European Union Lecture 1
“No nation was ever ruined by trade”
-Benjamin Franklin
The world economy
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In 2019 total population of the World was 7.8 billion persons
The GDP of the world economy is 84 thousand billion dollars
The GDP per capita 10 770 dollars
The GDP growth rate is around 3%
Labor force of the World 3.4 billion persons.
The international economics builds models and analysis the relationships between the
economic variables in quantitative (mathematical) form.
endogenous variables -> model -> exogenous variables
Positive versus normative analysis in international economics
The positive economics is objective and fact based, while normative economics is subjective
and value based.
Positive economic statements do not have to be correct, but they must be able to be tested
and proved or disproved.
Normative economic statements are opinion based, so they cannot be proved or disproved.
As positive economics describe economic situations and conditions as they are, normative
economics aim to prescribe solutions.
Normative economic statements are used to determine and recommend ways to change
economic policies or to influence economic decisions.
International economics related to microeconomics and macroeconomics
To understand the international economics we need microeconomic knowledge. (supply,
demand, consumer’s behavior, firm decision, etc)
The international economics has macroeconomic background.
Aggregated variables (such as GDP) and correlations, known from macroeconomics, play an
important role in understanding operational mechanisms.
Fallacy of Compositions (Micro versus Macro thinking)
Importance of international economic relations
Economic data from last 500 years
Denomination
Population of the
Worlds (in million)
GDP/capital
World GDP (in billion
USA dollar)
World export (in
billion USA dollar)
Source Madison
1995
1500
425
1820
1068
1992
5441
565
240
651
695
5145
27995
n.a.
7
3786
Increasing dependency in the world economy: Chimerica
 Chimerica (from the Greek (myrhology) word Chimerica (a lion, with the head of a
goat arising from its back))
 Chimerica: economy of China (17% of the World) + Economy of USA (24% of the
World)
 Not two countries, but one: Chimerica.
 China produces USA consumes – China lends USA borrows.
Closed economy versus Open economy
Closed economy
A closed economy is a country that does not import or export.
Y=C+I+G
C Consumption
I Investment
G Government Purchase
Closed Economy:
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No imports
No aid
Self-reliant
No exports
Isolationist
Autarky
Can defend itself
A closed economy sees itself as self-sufficient and claims it does not want to trade
internationality. In fact, it believes it does not need to trade.
Maintaining a closed economy is more difficult today that two hundred years ago.
Certain raw materials are vital for the production of many products, For example, without
oil, a country would not be able to function today. Many countries, such as Japan, need to
import nearly all their raw materials.
Arguments for closed economy???
The communist autarchy: North Korea and Albania.
Open economy
Y+M=C+I+G+X
Y=C+I+G+X–M
X export, M import
Y = C + I + G + NX, where NX = X – M
Open
Trade 65% of GDP
Canada
vs.
Closed economy
Trade 23% of GDP
Argentina
In 1930, GDP per capita in Canada and Argentina were the same
GDP Per Capita in
GDP Per Capita in
Canada
Argentina
$42,319
$12,525
A top country most open to trade: Singapore
 Singapore is the 2nd freest in the 2016 Global Competiveness Index.
 Singapore’s average tariff rate is 0 percent, and there are few non-tariff barriers.
 Singapore remaining the second-most competitive economy in the world in 2016.