Class Notes of Chapter 1: The United States in a Global Economy
1. List three reasons (benefits) for international integration.
 Technological innovation,
 Less expensive products,
 Greater investment in regions where local capital is scarce.
2. Definitions:
 Exports – Are goods (services) that are produced in one country and sold to buyers in
another.
 Imports – Are goods (services) that are produced abroad and purchased in home country.
 Foreign Direct Investment (FDI) – Is the latter type of capital flow for across
international boundaries investment.
 Trade-GDP-Ratio – Is a measurement of international trade in a nation’s economy.
 Shallow Integration – Is referred to the reduction of tariffs and the elimination of quotas.
 Deep Integration – Is referred to the negotiations over domestic policies that impact
international trade.
 Gross Domestic Products – Is a measure of total production.
 Tariffs – Are taxes on imports.
 Quotas – Are quantitative restrictions on imports.
 Transaction Costs – Are referred to the costs of obtaining market information, negotiating
an agreement, and enforcing the agreement.
 Regional Trade Agreements (RTAs) – Are referred to agreements between groups of
nations including free-trade agreements and other forms of preferential trade.
3. Trade-GDP-Ratio
For example, in 2016, Laos had exports of 3,124 million US dollars and imports of 4,107
million US dollars. The GDP of Laos in 2016 is 15,912 million US dollars. So, to calculate the
Trade-to-GDP ratio, we sum exports and imports together and then divided by the GDP as
illustrated below:
Formula: Trade-to-GDP ratio  (Exports  Imports)  GDP
Trade-to-GDP ratio  ($3,124,000  $4,107,000)  $15,912,000
Trade-to-GDP ratio  0.4544
Therefore, if we multiplied by 100, we get the Trade-to-GDP ratio for Laos of 45.44%.
This means that international trade of Laos accounts for 45.44% of the country's economic
activity.
4. Why are international capital flows greater today than a century ago?
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Several factors why international capital flows are greater today than a century ago:
First, there are many more financial instruments available now than there were a century
ago.
Second, today is the role of foreign exchange transactions. Many firms today spend
significant resources to protect themselves from sudden shifts in currency values.
Consequently, buying and selling assets denominated in foreign currencies is the largest
component of international capital movements.
Third, the costs of foreign financial transactions have fallen significantly. The costs are
referred to the costs of obtaining market information, negotiating an agreement, and
enforcing the agreement as transaction costs. So, lower transaction costs for foreign
investment mean that it is less expensive to move capital across international boundaries.