IR292 : Introduction to International Economics

When did our current wave of economic integration begin?

It began in the 1950s after trade barriers were removed post WWII. However it wasn’t the first as there was another during 1870-1913, steamships, railroads, transatlantic cables, etc

What do economists look at when measuring economic integration?

1) Capital flows

2) Trade Flows

3) People/ Labor Flows

4) Price differences across different markets

The first three are more related to how much goods and moving through exports and imports, how much money and investment is moving, and how much labor and migration is happening between countries.

For the fourth, the more integration there is, the price differences between economies are small because the prices converge through abritrage.

Since the end of WWII, trade has grown much faster than ____.

How does the estimate of total world exports in 1950s compare with the estimate in 2013?

global GDP/ output. In the 1950s total world exports, which equal total world imports, was estimated to be about 5.5%. In 2013 that estimate went up to about 30%

Economists measure the important of trade with…

Trade-to-GDP ratio, which measures the level of international trade compared with the the size of that country’s economy.

A higher ratio means that there is more intl. trade relative to the size of the economy, but the ratio tells us nothing about trade policies, and countries with high ratios do not necessarily have lower trades to barrier ! (though it is a possibility)

In general, large countries are less depentent on..

International trade because their firms can reach optimal production levels without having to sell to foreign markets.

Typically smaller countries tend to have higher trade-to-GDP ratios

As national economies become more interdepenent.. (labor and capital what?)

What has changed about international migration since the year 1900? In the United States?

Labor and capital should move easily across international borders. However, labor and international migration is less mobile than it was in 1900. During this time there were many nations with open door policies, no passport requirement, little border control.

In 1900, In the US, immigrants made up 14.5% of the population, now it is at 13%

What are capital flows? What are the different ways these flows can happen?

Capital flows are savings of one country that are invested in another.

1) Financial assets - stocks, bonds, currencies, bank deposists

2) Physical assets - factories, businesses, real estate (FOREIGN DIRECT INVESTMENT , FDI)

How are savings and investment correlated?

Countries with high savigns tend to have high investment, and low savings are correlated with low investment.

Why are capital flows not completely integrated?

Capital markets are highly integrated, but not completely. We know this because a country’s investment is still tied closely to how much domestic savings it has. If markets were completely integrated countries could rely much more heavily on foreign savings to finance investment.

What are some features of contemporary international economic relations?

1) Deeper integration —means going beyond just lowering tarrifs anf quotas to coordinating domestic policies and regulations that impact trade.

2) Presence of multilateral organizations like the WTO— organizations where many countries work together on shared issues and rules

3) Growth of regional trade agreements — trade agreements themselves are not new, but the number of these agreements has grown substantially.

What is an institution? What kinds of institutions are there?

Economists define it as a set of rules that shapes how people behave, what is permitted and not permitted.

1) Formal Institutions — written, often in the forms of laws, codes, etc

2) Informal Institutions — customs or traditions, unwritten rules like manners, etiquette

Three international organizations that play major roles in international economic relations

1) The International Monetary Fund (IMF)

2) The World Bank

3) The World Trade Organization (WTO)

Bretton Woods Conference

After WWII, several nations held discussions about the shape of postwar international economics, and the the Bretton Woods Conference was held in July 1944 to discuss these concerns

What was the goal of the Bretton Woods Conference? What was created at this conference?

They wanted to avoid the mistakes of the 1930s and to create a more stable and prosperous world economy.

The IMF (International Monetary Fund) was created at Bretton woods and began operation in 1945 with 29 members which is now at 188.

How is the IMF funded?

How is this significant in terms of voting power within the IMF?

It is funded by a quota that each members pays; that quota is proportional to the size of the country’s economy. Important decisions within the IMF are made by voting, with the weight of each nation’s vote proportional to its quota. ← This gives high-income countries more voting power.

What is the primarypurpose of the International Monetary Fund?

To intercede, by invitation, whenever a country is facing a crisis with its international payments. Tries to fix/prevent situations where countries can’t make the payments they need to internationally

What are Foreign Exchange Reserves?

The supply of a country’s foreign currency and foreign assets held by the central bank. It gives the country a stash of foreign money it can use when needed.

For example: Thailand buys 100 billion dollars worth of stuff from other countries, but in order to do so it cannot use Thai baht, so it needs internationally accepted currencies like U.S dollar

The IMF is an internaional lender…

of last resort. It provides loans to countries that cannot make payments on their debts and cannot borrow elsewhere.

What is IMF Conditionality?

The loans given out by the IMF are limited in size and come with a set of requirements. The goal is to make the country carry out policies to prevent a similar crisis from happening in the future

What is the controversy surrounding IMF Conditionality?

People who support it argue that handing out money without fixing what caused it can open the door for it to happen again

Those who oppose it say that the required reforms can sometimes be painful for the people living in the country, making life hard in the short run.