International Economics Gerber Study Questions Essay

The join States in a innovation(a) Economy1.Outline knowledgeableness orbicularization in PerspectiveThe growth of World handicraftCapital and Labor MobilityNew Features of the Global EconomyNew Issues in Inter bailiwick grapple and InvestmentThe Role of Inter dry landal OrganizationsRegional Trade AgreementsTrade and Economic GrowthTwelve Issues in the Inter content EconomyThe Gains from TradeWages, Jobs, and ProtectionTrade DeficitsRegional Trade AgreementsThe Resolution of Trade ConflictsThe Role of International InstitutionsExchange Rates and the Macro prudenceFinancial Crises and the Global ContagionCapital Flows and the Debt of Developing CountriesCrisis and Reform in Latin AmericaExport Led Growth in East AsiaThe Integration of India and mainland China into the World Economy2. A Thumbnail Sketch of the Material cover in Chapter One The re-emergence of world(prenominal) scotch integrating theme tries to put globalization in perspective. around features of globalization atomic number 18nt in the buff, and internationalistic economic integration could be described as re-emerging after a period of breaking during time periods surrounding WWI and WWII. There ar three aspects of international economic integration considered 1.The growth of world flip. World mint has grown over the last lx or lxx long time but is still fairly comparable in percentage terms to what existed 110 years ago. Trade has become a sizeable sh be of national economies as cargonful by the tycoon of Openness (Exports Imports)/GDPThis index does non tell us ab stunned a nations raft policies. Nations with higher figures for the index of openness do not necessarily permit visit handle barriers. Large economies atomic number 18 slight dependent on international care and often view as lower measures of openness than small countries. Figure 1.1 shows the openness index for six nations at different points in time. It shows the throw up in trade from 1913 to 1950 and its growth (even above 1913 trains) for or so nations by 2000. A trend obscured in the boilers suit trade data is that in 1890 most U.S. trade was in agricultural products and raw materials, while instantly most is manufactured goods. The relative importance of with child(p) goods has emergenced dramatically. 2.Capital and labor mobility. Labor is much little mobile internationally now than it was in 1900. For capital, it is somewhat more(prenominal) mobile. There is a difference amidst financial capital and physical capital. Foreign Direct Investment (FDI) is the flow of capital representing physical assets much(prenominal)(prenominal) as real estate, factories, and businesses. While capital flows to developing countries have increased over recent decades, the level of investment in any bucolic is still correlated with its national level of savings, making national savings counts far more important than global capital flows. However, capital flows today atomic nu mber 18 different from earlier periods in three shipway. More types of financial instruments exist today, and flows of financial capital be likely much greater. In 1900, the world ope pointd on a fixed reciprocation rate modular and much of todays financial market transactions are aimed at protecting against exchange rate risk caused by floating exchange rates. Transactions costs associated with conflicting capital flows have also fallen probatively. Volatility in international capital flows, while often a plain of intense attention today, is not clean. 3.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 municipal supply and necessity determined prices. News reports today could easily demonstrate this for most commodities. New issues in international trade and investmentBarriers to manufactured goods ha ve fallen signifi tail assemblytly as a result of a process that began at the end of WWII. As formal restrictions on importshave 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, obligations and quotas, is referred to as school integration because it clean changes policies at the b sight. Eliminating domestic policy differences that create trade barriers is much more complicated and is referred to as dusky integration. International organizations created at the end of WWII play a key 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 agreem ents is controversial for different reasons for both trade opponents and trade proponents. The growth of world trade can potentially lead to a variety of consequences, but generally economists remain committed that the benefits outweigh the costs. This position is back up by the chance(a) empirical grounds of historical experience, evidence keeped by models and deductive reasoning, and evidence from statistical comparisons of countries. Open economies grow faster and prosper sooner than more closed ones.3. What Students Should Know afterward Reading This Chapter Chapter 1 challenges the belief 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 scientific change in the form of railways, steamships, and telegraphs that all came into widespread usage and spanned the oceans they underwent business and fin ancial sector introduction through the rapid growth in the corporate form of business organization, the invention and spread of demand deposits, and the development of stockmarkets trade policies were liberalized in some(prenominal) nations and there were widespread protests against immigration and the global economy. In the join States, the protest movement was centered in populist movements that are reminiscent of some politicians and commentators today. This is not an lineage about history repeating itself. Rather, it is an attempt to get students to think 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 halt or reverse the trend. When students are asked what they think is new about todays economy, they inevitably answer engineering science. E-mail, faxes, satellite systems, jet aircraft, and less visible forms suc h as container cargo transportation systems have each made significant contributions to increase trade flows. It is useful to engage students in a discussion over the fringy 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 training to queer the ocean from around three weeks to relatively instantaneously, and reduced the time it took to buy a foreign bond from around three weeks to about one day. It is useful for students to realize 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 fruition that integration was important and helpful and indispensablenessed to be encouraged. An important sub-theme of the text is the idea of deep v ersus shallow integration and the institutional process that nations go through to create deeper levels of integration. The chapter also points to some things that are new about today. Important ones for the text will be flexible exchange 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. Another 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 importance of trade to various nations and to parkway home the fact that relative determine matters. The United States is a huge participant in trade in dollar terms, but it is not as dependent on trade as many other countries. Some countries entire economies are dependent on international trade. I find students need some practice calculating and interpre ting the index of openness. The data below is from the World Fact appropriate and is 2006 estimated data in billions of U.S. dollarsCountryExportsImportsGDPNew Zealand23.7 B25.2 B106 BBahrain12.6 B9 B17.7 BBrazil138 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 on in the course, I sometimes assign students each a nation, and one of the pieces of information they are to ask is its Index of Openness. I also ask them to find out its currency, current exchange rate with the U.S. dollar, simple exports, imports, major trading partners, and the trade agreements in which it participates. To compare 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 also lends itselfto students developing some factual knowledge about U.S. trade history. One initiative 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 of the nineteenth century. In 1890, Congress passed the McKinley Tariff, followed in 1897 by the Dingley Tariff. Both tariffs embossed rates further from their already high base. Wilson tried to reduce tariffs but was foil by World War I. Rates in the 1920s dribble, 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 depositary of State, Dulles, persuaded Congress to pass the Reciprocal Trade Agreement Act. The Act authorized Roosevelt to negotiate bilateral, reciprocal tariff reduction agreements. This piece of legislation marks an historic shift in U.S. tariff policy, away from protectionism and toward more openness.Answers to End-of-Chapter Questions1.How can globalization and international economic integration be measured? Answe rThe chapter offers three ways to measure globalization and economic integration (1) trade flows (2) factor movements and (3) convergence of prices (goods, factors, and assets). 2.In what sense is the U.S. economy more incorporate with the world today than it was a century ago? In what ways is it less integrated? AnswerThe 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 people claim.The sixty percent statistic might be considered misleading, however, in that a much larger share of total goods output signal is traded (more than thirty percent in 1990 versus less than ten percent in 1950). While we cannot compare the latter(prenominal) 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. more than 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 probably 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 cardinal percent in 1990 and twelve percent today).Capital flows are more difficult to generalize since they can be measured several ways. While the absolute 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, and it whitethorn be less. While the absolute volume of capital flows to developing countries has increased, the level of investment in any country is st ill highly correlated with its domestic savings rate. What is different, however, is the ease at which capital can cross international boundaries (lower transaction 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 first-string 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 indicate an increase in international integration. 3.What is openness? How is it measured? Does a low openness indicator indicate that a country is closed to trade with the alfresco world? AnswerOpenness is a measure of the relative importance of trade to a nat ional 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 across 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.Describe the rule over the last century shown by the openness index for leading industrial economies. AnswerThe indicators fell between 191 3 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 generally higher 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. formulate the difference. Which term seems more valid, relative or absolute? Why? AnswerAbsolute values are the dollar amounts of trade and capital flows. carnal knowledge 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 nea rly 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 certainly 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 useable 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 ma rkets 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 recently were considered the goop responsibility of local or national governments. Examples include labor standards, environmental standards, competition or antimonopoly policies, and industrial support policies.Negotiations between nations potentially give foreign interests a voice in place 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 all occur or are proposed because some aspect of domestic policy is perceived by foreigners as a barrier to trade, a nd 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 decline 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 cathode-ray oscilloscope 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 partially closed, experienced mediocre growth. (2)The logic of economic supposition also suggests a strong causal relation between trade and faster economic growth. The next 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 improvement 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 encourage 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 limited 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 contribute 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.