Applied International Economics

W. Charles Sawyer, Richard L. Sprinkle

• Publisher: Routledge
• Year: 2020
• ISBN:
  9780429758317
• Edition: 5
• Topic: Economía
• Subtopic: Macroeconomía

Applied International Economics, 5th edition, offers a modern and accessible treatment of international economics, shifting the emphasis from pure theory to the application of theory by using the standard tools of economic analysis. This new and streamlined edition makes the real-world application of international economics even more clear than previous editions, and focuses on the basics that students will need in order to analyze information on the world economy throughout their future careers. The new edition has been refocused, revised, and thoroughly updated. Key features include:

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• Expanded coverage of China's role in the world economy.
• New material on how changes in trade flows can be decomposed into the extensive and intensive margins of trade.
• New material on the use of Section 301 of U.S. trade law and the U.S.–China trade dispute.
• Updated coverage of Brexit.
• A new focus on the sole use of the Mundell-Fleming model to analyze balance of payments issues.
• Improved linkages between the concepts of purchasing power parity and the real exchange rate.

Written in a thorough and engaging style, the book covers topics at a level appropriate for students specializing in business or international relations, as well as economics students. Along with a wealth of case studies and real-life examples, the book offers extensive pedagogical tools that include a companion website, end-of-chapter summaries, and explanations of key concepts and terms. For instructors, PowerPoint presentations and an extensive test bank are available.

CHAPTER 1
Introduction

An overview of the world economy

Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.

Thomas Jefferson

INTRODUCTION

Today, no country inhabits an economic island. Its firms and industries, its commercial activities in goods and services, its technology and available capital, its standard of living, and all other features of its economy are related to the economies of other countries. These relationships form a complex flow of goods, services, capital, labor, and technology among countries. As the world economy becomes increasingly integrated, every country must come to terms with this increased interdependence.

Until the early 1970s, this interdependence was perceived to be a one-way street. To most consumers and businesses located within the U.S., the economy appeared to be and acted like a self-sufficient and closed economy. At the time, the U.S. economy’s absolute and relative size led consumers, businesses, and policy makers to conclude that the economy was immune to economic events that occurred abroad. In contrast, foreign countries were greatly influenced by events that took place in the U.S. A recession would mean that the rest of the world’s economy would suffer greatly. In addition, the U.S. could raise import tariffs on steel, automobiles, or lumber without effective retaliation. Further, the U.S. could ignore the international value of the dollar because exchange rates were fixed.

However, over the last several decades, this interdependence truly has become a two-way street. In the U.S. and the rest of the world, goods, services, capital, technology, and people flow across borders with greater frequency and in increasingly greater volumes. Between 1975 and 2019, global trade in goods has increased by almost 600 percent. For some individuals and businesses, international transactions and international relationships have become more important than interactions within their own country. National policies that affect trade, investment, the value of the country’s currency, and the level of national output can be used to enhance these benefits and lessen the costs of interdependence. To reap these additional benefits, each country needs to base its national policies on an objective analysis of international economics.

The purpose of international economics is to explain these patterns of international trade, investment, and other cross-border transactions that we currently observe in the real world. Much of our examination of international economics is based on analyzing the economic data of individual countries and the world economy. In this chapter, we describe several different aspects of a country’s interdependence in the world economy. Throughout the rest of the text, we will refer to economic data as it pertains to selected international economic issues. We begin by describing how international economics relates to the concepts you have learned in previous economics courses. From there we will examine the overall landscape of the world economy. We will do this by first looking at the output of the world economy. With this information we can then consider how international transactions such as international trade and capital movements fit into the picture. At that point, some of the more important issues that are discussed later in the book can be introduced.

THE SCOPE OF INTERNATIONAL ECONOMICS

The discipline of economics can be divided into two major parts: microeconomics and macroeconomics. Microeconomics deals with the production and consumption of various goods and services and how particular industries work. Using microeconomic theory, you can analyze the activities of individuals and the behavior of individual businesses in choosing what to produce and how much to charge. Macroeconomics deals with the operation of the entire economy and examines the factors that determine the economy’s total output and the overall price level. In a sense, economics is like medicine. Many physicians are general practitioners who can deal with practically any minor ailment. On the other hand, a large number of physicians are specialists who primarily work on one particular disease or system of the body. Economics has evolved in much the same way. The study of economics is now subdivided into a number of different areas such as labor economics, natural resource economics, economic development, and international economics.¹

International economics is the study of the production, distribution, and consumption of goods and services on a worldwide basis. As such, international economics is a blend of microeconomics and macroeconomics. In Chapters 1 through 12, we extend our study of microeconomics by examining international trade. In many respects, international trade is similar to domestic trade. However, each country has different codes or rules that make one national economy different from another. These national or political boundaries determine not only the legal, linguistic, social, and currency barriers to trade, but also the nature of economic policies. These national laws tend to partially isolate each country and cause significant differences in the way trade is conducted domestically versus how it is carried out internationally.

Chapters 13 through 20 are an extension of macroeconomics. In your Principles of Economics course, the text you read may have assumed that the U.S. economy was something like an economic island. To simplify the analysis, the effects of changes in other countries’ economic conditions on the U.S. economy may have been downplayed or ignored. This simplification was based on the idea that the economy can be more easily understood by considering only domestic consumption, investment, government spending, and various government policies. Adding factors, such as changes in the exchange rate or trade flows, creates a model that is more realistic. However, this added degree of realism may get in the way of teaching the basic principles of macroeconomics.

The purpose of the second half of this book is to expand the model you learned in your principles courses in two important ways. First, changes in foreign economic conditions at times may noticeably affect the domestic economy. Further, changes in any domestic economy can have noticeable impacts on foreign economies. Second, changes in government policies have significant impacts not only on the domestic economy, but also on the sectors of the economy related to international trade. These extensions to microeconomics and macroeconomics have now become so important and extensive that they easily constitute an extra semester of study.

Although international economics is important, it is essential to keep it in perspective. For the U.S. and many other countries, international trade is an important adjunct to domestic economic activity. However, the international exchange of goods, services, and assets is now large and growing at a rapid rate. While no one can predict how long this process of “internationalization” or “globalization” will continue, it currently shows no signs of abating. This chapter provides basic information about the world econo...