For information concerning this course, including PowerPoint slides and a course syllabus, please visit my website at:
http://www.angelfire.com/ok5/osucowboytc
WebpageWebpage
What is the purpose of this What is the purpose of this course?course?
To introduce you to the World Economy To focus on the key features of the
global economic environment To advance economic concepts and
allow you to develop research and analytical skills
To gain an understanding of trade, international payments, exchange rates and economies undergoing change
Outcomes of this courseOutcomes of this course
Outcome 1 – Explain international trade and the role of trade organizations
Outcome 2 – Analyze the balance of payments and exchange rate regimes
Outcome 3 – Evaluate world economies
AssessmentAssessment
There will be one open assessment to develop your research skills
You will be required to present a portfolio of evidence either in the form of a written report or in oral presentation
A written report will require a response of 1000-2000 words, where an oral presentation should be 15 minutes in length
A Global EconomyA Global Economy
You buy a computer in the United States The components of the computer were
designed in Japan The components were manufactured
in China When you call for service, your call is
transferred to a customer service agent in India
Common Mistakes in Common Mistakes in International TradeInternational Trade
"Trade is zero-sum" - trade can bring benefits to both partners
"Imports bad, exports good" - if you buy nothing from other countries, they have no income to buy from you
"Tariffs and quotas save jobs" - cutting imports makes it harder to export, so other jobs are lost
Reasons for TradeReasons for 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
Sectors open to competition become more efficient and productive
Reasons for TradeReasons for Trade
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
Results of TradeResults of Trade
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
Results of Trade (cont.)Results of Trade (cont.)
Other impacts - good & bad Slows inflationary pressures at home Limits domestic wage increases Makes economy vulnerable to external
disturbances Limits impact of domestic fiscal policy
on economy
A Look at Economies of the A Look at Economies of the WorldWorld
Rank Economy $ US Millions
1 United States 10,416,818
2 Japan 3,978,782
3 Germany 1,976,240
4 United Kingdom 1,552,4375 France 1,409,604
6 China 1,237,145
7 Italy 1,180,921
8 Canada 715,692
9 Spain 649,792
10 Mexico 637,205
Gross National ProductGross National Product
国民生产总值 This means that the income of all citizens o
f the country is included and the income of all non-citizens is excluded
Used by the United Nations to measure the wealth and poverty of nations
Per capita = Total GNP\Total Population EX. GNP = $ 1,000,000,000
Pop = ÷ 1,000,000GNP per capita = $ 1,000
Gross Domestic ProductGross Domestic Product
Many economists consider GNP a poor measure of wealth
They prefer a measure called GDP ( 国内生产总值 )
GDP includes all income within a country and excludes all income outside a country, regardless of who earns the income
GDP per capita is calculated the same as GNP per capita
GDP’s of the WorldGDP’s of the World
Rank Country GDP Per Capita US $
1 Liechtenstein 42,416
2 Switzerland 42,416
3 Japan 41,718
4 Luxembourg 35,109
5 Norway 33,734
6 Denmark 33,191
7 Germany 29,632
8 Austria 29,006
9 Belgium 26,582
10 Monaco 26,470
Exports of goods and services as Exports of goods and services as percent of Gross Domestic Product, percent of Gross Domestic Product,
19991999
Country Exports as percent of GDP
Netherlands 55%Norway 41Canada 39Mexico 31South Korea 31United Kingdom 29Germany 25France 25United States 12Japan 10
Free TradeFree Trade
What is Free Trade?
Trading of goods between countries without any barriers to the transaction
Allows countries to obtain goods that they do not produce or do not produce efficiently
Free TradeFree Trade
Assumptions No barriers of any kind would be
imposed upon entry of the goods to any market
What are some types of barriers? The selling price would be the
“economists price” (the goods would be sold at a price which covers all the costs relating to producing and transporting the goods plus allow for what economists term “normal profit”
Free Trade is an idealized situation that rarely, if ever, really occurs
Adam SmithAdam Smith
Scottish Philosopher and Economist Wrote “An Inquiry into the Wealth
of Nations”, better known as “The Wealth of Nations”
Established basic economic principals such as free markets
Absolute AdvantageAbsolute Advantage
Occurs when one country can produce a good or service more cheaply than another country
A country can possibly have an absolute advantage in producing many goods, or an absolute advantage in producing no goods
Countries benefit from exporting what they produce cheaper than anyone else
Absolute AdvantageAbsolute Advantage
Absolute advantage: each nation is more efficient in producing one good
Output per labor hour
Nation Wine Cloth
United States 5 bottles 20 yardsUnited Kingdom 15 bottles 10 yards
US should produce….?UK should produce….?
Absolute AdvantageAbsolute Advantage
Absolute advantage: one nation is more efficient in producing both goods
Output per labor hour
Nation Cars Wheat
United States 40 cars 20 bushelsUnited Kingdom 25 cars 10 bushels
US should produce….?UK should produce….?
Absolute AdvantageAbsolute Advantage
Limitations Countries often want to import goods
and services but cannot guarantee that the country whose product they purchase will want to purchase their own products
Cannot explain, for example, why the US is the United States is both the largest producer and importer of cars in the world
David RicardoDavid Ricardo
British Economist
Main developer of Classical Economics
Famous for his “Wine and Cheese” explanation of Comparative Advantage
Comparative AdvantageComparative Advantage
Nations can gain from specialization, even if they lack an absolute advantage
Absolute Advantage
(aL = labor/1 unit, no * = USA, * = France)If aLA < aL*A, then USA has an absolute advantage in producing Product A over France
Comparative AdvantageComparative Advantage
Opportunity Cost (机会成本) To produce one product, a countr
y must use resources that could be used to produce another product
Marginal Rate of Transformation Slope, shows how much of one pr
oduct must be given up to produce another product
L*A
L*B
A
BX
Marginal Rate of Transformation
Comparative AdvantageComparative Advantage
The USA has a comparative advantage in producing Product A over France if:aLA aL*A aL*B aLB
< < aLB aL*B aL*A aLA
In this case, France would have the comparative advantage in producing Product B
Comparative AdvantageComparative Advantage
This can also be calculated from production:The US has a comparative advantage in
Product A if:A A* B* B
> >B B* A* A
In this case, France would have the comparative advantage in producing Product B
Comparative AdvantageComparative Advantage
Cheese Wine Total
USA aLC=1 aLW=2 L=24
France aL*C=6 aL*W=3 L*=24Which country has the absolute advantage in Cheese? Wine?
Cheese – aLC(1) < aL*C(6) = US Wine – aLW(2) < aL*W(3) = US
Which country has the comparative advantage in Cheese? Wine?Cheese – aLC(1) aL*C(6) US requires 0.5 hrs/unit of Cheese
< = aLW(2) aL*W(3) France requires 2 hrs/unit of Cheese
Wine - aL*W(3) aLW(2) France requires 0.5 hrs/unit of Wine < =
aL*C(6) aLC(1) US requires 2 hrs/unit of Wine
US has a comparative advantage in Cheese, France has a comparative advantage in wine
Comparative AdvantageComparative AdvantageW
ine
Cheese
24
12
2
2 12 24
USA
France
The slope (MRT) of the US line is flatter, the opportunity cost for cheese is lower in the US, whereas the opportunity cost for wine is higher
Production Possibilities Line
MRT=0.5
MRT=2.0
Comparative AdvantageComparative Advantage
Autarky means a countries production and consumption are exactly the same
This is usually the equilibrium of supply and demand
Comparative AdvantageComparative Advantage
Cheese (units) Wine (units)
US 16 4
France 3 2
World Total 19 6
Win
e
Cheese
24
12
2
2 12 24
USA
France
Autarky Production/Consumption
Comparative AdvantageComparative Advantage
Cheese (units) Wine (units)
US 16 4
France 3 2
World Total 19 6
Autarky Production/Consumption
Cheese (units) Wine (units)
US 24 0
France 0 8
World Total 24 8
Specialized Production
Cheese (units) Wine (units)
5 2
Net Gains
Comparative AdvantageComparative Advantage
Cheese (units) Wine (units)
Consumption
Production
Consumption
Production
US 16+2=18 24 4+1=5 0
France 3+3=6 0 2+1=3 8
World Total 24 24 8 8
Consumption/Production After Trade
US imports 5 units of wine; France imports 6 units of cheese
Terms of Trade = 5 wine/6 cheese or 5/6 wine/cheese
Both countries benefit as a result of specialization and trade
Comparative AdvantageComparative Advantage
Win
e
Cheese
24
12
2
2 12 24
We can also see graphically the terms of
trade
Comparative AdvantageComparative Advantage
p. 23 Tractors Wool Total
Country A aLT=1/20 aLW=1/200 L=10
Country B aL*T=1/10 aL*W=1/150 L*=10
Which country has the absolute advantage in Tractors? Wool?
Tractors – aLT(1/20) < aL*T(1/10) = A Wool – aLW(1/200) < aL*W(1/150) = A
Which country has the comparative advantage in Tractors? Wool?Tractors – aLT(1/20) aL*T(1/10) “A” requires 10 resources / Tractor
< = aLW(1/200) aL*W(1/150) “B” requires 15 resources / Tractor
Wool - aL*W(1/150) aLW(1/200) “B” requires 1/15 resources / bale of Wool < =
aL*T(1/10) aLT(1/20) “A” requires 1/10 resources / bale of Wool
“A” has a comparative advantage in Tractors, “B” has a comparative advantage in Wool
Comparative AdvantageComparative Advantage
The slopes of both countries are flat, but the slope for Country A is slightly more sloped than Country B
Tra
ctor
s
Wool
Comparative AdvantageComparative Advantage
Tractors Wool
Country A 100 1000
Country B 50 750
World Total 150 1750
Autarky Production/Consumption
Tra
ctor
s
Wool
Comparative AdvantageComparative Advantage
Tractors Wool
Country A 100 1000
Country B 50 750
World Total 150 1750
Autarky Production/Consumption
Tractors Wool
Country A 200 0
Country B 0 1500
World Total 200 1500
Specialized Production
Tractors Wool
50 -250
Net Gains/LossesWe have a gain in Tractors, but
a loss in Wool
Comparative AdvantageComparative Advantage For comparative advantage to be effective, we must
have a gain in both goods
Resources Used Tractors Wool
Country A 10 0 200 0
Country B 0 10 0 1500
World Total 200 (+50) 1500 (-250)
Specialized Production
Resources Used Tractors Wool
Country A 9 1 180 200
Country B 0 10 0 1500
World Total 180 (+30) 1700 (-50)
Partially Specialized Production
Resources Used Tractors Wool
Country A 8 2 160 400
Country B 0 10 0 1500
World Total 160 (+10) 1900 (+150)
Partially Specialized Production
Comparative AdvantageComparative Advantage
Tractors Wool
Consumption
Production
Consumption Production
Country A 100+5=105
160 1000+75=1075
400
Country B 50+5=55 0 750+75=825 1500
World Total 160 160 1900 1900
Consumption/Production After Trade
“A” imports 675 bales of wool; “B” imports 55 Tractors
Terms of Trade = 675 wool/55 tractors or 135/11 wool/tractors
Both countries benefit as a result of specialization and trade
Comparative AdvantageComparative Advantage Transport and tariffs may modify the gains from
trade by increasing costs Opportunity costs may change as resources are
moved from one industry to another Increasing speculation may yield advantages in
terms of economies of scale If concentrating on a narrow range of products,
a sudden change in demand could cause severe problems
Exchange rates may vary affecting opportunity cost ratios
Imperfect competition could mean that prices do not reflect opportunity cost ratios in some countries