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CHAPTER 1 Introduction: An Overview of the World Economy CHAPTER OUTLINE I. Introduction increasing interdependence 1975 2002 world trade increases by 266 percent purpose of international economics The Scope of International Economics microeconomics macroeconomics international economics course outline chapters 1 10 microeconomics chapters 11 20 macroeconomics keeping international economics in perspective, i.e., domestic economic activity also is important importance of international economics the world economy differences among countries standards of living <a href="/keyword/international-trade/" >international trade</a> in services The Output of the World Economy the importance of the concept world GDP = $32.3 trillion an aside on the World Bank Table 1.1 Imports and Exports of Goods in the World Economy imports exports Table 1.2 Figure 1.1 world exports and world GDP PASSPORT: U.S. States and Regions in the World Economy <a href="/keyword/international-trade/" >international trade</a> in Services issues invisible trade measurement problems a new area of study II. III. IV. V. 1 2 Chapter 1 relative size $3 trillion Table 1.3 a. PASSPORT: The U.S. Position in the World Economy -- Figure 1.2 VI. Capital Flows in the World Economy multinational corporations (MNCs) portfolio capital foreign direct investment (FDI) Table 1.4 foreign exchange market Figure 1.3 the exchange rate VII.Trends in International Production and Trade Table 1.5 PASSPORT: The Growth of the World Economy: Historical Perspectives and Future Trends VIII. Globalization definition Table 1.6 A country perspective Figure 1.4 A world perspective analyzing globalization costs benefits Introduction: An Overview of the World Economy 3 TEACHING NOTES AND TIPS I. Introduction Notes The introduction begins by emphasizing the interdependence of the economies of the world. The second part is a listing of the topics covered in the chapter. Teaching Tip Introduce the concept of autarky by asking the students what their lives would be like if the U.S. did not interact with any other economies. II. The Scope of International Economics Notes This section shows students how to relate the new course to the courses they have already taken. The emphasis is on reviewing the concepts of microeconomics and macroeconomics and explaining how they relate to international economics. Teaching Tip Emphasize the example in the text on how economics is conceptually like medicine. International economics is one of the major branches of economics that uses concepts developed in other parts of the discipline. In this sense, it is analogous to a major branch of medicine like internal medicine. III. The Output of the World Economy Notes This section provides the basic data on the size of the world economy. It also provides information on population and GDP per capita for low-, middle-, and high-income economies. Finally, GDP and population are shown for the various types of economies as percentages of world totals. Teaching Tip This is a good place to talk about the relationship between international economics and economic development. The drastic differences in income levels in the world economy are clearly shown in the second column of Table 1.1. This is also a good place to interject the material on U.S. states and regions in the world economy. IV. Imports and Exports in the World Economy Notes This starts with how trade fits in with the other components of GDP. The data on world trade in goods for the three different types of economies are given in Table 1.2. Also, refer to Figure 1.1 to show that <a href="/keyword/international-trade/" >international trade</a> is becoming an increasingly important part of the world economy. 4 Chapter 1 Teaching Tip Ask the students to calculate the ratio of trade to total output and then ask them if their curriculum comes anywhere near that ratio in terms of &quot;international&quot; content. You've just explained why they need to take this course. V. <a href="/keyword/international-trade/" >international trade</a> in Services Notes The section starts with what <a href="/keyword/international-trade/" >international trade</a> in services is and moves to why it is an understudied part of international economics. Table 1.3 provides information on <a href="/keyword/international-trade/" >international trade</a> in services. This is an appropriate place to cover the position of the U.S. in the world economy. Teaching Tip Emphasize that <a href="/keyword/international-trade/" >international trade</a> in services is growing faster than <a href="/keyword/international-trade/" >international trade</a> in goods so that over time the former is getting more important relative to the latter. Also, mention that many of the students will be working in the service sector and their careers are likely to be influenced by this type of trade. VI. Capital Flows in the World Economy Notes This section begins by defining movements of portfolio capital and FDI and relating the concepts to the activities of MNCs. Table 1.4 and Figure 1.3 provide information on the relative size of these flows. Teaching Tip Emphasize that the size of these flows is so large that it is little wonder that the exchange rate is a closely watched figure. VII.Trends in International Production and Trade Notes The purpose of this section is to show the growth rates of output, trade, and population for the different types of economies. Notice from Table 1.5 that even as output growth has slowed in the world economy the growth of trade has increased. The boxed feature, PASSPORT: The Growth of the World Economy: Historical Perspective and Future Trends, emphasizes the historical aspects of world economic growth. Teaching Tip Emphasize the importance of the concept of world economic growth. Also, indicate that although the 1990s were a good decade for the U.S. it was not a particularly stellar decade for the world economy. If historical averages mean anything, there is an increasing probability that our students may experience another global boom during their careers. Introduction: An Overview of the World Economy 5 VIII. Globalization Notes The purpose of this section is to clarify the term globalization and how it relates to what will be covered later in the book. Notice from Table 1.6 and Figure 1.4 that some countries are more open to trade than others and that <a href="/keyword/international-trade/" >international trade</a> is becoming an increasingly important component of total economic activity. Teaching Tip Emphasize the importance of globalization. Also, indicate that globalization has both benefits and costs. A consistent approach throughout the book is that one has to consider both the benefits and the costs when assessing the impact of globalization. BRIEF ANSWERS TO PROBLEMS AND QUESTIONS FOR REVIEW 1. As countries have become more interdependent, the need for an understanding of international economics has increased. International economics explains the benefits and costs of the patterns of <a href="/keyword/international-trade/" >international trade</a> , investment, and other cross-border transactions that are currently observed in the world economy. The Internet search engine used by the student will determine the number of hits he/she will receive. The Google search engine yielded more than 697,000 hits. International economics is the study of the production, distribution, and consumption of goods and services on a worldwide basis. International economics is a blend of microeconomics and macroeconomics. It extends the study of microeconomics by examining the differences between domestic trade and <a href="/keyword/international-trade/" >international trade</a> . In addition, international economics is an extension of macroeconomics. This is done by allowing foreign economic conditions to affect the domestic economy and by allowing changes in government policies to affect sectors of the economy related to <a href="/keyword/international-trade/" >international trade</a> . The economic output of the world is not evenly distributed. The high-income countries produce approximately 81% of the world's output. The middle- and low-income countries produce approximately 16% and 3% of the world's output, respectively. The distribution of merchandise trade between low-, medium-, and high-income economies is not evenly distributed. High-income countries account for approximately 76% of the world's imports and 77% of the world's exports. For middle-income countries, the analogous percentages are 21% of the world's imports and 23% of the world's exports. The low-income countries provide approximately 3% of the world's exports and imports. The distribution of merchandise trade mirrors the distribution of world output. The major difference between output and trade is that middle-income countries have a slightly higher percentage of trade than output and high-income countries have a slightly lower percentage of trade than output. In part, this can be explained by <a href="/keyword/international-trade/" >international trade</a> in crude oil, as some middle-income countries are also major exporters of oil. 2. 3. 4. 5. 6 Chapter 1 6. The particular state that the student lives in will determine the answer to this question. However, most students will be surprised concerning the relative size of the various states in the U.S. when compared to the various countries of the world. <a href="/keyword/international-trade/" >international trade</a> in services is composed of trade in business services, such as transportation and insurance, and tourism. The distribution of <a href="/keyword/international-trade/" >international trade</a> in services among low-, medium-, and high-income economies is not evenly distributed. High-income countries provide approximately 80% of the world's imports and 82% of the world's exports of services. Middle-income countries account for approximately 16% of the world's imports and 15% of the world's exports. For low-income countries, the analogous percentages are 4% of the world's imports and 3% of the world's exports. The distribution of <a href="/keyword/international-trade/" >international trade</a> in services mirrors the distribution of world output. The major difference between output and trade in services is that high-income countries have a slightly higher percentage of trade in services than output. This can be partially explained by the service orientation of high-income countries. The world's three largest economies are the U.S., Japan, and Germany. However, the U.S. economy is more than twice the size of Japan's and more than four times the size of Germany's. In addition, the U.S. economy exports approximately $976 billion, whereas Japan and Germany export approximately $400 billion and $600 billion, respectively. Investments of portfolio capital include the purchase of financial assets, such as stocks, bonds, and bank accounts, in a foreign country. Foreign direct investment is a domestic corporation's purchase of real assets, such as plant and equipment in a foreign country. The trading of foreign exchange exceeds more than $1.2 trillion per day. This trading activity is designed to facilitate <a href="/keyword/international-trade/" >international trade</a> in goods, services, and the movement of capital between countries. The volume of foreign exchange trading for one month is greater than the total output of the world economy for a year. During the 1980s world output increased by 3.2% per year with low-income economies growing faster than the middle- and high-income economies. During the 1990s, world economic growth slowed to 2.5% per year, and only middle-income countries increased their rate of growth over the two decades. During the 1980s and 1990s, world exports grew faster than world production. For the 1980s, world exports grew at 5.2% per year and during the 1990s world exports grew at 6.9% per year. Over the two decades, only exports of the low-income economies have been growing at a slower rate than world exports. These trends indicate that while high-income countries dominate world output and trade, the focus of international economics and business will shift to production and trade in middle- and low-income countries as their absolute and relative size increases. The most recent ranking of countries listed the following as the top 20 countries: Ireland, Singapore, Switzerland, the Netherlands, Finland, Canada, the U.S., New Zealand, Austria, Denmark, Sweden, the U.K., Australia, the Czech Republic, France, Portugal, Norway, Germany, Slovenia and Malaysia. The A.T. Kearney/Foreign Policy Magazine Globalization Index incorporates 16 key indicators of global integration. The index quantifies economic integration by considering data on trade, foreign direct investment 7. 8. 9. 10. 11. 12. Introduction: An Overview of the World Economy 7 (FDI), portfolio capital flows, and income payments and receipts. The latter includes compensation of nonresident employees and income earned and paid on assets held abroad. It charts personal contact via levels of international travel and tourism, international telephone traffic, and cross-border transfers, including remittances. The index also gauges technological connections by counting the number of Internet users and the Internet hosts and secure servers through which they communicate. It also assesses political engagement by taking stock of the number of international organizations and U.N. Security Council missions in which each country participates, as well as the number of foreign embassies that each country hosts. MULTIPLE-CHOICE QUESTIONS 1. * The discipline of economics can be divided into: a. microeconomics and macroeconomics. b. stocks and flows. c. merchandise and services. d. unlimited wants and limited resources. The study of microeconomics focuses on the: a. interaction of <a href="/keyword/international-trade/" >international trade</a> and domestic production of goods and services. b. operation of the entire economy. c. role of the banking system in the economy. d. structure and performance of particular industries and markets. Macroeconomics focuses on the performance of: a. individual consumers. b. business firms. c. government agencies. d. the economy as a whole. International economics is a blend of: a. microeconomics and sociology. b. macroeconomics and medicine. c. regional economics and macroeconomics. d. microeconomics and macroeconomics. The majority of economic activity is: a. international activity. b. domestic activity. c. trade block activity. d. internationalization. 2. * 3. * 4. * 5. * 8 Chapter 1 6. * 7. * 8. GDP has several major exclusions, including: a. economic activity that does not occur in a market. b. items resold during the period. c. legally sold items that are non-taxable. d. all of the above. GDP for a country excludes which of the following? a. Consumption by the public b. Imports and exports c. Illegal economic activities d. Investment spending by businesses GDP is: a. the sum of the amounts of goods and services in the economy. b. a measure of the amount of capital in an economy. c. a measure of per capita economic growth of the economy. d. a monetary measure of final output produced during a given period of time. GDP is: a. measured in physical units. b. a measure of the economic growth rate. c. the total market value of all final goods and services produced in a country in a year. d. a per capita measure. GDP per capita is: a. the sum of consumer goods, investment goods, government services, and exports. b. a monetary measure of the economic growth rate of a country. c. the value of the factors of production used to produce a country's output. d. GDP divided by the total population. GDP per capita will always increase when: a. the population increases. b. the rate of economic growth increases. c. there is an increase in the rate of growth of the country's labor force. d. the rate of economic growth exceeds the rate of population growth. The best measure of how much output the average person would receive if all output were divided evenly among a country's population would be: a. GDP. b. population. c. percentage change in GDP. d. GDP per capita. * 9. * 10. * 11. * 12. * Introduction: An Overview of the World Economy 9 13. * Average living standards are best measured using: a. GDP. b. GDP per capita. c. the economic growth of a country. d. the amount of business investment in the economy. The size of the world economy is approximately: a. $15 trillion. b. $20 trillion. c. $32 trillion. d. $40 trillion. The total GDP of the world economy is approximately: a. $10 trillion. b. $15 trillion. c. $32 trillion. d. $66 billion. The average GDP per capita in the low-income economies is approximately: a. $451. b. $800. c. $3,200. d. $2,140. The average GDP per capita in the middle-income economies is approximately: a. $360. b. $1,123. c. $1,877. d. $8,672. The average GDP per capita in the high-income economies is approximately: a. $5,642. b. $10,000. c. $15,000. d. $26,964. The high-income economies account for about: a. 40% of world output. b. 55% of world output. c. 60% of world output. d. 81% of world output. The low-income economies account for approximately what percentage of world output? a. 3.5% b. 10% c. 15% d. 25% 14. * 15. * 16. * 17. * 18. * 19. * 20. * 10 Chapter 1 21. * 22. Approximately 81% of the world's economic output is produced by: a. low-income countries. b. middle-income countries. c. high-income countries. d. low- and middle-income countries. The high-income economies account for approximately what percentage of world output? a. 16% b. 40% c. 50% d. 81% Which of the following is a multilateral institution that makes loans to developing countries? a. The OECD b. The World Bank c. The WTO d. The INA Imports are: a. the part of domestic consumption from foreign producers. b. the part of domestic production sold to foreigners. c. the part of domestic investment that is purchased by foreigners. d. none of the above Total world imports and exports of merchandise are each a little over: a. $556 billion. b. $1 trillion. c. $6 trillion. d. $22 trillion. Total imports of merchandise in the world economy are approximately: a. $700 billion. b. $1 trillion. c. $2.2 trillion. d. $6.6 trillion. The total amount of merchandise exports in the world economy is approximately: a. $220 billion. b. $890 billion. c. $1 trillion. d. $6.5 trillion. * 23. * 24. * 25. * 26. * 27. * Introduction: An Overview of the World Economy 11 28. * 29. The middle-income economies account for about: a. 5% of world imports. b. 10% of world exports. c. 12% of world imports. d. 22% of world exports. The high-income economies account for approximately what percentage of world exports? a. 15% b. 20% c. 40% d. 74% The high-income economies account for approximately what percentage of world imports and exports of merchandise? a. 10% b. 25% c. 30% d. 76% The GDP of the U.S. is approximately: a. $10.4 trillion. b. $14.2 trillion. c. $20.4 trillion. d. $32 trillion. The largest economy of the world is: a. China. b. Japan. c. Germany. d. none of the above Which of the following is the world's largest economy? a. Japan b. Germany c. U.S. d. China The U.S. state with the highest Gross State Product (GSP) is: a. New York. b. Texas. c. Florida. d. California. * 30. * 31. * 32. * 33. * 34. * 12 Chapter 1 35. * Trade in services is less `visible' than trade in merchandise because: a. the value of services is more difficult to measure. b. services lower valuation makes them less important and thus less visible. c. the study of services is older and needs to be studied less. d. services are such a small percentage of GDP. The total amount of world exports of services is approximately: a. $300 million. b. $500 million. c. $3 billion. d. $1.5 trillion. Total imports of services in the world economy are approximately: a. $500 million. b. $1 billion. c. $500 billion. d. $1.5 trillion. A British firm building a facility in Tokyo to produce cars is engaging in: a. portfolio capital. b. foreign direct investment. c. indirect foreign investment. d. autarky. Foreign Direct Investment (FDI): a. is the same as a movement of portfolio capital. b. usually does not involve the participation of MNCs. c. usually involves a MNC investing in plant and equipment in a foreign country. d. is illegal in high-income countries. The daily volume of trading in the foreign exchange market is: a. $75 million. b. $100 million. c. $500 billion. d. $1.2 trillion. The economies in which country group are growing the fastest? a. Low-income b. High-income c. Middle-income d. All of the above The population in which country group is growing the slowest? a. Low-income b. High-income c. Middle-income d. None of the above 36. * 37. * 38. * 39. * 40. * 41. * 42. * Introduction: An Overview of the World Economy 13 43. * From 1990 - 2000 which group of countries grew the fastest? a. Low-income countries b. Middle-income countries c. High-income countries d. Low, middle and high-income countries grew at the same rate Which of the following time periods was one of unusually rapid growth in the world economy? a. 1850-1914 b. 1914-1945 c. 1929-1939 d. 1914-1920 Which of the following statements is false? a. The world economy grew at a fast rate between 1850 and 1914. b. The world economy grew at a slow rate between 1915 and 1945. c. The world economy grew at a fast rate between 1946 and 1973. d. The world economy has been growing at a fast rate since 1973. A relative measure of the importance of trade is: a. the dollar value of trade. b. trade as a percentage of GDP. c. the dollar value of trade adjusted for inflation. d. trade as a percentage of investment. Which of the following terms refers to the increasing importance of <a href="/keyword/international-trade/" >international trade</a> and investment either for a country or the world economy? a. Comparative advantage b. FDI c. Globalization d. Commercial policy 44. * 45. * 46. * 47. * TRUE FALSE QUESTIONS 1. F 2. F 3. F 4. F Economics can be divided into microeconomics and international economics. Microeconomics deals with operation of the overall economy such as consumption, investment, and government spending. International economics is a blend of macroeconomics and regional economics. The study of <a href="/keyword/international-trade/" >international trade</a> is completely unrelated to the principles of microeconomics. 14 Chapter 1 5. F 6. F 7. T 8. F 9. T The study of microeconomics has nothing to do with the study of international economics. There are no institutional differences between domestic trade and <a href="/keyword/international-trade/" >international trade</a> . Changes in U.S. macroeconomic policy may influence economies in the rest of the world. Changes in foreign economic conditions never have any noticeable impact on the U.S. economy. Most economic activity in the world is domestic economic activity. 10. F Imports and exports are much more important than purely domestic economic activity. 11. F <a href="/keyword/international-trade/" >international trade</a> is much more important than domestic economic activities such as consumption by the public or investment. 12. F We account for non-market and non-reported activities in the world economy by making a reasonable guess of their size and adding them to the official GDP statistics. 13. F The economic output of the world is evenly distributed among the different countries of the world. 14. F The value of the world economy's output as measured by GDP is approximately $50 trillion. 15. T There is a strong relationship between the distribution of world production and the distribution of world income. 16. T Average GDP per capita in low-income economies is approximately $451. 17. F The high-income economies account for approximately 90 percent of total world output. 18. T The output of the world economy is approximately $32 trillion. 19. T GDP per capita in middle-income economies is a little over $1,800 per year. 20. T The total GDP of the low-income economies is a little over $1 trillion. 21. T GDP per capita levels provide one possible measure of a country's standard of living. 22. F Merchandise trade includes <a href="/keyword/international-trade/" >international trade</a> in goods and services. 23. F Imports are that part of domestic production sold to foreign countries. 24. F Imports and exports of merchandise are each about 5% of world economic output. Introduction: An Overview of the World Economy 15 25. F The total value of exports in the world economy usually is larger than the total value of imports because the former is counted more carefully than the latter. 26. T World exports and imports are about 20% of world output, respectively. 27. T About 76% of world imports and exports are accounted for by the high-income economies. 28. F The middle-income economies account for most of world imports and exports because they have most of the world's income and production. 29. F A simultaneous drop in GDP in the U.S., Germany, and Japan would reduce the probability of a global recession. 30. F China is the world's largest economy based on total output. 31. T The Japanese economy is roughly half the size of the U.S. economy. 32. F The U.S. is currently the world's second largest economy after Japan. 33. T GDP per capita in the U.S. is approximately $36,000. 34. F The largest economy in the EU is France. 35. T The U.S. is the world's largest trading nation. 36. T Gross State Product refers to the economic output of a state in the U.S. 37. F <a href="/keyword/international-trade/" >international trade</a> in services is more important than <a href="/keyword/international-trade/" >international trade</a> in goods. 38. F As GDP per capita increases, the percentage of total economic activity allocated to services tends to decrease. 39. T Tourism is an example of <a href="/keyword/international-trade/" >international trade</a> in services. 40. F <a href="/keyword/international-trade/" >international trade</a> in services is easier to measure than <a href="/keyword/international-trade/" >international trade</a> in goods. 41. F The data on <a href="/keyword/international-trade/" >international trade</a> in services is just as accurate as the data for <a href="/keyword/international-trade/" >international trade</a> in merchandise. 42. F Economists know much more about <a href="/keyword/international-trade/" >international trade</a> in services than they know about <a href="/keyword/international-trade/" >international trade</a> in merchandise. 43. F <a href="/keyword/international-trade/" >international trade</a> in services is significantly larger than <a href="/keyword/international-trade/" >international trade</a> in merchandise. 16 Chapter 1 44. F <a href="/keyword/international-trade/" >international trade</a> in services is becoming less important in the world economy over time. 45. T <a href="/keyword/international-trade/" >international trade</a> in services is growing faster than <a href="/keyword/international-trade/" >international trade</a> in goods. 46. F <a href="/keyword/international-trade/" >international trade</a> in services is a little less than half of the size of <a href="/keyword/international-trade/" >international trade</a> in merchandise. 47. F Imports and exports of services in the world economy are approximately $7 trillion and $7.2 trillion, respectively. 48. T The ratio of imports and exports to GDP in the U.S. has been rising since World War II. 49. F In the U.S., for the last 50 years the percentage of GDP accounted for by imports and exports has been continually falling. 50. T Foreign direct investment is investment by a company outside of its home country in plant and equipment. 51. F Flows of FDI are substantially larger than <a href="/keyword/international-trade/" >international trade</a> in merchandise. 52. F Trading in the foreign exchange markets has reached a level of $15 trillion per day. 53. F The total output of the world economy in a month is greater than the total volume of foreign exchange trading for a month. 54. T <a href="/keyword/international-trade/" >international trade</a> has grown faster than world production during the 1990s. 55. F GDP growth in the high-income economies is usually higher than it is in low-income economies. 56. T GDP growth in low-income economies is usually higher than it is in high-income economies. 57. T For all types of economies imports and exports have grown faster than GDP. 58. F World economic growth is a constant that does not change much from year to year. 59. F In the 1990s, the economic output of the world has been growing at about a 10% annual rate. 60. T The global economic boom, which lasted from 1850 to 1914, was partially attributable to rapid advances in transportation and communication. 61. F <a href="/keyword/international-trade/" >international trade</a> is growing much more slowly than the world economy so it is becoming a smaller and smaller percentage of world economic activity. Introduction: An Overview of the World Economy 17 SHORT ANSWER ESSAY 1. 2. 3. 4. Describe the two different parts of international economics. Why is the discipline of economics similar to medicine? What is the economic output of the world? How is this output divided among low-, middle-, and high-income economies? What is the current division of the economic output of the world in terms of the share generated by the U.S., Germany, and Japan versus the rest of the world? How has the U.S. share changed since World War II, and how is it likely to change in the next 20 years? Describe the differences in GDP per capita among low-, middle-, and high-income economies. Give an example of each type of country. How important are imports and exports in relation to the economic output of the world? Why is trade in goods and services so concentrated among the high-income countries? What is the term used to describe the economic output of a state? Which country in the world economy is most similar to your state in terms of economic output? Describe the various components of <a href="/keyword/international-trade/" >international trade</a> in services. How important is this trade relative to trade in goods? Describe the differences between foreign direct investment (FDI) and movements of portfolio capital. Explain why <a href="/keyword/international-trade/" >international trade</a> in goods and services is becoming an increasing percentage of world economic output. In the last 150 years there have been three distinct periods of world economic growth. Describe these periods and explain why studying these past episodes may be relevant to your future career. Briefly describe what the term globalization means and what is the best way to analyze this term? 5. 6. 7. 8. 9. 10. 11. 12. 13. BRIEF ANSWERS TO SHORT ANSWER ESSAY 18 Chapter 1 1. International economics is the study of the production, distribution, and consumption of goods, services, and capital on a worldwide basis. As such, international economics is a blend of microeconomics and macroeconomics. First, we extend our study of microeconomics by examining <a href="/keyword/international-trade/" >international trade</a> . For example, each country has different codes or rules that make one national economy different from another. These national laws tend to partially isolate each country and cause significant differences in the way trade is conducted domestically versus internationally. Second, we extend our study of macroeconomics by considering the impacts of changes in the domestic economy on foreign economies, and the impacts of changes in government policies on the domestic economy. In a sense, economics is like medicine. Many physicians are general practitioners who can deal with practically any minor ailment. On the other hand, a large number of physicians are specialists who primarily work on one particular disease or system of the body. Economics has evolved in much the same way. The study of economics now is subdivided into a number of different areas such as labor economics, natural resource economics, economic development, and international economics. The total economic output of the world is approximately $32.3 trillion. Low-income economies account for 3.5% of total output; middle-income economies account for 15.9% of total output; and high-income economies account for 80.6% of total output. Currently, the U.S., Germany, and Japan account for approximately 32%, 6%, and 12% of total world output, respectively. Since World War II, the U.S. share of total output has declined and it is likely to continue to decline over the next 20 years as many middleincome economies are growing faster than the U.S. GDP per capita for low-income economies is approximately $451 (India); for middleincome economies GDP per capita is approximately $1,877 (Mexico); and for highincome economies per capita GDP is approximately $26,964 (U.S.). Exports and imports of goods are approximately $6.5 trillion and $6.6 trillion, respectively. In terms of percentages, exports and imports are approximately 20.0% and 20.4% of world output, respectively. The similarity in world production and trade is not difficult to explain. For a country to export a product, it first must produce the product. Since the high-income economies have the overwhelming part of world production, then a corresponding share of world exports originates in these economies. Similarly, imports are a form of consumption or investment spending that is produced in another country. For a country to import a product, the buyer has to have the income to purchase the good, i.e., effective demand. High-income economies are not a misnomer. Countries with high levels of income not only consume more domestically produced goods but also consume more foreignproduced goods. As a result, the high-income economies also have a high share of world imports. 2. 3. 4. 5. 6. 7. Introduction: An Overview of the World Economy 19 8. The output data for the states and regions are referred to as Gross State Product (GSP). GSP is analogous to the concept of GDP for a country. See the Appendix at the end of the text for a state to country comparison. <a href="/keyword/international-trade/" >international trade</a> in services consists of business services such as transportation and insurance. Individuals also consume international services with tourism being a prominent example. Imports and exports of services in the world economy are approximately $3.0 trillion. <a href="/keyword/international-trade/" >international trade</a> in services is approximately 23% of the size of <a href="/keyword/international-trade/" >international trade</a> in goods. Capital flows between countries (movements of portfolio capital) occur when domestic residents purchase equities or bonds in a foreign financial market. In addition, there are movements of capital between countries known as foreign direct investment (FDI). Foreign direct investment is the purchase of real assets (such as plant and equipment) by a domestic firm in a foreign country. During the 1980s, world economic output grew at 3.3% per year, and the low-income economies were growing faster than the other country groups. During the 1990s, world economic growth slowed to 2.7% per year, and only the middle-income economies increased their rate of growth over the two decades. The trends with respect to the growth rate of exports for the same time periods for the various economies indicate that during the 1980s, world exports grew at 5.2% per year, while the growth rate of world exports increased to 6.9% during the 1990s. These differences in the growth rates of production and exports imply several things. First, the faster production growth rates in the middle-income economies imply that over time, these economies will account for an increasingly important part of world output. Because income growth is tied to production growth, this means that income in these economies is also rising. Over time, the higher production growth is leading to a higher growth rate of exports of goods and services for these economies. Further, the rapid growth of GDP for these economies leads to a faster growth rate for imports. In general, three distinct periods of world economic growth have been identified over the last 150 years. From 1850 to 1914, the world economy experienced a prolonged period of rapid economic growth. Rapid advances in transportation and communication helped fuel the growth of trade both domestically and internationally in many countries. A period of slow growth began with the start of World War I and ended in 1945 with the end of World War II. This period included two world wars and a global depression. A prolonged period of rapid world economic growth began in 1945. The period 1945 to 1973 was a golden age for the world economy characterized by rapid increases in output and especially <a href="/keyword/international-trade/" >international trade</a> . Growth in trade was partially a function of the dismantling of many of the trade barriers erected during the 1930s. This &quot;golden age&quot; ended abruptly in 1973 with the rapid increase in oil prices. Since 1973, the world economy has been growing at an abnormally low rate (2%) compared to the two earlier booms. Globalization refers to the increasing percentage of GDP accounted for by <a href="/keyword/international-trade/" >international trade</a> either for a country or the world economy. Like all economic phenomenon, 9. 10. 11. 12. 13. 20 Chapter 1 globalization has both costs and benefits. In analyzing globalization, one needs to look at both of the factors. ... View Full Document

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