chapter Objectives

• Provide a general overview of the growth of globalization since World War II

• Identify the major issues facing the international economy today

Introduction:International Economic Integration

• International integration of national economies has brought many benefits to many nations

-Technological innovation

-Less expensive products

-Greater investments in scarce resource regions

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Elements of International Economic Integration

• Today’s major economies are more integrated than they’ve been at any time in history

- Instantaneous communications

- Modern transportation

- Relatively open trading systems

• This allows most goods to move across boundaries without major obstacles and low relative costs

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Elements of International Economic Integration (cont.)

• There are four criteria or measures for judging the degree of integration:

1.Trade flows

2.Capital flows

3.People flows

4.Similarity of prices in separate markets

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The Growth of World Trade

• Since the end of World War II, world trade has grown much faster than world output

• In 1950, total world exports were estimated to be 5.5% of world gross domestic product (GDP)

• By 2005, total world exports were 20.5% of world GDP

The Index of Openness

• The index of openness is the ratio of trade to GDP

Index of Openness = (Exports +Imports)/GDP

• Openness does not reveal a country’s trade policies or define its barriers to trade

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FIGURE 1.1 Openness Index for Six Countries, 1913–2000

Capital and Labor Mobility

• Factor movements are indicators of economic integration

• As national economies become more interdependent, labor and capital generally move more easily across international borders

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Capital and Labor Mobility (cont.)

• Two important points regarding international capital flows:

1. Savings and investment are highly correlated

2. Technology improvements increase capital flows

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Contemporary International Economic Relations

• There are three features of contemporary international economic relations:

-Deeper integration

-Multilateral organizations

-Regional trade agreements

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Twelve Themes in International Economics

1. The Gains from Trade

2. Wages, Jobs and Protection

3. Trade Deficits

4. Regional Trade Agreements

5. The Resolution of Trade Conflicts

6. The Role of International Institutions

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Twelve Themes in International Economics (cont.)

7. Exchange Rates and the Macroeconomy

8. Financial Crisis and Global Contagion

9. Capital Flows and the Debt of Developing Countries

10.Latin America and the World Economy

11.Export-Led Growth in East Asia

12.The Integration of India and China into the World Economy

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