Chapter 1: Introduction: To International Economics

to International Economics
Chapter 1: Introduction
Dominick Salvatore
John Wiley & Sons, Inc.
LocUEH
Nguyễn Hữu Lộc
Agenda
1. Get to know each other
2. What is International Economics?
3. Course overview and structure
4.Trade Theory

About Huu Loc
 M.A from the Netherlands
 Have been teaching:

 at UEH for 34 years
 at UEH Victoria University of Wellington Joint Program over 10 years.
IU International University
UEL Vietnam National University
VNP Vietnam - the Netherland Programme

My research
International
Business
International
Economics
International Applied
Finance Economics

I need to know a bit more about you
(e.g. your major, year, where you are from…)

Opening Day Quiz
Which country made the shirt you are wearing?

A. China
B. Malaysia
C. Campuchia
D. Vietnam

Opening Day Quiz
Which country made your mobile communication device?

A. China
B. Germany
C. Korea
D. Taiwan
E. US

Terms in Vietnamese
Emerging economy Nền kinh tế mới nổi

Potential gains Lợi ích tiềm năng
Currency exchange Trao đổi ngoại hối
Excessive fluctuation Biến động vượt mức
Disequilibria in exchange Rates Mất cân bằng tỷ giá
Access to product variety Tiếp cận đa dạng sản phẩm

What is International Economics?
• International trade in goods and services

– An example: Sony Televisions


– A key issue – its not just imports!
• Exports of Boeing Aircraft
• Exports of Microsoft Software


– Its also not just for consumers!
• Trade in component parts
• Monitors for Dell Computers


– Services, not just goods!
• Lloyd’s of London


– International trade is expanding

– International trade is expanding
Source: World Trade Organization


• International ownership of assets
– Examples
• Foreign stock ownership
• Automobile assembly plants
– Toyota WWW link
• US government debt


• Currency exchange
– International transactions require conversions
between currencies
– Foreign exchange markets
• Federal Reserve Bank Exchange Rate Data WWW link

• Currency exchange
• International organizations
– World Trade Organization
• WWW link
– International Monetary Fund
• WWW link
– European Union
• WWW link

Standard of Living
• The International Economy generates

Interdependence
Economic growth in the United States spurs increased
demand for imports
Increased import demand by the United States
generates economic growth in other countries

Standard of Living

Interdependence
• Sources of potential gain
 Access to items not available domestically
 Coffee
 Bananas
 Tin
 Tungsten

Standard of Living

Interdependence
 Access to items not available domestically
 Access to lower cost products
 Access to greater product variety

Standard of Living

Interdependence
• Is it always a gain?
 Import competing sectors may experience production
and job losses
 This loss is at least partially (and potentially,
completely) offset by gains in the exporting sectors

Subjects in International Economics
• International Trade Theory

Analyzes the basis of and the gains from
international trade
Focuses on the microeconomic aspects of the
international economy


• International Trade Policy
 Examines the reasons for and the effects of
restrictions on international trade
 Analyzes the implications for International
Trade Theory of such restrictions


• Balance of Payments
 A summary statement of all the international transactions of the
residents of a nation with the rest of the world during a
particular period of time, usually a year.
 Provides a statistical summary of the size of international trade
and international asset ownership for a country


• Foreign Exchange Markets
 The institutional framework for the exchange of one
national currency into another
 Part of the study of International Finance (or Open-
Economy Macroeconomics) that is concerned with
the macroeconomic implications of the International
Economy


• Foreign Exchange Markets
• Adjustments in the Balance of Payments
 Focuses on the relationship between internal and external
aspects of the economy
 Examines how disequilibria lead to macroeconomic
adjustment under difference international monetary systems

Current International Economic Problems
• Trade Protectionism in Industrial Countries

What are the reasons for this protection?
What are the implications of this protection for the
industrial countries?
What are the implications of this protection for the rest
of the world?
How do regional trade blocks (the NAFTA, the
European Union, etc.) complicate efforts to reduce
this protection?


• Excessive Fluctuations and Large Disequilibria in
Exchange Rates
– Large exchange rate fluctuations may disrupt
international trade and harm economic growth
– What is the source of these fluctuations?
– How can the international financial system be
reformed to eliminate these fluctuations?


Exchange Rates
• Financial Crises in Emerging Market Economies
 The causes and consequences of a sudden collapse
in the value of a currency of an emerging economy


• High Structural Unemployment and Slow Growth
in Europe and Stagnation in Japan


Exchange Rates
• Job Insecurity from Restructuring and Downsizing
in the United States

Current International Economic
Problems

Exchange Rates
• Job Insecurity from Restructuring and Downsizing
in the United States
• Restructuring Problems of Transition Economies

• Deep Poverty in Many Developing Countries

Limits to a Global World
• Loss of sovereignty – who holds the power? Nation
states, MNEs, multilaterial organisations?
• Inequality - North/South Divide.
• Contagion effects: Economic, financial even political
events in one country increasingly effect other
countries.
• Global Problems – environmental damage,
sustainability, financial crises, terrorism, ethic conflicts,
piracy, computer viruses, GE, pollution, disease
(superbugs) …
Read more:
Chossudovsky, M. 2009. The Globalisation of Poverty and the New World Order. Global
Research.
LocUEH
• Economic conditions
• Cultural differences
• Barriers to trade and investment
• political, cultural, economic, technological, geographical
• Political uncertainty, war
• Resources
• Reduce, reuse, recycle; limits to consumerism
• Capitalist system
• not universally adopted, nor infallible
Policy-maker must recognise and appreciate these differences
LocUEH
LocUEH
E
C
O
N
O
M Visit and discuss different economies …
y
LocUEH
39
What is globalisation
• The shift towards a more integrated and interdependent

world economy
• The close integration of countries and people of the world
Integrated market
Flow of goods, services, capital, people etc.
Country market 1 Country market 2
Flow of goods, services, capital, people etc

Drivers of Globalisation
 MNES
 Transportation technology
 Communications technology
 Political ideology-peace
 Liberalisation of trade/investment
 Movement of people
LocUEH
MNEs
• Trade
• 1970 - 700 MNEs, 1998 - 60,000 (with 500,000 foreign affiliates)
• Finance
• 1997 FDI reached its peak, MNEs accounted for 25% of world GDP,
• FDI 33% of world exports
• M&As • 1970, US$10-20b exchanged daily on currency markets
• Alliances • 1997 FDI is growing faster than international trade – 39% increase
MNEs are so large and powerful that they have replaced nation-states as
the defining power structures of the global economy - of the world's
100 largest economies, 51 are corporations
2007 FDI peaked again - rising by 30% to reach $1,833 billion
2008 FDI declined by 15% due to the global financial crisis
Approximately 79,000 MNEs, and 790,000 affiliates
200 MNEs now control over ¼ world economic activity
Forex market today = US$trillions

Transportation Technology
Today:
The Shrinking Globe - Supersonic flight
Transportation (Concorde)
Singapore Airlines
1500 -1840 1850 - 1930 1950s 1960s
A380 – 500+
passengers, speed
Propeller Jet Mach 0.89
Steam locomotives aircraft passenger
Best average speed of
average 65 mph. 300 - 400 aircraft,
horse-drawn coaches
Steamships average mph. 500 - 700
and sailing ships, 10
36 mph. mph.
mph.
©The©The McGraw-Hill
McGraw-Hill Companies,
Companies, Inc., 2000 Inc., 2000

Communications Technology
• The world is
• 1990-95 - TV sets per thousand people doubled to 235
witnessing
unprecedented • Mid-1990s - number of minutes of international
transformation into an telephone communications doubled to 70 billion
information-based • 1998 - 140 million Internet users in 1998, by 2002 there
society. were 600 million
• This is driven by • 2000 – 12% of the world owned a mobile phone
major technological Implications for the spread of knowledge …
changes in
communications and Over half the GDP in major OECD countries
computers. is knowledge-based.
2000-2008 Internet users – tripled to 1,464 millon
 22% internet penetration (from 74% N.A to 5% Africa
 Mobile phone use expected to reach 50% of world’s population (3.3
billion subscribers) in 2008

Communications Technology- Industry 4.0

 Dominance of US
(Relative) Peace
market forces and
capitalism – but not
always peacefully! • End of the Cold War
• Change towards Capitalism and Market Ideology, but also
 Rise of emerging communism socialism still dominant in parts of Asia, Latin America
markets, especially • Bases of Power
China and continued  Colonial control (1870s-1945) – Imperialist power
dominance of Europe,  Cold war rivalry between Soviet/US blocs (1945-1990) – Military
coupled with financial power
problems in the US may  Informal, economic competition (1990 onwards) – Economic
undermine this power
dominance
 Rise of politically and Today:
faith-motivated conflict
Terrorist acts
 Multipolar world?
New US president (new view?)
Economic power
Implications for the future?

Liberalisation
 Unprecedented levels of
economic cooperation between 1980s -2010s
countries, especially with
 Macroeconomic stability – reduction of
regard to trade fiscal deficits
 International capital markets  Reduced role for government – deregulation
and privatisation
 Multilateral and supranational
 Greater openness to the outside-reduced
governance (G20) trade and investment barriers
 However: BREXIT (2017),
CATALONIA-SPAIN (Oct 2017)
TODAY
Almost all new regulations and agreements serve to promote trade and investment
 Regional economic integration is now firmly embedded in Europe, growing in
North (and to a lesser extent, South) America, and rapidly increasing in Asia

Movement of People
In the 20th Century, the world’s population grew from 1.6 to 6
billion – 2 billion in the last 30 years
Population growth concentrated in developing countries, and in
cities
TODAY
World population = 6.7 billion, 3.2 billion live in cities, 3.4
in rural areas
 Population growth has slowed to 1.3%
 190 million (3%) immigrants, 13.5 are refugees
 South-South and South-North immigration
 Travel - almost 900 million tourist arrivals
TOMMOROW
 2 billion added to world population in the next 30 years
Concentrated in developing countries, urban areas

49
Dimensions of globalisation
• We identify globalisation as a multifaceted

phenomenon along several dimensions
 Integration and interdependence of national economies
 Rise of regional economic integration blocs
 Growth of global investment and financial flows
 Convergence of consumer lifestyles and preferences
 Globalisation of production and services

50
Five dimentions of Globalization
 The term of globalisation has been adopted widely:

e.g. Economic globalisation involves a shift toward a system
based on a consolidated global marketplace for production
and consumption rather than on autonomous national
economies (Lubbers, 2000)

Globalisation of Production
• How much does Nike sell in a year (by USD)?

a) < 100 million
b) 100 million < R < 1 billion
c) 1 billion < R < 10 billion
d)＞ 10 billion
e) ＞ 100 billion
• USD $19 billion approximately, compared with…
 NZ GDP 2009: USD $116.5 billion
 Fonterra revenue 2012: NZD 15.7 billion

• Where does Nike sell its products?

• How many factories does Nike own in the world?

a) < 100
b) 100 < N < 500
c) 500 < N < 1,000
d) > 1,000
e) None of the above
• NONE! Subcontract to hundreds of factories worldwide

 A qualitative shift in the world economy has seen the
emergence of an integrated international production
system (IIP) or a ‘global factory’ (Buckley & Ghauri, 2004)
 Eg. Ford ‘Global Car’
 Parts/components sourced worldwide
 Assembly in three strategic locations
 Sales worldwide
Video Clip:
The Globalization of the Automobile Industry
http://jp.youtube.com/watch?v=7v_LLkEIYc0

55
 Underpinned by the front-wheel drive GM Delta II platform, GM has
confirmed the Cruze development program occurred under a global
design and engineering team.
 Most of the design work was conducted by GM Daewoo (now GM
Korea), with GM's Opel division responsible for most of the
engineering.
 This development program spanned over 27 months at a cost of US$4
billion. A total of 221 prototypes were tested in Australia, Canada,
China, South Korea, Sweden, the United Kingdom and the United
States. (Source: Wikipedia)

Another example of Globalisation of Production
(BMW)
 Automaker BMW employs 70,000 factory personnel at 23 sites
in 13 countries to manufacture its vehicles.
 The Munich plant builds the BMW 3 Series and supplies
engines to other BMW factories abroad.
 The South Carolina plant makes 500 vehicles daily.
 A plant in NE China makes cars in a local joint venture.
 A plant in India makes BMWs for the Asian market.
 BMW configures sourcing to minimise costs (by producing in
China), access skilled personnel (by producing in Germany),
and remain close to key markets (by producing in China, India,
and the United States).

Example: Global Factory
 Global factory NOT

limited to manufacturing
 Eg. Software
development and
distribution for global
banking firms

Globalization of production

59
Globalisation of production
The sourcing of goods and services from locations around
the globe to take advantage of national differences in the
cost and factors of production (such as labour, energy, land
and capital)
The emergence of an integrated international production
system (IIP) or a ‘global factory’ (Buckley & Ghauri, 2004)

(Made in Vietnam)

Vietnam in “an Airplane Global Factory”
 Mitsubishi Heavy Industries (a supplier of Boeing) has a
subsidiary of MHI Aerospace Vietnam Co., Ltd. (MHIVA),
specialized in airplane components in worldwide .
 2010, MHIVA produced trailing-edge flaps 4 per month, from 2011 its
produtivity up to 10 flaps per month by foreign parts and materials.
 4/ 2014 Nikkiso Vietnam was selected to produce Airbus’
components.
 By contract with a supplier component of sharklet Airplane Sharklet
Deparment of S Korea (KAL - ASD), from 8/2014, Nikkiso produced wing
spar by composite.

63
Globalisation of markets
 The merging of historically distinct and separate
national markets into one huge global marketplace.
 Standardisation of products, packaging, promotion
 The tastes and preferences of consumers are converging on
some global norm
 Firms help create the global market by offering the same
basic products worldwide

Globalisation of Markets
Exploitation and creation of global market segments, ie. ipod, Coca-

cola, industrial goods (chemicals)
 Google Earth & iphone http://jp.youtube.com/watch?v=v6BPuKaLel4
Standardisation of products and packaging

Châu Âu Product Châu Đốc Product

Globalisation of Capital
• International institutions (gold standard)
• Floating currencies
• Instantaneous international capital transaction and transfer
International portfolio investment
• Rise (and fall) of global financial institutions
 Contagion effect (eg. Asian financial crisis, US sub-prime mortgage
market)
Video:
The End Of Globalisation – World – Globalisation at a crossroads
http://jp.youtube.com/watch?v=2EVWE5XNeDc

Novel Features of Globalisation today
 Follows a prolonged period of inward orientation

(protectionism)
 International players include governments (whose role is
declining) as well as MNEs, multilateral agencies, NGOs
 Dramatic increase in flows of trade, investment, people
 Growing importance of international production (deep
integration) over trade and capital movements (shallow
integration)
 Information and knowledge driven
 Extended international division of labour

Globalization
 Increasing international economic connections
 International Trade
 International Asset Ownership
 Increasing role of International Organizations
in constraining domestic policies
 Increasing cultural homogeneity
 Increased domestic economic growth caused
by expanded international connections
Potential harm?
 Environmental concerns

Video: Globalization- pros and cons

• Good Luck! ‫حظ سعيد‬
सौभाग्य
Viel Glück
Lycka till!
祝您好运
buona fortuna 행운을 빕니다
Bonne Chance!
頑張って onnea удачи

Thanks for being a great first class in UEH!
Truly Global?
• Henry Ford ‘Model T’
• Theodore Levitt ‘Globalisation of markets’

Harvard Business Review (1983)
• ‘emergence of global markets for standardized
consumer products on a previously unimagined
scale’
• Daniel J. Boorstin ‘The Americans’ (various)

• ‘the Republic of Technology [whose] supreme law…
is convergence, the tendency for everything to
become more like everything else’
• Alan Rugman (2005) ‘globalization is a

myth…few MNEs are truly global and most
operate on a regional level instead’

Globalization
 The Anti-Globalization movement

 A loose coalition of groups opposed to globalization
 Concerns
• Environmental damage
• Loss of domestic labor protections
• Erosion of domestic sovereignty

Organization of the Text
• Part One: Chapters 2-4

– International Trade Theory


• Part Two: Chapters 5-6
– International Trade Policies


• Part Three: Chapters 7-9
– International Asset Ownership


• Part Four: Chapters 10-12
– Balance of Payments and Exchange Rate Markets


• Part Five: Chapters 13-14
– Open-Economy Macroeconomics


• Part Five: Chapters 13-14
• Part Six: Chapters 15-16
– The International Economy in Operation

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to International Economics

John Wiley & Sons, Inc.

1. Get to know each other

2. What is International Economics?

3. Course overview and structure

Nguyễn Hữu Lộc

 Have been teaching:

Nguyễn Hữu Lộc

Nguyễn Hữu Lộc

Nguyễn Hữu Lộc

Which country made the shirt you are wearing?

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Which country made your mobile communication device?

Nguyễn Hữu Lộc

Emerging economy Nền kinh tế mới nổi

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• International trade in goods and services

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• International trade in goods and services

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• International trade in goods and services

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• International trade in goods and services

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• International trade in goods and services

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Source: World Trade Organization

• International trade in goods and services

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• International trade in goods and services

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• The International Economy generates

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• The International Economy generates

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• The International Economy generates

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• The International Economy generates

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• International Trade Theory

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• International Trade Theory

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• International Trade Theory

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• International Trade Theory

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• International Trade Theory

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• Trade Protectionism in Industrial Countries

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• Trade Protectionism in Industrial Countries

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• Trade Protectionism in Industrial Countries

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• Financial Crises in Emerging Market Economies

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• Trade Protectionism in Industrial Countries