CHAPTER 1. International Economics is Different
Three main purposes to this chapter
-To show that international economicsimportant and interesting current events and issues
- Show why international economics is special in today's interdependent world.
-Provide a broad overview of the book
- A country such as Canada depends a lot on international trade. Note also that most components of products sold in the US (or even Canada) are actually manufactured elsewhere. In addition most of the food items in grocery stores are actually grown elsewhere.
In 1998, for example, out of a total manufacturing cost of $860 for an IBM PC in the US, $625 is for parts and components made overseas. Note that it might have been possible to make some imported components in the US but it would be more expensive.
- Large economies such as the US are more self sufficient and less dependent on international trade. Smaller economies tend to specialize in a few products and depend on international trade for a wide range of products e.g. Belgium, Switzerland, Canada.
Exports/Imports as % of National Income
US= 8, 10
France-20, 18
Canada-30, 28
Belgium65, 60
Not even though the US still depends a lot on trade for products that it does not produce-especially agricultural products and certain minerals.
Economic interdependence among nations has been on the rise. Indeed international trade has grown faster than world production. Even in the US both imports as a percentage have increased. In early 1980s US ran the largest trade deficit. It declined (protectionism policies) but has been on the increase again since about 1995.
Note that increased US imports implies faster growth for the exporting economies.
Lowering trade barriers across nations will increase exports of high tech. goods and therefore increase employment and wages in those sectors. On the other hand there would be an increase in imports of such products as textiles, shoes and therefore reduce employment and wages in other sectors.
The book analyses four events in international economics in this chapter:
The first is the imposition by President Bush in early 1992 of tariffs of up to 3o% on imports of steel into the US. This hit mainly imports from Japan, S.Korea, China and Taiwan (exempted NAFTA coys).
What is the effect of such a policy?
In the US who gains, who looses if any?
Cheaper imports would hurt steel firms and those who depend on steel industry for employment, i.e. steelworkers.
Firms that buy and use steel would however loose-producers of cars, appliances…Such firms might have to move to countries with lower tariffs-Therefore loss of jobs!
Note that other countries might also respond by imposing trade restrictions of their own thus leading to a trade war. Note that there are other protectionist policies apart from tariffs.
Countries that lost export sales to the US buyers filed complaints with WTO indicating that US had violated the accepted international rules.
Poor workers in poor countries
The second issue is the ongoing protests against low pay and poor working conditions in LDCs, including the protests at the Seattle meeting of the WTO in 1999.
There have pressure groups to agitate for better working condition s in LDCs through mainly NGOs
The chapter focuses more on Child labor (Other issues of concern include forced labor, formation of labor unions, Discrimination at work place). Are some of these problems as a result of globalization? Pressure to cut down costs so may to be able to compete in international markets
It is observed that Trade sanctions or other restrictions on international trade with these countries are not likely to help the poor workers in poor countries. Some remedies include better education and health care for these workers which will raise their productivity and incomes.
The third issue is the replacement of the national currencies of 12 European countries with a single new one, the Euro as part of the European monetary union (We will talk about this in chapter 11). Thus countries individual central banks have lost control of their monetary policies to the new union wide European central bank. Thus each country now has no power to use monetary policy to influence national production and employment.
The fourth is the economic and financial crisis that hit Argentina in early 2002. (This will be highlighted in the finance part of this course).
These four events show that international economics addresses important issues. They also indicate why national boundaries matter. Governments adopt different macroeconomic policies to serve national interests and such policies normally have international effects.
Most international trade theories assume a two nation, two commodity, two-factor world with the following
-No trade restrictions
-Perfect factor mobility within the nations
-No international factor mobility-especially labor-Financial capital moves more freely but it could be disruptive.
-Perfect competition in factor and product market
-No transportation costs
Main areas of international economics are as follows:
-International trade theory-highlights basis for and gains from international trade.
-International trade policy-protectionist policies-That domestic companies might not be able to compete.-MDCS worry that trading with lower wage countries might actually lower wages.
-Balance of payments-receipts and payments to the rest of the world
-Foreign exchange markets and open economy macroeconomics. -Currency exchange issues
Review question:
How do international economic relations differ from interregional economic relations?
- Different Currencies
- Separate jurisdictions and policies
- Language
- ???????
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