THE INTERNATIONAL ECONOMY AND GLOBALIZATION

Instructor's Manual 2 Chapter 1

THE INTERNATIONAL ECONOMY AND GLOBALIZATION

CHAPTER OVERVIEW

This chapter introduces students to the international economy and to globalization. The first part of the chapter emphasizes the high degree of economic interdependence that characterizes today’s economies. Economic interdependence includes international trade and international finance.The chapter also focuses on the United States as an open economy. Data is provided that shows U.S. exports as a percent of gross domestic product and the value of U.S. trade with its major trading partners. The chapter notes that many U.S. firms source a portion of the production of their goods in foreign countries.The chapter discusses the nature of international competitiveness--for firms, industries, and nations. It is noted that exposure to global competition tends to improve the efficiency of firms. Finally, the chapter introduces the The potential effects that international trade has on workers is introduced.The chapter concludes with a look at the backlash against globalization that has emerged in recent years and summarizes the advantages and disadvantages of globalization.

After completing the chapter, students should be able to:

• Define economic interdependence.• Discuss the importance of international trade for the U.S. economy.• Examine the factors that make a company American.• Discuss the nature of competitiveness and how it applies to firms, industries, and nations.• Identify the advantages and disadvantages of globalization to workers and others.

BRIEF ANSWERS TO STUDY QUESTIONS

1.Interdependence among today's economies reflects the historical evolution of the world's economic and political order. Since World War II, Europe and Japan have reindustrialized. What is more, the formation of the European Community and the Organization of Petroleum Exporting Countries, as well as the rise of International Economics 14e Robert Carbaugh (Instructor Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

Instructor's Manual 3 multinational corporations, has contributed to closer economic and political linkages.

2.Proponents of an open trading system maintain that free trade leads to lower prices, the development of more efficient production methods, and a greater range of consumption choices. Free trade permits resources to move from their lowest productivity to their highest productivity. Critics of an open trading system maintain that import competition may displace domestic firms and workers. It is also argued that during periods of national emergency, it is in the best interests of a nation to protect strategic industries.

3.For the United States, growing economic interdependence has resulted in exports and imports increasing as a share of national output. Profits of domestic firms and wages of domestic workers are increasingly being affected by foreign competition. Political and economic events play important roles for the operation of some sectors of the American economy, such as energy and agriculture.

4.The volume of international trade is governed by factors including the level of domestic economic activity (e.g., prosperity versus recession) and restrictions imposed by countries on their imports.

5.The chapter describes three fallacies of international trade: 2 / 4

Instructor's Manual 4

• Trade is a zero sum activity
• Imports reduce employment and act as a drag on the economy
• Tariffs and quotas will save jobs and promote a higher level of employment

6.International competitiveness refers to the extent to which the goods of a firm or industry can compete in the marketplace; this competitiveness depends on the relative prices and qualities of products. No nation can be competitive in, and thus be a net exporter of everything. Because a nation’s stock of resources is limited, the ideal is for these resources to be used in their most productive manner. Nations will benefit from specialization and trade by exporting products having a comparative advantage.

7.Researchers have found that global competitiveness is a bit like sports. You get better by playing against folks who are better than you. This means companies are exposed to intense global competition tend to be more productive than those who aren’t.

8.International trade benefits most workers, especially those in exporting industries. In addition to providing them jobs and income, it allows them to shop for consumption goods that are cheapest and of the highest quality. However, workers in import-competing industries often feel threatened from competition of cheap foreign labor.

9.Among the challenges confronting the international trading system are maintaining fair standards for labor and promoting environmental quality.

10.The threat of international terrorism tends to slow the degree of globalization and also make it become costlier. With terrorism, companies must pay more to insure and provide security for overseas staff and property. Heightened border inspections could slow shipments of cargo, forcing companies to stock more inventory. Tighter immigration policies could reduce the liberal inflows of skilled and blue-collar laborers that permitted companies to expand while keeping wages in check. Moreover, a greater preoccupation with political risk has companies greatly narrowing their horizons when making new investments. 3 / 4

CHAPTER 2

FOUNDATIONS OF MODERN TRADE THEORY: COMPARATIVE ADVANTAGE

CHAPTER OVERVIEW

This chapter introduces students to the foundations of modern trade theory which seeks to answer three questions: (1) What constitutes the basis for trade? (2) At what terms of trade are products exchanged in international markets? (3) What are the gains from trade in terms of production and consumption?

The chapter first examines the historical development of modern trade theory by introducing the ideas of the mercantilists, Adam Smith, and David Ricardo. Next, the deficiencies of mercantilism and Adam Smith’s principle of absolute advantage are noted and attention shifts to David Ricardo’s principle of comparative advantage. This principle is explained in terms of a production possibilities table and also in terms of money.

The principle of comparative advantage is then explained under conditions of constant opportunity cost and increasing opportunity cost. The analysis concludes that international trade can provide economic gains for all trading nations. The chapter then extends the principle of comparative advantage to more than two products and two countries. The chapter concludes by examining the empirical evidence regarding comparative advantage.

Attention then shifts to the determination of the equilibrium terms of trade. The chapter emphasizes the theory of reciprocal demand and offer curves in the determination of the equilibrium terms of trade. The effect of economic growth on the terms of trade is also examined as is empirical data regarding the terms of trade.

This chapter also discusses the role of demand in the trading model. The inclusion of demand allows us to determine the autarky point on each nation’s production possibilities schedule, the equilibrium value of the international terms of trade, and the equilibrium consumption point of each nation under free trade.

Indifference curves are used to show the role of demand in the trading model. It is noted that a country in autarky will maximize its well being at the point where its community indifference curve is tangent to its production possibilities schedule. Similarly, a trading nation will maximize its welfare at the point where its community indifference curve is tangent to its international terms of trade ratio.

After completing the chapter, students should be able to:

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