International Economics Gerber Study Questions Essay

The united States in a Global Economy1.OutlineIntroductionGlobalization in PerspectiveThe b atomic number 18 of being peckCapital and Labor Mobility current-sprung(prenominal) Features of the Global EconomyNew Issues in Inter bailiwick Trade and investmentThe Role of International OrganizationsRegional Trade AgreementsTrade and Economic GrowthTwelve Issues in the International EconomyThe Gains from TradeWages, Jobs, and ProtectionTrade DeficitsRegional Trade AgreementsThe Resolution of Trade ConflictsThe Role of International Institutions throw Rates and the MacrothriftinessFinancial Crises and the Global ContagionCapital Flows and the Debt of Developing CountriesCrisis and interior(prenominal)ise in Latin AmericaExport Led Growth in easternmost AsiaThe Integration of India and chinaw atomic number 18 into the sphere Economy2. A Thumbnail subject of the Material Covered in Chapter One The re-emergence of reality-wide stinting desegregation theme tries to put world-w ideization in perspective. Most features of globalization arnt new, and global economic desegregation could be described as re-emerging after(prenominal) a period of commotion during quantify periods surrounding WWI and WWII. There be collar aspects of world-wide economic integration considered 1.The crop of realness change over. humans contend has grown over the last six-spotty or 70 old age but is still gracefully comparable in fortune wrong to what constituteed 110 years ago. Trade has become a big(a) share of national economies as measured by the tycoon of bleakness (Exports Imports)/GDPThis index does non tell us about a nations great deal policies. Nations with elevateder figures for the index of yieldness do non necessarily eat up dismantle commove barriers. Large economies are less dep rarityent on planetary mint and often have lower measures of openness than sm all countries. Figure 1.1 shows the openness index for six nations at diff erent points in time. It shows the drop in make do from 1913 to 1950 and its festering (even above 1913 aims) for most nations by 2000. A trend obscured in the boilersuit craftiness data is that in 1890 most U.S. consider was in rural products and raw materials, while nowadays most is manufactured goods. The relative brilliance of great goods has increased dramatically. 2.Capital and dig out mobility. Labor is a great deal less peregrine internationally now than it was in 1900. For capital, it is almostwhat more mobile. There is a difference amid financial capital and physical capital. Foreign turn to Investment (FDI) is the flow of capital representing physical assets such(prenominal) as original estate, factories, and businesses. composition capital flows to developing countries have increased over new-fangled decades, the level of investment in any country is still jibe with its domestic level of savings, making national savings rates farther more important th an global capital flows. However, capital flows right away are different from earlier periods in three slipway. More types of financial instruments exist today, and flows of financial capital are likely very a lot(prenominal) greater. In 1900, the world operated on a fixed qualify rate standard and much of todays financial commercialize effects are aimed at protecting against rallying rate risk caused by floating swap rates. Transactions costs associated with strange capital flows have likewise move substantially. Volatility in international capital flows, while often a subject of intense circumspection today, is not new. 3.Movement of prices in different markets. The textual matter does not develop this, but points out that in the after-hours 1800s stalk farmers, meat packers, and fruit growers all produced for a global market where international rather than domestic supply and demand determined prices. News reports today could easily demonstrate this for most comm odities. New issues in international handle and investmentBarriers to manufactured goods have fallen signifi stinkertly as a result of a process that began at the end of WWII. As evening gown restrictions on importshave been reduced, domestic policies on issues such as the environment, labor, and fair market conditions have become the barriers to foster increases in commerce in flows. minify trade barriers has been the focus of negotiations between nations. Eliminating the traditional barriers to trade, tariffs and quotas, is referred to as sh stop integration because it just changes policies at the border. Eliminating domestic policy differences that create trade barriers is much more complicated and is referred to as deep integration. International organizations created at the end of WWII play a find role and are an entirely new element in the international economy. Agreements between nations are not new, but there has been a significant increase in the number of regional trade agreements signed, especially in the 1990s. The formation of these regional trade agreements is disputed for different reasons for both trade opponents and trade proponents. The growth of world trade can potentially lead to a variety of consequences, but primarily economists remain committed that the benefits outweigh the costs. This position is supported by the free-and-easy empirical cause of historical experience, indicate supported by models and deductive reasoning, and show up from statistical comparisons of countries. Open economies grow faster and prosper before than more unappealing ones.3. What Students Should Know After Reading This Chapter Chapter 1 challenges the spirit that the world has embarked on an entirely new and unprecedented era of globalization. Looked at from the long run, it seems clear that the period 1870 to 1914 was an earlier era with similar trends. Those years experienced rapid technological change in the form of railways, steamerships, a nd telegraphs that all came into widespread usage and spanned the oceans they underwent business and financial sector innovation by dint of the rapid growth in the corporate form of business organization, the trick and spread of demand deposits, and the development of stockmarkets trade policies were liberalized in many nations and there were widespread protests against immigration and the global economy. In the United States, the protest lawsuit was centered in populist movements that are reminiscent of some politicians and commentators today. This is not an argument about history repeating itself. Rather, it is an attempt to get students to recollect of the period from World war I to the end of World War II as an aberration in the last 150 years of world history. The long run trend is towardintegration, punctuated by protests and nationalistic movements that hold on or reverse the trend. When students are asked what they think is new about todays economy, they inevitably ans wer technology. E-mail, faxes, satellite systems, jet aircraft, and less megascopic forms such as container cargo transportation systems have each brace significant contributions to increasing trade flows. It is useful to engage students in a discussion over the marginal impacts of these new technologies versus the marginal effects of steam powered ocean going vessels or trans-Atlantic telegraphy. Telegraphy cut the time it took information to cross the ocean from around three weeks to comparatively instantaneously, and reduced the time it took to buy a contradictory bond from around three weeks to about one day. It is useful for students to suck in there was a disruption for two reasons. First, much of what has happened over the last 50 years was aimed at fixing something that was broken, not creating a new phenomena. Second, the international institutions that deal with the global economy are new and were created because of some shared recognition that integration was importan t and helpful and urgencyed to be encouraged. An important sub-theme of the text is the subject of deep versus shallow integration and the institutional process that nations go finished to create deeper levels of integration. The chapter also points to some things that are new about today. great ones for the text will be flexible turn rates, regional trade agreements, and the changing mix of the types of goods nations produce. Domestic policies will be a key focus when trade barriers and capital flows are considered. An separate important issue will be the evolving role of international organizations in negotiating and enforcing changes in domestic policies.4. Assignment Ideas1.I like to use the index of openness to contrast the magnificence of trade to various nations and to drive home the fact that relative prise matters. The United States is a huge participant in trade in dollar terms, but it is not as subject on trade as many other countries. Some countries entire econom ies are dependent on international trade. I find students need some utilization calculating and interpreting the index of openness. The data below is from the World feature Book and is 2006 estimated data in billions of U.S. dollarsCountryExportsImportsGDPNew Zealand23.7 B25.2 B106 BBahrain12.6 B9 B17.7 B brazil-nut tree138 B95.8 B1,616 BCambodia3.3 B4.5 B36.78 BChad4.34 B0.823 B15.26 BNigeria59 B25.1 B188.5 B2. As homework very early in the course, I sometimes destine students each a nation, and one of the pieces of information they are to collect is its Index of Openness. I also ask them to find out its currency, current exchange rate with the U.S. dollar, primary exportings, imports, major trading partners, and the trade agreements in which it participates. To oppose with the U.S. historical data, you might ask them to track the nations trade figures over time. While these are basic matters of fact, I find it helps make what we are discussing more concrete. 3.The chapter als o lends itselfto students developing some factual companionship about U.S. trade history. One possibility is to look at U.S. trade policy in various time periods. The U.S. had relatively high tariffs (greater than 40 percent on average) throughout the second half(prenominal) of the enneadteenth light speed. In 1890, Congress deliberateed the McKinley responsibility, followed in 1897 by the Dingley Tariff. Both tariffs raised rates further from their already high base. Wilson tried to reduce tariffs but was thwarted by World War I. Rates in the 1920s fell, but the Tariff Act of 1930 (Smoot-Hawley Tariff) raised the rates back up to nearly 45 percent. In the midst of the Great Depression (1934), Roosevelt and his Secretary of State, Dulles, persuaded Congress to pass the Reciprocal Trade Agreement Act. The Act authorized Roosevelt to negotiate bilateral, multiplicative inverse tariff reduction agreements. This piece of legislation marks an historic shift in U.S. tariff policy, away from protectionism and toward more openness. dish ups to End-of-Chapter Questions1.How can globalization and international economic integration be measured? reactThe chapter offers three ways to measure globalization and economic integration (1) trade flows (2) factor movements and (3) carrefour of prices (goods, factors, and assets). 2.In what sense is the U.S. economy more compound with the world today than it was a century ago? In what ways is it less integrated? swear outThe U.S.s openness indicator is about sixty percent greater today than it was in 1890 ((25.3 15.8)/15.8 0.601), or almost one hundred and nine percent greater than in 1910. While this is a very significant increase, it is hardly the revolution in economic relations that many hatful claim.The sixty percent statistic might be considered misleading, however, in that a much astronomicr share of total goods output is traded (more than thirty percent in 1990 versus less than ten percent in 1950). While we cannot compare the last mentioned statistic to 1890 or 1900, it does appear that there is a clear trend toward a greater role for international commerce. This is consistent with the observation that world trade has been growing faster than world output, at least since 1950. Much of the growth in trade since then, however, simply brought us back to where we were before World War II.In terms of labor flows, the U.S. is belike less integrated with the world economy than it was in 1890 or 1900. At those latter dates we had an open door immigration policy (for all but Chinese citizens), and a larger share of our population was foreign born (fourteen and one half percent in 1890 versus less than eight percent in 1990 and xii percent today).Capital flows are more difficult to generalize since they can be measured several ways. While the dogmatic volume of capital flows has increased dramatically, as a share of world GDP it is probably no more than it was at the turn of the century, an d it may be less. While the absolute volume of capital flows to developing countries has increased, the level of investment in any country is still highly correlated with its domestic savings rate. What is different, however, is the ease at which capital can cross international boundaries (lower exertion costs) and the much greater variety of assets that are traded. The need to protect against exchange rate risk is a key component of todays international financial markets and is a primary difference from the fixed exchange rate standard of the past. The incidence of financial crises has not increased and, as a metric of integration, it implies no increase in capital market integration.The growth of regional trade agreements is also an indicator of increased integration. A growing role for international institutions such as the IMF or the World Bank may also advise an increase in international integration. 3.What is openness? How is it measured? Does a low openness indicator indica te that a country is closed to trade with the outside world? AnswerOpenness is a measure of the relative importance of trade to a national economy. It is measured by the ratio of exports plus imports to GDP.A relatively small openness indicator does not necessarily mean that an economy is intentionally closed to the outside world. Large countries like the U.S. or China have big domestic markets that enable firms to specialize and produce in volume in order to attain their optimal scale. Specialization and high volume in manufacturing is often associated with increased productivity, so firms in large markets can achieve the highest possible level of productivity without having to sell to foreign markets. Firmslocated in smaller countries have to trade their output crossways international boundaries if they want to have the same technology and the same level of productivity. Consequently, large countries tend to have lower openness indicators regardless of their trade policies. 4.De scribe the public figure over the last century shown by the openness index for leading industrial economies. AnswerThe indicators fell between 1913 and 1950, when it begins to rise relatively rapidly. The main causes of the pattern shown in Figure 1.1 are the two world wars and the Great Depression of the 1930s and changes in trade policy that accompanied that period. In 2000, they are mostly higher(prenominal) than they were before WWI. Another pattern the chapter notes is that the index is smaller for the larger population countries of Japan and the United States, and higher for the Netherlands, with its small population. 5.Trade and capital flows were described and measured in relative terms rather than absolute. Explain the difference. Which term seems more valid, relative or absolute? Why? AnswerAbsolute determine are the dollar amounts of trade and capital flows. Relative values are the ratio of dollar values to GDP. Relative values are a better indicator of the importance of a variable. Large economies like the U.S. may have large export and import values, but the importance of trade to the national economy is not nearly as great as it is for other economies. The U.S. is the worlds largest exporter and importer, but the national economy is so large that trade is much less important for the U.S. than it is for many smaller countries such as Canada, Belgium, or the Netherlands. 6.The relative size of international capital flows may not be much greater today than they were 100 years ago, although they are sure greater than they were 50 years ago. Qualitatively, however, capital flows are different today. Explain. AnswerMajor qualitative difference between late nineteenth and late twentieth century capital flows include the fact that there are many more types of financial instruments available now compared to a century ago. These instruments can be finely tailored to the income and risk preferences of investors. Secondly, a large share of the total flow of capital across borders is related to the need to protect against fluctuations in the value of currencies. This use of international capital markets was not as necessary when nations operated within fixed exchange rate systems. And third, the transaction costs of participating in international capital markets is muchlower today than it was a century ago. 7.What are the new issues in international trade and investment? In what sense do they expose national economies to outside influences? AnswerThe new issues involve policy differences between nations that until late were considered the exclusive responsibility of local or national governments. Examples include labor standards, environmental standards, competition or antitrust policies, and industrial support policies.Negotiations between nations potentially give foreign interests a constituent in screen background domestic policy. The scope and the depth of the negotiations determine how great a voice foreigners will have. It is often the case, however, that negotiations either occur or are proposed because some aspect of domestic policy is perceived by foreigners as a barrier to trade, and they seek to alter the domestic policy that creates it.8.Describe the three kinds of evidence economists use to support the assertion that open economies grow faster than economies that are closed to the word economy. AnswerThese are (1) casual empirical evidence of historical experience (2) economic logic and deductive reasoning and, (3) evidence of statistical comparisons of countries. (1)The historical evidence examines the experiences of countries that tried to isolate themselves from the rest of the world. First, not only did trade protection exacerbate the depression of the 1930s, but it also led to the misery and tragedy of World War II. Second, an examination of countries such as the former West and East Germany, South and North Korea, and other countries with the same historical, economic, and ethnic backgrou nd that were divided by war, indicate that those who closed their economies from the rest of the world suffered in terms of prosperity and environmental degradation. East Asia experienced an economic take-off when it decided to integrate with the rest of the world, while Latin America, which had the same economic background with East Asia but chose to remain part closed, experienced mediocre growth. (2)The logic of economic theory also suggests a strong causal relation between trade and faster economic growth. The following is a summary of this linkageFollowing Adam Smith, David Ricardo proved that comparative advantage leads to trade and this in turn leads to the reallocation of resources and the value of the standard of living of any nation, large or small. Modern trade theory also makes the case for exports and open trade as the causes for economic expansion. Exports and open trade foster competition, innovation, and learning-by-doing, and bring international best practices to the attention of domestic producers, spurring greater efficiency and export expansion. This helps domestic producers to realize economies of scale when they attempt to produce for the world market, rather than for their own express mail domestic consumers. Larger markets create incentives for firms to engage in research and development, and allow countries to import important production inputs and foreign capital by minimizing the foreign exchange constraints. They facilitate the transfer of technology and managerial skills. It follows that open trade and exports increase the demand for the countrys output and therefore add together strongly to positive economic growth. (3)Even though the statistical evidence is not quite conclusive (mainly due to measuring trade policy), the evidence of statistical comparison of countries (cross-sectional time series) indicates that countries benefit from open trade.