Lecture 1
Page 1
Course Outline and Timetable
International Economics
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Textbook
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Course Outline and Timetable
International Economics
© Van Marrewijk, Ottens, Schueller
On-line resources
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Overview: The World Economy
• Using exchange rates to compare income levels in different
countries underestimates income in developing countries; it is
better to use Purchasing Power Parity (PPP) rates to correct
for price differences.
• We can distinguish two waves of globalization, both for trade
flows and capital flows.
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Developing country income higher at PPP rates
GDP top 15; ranked according to PPP, 2003 (current $, billions)
10,978
United States
6,410
China
3,062
India
2,279
Germ any
France
1,652
Un. Kingdom
1,643
India # 12 at exchange rate;
India # 4 at PPP rates
1,546
Italy
Brazil
1,326
Rus s ia
1,284
Canada
950
Mexico
919
Spain
910
South Korea
862
current $
current $, PPP
689
Indones ia
0
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China # 7 at exchange rate;
China # 2 at PPP rates
3,629
Japan
2,000
4,000
6,000
8,000
10,000
12,000
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Shares of global GDP 1900-2000
35%
China
% S ha re o f G lo b a l O ut p u t
30%
US
India
25%
20%
15%
Russia
UK
10%
Japan
5%
0%
1500
China
US
1600
India
1700
Japan
Time
Russia
Source: GSChina
Global ECS Research
India
1800
UK
US
UK
1900
Japan
2000
Russia
Sources: Maddison, 2000, Goldman Sachs, 2003, Revi, 2005
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9
Shares of global GDP 1900-2050
35%
China
% S ha re o f G lo b a l O ut p u t
30%
US
India
25%
20%
15%
Russia
UK
10%
Japan
5%
0%
1500
1600
US
1700
Time
Source: GSChina
Global ECS Research
India
1800
1900
UK
Japan
2000
Russia
Sources: Maddison, 2000, Goldman Sachs, 2003, Revi, 2005
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10
Shares of global GDP 1500-2050
35%
China
% S ha re o f G lo b a l O ut p u t
30%
US
India
25%
20%
15%
Russia
UK
10%
Japan
5%
0%
1500
1600
US
1700
Time
Source: GSChina
Global ECS Research
India
1800
1900
UK
Japan
2000
Russia
Sources: Maddison, 2000, Goldman Sachs, 2003, Revi, 2005
International Economics
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World per capita income increased past 200 years
World GDP per capita (1990 international $), logarithmic scale
10,000
5,709
1,000
667
435
444
100
0
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500
1000
1500
1820 2000
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Two waves of globalization in trade
Merchandise exports, % of GDP in 1990 prices
17.2
15
After World War II
10
13.4
10.1
Before World War I
5
4.6
2.5
0.2
0
1870
1900
1930
world
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1960
USA
1990
Japan
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Merchandise trade typically grows faster than GDP
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
1950-60
1960-70
1970-80
1980-90
1990-00
2000-09
2001
2002
Exports
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2003
2004
2005
2006
2007
2008
2009
GDP
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Two waves of globalization in capital flows
Foreign capital stocks; assets / world GDP
0.6
After World War I
0.4
Before World War I
0.2
0
1860
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1880
1900
1920
1940
1960
1980
2000
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Two waves of globalization
• Two waves of globalization:
– 1840–1914
– 1980–present
• Same underlying factors:
– Technological change
– Liberalization
• The death of distance? Is the world flat?
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Merchandise trade (exports + imports)/2, 2008
Shares in world trade of top 15 traders
United States
European Union
10,6
Including intra-EU
trade
Germany
8,2
China
7,9
Japan
trade
17,1
Excluding
intra-EU
United States
14,1
China
4,8
10,4
Japan
6,3
France
4,0
Canada
3,6
Netherlands
3,7
Korea, Republic of
3,5
Italy
3,4
Hong Kong, China
3,1
United Kingdom
3,4
Singapore
2,7
2,5
Belgium
2,9
Mexico
Canada
2,7
Taipei, Chinese
2,0
Korea, Republic of
2,6
India
1,9
Hong Kong, China
2,3
Saudi Arabia
1,7
Spain
2,1
United Arab Emirates
1,6
Singapore
2,0
Australia
1,6
Mexico
1,9
Switzerland
1,6
Other Members
32,3
0
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5
10
15
20
25
30
35
Other Members
19,3
0
5
10
15
20
25
30
35
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Exports of top five economies ($bill)
1.600
1.400
1.200
1.000
800
600
400
200
0
China
Germany
2000
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Japan
2005
2007
UK
US
2008
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Changing Composition of Trade
• What kinds of products do nations currently trade,
and how does this composition compare to trade in the past?
• Today, most of the value of trade is in manufactured products
such as automobiles, computers, clothing and machinery.
– Services such as shipping, insurance, legal fees and spending by
tourists account for 20% of the volume of trade.
– Mineral products (e.g., petroleum, coal, copper) and agricultural
products are a relatively small part of trade, in value but not in volume.
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Changing Composition of Trade (cont.)
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Changing Composition of Trade (cont.)
• In the past, a large fraction of the volume of trade came from
agricultural and mineral products.
– In 1910, Britain mainly imported agricultural and mineral products,
although manufactured products still represented most of the volume
of exports.
– In 1910, the US mainly imported and exported agricultural products
and mineral products.
– In 2002, manufactured products made up most of the volume of
imports and exports for both countries.
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Changing Composition of Trade (cont.)
• Developing countries, or low and middle-income
countries, have also changed the composition of
their trade.
– In 1960, about 58% of exports from developing countries
were agricultural products and only 12% of exports were
manufactured products.
– In 2001, about 65% of exports from developing countries
were manufactured products, and only 10% of exports
were agricultural products.
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Multinational Corporations and Outsourcing
• Before 1945, multinational corporations played a
small role world trade.
• But today about one third of all US exports and 42%
of all US imports are sales from
one division of a multinational corporation
to another (there is no comparable EU data)
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Multinational Corporations and Outsourcing
• Outsourcing occurs when a firm moves business
operations out of the domestic country.
– The operations could be run by a subsidiary of a
multinational corporation.
– Or they could be subcontracted to a foreign firm.
• Outsourcing of either type increases the amount of
trade.
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Example of global outsourcing: Volvo
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The Balance of Payments
• The BoP is divided in the current account and capital/financial
account.
• The transactions on the current account are income related.
Income gains are recorded as credit items (+) and income
spending as debit items (-).
• The transactions on the capital/financial account are asset
related. Asset gains are recorded as debit (-) and asset
losses as credit (+).
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The items of the Balance of Payments
The balance of payments
BoP of a country can be
subdivided further.
Current account
Goods
Trade balance
Services
Income
Current transfers
Capital and financial account
Capital account
Financial account
Direct investment
Portfolio investment
Other investment
Reserve assets
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Accounting identities
• By definition the BoP is equal to zero:
current account balance +
capital/financial account balance = 0
• From this it can be derived that net exports (surplus on the
current account) have to be accompanied by a capital outflow
(deficit on the capital account). Net imports on the other hand
go together with a capital outflow.
surplus account balance ⇔
net capital/financial outflow
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Benefits of international capital flows
• The benefits of international capital mobility can be illustrated
with a relatively simple framework.
• Total saving in a country is a positive function of the interest
rate and total investment a negative function.
• Without capital mobility, the interest rate in two countries can
be different as illustrated on the next slide.
• The introduction of international capital mobility makes both
countries better off. Savings from the country with the lower
interest rate will flow to investment opportunities in the other
country until the interest rate in both countries equalizes. The
next slide shows that both countries are better off.
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Both countries gain from capital mobility
net gain =
net gain =
r
r
IH
SH
IF
SF
rH0
1
rH1
3a
3b
4a
rF1
rF0
7.1a
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SH1 SH0=IH0
IH1
S, I
4b
2
7.1b
IF1
SF0=IF0
SF1
S, I
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Direction of capital flows
• We would expect capital to flow “down-hill”, from capital-rich
to capital-poor countries.
• This is what we observe within the EU
• But at global level things are little more complicated
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But global (CA) imbalances can be problematic
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The US-China trade balance
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