Introduction to International Economics
Lecture 1

International Economics

1. International economics – different and unique branch
   • Interaction of sovereign countries
   • Country has
     1. A currency; its own money
     2. Unique laws
     3. Fiscal policies – Greece cannot control its gov. spending
     4. Factor mobility – movement of labor, resources, land, etc.
     5. Example – Kazakhstan – foreigners cannot own land; difficult to get work permit
     6. Relations with other nations, etc.
   • International trade – countries trade goods and services among themselves
   • Note – money flows in opposite direction of products

2. Economic Interdependence
   • Exports/Imports become a larger share of a country's economy
   • International Investment
   • Globalization - countries are more interdependent on each other
   • Impacts a country's political and economic systems, culture, and technology level
   • Reasons
     1. Transportation costs are decreasing
     2. Communications costs are falling for email, fax, etc.
     3. Countries reduced tariffs and other trade barriers
     4. Foreign countries have pro-business legal system; businesses do not invest in countries with bad legal systems
3. Inverse relationship between trade protection and economic growth
   • An isolated country is more likely to have low economic growth
   • Exports are important
   • People obtain foreign currencies, so they buy more foreign products
   • Exports/Imports grow together
   • Openness (%) = 100 (Exports + Imports) / GDP
   • Gross Domestic Product (GDP) - a measure of the total amount of final goods and services produce in an economy per year

3. Is outsourcing international trade?
   • Outsourcing - companies have two choices
     • Produce internally or outsource part of production
     • U.S. firms outsource to India, Philippines, Russia, Central Europe, etc.
   • Benefits
     • Reduces costs which lowers prices and benefits the consumers
     • Boost incomes in foreign countries; consumers can buy more products and services from the U.S.
     • U.S. companies outsource jobs to reduce costs and increases profits; they bring the profits to the U.S.
   • Problems
     • U.S. lost factory jobs to overseas outsourcing; reduced incomes for people with a high school education and less
     • U.S. firms are outsourcing professional jobs; may reduce earnings of college graduates
     • Some large retailers like Walmart encourage U.S. companies to outsource as a means to drive down prices and costs
   • Types of jobs
     • White collar jobs
     • Call centers
     • Accounting
     • Medical diagnostics
     • Software
   • How can a country stop outsourcing?

4. Terrorism - September 11, 2001
   • Increased transportation costs
   • More security guards
   • More government security, checks, inspections, etc.
   • Could hamper free trade. Countries use free trade to prosper and grow

5. Developing countries
   • Poor working conditions
   • Low wages relative to developed countries
   • International corporations and banks dominate international trade
   • China and Mexico – companies hire single, young women in factories
   • May use child labor
   • Is globalization to blame for this?
     • Foreign companies usually pay better than local companies
     • Corporations rarely hire child labor
6. Immigration
   • Contentious issue
   • 2007 Great Recession - aftermath still felt today
   • United States and Europe have an unemployment crisis
   • Approximately 200 million people migrated (approximately 3% of world's population)

• Illegal immigration was always a problem in the U.S.
  • Many U.S. state and local governments passed laws, cracking down on illegal immigration
  • Arizona - a business could lose its license if illegal immigrants are caught working there
  • Arizona sheriffs are aggressive about arresting illegal immigrants
  • Malaysia approximately has one million legal workers, and possibly another million illegal
• Is there an economic impact, if a country expels its immigrants?
  • Immigrants could have special skills or higher education
  • Many educated Indians left the U.S. to establish computer companies in India
  • A community loses a family who buys or rents a home, shops in local stores, pays taxes, etc.

Exchange Rates

1. Exchange rates
   • Example: $1 U.S. = 0.8 euros
   • You exchanged $200, then you get ( 0.8 euros / 1$) * $200 = 160 euros
   • Bought two slices of pizza and a drink for 7 euros
   • You paid $8.75

2. Currency appreciates
   • Money can buy more foreign currency
   • Consumers buy more imports, because they are less expensive
   • Exporters export less, because they are more expensive
   • Example: $1 U.S. = 0.9 euros
     • Dollar appreciates; buys more euros
     • Euro depreciates; buys fewer U.S. Dollars
   • Note – strong means currency is compared to a basket of currencies
3. Currency depreciates
   • Money is “weaker”
   • Consumers buy less imports (more expensive)
   • Exporters export more (less expensive)
   • Example - $1 U.S. = 0.5 euros
     • Dollar depreciates; buys less euros
     • Euro appreciates; buys more dollars
   • Note – Weak means currency is compared to a basket of foreign currencies

4. Why do the Asian tigers and China weaken their currencies?
   • Causes a trade surplus, i.e. exports exceeds imports
   • Although domestic consumers are hurt, the weak currencies boosts the export industries
   • Creates manufacturing jobs, causing rapid industrialization
   • Government could accumulate foreign currencies, such as U.S. dollars and euros.
5. Why does the U.S. government and other countries maintain a strong U.S. dollar?
   • U.S. dollar is the international currency
   • Accepted in most countries
   • Investors and people hold onto to strong currencies
     • Strong currencies keep their value
     • Boosts investing in the U.S. and U.S. government debt
     • Note – investments in foreign countries with a depreciating currency lowers a project's return
   • Helps U.S. consumers, but harms the U.S. exporting industries