INTERNATIONAL ECONOMICS

Chapter 1: Introduction

Dam Thi Phuong Thao

VNU UEB
 LEARNING GOALS

After reading this chapter, you should be able to:

• Understand the meaning and importance of globalization
• Understand the relationship between international trade and the
nation’s standard of living
• Describe the subject matter (trade and monetary aspects) of
international economics
• Identify the major international economic problems and
challenges facing the world today
 CONTENTS

The Importance of International Economics

The subject matter of International Economics

Current International Economic Challenges

 1. THE IMPORTANCE OF
INTERNATIONAL ECONOMICS
 GLOBALIZATION
It's a Flat World, After All (Thomas L. Friedman, 2005)

• Globalization refers to the

economic integration of the
world, as trade, investment, and
monetary transactions
increasingly across international
borders.
• “We live in a global economy”
 GLOBALIZATION
It's a Flat World, After All (Thomas L. Friedman, 2005)

Trade

GVCs
Globalization

Movement of
Finance resources
 WE LIVE IN A GLOBAL ECONOMY
It's a Flat World, After All (Thomas L. Friedman, 2005)

• International trade in goods and service

– Imports and export
– Final good and component parts
– Good and services (Tourism, Studying abroad, Foreign Banking,
Medical services in Vietnam)
 WE LIVE IN A GLOBAL ECONOMY
It's a Flat World, After All (Thomas L. Friedman, 2005)

• International flows of capital and labor

 Labor migration: Vietnamese people leave the country for jobs overseas;
Vietnamese workers are now present in over 40 countries worldwide.
 Foreign Direct Investment (FDI): Samsung built factory in Bac Ninh
Province, Viettel established subsidiaries in Laos and Cambodia
 Foreign Indirect/Portfolio Investment (FPI): Vietnamese people buy
Sony’s stocks and bonds
 MNCs: Microsoft, Apple, Facebook, Amazon, etc.
 WE LIVE IN A GLOBAL ECONOMY (CONT.)
It's a Flat World, After All (Thomas L. Friedman, 2005)

• International finance
 International transactions require international payments =>
Balance of payments
 International transactions require conversions between currencies
=> Foreign exchange markets and Foreign exchange rate
 International transactions require cooperation between countries
=> International monetary systems
 WE LIVE IN A GLOBAL ECONOMY (CONT.)
Case study 1-1: The Dell PCs sold in the U.S are anything but American!
 WE LIVE IN A GLOBAL ECONOMY (CONT.)
Case study 1-2: What is an “American” car?
• Simple question is difficult to answer Figure 1.1
– Honda Accord produced in Ohio?
– Chrysler minivan produced in Canada?
– Mazda based in Chicago used nearly 40%
of imported Japanese parts?

• Answers differ widely:

– Any vehicle assembled in America:
American car (using US made components)
– Automobiles produced by Japanese –
owned plants in the US: American car
(providing jobs for Americans)

Source: https://www.aftermarketnews.com/world-us-auto-parts-come/
 WE LIVE IN A GLOBAL ECONOMY (CONT.)
Case study 1-3: Boeing 787 Dreamliner – Made in the world

The final assembly for the Boeing 787

 takes place at Boeings’ plant in Everett,
Washington. The plant employs a mere 800
to 1,200 staff who are responsible for the
final assembly of the major components of
the aircraft.  The Boeing 787 Dreamliner
will have the construction of its major
components contracted out to
manufacturers around the globe. https://modernairliners.com/boeing-787-dreamliner/
boeing-787-dreamliner-assembly/
 WE LIVE IN A GLOBAL ECONOMY (CONT.)
Case study 1-3: Boeing 787 Dreamliner – Made in the world
Figure 1.2

https://modernairliners.com/boeing-787-dreamliner/boeing-787-
dreamliner-assembly/
 MEASURING INTERNATIONAL
INTERDEPENDENCE
Figure: World merchandise exports and imports by level of development

Volume index, 2012Q1=100 Source: WTO and UNCTAD

MEASURING INTERNATIONAL
INTERDEPENDENCE
Figure: Trade as share of GDP
MEASURING INTERNATIONAL INTERDEPENDENCE
Openness ratio: The ratio of imports and exports of goods and services of a nation to its
GDP Or the value of total trade as a percentage of GDP

Figure 1.5: Singapore – A country with more than 300% openness ratio
MEASURING INTERNATIONAL INTERDEPENDENCE
Openness ratio: The ratio of imports and exports of goods and services of a nation to its GDP Or the
value of total trade as a percentage of GDP

Calculate the openess ratio? - Comments

 MEASURING INTERNATIONAL INTERDEPENDENCE

• The economies of all nations are closely related to each other.

• The small and developing countries are more dependent on the world
economy than the large and developed countries???
⇒ The study of international economics has been important
⇒ To understand what is going on in the world today
⇒To become informed consumers, citizens and enterprises
 MEASURING INTERNATIONAL INTERDEPENDENCE
Figure 1.6: Growth in GDP and trade volume
worldwide from 2007 to 2023

• Growth rate of world

trade: more rapid growth
of world trade than world
production, 2000 - 2011

• In 2019-2020, the trade

decrease dramatically
due to covid-19
pandemic

Source: Statista
World merchandise trade volume and real GDP growth,
2011-2020

Source: WTO and UNCTAD

INTERDEPENDENCE: WHO TRADE WITH
WHOM?
Figure: Top Trading partners of the U.S

Why does the U.S. trade

most with these countries?

Source: Statista
 INTERDEPENDENCE: WHO TRADE WITH WHOM?
Figure: The Size of European Economies and the Value of Their
Trade with the United States

• The No.1 trading with the

US is Canada with the value
of trade over $664.8 billion
USD
• Top there trading partners
with the US are Canada,
Mexico and China
INTERDEPENDENCE: WHO TRADE WITH WHOM?

• The gravity model postulates that, other things equal, the larger
(and the more equal in size) and the closer the two countries are,
the larger the volume of trade between them is expected to be.

• The volume of trade in goods and services increases with the size
and decreases with proximity of trading partners.
INTERDEPENDENCE: WHO TRADE WITH WHOM?

The gravity model’s equation:

Tij= A x Yi x Yj/Dij
Where:
Tij: the value of trade between country i and country j
A: the constant
Yi: the GDP of the country i
Yj: the GDP of the country j
Dij: the distance between country i and j
INTERDEPENDENCE: WHO TRADE WITH WHOM?

 Other things (besides size and distance) that matter for trade:
• Cultural affinity: if two countries have cultural ties, it is likely that they
also have strong economic ties.
• Geography: ocean harbors and a lack of mountain barriers make
transportation and trade easier.
• Trade agreements between countries are intended to reduce the
formalities and tariffs needed to cross borders and, therefore, to increase
trade.
• Political factors, such as wars, can damage international trade a lot.
 INTERDEPENDENCE: WHO TRADE WITH
WHOM?
Cultural affinity
- If two countries have cultural ties, it is likely that they also have strong economic
ties
- For example: The trade between Vietnam-China
• China is the biggest trading partners of Vietnam, reaching $US 132.88 billion and
accounting for 24.2% of the total import-export value of the country in 2020
• The reason: Vietnam and China have a lot of similarities in culture and custom
such as literature (Nôm- the old writing system), architecture, clothing, religion
(Buddhism), food and holiday
 Architecture

Food Holiday Religion

 INTERDEPENDENCE: WHO TRADE WITH
WHOM?
• Geography: ocean harbors and a lack of mountain barriers make
transportation and trade easier
• For example, Netherlands and Belgium have traditionally been the point of
entry to much of northwestern Europe;
- Rotterdam in the Netherlands is the most important port in Europe, as
measured by the tonnage handled
- Antwerp in Belgium ranks second.
 Netherlands,
Belgium and
Germany are all
big trading
partners of the
US

Figure 10: Top 10 busiest cargo ports in Europe

Source: Eurostat
https://www.shiphub.co/top-container-ports-in-the-eu-2021/
 Port of Rotterdam
is the largest in
Europe and
outside Asia.

This port can

handle about
466.4 million tons
of cargo annually

Figure 11: Port of Rotterdam, Netherlands

Source: Shiphub
INTERDEPENDENCE: The International Flow of Labor and Capital

• All nations export and import capital as their investors take

advantage of foreign lending and investment opportunities, cover
risk, and diversify their portfolios.
• Nations that export more capital than they import are the net
capital exporters
INTERDEPENDENCE: The International Flow
of Labor and Capital
 INTERDEPENDENCE: The International Flow of Labor and Capital

• About 190 million people in the world live in a country other than the one in
which they were born—nearly 60 per cent of them are in rich countries (about 36
million in Europe and 38 million in the United States).
• People migrate primarily for economic reasons, but some do so to escape political
and religious oppression.
• The 38 million foreign-born people who live in the United States represent 12.5
percent of the U.S. population and 16.2 percent of the American labour force. Over
11 million, or nearly 30 percent, entered the nation illegally.
• Most nations impose restrictions on immigration to reduce the inflow of low-
skilled people.
• Migration is generally more restricted and regulated than the international flow of
goods, services, and capital.
BENEFITS AND COSTS OF GLOBALIZATION
BENEFITS AND COSTS OF
GLOBALIZATION
BENEFITS AND COSTS OF GLOBALIZATION

• Benefits:
– Faster economic growth
– Improved living standards and reduction of poverty
– Enabled international political and economic tensions to be resolved on a
rule-based approach
– Expand market
– Increase investment, etc.
 BENEFITS AND COSTS OF GLOBALIZATION

• Costs
–  Social and economic costs to globalization: structural unemployment,
brain-drain, less cultural diversity...
–  Individual countries need to undertake economic restructuring and reform
–  Increased interdependence increases vulnerability
–  Inadequate environmental codes resulting in the over exploitation of
resources and environmental detrition.
–  Increased competition.
 2. THE SUBJECT MATTER OF
INTERNATIONAL ECONOMICS
 THE SUBJECT MATTER OF INTERNATIONAL
ECONOMICS
International trade
policies
International trade
theories International trade
Migration

I.
E
International monetary system

International movement of resources

International Finance

Foreign exchange market BOP TNCs Investment

3. CURRENT INTERNATIONAL
ECONOMIC CHALLENGES
 CURRENT INTERNATIONAL ECONOMIC
CHALLENGES

• Trade protectionism in Industrial countries

• Deep poverty in many developing countries
• Excessive fluctuation and large disequilibria in the exchange rate
• The financial crisis in emerging market economies
• High structural unemployment in Europe
• Increasing competition from China and Job losses in the US and other advanced
nations
• Restructuring problems of transition economies
• Resource scarcity, environmental degradation, climate change and unsustainable
development
• Other challenges: Trade wars, Economic recessions in the context of COVID-19...
 SUMMARY
• Interdependence
• Gravity model
• International trade theory
• International trade policy
• International finance
• Globalization and Anti globalization
 KEY TERMS
Adjustment in balance of
payments
International trade policy

Antiglobalization
movement
Microeconomics
Globalization

International finance
Macroeconomics

Gravity model
Interdependence Foreign exchange market

International trade theory Open-economy macroeconomics

END OF CHAPTER 1!