Introduction
Subprime Meltdown (2007)
BREXIT (2020)
Covid-19 (2020)
Russia vs Ukraine (2022)
Introduction to World Economy
- International integration of national economies has brought many benefits to nations across
the globe.
● Technological Innovations
● Less Expensive Products
● Investments
Elements of International Economic Integration
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Trade Flows
Capital Flows
People Flows
Similarity of prices in separate markets
The Growth of World Trade
Trade-to-GDP Ratio = (Imports + Exports) / GDP
- One important measure of international trade in a nation’s economy is the sum of imports and
exports divided by the GDP
Trade-to-GDP Ratio
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- It measures the relative importance of international trade in a nation’s economy.
CAPITAL AND LABOR MOBILITY
FDI (Foreign Direct Investment) - refers to an ownership stake in a foreign company or project
made by an investor, company, or government from another country.
- International Economic Institutions International economic institutions are an important feature
of the world economy.
- Institutions can be formal or informal. A formal institution is a written set of rules that
explicitly state what is and is not allowed. The rules may be embodied in a club, an association,
or a legal system. An informal institution is a custom or tradition that tells people how to act in
different situations but without legal enforcement.
The IMF, THE WORLD BANK AND THE WTO
GLOBALIZATION
- It is the process of greater interdependence among countries and their citizens. It consists of
the increased interaction of product and resource markets across nations via trade, immigration,
and foreign investment—that is, via international flows of goods and services, of people, and of
investments in equipment, factories, stocks, and bonds. It also includes non-economic elements
such as culture and the environment.
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WAVES OF GLOBALIZATION
➔ First Wave (1870-1914)
➔ Second Wave (1945-1980)
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➔ Third Wave (1980-present)
BENEFITS OF GLOBALIZATION
● International Trade
● Increased Competition
● Increased Capital and Labor Mobility
● High Standard of Living
COSTS OF GLOBALIZATION
● Structural Unemployment
● Monopoly power of MNCs
● Easier Tax Avoidance
● Environmental Costs
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MERCANTILISM
An economic system of trade based on the idea that a nation's wealth and power were best
served by increasing exports and trade.
Favorable trade balance - a surplus of exports over imports
WHY DO NATIONS TRADE?
Adam Smith's concept of cost on the labor theory of value that assumes that, within each nation,
labor is the only factor of production and is homogeneous (of one quality) and the cost or price
of a good depends exclusively on the amount of labor required to produce it.
Adam Smith was a leading advocate of free trade.
WHY DO NATIONS TRADE?
Principle of Absolute Advantage - uses less labor to produce a unit or output.
Each nation is more efficient in the production of one good.
WHY DO NATIONS TRADE?
Principle of Comparative Advantage - It argues that countries can benefit from trading with
each other by focusing on making the things they are best at making, while buying the things
they are not as good at making from other countries.
David Ricardo is the proponent of the Principle of Comparative Advantage
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David Ricardo's law of comparative advantage suggested that specialization and trade can lead
to gains for both nations.
PRODUCTION POSSIBILITY SCHEDULES
It is used to discover the mix of products that will use available resources most efficiently.
This schedule shows various alternative combinations of two goods that a nation can produce
when all factors inputs (land, labor, capital, entrepreneurship) are used in their most efficient
manner.
PRODUCTION POSSIBILITY SCHEDULES
The production possibilities schedule illustrates possibilities of a nation.
The marginal rate of transformation (MRT) shows the amount of one product a nation must
sacrifice to get additional unit the other product:
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Autarky
It is the absence of trade.
WHY DO NATIONS TRADE?
Theory of Reciprocal Demand - It asserts that within the outer limits of the terms of trade, the
actual terms of trade are determined by the relative strength of each country's demand for the
other country's product.
John Stuart Mill
WHY DO NATIONS TRADE?
The reciprocal demand theory best applies when both nations are of equal economic size, so
that the demand of each nation has a noticeable effect on market price.
WHY DO NATIONS TRADE?
Factor-Endowment Theory is also known as Heckscher-Ohlin theory.
The factor-endowment theory asserts that the immediate basis for trade is the difference
between pre-trade relative product prices of trading nations.
REGIONAL TRADE AGREEMENTS
• Treaties signed by two or more countries to encourage the free movement of goods and
services across borders.
5 Types of Regional Trade Agreements
Agreements between groups of nations are not new.
Free-trade agreements and other forms of preferential trade have existed throughout history.
Partial Trade agreement
Free Trade Area
Customs Union
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Common Market
Economic union
Partial Trade Agreement
It is the least comprehensive RTA. It occurs when two or more countries agree to drop trade
barriers in one or a few economic sectors, such as steel, autos, or any other line of production.
Free Trade Area
In a free-trade area, nations trade goods and services
international boundaries paying a tariff and without
across without the limitations imposed by quotas, which are direct limits on imports.
Customs Union
A customs union is an extension of the free trade area in the sense that member countries must
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also agree on a common schedule of identical tariff rates.
Common Market
is a customs union plus an agreement to allow the free mobility of inputs, such as labor and
capital.
Economic Union
The final level of economic integration is an economic union. An economic union is a common
market with substantial coordination of macroeconomic policies, including a common currency,
and harmonization of many standards and regulations.