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Econ 340 Lecture 1 Overview of the World Economy
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Announcements • We will start discussing news next week, on Monday Sep 17. You should be watching for international economic news. • Be sure to register your clicker on the Canvas site for this course. Lecture 2: Institutions 2
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Lecture 1 Outline Overview of the World Economy • “Globalization” • Elements of the World Economy • Ways that Countries Interact – Trade – Capital Flows – Migration • Policies that Affect Others Lecture 1: Overview 3
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Overview of the World Economy “Globalization” • Means different things to different people – • My definitions (see my online Glossary): 1. The increasing world-wide integration of markets for goods, services and capital. 2. Also the role of MNCs, IMF, WTO, World Bank. 3. Elsewhere: domination by United States. • Some see good, others bad Lecture 1: Overview 4
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Overview of the World Economy “Globalization” • Some aspects of globalization, especially trade, – • • • – Declined with the world recession of 2008, then recovered Slowed down in 2015-16 Resumed growth in 2017 What’s next? We don’t know! Lecture 1: Overview 5
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World Recession Lecture 1: Overview 2015-16 Slowdown 6
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World Merchandise Exports by Level of Development, 2012Q1 – 2017Q4 (Volume index, 2012Q1=100) 2015-16 Slowdown 7 1 0 2 th w Gro Source: WTO Lecture 1: Overview 7
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Overview of the World Economy Globalization Backlash • There is growing opposition to globalization This happened before, with the “First Globalization” (See Swanson) – – • • • Both trade and migration grew strongly up to World War I in 1914 Inequality also grew Trade and migration both declined for decades after Lecture 1: Overview 8
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Lecture 1: Overview 9
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Lecture 1: Overview 10
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Lecture 1: Overview 11
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Globalization of Supply Chains • Much trade today is intermediate inputs. • Supply chains cross national borders multiple times • Example from Black Lecture 1: Overview 12
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NAFTA and the Auto Supply Chain Black, Diamond, and Merrill, “One Tiny Widget’s Dizzying Journey Shows Just How13 Critical Nafta Has Become,” Bloomberg, February 2, 2017.
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NAFTA and the Auto Supply Chain Black, Diamond, and Merrill, “One Tiny Widget’s Dizzying Journey Shows Just How14 Critical Nafta Has Become,” Bloomberg, February 2, 2017.
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NAFTA and the Auto Supply Chain Black, Diamond, and Merrill, “One Tiny Widget’s Dizzying Journey Shows Just How15 Critical Nafta Has Become,” Bloomberg, February 2, 2017.
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NAFTA and the Auto Supply Chain Black, Diamond, and Merrill, “One Tiny Widget’s Dizzying Journey Shows Just How16 Critical Nafta Has Become,” Bloomberg, February 2, 2017.
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NAFTA and the Auto Supply Chain Black, Diamond, and Merrill, “One Tiny Widget’s Dizzying Journey Shows Just How17 Critical Nafta Has Become,” Bloomberg, February 2, 2017.
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NAFTA and the Auto Supply Chain Black, Diamond, and Merrill, “One Tiny Widget’s Dizzying Journey Shows Just How18 Critical Nafta Has Become,” Bloomberg, February 2, 2017.
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Clicker Question At what times will the classes start and stop? a) b) ✓ c) d) 8:40-10:00 8:30-10:00 8:30-9:50 8:40-9:50 19
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Slide #20.

Lecture 1 Outline Overview of the World Economy • “Globalization” • Elements of the World Economy • Ways that Countries Interact – Trade – Capital Flows – Migration • Policies that Affect Others Lecture 1: Overview 20
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Overview of the World Economy • International Economics – Is NOT about countries – It IS about interactions among countries Lecture 1: Overview 21
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Overview of the World Economy • World Economy consists of – Countries: a few hundred (CIA lists about 240) (WTO has 164 members) – People: over 7 billion (7.495 billion 8/28/18, compare 328 million US) – Land: about 15 times the US Lecture 1: Overview 22
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(Aside, on getting information) An excellent source of information about countries is the CIA World Fact Book (Just Google “fact book”) Lecture 1: Overview 23
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Overview of the World Economy • World Economy consists of – GDP (2017 est., per CIA, in US$) • • World: Total = $79.45 trillion per capita = $17,300 US: Total = $19.39 trillion per capita = $59,500 Lecture 1: Overview 24
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Overview of the World Economy • Implication – US is very unusual • Very rich – US has less than 5% of world population but almost 25% of world income » (This changes, as measured here in official exchange rates, as the exchange rates change.) Lecture 1: Overview 25
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Lecture 1 Outline Overview of the World Economy • “Globalization” • Elements of the World Economy • Ways that Countries Interact – Trade – Capital Flows – Migration • Policies that Affect Others Lecture 1: Overview 26
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Overview of the World Economy • Ways that countries interact economically – Trade (per CIA, 2017 est.) • • World exports: $17.31 trillion (compare world GDP of $79 trillion) (That’s at official exchange rates) (Exports = 22% of GDP) World trade has grown faster than world GDP most years – – – But not during 2008-9, due to world recession Or during 2015-16 But resumed in 2017 Lecture 1: Overview 27
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Source: WTO Lecture 1: Overview 28
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Lecture 1: Overview 29
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Overview of the World Economy • See tables below for – – – – Who trades most? Who trades with whom? Share of trade in GDP US: • What do we export/import? • To/from whom? Lecture 1: Overview 30
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Who Trades the Most? ($ b. & % share, 2017) Exporters Importers Value China US Germany Japan Netherlands World Share 2263 12.8 1547 8.7 1448 8.2 698 3.9 652 3.7 17,730 100.0 Value US China Germany Japan UK World 2410 1842 1167 672 644 18,024 Share 13.4 10.2 6.5 3.7 3.6 100.0 Source: WTO, World Trade Statistical Review, 2018, Table A6 Lecture 1: Overview 31
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Who Trades the Most? (Excluding intra-EU-28) ($ b. & % share, 2015) Exporters Importers Value Share Value Share China 2263 16.2 US 2410 16.9 EU-28* 2122 15.2 EU-28* 2097 14.7 US 1547 11.1 China 1842 12.9 Japan 698 5.0 Japan 672 4.7 Korea, S. 574 4.1 Hng Kng 590 4.1 World 13,949 100.0 World 14,243 100.0 *EU external only Source: WTO, World Trade Statistical Review, 2018, Table A7 Lecture 1: Overview 32
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Who Trades the Most? • Developed countries are most of the biggest traders • China has caught up, in trade volume – It was the #3 exporter nine years ago when I taught the course; now it’s #1. – Others are gaining as well: Five years ago Canada was #5 exporter. Four years ago that was S Korea Lecture 1: Overview 33
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Who Trades the Most? • See Economist from four years ago: “Trading Up: Picking the world champion of trade” – China claimed to have surpassed US. True only for goods, not goods + services • But with time China will pass US in both – China’s trade per GDP is much larger than the US, but below world average – Much of the value in China’s exports is imported inputs, thus low “value added.” Lecture 1: Overview 34
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Who Trades the Most? • “Emerging Markets” in general are catching up to, or surpassing, the developed countries – In GDP, trade, and more – See Economics Focus from The Economist, “Why the Tail Wags the Dog” Lecture 1: Overview 35
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Lecture 1: Overview 36
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Lecture 1: Overview 37
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Who Trades with Whom? ($ b., 2014, Intra- and inter-regional merchandise trade) Destination: Origin: North Amer. Latin Amer. Eur. Asia Africa Other North Amer. 1251 214 379 504 43 97 Latin Amer. 173 179 114 170 18 26 Europe 540 119 4665 738 221 447 1065 185 900 3093 207 428 Africa 39 29 201 152 98 20 Other 128 18 532 828 51 273 World 3195 744 6792 5485 639 1292 Asia Source: WTO, International Trade Statistics, 2015, Table I.4 Note: This source is no longer published, and its replacement lacks these data. Lecture 1: Overview 38
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• North America, Europe, and Asia trade mostly within their group • Poorer regions – Latin America, Africa – trade mostly with the richer regions • This reflects what is not so clear in the table and charts: – Rich countries trade most with each other – Poor countries trade most with rich countries • But their trade with each other is growing Lecture 1: Overview 39
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Lecture 1: Overview WTO, World Trade Report 2013 40
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Lecture 1: Overview WTO, World Trade Report 2013 41
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1990 2011 Lecture 1: Overview WTO, World Trade Report 2013 42
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What Does the World Trade? ($ b. 2014 merchandise exports) Value All Products 17,797 Agriculture 1,765 Fuels & Mining 3,789 Manuf. 12,243 Source: WTO, International Trade Statistics, 2015, Table II.1 Note: This source is no longer published, and its replacement lacks these data. Lecture 1: Overview 43
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What Does the World Trade? • Biggest traded category: manufactures • Fastest growing, then shrinking, then growing: “fuels & mining” Why? • Because this is the value of trade, and prices of oil and other raw materials were rising, and then falling. Lecture 1: Overview 44
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Did (Not available since 2011) What Does the US Trade? ($ b. 2011) Total Agriculture Petroleum Industrial supplies Capital goods, exc. auto Automotive Other non-ag Other non-petrol Exports 1,497.4 140.0 Imports 2,235.8 496.4 493.2 133.1 234.6 462.3 319.8 513.4 255.2 685.1 Source: Economic Report of the President, Feb 2013, Table B-104. Lecture 1: Overview 45
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What Does the US Trade? • US imports are much larger than US exports – (We’ll see what that means later in the course.) • US is a big… – Exporter of agricultural products – Importer of oil (but that’s been falling) – Exporter and importer of capital goods (i.e., machines for making things) Lecture 1: Overview 46
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Trade of US States • US states differ substantially in the importance of international trade to them Lecture 1: Overview 47
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Source: Perry and Balliou (2017)
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Source: Perry and Balliou (2017)
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Source: Perry (2017)
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Importance of Trade for Countries? (GDP in US$ b., Exports % of GDP, Selected countries, 2017) GDP United States Japan Germany Canada India Mexico Netherlands Singapore Philippines Nepal 1456.0 634.9 1322.0 393.5 268.6 374.3 495.4 361.6 43.4 0.8 Exports/GDP 8% 14% 37% 26% 11% 35% 64% 115% 20% 3% Source: CIA World Fact Book Lecture 1: Overview 51
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Importance of Trade for Countries? • Even though we trade more than most, US trade is a smaller part of US GDP than for many other countries • Others that are low: Japan, Nepal (even lower than US) • Note Singapore: Exports can be more than GDP. – Reason: Exports are made using imported inputs, so value of exports includes imports. Lecture 1: Overview 52
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Importance of Trade for Countries? A Few More of Interest GDP Exports/GDP 1990.0 18% 502.5 145% 511.8 38% 3.0 11% 9.1 15% 1.7 7% 56.2 17% China Hong Kong Korea, South Korea, North (2013) Burma Syria Israel Source: CIA World Fact Book Lecture 1: Overview 53
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Lecture 1 Outline Overview of the World Economy • “Globalization” • Elements of the World Economy • Ways that Countries Interact – Trade – Capital Flows – Migration • Policies that Affect Others Lecture 1: Overview 54
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Overview of the World Economy • Ways that countries interact economically – Capital Flows • • Financial (holdings of financial assets abroad) Real (international ownership of real assets) Lecture 1: Overview 55
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Overview of the World Economy • Ways that countries interact economically – Capital Flows • Financial (holdings of financial assets abroad) » » » » » • Currency Bank deposits Bonds – private and government Stocks Bank loans Real (international ownership of real assets) Lecture 1: Overview 56
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Overview of the World Economy • Ways that countries interact economically – Capital Flows • • Financial (holdings of financial assets abroad) Real (international ownership of real assets) » » » » Real estate Capital assets (plant and equipment) Stocks (equities) if ownership share is large Other Data, below, are stocks (i.e, amounts at a point in time) Lecture 1: Overview 57
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US Investment Position ($ trillion at market value, end of 2017) Total* Direct investment Portfolio investment Other investment Reserve assets We “Own” We “Owe” US Assets US Liabilities 27.80 8.91 12.54 4.27 0.45 35.52 8.93 19.48 5.52 Compare: US GDP in 2017 = $19.39 trillion *Excludes financial derivatives other than reserves. Would add net +0.06. Source: Bureau of Economic Analysis, U.S. Net International Investment Position Lecture 1: Overview 58
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US Investment Position • (Qualification: “Owe” may not be quite right. This may include all assets in the US owned by foreigners, including land, buildings, etc. Not just what we’ve borrowed.) • Lessons: – US is a large net “debtor” (result of our spending more than we earn) Lecture 1: Overview 59
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Lecture 1 Outline Overview of the World Economy • “Globalization” • Elements of the World Economy • Ways that Countries Interact – Trade – Capital Flows – Migration • Policies that Affect Others Lecture 1: Overview 60
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Overview of the World Economy • Other ways that countries interact economically – Migration • Temporary – Guest workers – Day workers • • Permanent In practice, most (all?) countries limit migration severely Lecture 1: Overview 61
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Lecture 1 Outline Overview of the World Economy • “Globalization” • Elements of the World Economy • Ways that Countries Interact – Trade – Capital Flows – Migration • Policies that Affect Others Lecture 1: Overview 62
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Overview of the World Economy • Other ways that countries interact economically – Policies that affect other countries • • Direct Indirect Lecture 1: Overview 63
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Overview of the World Economy • Other ways that countries interact economically – Policies that affect other countries • Direct – – – – – • Trade policies (tariffs, quotas) Foreign aid Capital controls Exchange rate management Immigration restrictions Indirect Lecture 1: Overview 64
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Overview of the World Economy • Aside on Tariffs – We will be dealing a lot with these • • • • US tariffs are much lower than they used to be (average 4% now, vs. 40% in 1946) US has gained a great deal from lowering tariffs US still has much to gain from further lowering But there are also severe costs for some people and firms who compete with imports Lecture 1: Overview 65
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Overview of the World Economy • Aside on Tariffs – Tariffs could go up, even legally: • • • WTO enforces only upper limits on tariffs Actual tariffs in many countries are below these limits, and could legally rise There was danger that the world recession of 2008 would push countries to do that. – They didn’t – at least not much. – Tariffs have gone up this year under Trump • We’ll see more next time Lecture 1: Overview 66
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Overview of the World Economy • Aside on Tariffs – US tariffs are much higher against developing countries than against developed countries Lecture 1: Overview 67
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Overview of the World Economy • Aside on Tariffs – Until recently, much trade policy has been Trade Agreements, by countries that reduce tariffs. – This trend has now stalled for the US under President Trump. – But other countries are continuing it without Trump. Lecture 1: Overview 68
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Overview of the World Economy • Other ways that countries interact economically – Policies that affect other countries • Indirect – – – Subsidies (esp. agriculture) » US farm subsidies > foreign aid » Macro policies (monetary, fiscal) Environmental policies Standards » Labor » Health & safety » Norms Lecture 1: Overview 69
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Next Time • Current Tensions in the International Economy – NAFTA – Brexit – Trade War – Currencies Lecture 1: Overview 70
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