Brief answers to problems and questions for review
1. As countries have become more interdependent, the need for an understanding of international
economics has increased. International economics explains the benefits and costs of the patterns
of international trade, investment, and other cross-border transactions that are currently observed
in the world economy.
2. The internet search engine used by the student will determine the number of hits he/she will
receive. The Google search engine yielded more than three million hits.
3. International economics is the study of the production, distribution, and consumption of goods
and services on a worldwide basis. International economics is a blend of microeconomics and
macroeconomics. It extends the study of microeconomics by examining the differences between
domestic trade and international trade. In addition, international economics is an extension of
macroeconomics. This is done by allowing foreign economic conditions to affect the domestic
economy and by allowing changes in government policies to affect sectors of the economy related
to international trade.
4. The economic output of the world is not evenly distributed. The high-income countries produce
approximately 68 percent of the world’s output. The middle- and low-income countries produce
approximately 30 percent and 1percent of the world’s output, respectively.
5. The collective GDP of the low-income countries is about $527 billion. The population of these
countries is over 830 million. In perspective, 12 percent of humanity is producing 1 percent of
world output. This yields GDP per capita of $635 or less than $2 per day.
6. The distribution of merchandise trade between low-, medium-, and high-income economies is not
evenly distributed. High-income countries account for approximately 68 percent of the world’s
imports and exports. For middle-income countries, the analogous percentages are 30 percent. The
low-income countries provide approximately 1 percent of the world’s exports and imports. The
distribution of merchandise trade mirrors the distribution of world output. The major difference
between output and trade is that middle-income countries have a slightly higher percentage of
trade than output and high-income countries have a slightly lower percentage of trade than output.
In part, this can be explained by international trade in crude oil, as some middle-income countries
are also major exporters of oil.
7. The particular state that the student lives in will determine the answer to this question. However,
most students will be surprised concerning the relative size of the various states in the US when
compared to the various countries of the world.
8. International trade in services is composed of trade in business services, such as transportation
and insurance, and tourism.
9. The distribution of international trade in services among low-, medium-, and high-income
economies is not evenly distributed. High-income countries provide approximately 73 percent of
the world’s imports and 79 percent of the world’s exports of services. Middle-income countries
account for approximately 26 percent of the world’s imports and 20 percent of the world’s
exports. For low-income countries, the analogous percentages are 1 percent of the world’s imports
and exports. The distribution of international trade in services mirrors the distribution of world
output. The major difference between output and trade in services is that high-income countries
have a slightly higher percentage of trade in services than output. This can be partially explained
by the service orientation of high-income countries.
© 2015 W. Charles Sawyer and Richard L. Sprinkle
10. World trade in goods is approximately $18 trillion and world trade in services is $4 trillion. The
economic output of the world is $72.9 trillion. Trade in goods and services is approaching 30
percent of world economic output.
11. The US economy is more than three times the size of Japan’s and more than five times the size of
Germany’s. In addition, the US economy exports approximately $1.6 trillion, whereas Japan and
Germany export approximately $776 billion and $1.5 trillion, respectively.
12. In the early nineteenth century, the US produced less than 5 percent of world economic output. By
the late twentieth century, the US was producing almost 30 percent of the world’s total.
13. Investments of portfolio capital include the purchase of financial assets, such as stocks, bonds,
and bank accounts, in a foreign country. Foreign direct investment is a domestic corporation’s
purchase of real assets, such as plant and equipment in a foreign country.
14. The low-, middle-, and high-income economies receive approximately 2 percent, 41 percent, and
58 percent of the world’s FDI, respectively.
15. The trading of foreign exchange exceeds more than $5 trillion per day. This trading activity is
designed to facilitate international trade in goods, services, and the movement of capital between
countries. The volume of foreign exchange trading for one month is greater than the total output
of the world economy for a year.
16. During the 1980s world output increased by 3.2 percent per year with low-income economies
growing faster than the middle- and high-income economies. During the 1990s, world economic
growth slowed to 2.5 percent per year, and only middle-income countries increased their rate of
growth over the two decades. During the 1980s and 1990s, world exports grew faster than world
production. For the 1980s, world exports grew at 5.2 percent per year and during the 1990s world
exports grew at 6.9 percent per year. Over the two decades, only exports of the low-income
economies have been growing at a slower rate than world exports. These trends indicate that
while high-income countries dominate world output and trade, the focus of international
economics and business will shift to production and trade in middle- and low-income countries as
their absolute and relative size increases.
17. The world economy grew rapidly from 1850 to 1914 based on rapid changes in transportation and
communication. A period of slow growth started in 1914 and ended with the end of WWII in
1945. A period of rapid economic growth began after the war and lasted until the first oil shock in
1973.
18. After a period of slow growth beginning in 1973, some argue that advances in IT and the spread
of economic freedom to former communist countries may create the conditions necessary for the
resumption of faster economic growth in the world.
19. In general, globalization means the increasing amount of economic interactions that are
international in nature. In numerical terms, one can easily track this by computing the changing
ratio of trade to GDP either for a country or the world.
20. There are a number of indexes of globalization. The point is that X + M/Y is both convenient and
will be highly correlated with any index. However, it is not a perfect measure. However, broader
indexes are not perfect in that they are sensitive to the factors used and the weights given to
various factors.
© 2015 W. Charles Sawyer and Richard L. Sprinkle