1. The U.S. economy is more integrated today than it was over a century ago because of the development of things like instantaneous communications, modern transportation, and relatively open trading systems. After World War I & II and the Great Depression, the world economy suffered as countries became de-integrated by closing their borders to foreign goods, capital, and people. These three indicators measure the degree of international economic integration and as World War II ended, most countries involved in the war lacked these indicators. Countries were so damaged from the wars and depression that economic linkages had to be used to repair the damage of the de-integrated counties.
Today, major economies in the world are more integrated as communication, modern transportation, and open trading systems allowing goods to move from country to country at a low cost have increased. This sign of furthered integration began in the 1950’s as trade barriers were lowered after the second world war. Increased openness of capital markets in the 1970’s also encouraged financial integration around the world. The development of the Internet and other telecommunications in the 1990’s pushed economic integration even further on the global scale. This development of instantaneous communication, rapid transportation, and easily available foreign products have furthered integration by easily and quickly providing people the ability to integrate with people and markets outside of the U.S. However, as technology and methods lessen the burden integration has on people. It is easy to lose sight of integration because most of what we buy are wholly or partially domestic products. For example, about 83.4% of goods and products purchased in the U.S. are domestic compared to in 1890 where domestically produced goods and services was 92%. This percent chance from 1890 to 2016 has not drastically dropped despite the massive innovation in technology and ability to integrate with the rest of the world and as a country we are pretty much still as dependent on American products as we were in the 19th century.
2. Trade to GDP ratio measures the relative importance of international trade in a nation’s economy by adding the sum of exports plus imports, divided by the GDP. The GDP ratio does not provide any information about a nation’s trade policy o barriers but large countries are less dependent on international trade because they are able to reach optimal production size without having to tap into foreign markets. In contrast, smaller countries tend to have higher ratios of trade to GDP. Generally, smaller countries trade more than larger ones because they cannot efficiently produce a wide range of goods and must rely on trade to a greater extent.
3. The four leading industrial economies and their trade to GDP ratios over the past century are the Netherlands, United Kingdom, Japan, and the U.S. Figure 1.1 shows a decline in trade between the beginning of World War I and the 1950’s in all four countries. After 1950, each country’s trade to GDP ratio increases slightly up until 1973 and in 2013 each country’s ratio nearly doubles. Japan and the U.S. who have the largest populations remain at a low ratio where the Netherlands with the smallest population has the highest ratio. In conclusion, figure 1.1 shows that smaller countries trade more than the larger ones because they cannot efficiently produce a wide range of goods and must rely on trade more than the larger countries which would result in a higher trade to GDP ratio.
4. Absolute terms are the dollar amounts of trade and capital flows while the relative terms are the ratio of dollar values to GDP. I believe the relative terms seem more valid because they represent the size of the economy in which it is referring to. Similar to figure 1.1, U.S. and Japan had the largest economies out of the 4 countries measured and their trade to ratio GDP was much lower than that of Netherlands of which had the smallest population. Taking the ratio of dollar values to GDP would provide more accurate information when trying to indicate the importance of trade and capital flows of a nation.
5. Economists believe the benefits of trade outweigh the costs and that openness to the world economy is a superior policy compared to closing off a country. Supporting their stance, economists have three facts of evidence to back up their points. There evidence is: casual empirical evidence of historical experience, evidence based on economic models and deductive reasoning, evidence from statistical comparisons of countries. These points conclude that economies who are open grow and prosper more than closed ones.
Economists focused on historical experience because they have seen how countries who tried to isolate themselves from the world economy by shutting flows of goods, capital, and labor have been affected by closing their economy. This strategy worsened the Great Depression and led to World War II. Other examples of countries divided by war with one side having a closed economy, while the other open include Germany (East vs. West) and Korea (North vs. South).
Evidence based on economic models and deductive reasoning have been used by economists by suggesting the casual mechanisms that lead from trade to faster growth. The benefits of increasing innovation, competitive pressure to raise productivity levels, and access to new technology and ideas that are fostered by trade are positive factors. To consumers, trade provides a larger variety of goods and offers them at a lower price.
The statistical evidence of the benefits of more open economies comes from comparison of large samples of countries over different periods. Results from the statistical tests consistently show that open economies grow faster but these results cannot be viewed as absolutely conclusive. However, with trade theory and the empirical evidence taken from the historical experiences, the statistical evidence provides more support that trade is beneficial to a country.
Chapter 2
2. Public goods are goods that are nonexcludable and nonrival. Nonexcludable means that the normal price mechanism does not work as a way of regulating access. Nonrival means that no matter how much someone consumes a certain good it will not reduce the amount for someone else. In contrast a private good is one that is excludable and rivalrous meaning that someone can exclude someone from consuming the good and having someone consume the good will affect the consumption of the other, the two people are rivals in consumption. An example of a private good could be an individual item like a piece of pie. With this item, the consumer can exclude others from eating it and by eating the piece of pie, the consumer is diminishing the amount left for the other possible consumers. A popular example of a public good is air. With air, it is impossible for the consumer to exclude someone else from consuming air to breathe and it includes everyone. Also, air is non-rivalrous because someone’s consumption of air will not reduce the amount left for another consumer and there is no rivalry in breathing air between two or more consumers.
3. The International Monetary Fund, also known as the “lender of last resort”, provides loans to its members under different programs for the short, medium, and long terms. The main purpose of the IMF is to assist in the creation of a stable, crisis free, system of international payments between countries. The IMF is funded by a quota which is proportional to a country’s economy and voting rights. The IMF prevents crisis and contagious economies and provides technical and standards assistance to countries that have debt problems or an unstable currency. The most observable role of the IMF is to intercede, by invitation, whenever a nation experiences a crisis in its international payments. The IMF also has its own currency called and SDR, or special drawing right.
The World Bank has the same membership and organizational structure as the IMF. This organization’s members buy shares that convey voting rights on policy proportional to the shares. The World Bank believed by rebuilding the economy of countries around the world will decrease the likelihood of war. The original purpose of this organization was to provide financing mechanisms for rebuilding Europe after World War II but its capital reserves were inadequate to the task. The U.S. then shifted the World Bank to have more control over the reconstruction funds rather than routing them through an international organization. The World Bank then moved toward assisting development in non-industrial economics. Non-industrial economics such as humanitarian reasons and expanding markets and helping through loans and technical assistance.
The General Agreement on Trades and Tariffs (GATT) functions through a series of trade rounds in which countries periodically negotiate a set of incremental tariff reductions. The main purpose is to provide a forum for discussing trade rules and a mechanism for gradually opening markets to more international trade. Key obdurate issues that the GATT wished to address were dumping, subsidies, and nontariff barriers to trade. The GATT was initially focused on tariff reduction and elimination of quotas by promoting freer trade and proportional tariff reductions that require each country to reduce tariffs by the same percentage but tariffs remain different. The two guiding principles of the GATT are national treatment and nondiscrimination and all WTO members must adhere to these rules when trading with other WTO members. National treatment means that foreign goods must be treated the same as national goods. Nondiscrimination prohibits different tariffs or rules for different countries, the principle of most favored nation status.
The Uruguay round created the WTO to serve as the umbrella organization for all agreements by extending trade agreements into services, agriculture, patent protections, international investment, and others. The GATT and WTO remain the core set of international trade rules but the WTO continues trade talks and sector-specific discussions between comprehensive rounds of negotiations.
4. Free riding means that there is no incentive to pay for public goods because people cannot be excluded from consumption. Governments often use their powers to tax as a way to force people to pay for the goods rather than free riding A decline in a nation’s economy results in the nation increasing its trade barriers in order to safeguard domestic workers all while maintaining exports and bringing in money. This also manipulates other countries who may have a low trade barrier while not accepting the imports. Since tariff binding prevents the nation from raising tariffs except under specific circumstances, it is inefficient for them to only export and the country will not be able to keep the blocked imports from reaching their country. In the end, blocking imports hurts the country more than it helps when they’re struggling economically.
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