Instructor Manual - Seventh Edition James Gerber ©2018 Pearson Edu...

Instructor Manual for International Economics Seventh Edition James Gerber 1 / 4

©2018 Pearson Education, Inc.Chapter 1 The United States in a Global Economy ◼ Outline

Introduction: International Economic Integration

Elements of International Economic Integration The Growth of World Trade Capital and Labor Mobility Features of Contemporary International Economic Relations Multilateral Organizations Regional Trade Agreements Trade and Economic Growth Twelve Themes in International Economics The Gains from Trade and New Trade Theory (Chapters 3, 4, and 5) Wages, Jobs, and Protection (Chapters 3, 6, 7, and 8) Trade Deficits (Chapters 9, 11, and 12) Regional Trade Agreements (Chapters 2, 13, and 14) The Resolution of Trade Conflicts (Chapters 2, 7, and 8) The Role of International Institutions (Chapters 2, 8, and 12) Exchange Rates and the Macroeconomy (Chapters 10 and 11) Financial Crises and the Global Contagion (Chapter 12) Capital Flows and the Debt of Developing Countries (Chapters 2, 9, and 12) Latin America and the World Economy (Chapter 15) Export-Led Growth in East Asia (Chapter 16) China and India in the World Economy (Chapter 17)

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• Gerber • International Economics, Seventh Edition

Copyright © 2018 Pearson Education, Inc.

◼ Learning Objectives

After studying this chapter, students will be able to:

1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

1.2 Compute the trade-to-GDP ratio and explain its significance.

1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

1.4 List the three types of evidence to support the idea that trade supports economic growth.◼ What Students Should Know after Reading Chapter 1 The goal of Chapter 1 is to examine international economic integration in historical perspective. Most features of globalization aren’t new, and international economic integration is described as re-emerging after a period of disruption during World War I, the Great Depression, and World War II. The chapter adds a brief discussion of new features in the current wave of globalization, including regional trade agreements and multilateral organizations. It also briefly discusses three types of evidence to support the idea of gains from trade: historical experiences of similar countries such as North and South Korea; economic theory; and large statistical comparisons of countries.

There are three aspects of international economic integration considered:

• The growth of world trade. World trade has grown over the last sixty or seventy years but is roughly

comparable in percentage terms to trade in 1900.

Trade has become a larger share of national economies as measured by the:

Trade-to-GDP ratio = (Exports + Imports)/GDP This index does not tell us about a nation’s trade policies. Nations with higher figures for the index of openness do not necessarily have lower trade barriers. Large economies are less dependent on international trade and often have lower measures of openness than small countries do.Figure 1.1 shows the openness index for six nations at different points in time. It shows the drop in trade from 1913 to 1950 and its growth (even above 1913 levels) for most nations by 2000. A trend obscured in the overall trade data is that in 1890 most U.S. trade was in agricultural products and raw materials, while today it is mostly in manufactured goods. The relative importance of capital goods has increased dramatically. 3 / 4

Chapter 1 The United States in a Global Economy 3 Copyright © 2018 Pearson Education, Inc..

• Capital and labor mobility. Labor is much less mobile internationally now than it was in 1900.

For capital, it is somewhat more mobile. There is a difference between financial capital and physical capital. Foreign Direct Investment (FDI) is the flow of capital representing physical assets such as real estate, factories, and businesses. While capital flows to developing countries have increased in recent decades, the level of investment in any country is still correlated with its domestic level of savings, making national savings rates an important element in national economies.Capital flows today differ from earlier periods in three ways. More types of financial instruments exist today, and flows of financial capital are likely much greater. In 1900, the world operated on a fixed exchange rate standard, and much of today’s financial market transactions are aimed at protecting against exchange rate risk caused by floating exchange rates. Transactions costs associated with foreign capital flows have also fallen significantly. Volatility in international capital flows, while often a subject of intense attention today, is not new.

• Movement of prices in different markets. The text does not develop this, but points out that in the

late 1800s wheat 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 commodities.

New issues in international trade and investment:

• Deeper integration. Barriers to manufactured goods have fallen significantly as a result of a process

that began at the end of WWII. As formal restrictions on imports have been reduced, domestic policies on issues such as the environment, labor, and fair market conditions have become the barriers to further increases in trade flows. Reducing trade barriers has been the focus of negotiations between nations. Eliminating the traditional barriers to trade, tariffs, and quotas is referred to as shallow 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.

• Regional trade agreements. Since the 1960s, and increasingly after 1990, nations have formed

preferential trade agreements with one or more other nations. The European Union, NAFTA, ASEAN, ASEAN+3, and a host of other agreements have provided privileged market access for member countries.

• Multilateral organizations. While the number of preferential trade agreements has grown

dramatically, it has occurred within an international economic environment that contains several key international institutions: the WTO, IMF, and World Bank are each important and are the main institutions discussed in the text. Their roles are discussed more fully in Chapter 2.Economists are in agreement that the benefits of trade outweigh the costs, although there is a great deal of disagreement over the form that trade agreements should take (and if preferential agreements are even desirable), the role that multilateral institutions should play, and the optimal trade policy for developing countries.

Chapter 1 challenges the belief that the world has embarked on an entirely new and unprecedented era of globalization. In 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, which came into widespread use in the form of railways, steamships, and telegraphs; they underwent business and financial sector innovation through rapid growth in the corporate form of business organization, the invention and spread of demand deposits, and the development of stock markets; trade policies were liberalized in many nations; and there were widespread protests against immigration and the global economy. In the United States, the protest

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