Chapter 1: Windows on the
World Economy
An Introduction to International
Economics: New Perspectives on the
World Economy
© Kenneth A. Reinert, Cambridge University
Press 2012
Introduction


Task we take up in this book—discovering
the nuances of globalization
Will try to explore the world economy and
globalization in as balanced a manner as
possible

Will help us develop informed views and opinions
© Kenneth A. Reinert, Cambridge University
Press 2012
Windows on the World Economy

Will explore four windows on the world
economy




International trade
International production
International finance
International development
© Kenneth A. Reinert, Cambridge University
Press 2012
International Trade




The exchange of goods (merchandise) and
services among the countries of the world.
Goods: tangible and storable (something you
can drop on your toe).
Services: intangible and non-storable
(something you cannot drop on your toe).
Trade in services accounts for approximately
one quarter of global trade.
© Kenneth A. Reinert, Cambridge University
Press 2012
Figure 1.1 Gross Domestic Product and Exports in the World Economy, 1980 to
2013 (1980=100). Source: World Bank, World Development Indicators
700
600
500
400
300
200
100
0
Exports of goods and services
GDP
© Kenneth A. Reinert, Cambridge University
Press 2012
International Production


Production of a product in multiple countries
Can take place through

Contracts


International licensing and franchising
Foreign direct investment (FDI) undertaken by
multinational enterprises (MNEs)

Involves firms based in one country owning at least a 10
percent of firms producing in another country
© Kenneth A. Reinert, Cambridge University
Press 2012
International Production





MNEs account for approximately one fourth of
world gross domestic product (GDP) or aggregate
output.
The sales of foreign affiliates of MNEs now exceed
the volume of world trade.
MNEs are involved in approximately three fourths
of all world trade.
Approximately one third of world trade takes place
within MNEs.
MNEs account for approximately three fourths of
worldwide civilian research and development.
© Kenneth A. Reinert, Cambridge University
Press 2012
Figure 1.2 Nominal FDI Inflows to Low, Middle and High Income Countries,
1980 to 2013. Source: World Bank, World Development Indicators.
3,000
2,500
US$ billion
2,000
1,500
1,000
500
0
-500
Low income
Middle income
High income
© Kenneth A. Reinert, Cambridge University
Press 2012
International Finance

Refers to the exchange of assets among
countries

Individuals and firms around the world conduct
international transactions in






Currencies
Equities
Government bonds
Corporate bonds (commercial paper)
Real estate
Plays increasingly important role in the world
economy
© Kenneth A. Reinert, Cambridge University
Press 2012
6,000
120
5,000
100
4,000
80
3,000
60
2,000
40
1,000
20
0
0
1989
1992
1995
1998
Turnover
2001
2004
Multiple of Exports
© Kenneth A. Reinert, Cambridge University
Press 2012
2007
2010
2013
multiple
US $ billions
Figure 1.3. Daily Foreign Exchange Market Turnover and Annualized Multiple of
Exports. Sources: Bank of International Settlements and World Bank, World
Development Indicators
International Development


Hoped that the processes of international
trade, production and finance will contribute
to improved levels of welfare and standards
of living throughout the world
Major issues involved


How we conceptualize levels of welfare or
standards of living
How the processes help to determine international
development
© Kenneth A. Reinert, Cambridge University
Press 2012
International Development

Measure of these differences in living
standards is the human development index
(HDI)



Per capita income
Average life expectancy
Average levels of education
© Kenneth A. Reinert, Cambridge University
Press 2012
Table 1.1. Measures of Living Standards (2010). Sources: World Bank, World
Development Indicators and United Nations Development Program
Country
Ethiopia
PPP GDP
per capita
(U.S.
dollars)
Life
Expectancy
(years)
Mean Years Human
of
Development
Schooling
Index (0 to 1)
358
59
1.5
0.358
India
1,375
65
4.4
0.542
China
4,433
73
7.5
0.682
Costa Rica
7,774
79
8.3
0.742
South Korea
20,540
81
11.6
0.894
United
States
46,702
78
12.4
0.908
© Kenneth A. Reinert, Cambridge University
Press 2012
Connecting Windows

Each offers a view, but each has a
frame

Each offers some insight into the world
economy

An insight that needs to be supplemented
by one or more of the other windows
© Kenneth A. Reinert, Cambridge University
Press 2012
Figure 1.4. Connecting Windows
International
Trade
International
International
Development
Production
International
Finance
© Kenneth A. Reinert, Cambridge University
Press 2012
Analytical Elements







Countries
Sectors
Tasks
Firms
Factors of production
Currencies
Financial assets
© Kenneth A. Reinert, Cambridge University
Press 2012