CHAPTER 1 ― INTRODUCTION

1. What is the meaning of globalization? What is its advantage and disadvantage? Why is
there an anti-globalization movement?
Meaning of Globalization: Globalization refers to the process by which countries, businesses,
and people around the world become more interconnected and interdependent through increased
flows of goods, services, capital, technology, information, and people across borders. It involves
the integration of national economies into a global marketplace.
Advantages of Globalization:
 Economic growth: It boosts trade and investment, promoting economic growth worldwide.
 Access to markets: Countries and companies can reach broader markets.
 Technology transfer: Globalization facilitates sharing and diffusion of new technologies.
 Consumer benefits: Consumers gain access to a wider variety of goods and services at
lower prices.
 Cultural exchange: Promotes cultural awareness and exchange among nations.
Disadvantages of Globalization:
 Job displacement: It may lead to job losses in industries that cannot compete internationally.
 Income inequality: Benefits of globalization are unevenly distributed, increasing wealth
gaps.
 Loss of sovereignty: Countries may lose control over domestic policies due to global
agreements.
 Environmental degradation: Increased production and transportation can harm the
environment.
 Cultural homogenization: Risk of losing local cultures and traditions.
Reasons for Anti-globalization Movement: The anti-globalization movement opposes certain
effects of globalization, particularly those perceived as harmful to workers, the environment, and
national sovereignty. Activists argue that globalization benefits multinational corporations and
wealthy nations at the expense of poor countries and marginalized populations, undermining
labor rights, increasing inequality, and causing environmental harm. They call for more equitable
and sustainable global economic policies.
2. What are some of the most important current events that are part of the general subject
matter of international economics? Why are they important? How do they affect the
economic and political relations between the United States and Europe? the United States
and Japan?
Important Current Events:
 Trade disputes and tariffs: For example, US-China trade tensions impact global supply
chains.
 Brexit: The UK's exit from the EU has reshaped trade and regulatory relationships in
Europe.
 Global supply chain disruptions: Caused by COVID-19 pandemic and geopolitical
conflicts.
 Climate change policies: Affect energy trade and international cooperation.
 Technology and data regulation: Issues over digital trade, privacy, and intellectual property
rights.
Importance: These events affect trade flows, investment decisions, and economic growth
worldwide. They influence tariffs, market access, and regulatory frameworks, which in turn
impact businesses and consumers.
Effects on US-Europe Relations: Trade tensions or cooperation on issues like climate and
digital economy influence diplomatic ties. For instance, disagreements over tariffs can strain
relations, while collaboration on regulatory standards can strengthen ties.
Effects on US-Japan Relations: Economic agreements on trade and technology cooperation
reinforce strategic partnerships. Trade barriers or disputes may cause friction but overall relations
tend to emphasize mutual economic benefit and security cooperation.
3. How is international trade related to the standard of living of the United States? of other
large industrial nations? of small industrial nations? of developing nations? For which of
these groups of nations is international trade most crucial?
Relation to Standard of Living:
 United States and other large industrial nations: International trade allows access to
cheaper inputs and a wider range of goods, improving consumption choices and productivity,
thereby raising the standard of living.
 Small industrial nations: These countries often rely heavily on trade since their domestic
markets are small; access to foreign markets and technologies is essential for economic
growth and living standards.
 Developing nations: Trade can drive growth by providing markets for exports, technology
access, and foreign investment, which can improve incomes and living conditions.
Most Crucial Group: International trade is most crucial for small industrial nations and
developing nations due to their dependence on foreign markets and capital. Large industrial
nations are also highly engaged but have more diversified domestic economies.
4. How can we get a rough measure of the interdependence of each nation with the rest of
the world? What does the gravity model postulate?
Measuring Interdependence: One common rough measure is the ratio of a country’s total trade
(exports + imports) to its GDP. A higher ratio indicates greater economic interdependence with
the global economy.
Gravity Model Postulate: The gravity model in international trade postulates that bilateral trade
flows between two countries are directly proportional to the size of their economies (usually
GDP) and inversely proportional to the geographic distance between them. In other words, larger
economies trade more with each other, but trade decreases as the distance (and thus trade costs)
increases.
5. What does international trade theory study? international trade policy? Why are they
known as the microeconomic aspects of international economics?
International Trade Theory: This studies the reasons countries trade, the benefits of trade, and
how trade affects the allocation of resources. It analyzes concepts such as comparative
advantage, trade patterns, factor endowments, and gains from trade.
International Trade Policy: Trade policy examines the rules and regulations governments use
to control international trade, including tariffs, quotas, trade agreements, and subsidies. It looks
at how these policies affect welfare, market efficiency, and the distribution of income within and
between countries.
Microeconomic Aspects: They are called microeconomic because they focus on individual
agents such as firms, consumers, and markets, analyzing decisions about production,
consumption, and trade. They examine how trade affects prices, quantities, and welfare at the
micro level rather than aggregate national economic indicators.
6. What is the balance of payments, and what are foreign exchange markets? What is
meant by adjustment in the balance of payments? Why are these topics known as the
macroeconomic aspects of international economics? What is meant by open-economy
macroeconomics and international finance?
Balance of Payments (BOP): The balance of payments is a comprehensive record of all
economic transactions between residents of a country and the rest of the world during a specific
period. It includes trade in goods and services, capital flows, financial transfers, and changes in
foreign reserves. It is divided mainly into the current account (trade in goods and services,
income, and transfers) and the capital/financial account (investment flows and financial assets).
Foreign Exchange Markets: These are markets where currencies are bought and sold. They
facilitate currency conversion needed for international trade and investment and help determine
exchange rates.
Adjustment in the Balance of Payments: Adjustment refers to the process by which a country
addresses imbalances in its balance of payments—either deficits or surpluses—through changes
in exchange rates, monetary and fiscal policies, or changes in trade and capital flows to restore
equilibrium.
Why Macroeconomic Aspects: These topics deal with aggregate economic variables—national
income, exchange rates, inflation, and overall economic stability—rather than individual firms or
sectors. Hence, they belong to the macroeconomic side of international economics.
Open-Economy Macroeconomics and International Finance: Open-economy
macroeconomics studies how an economy interacts with the rest of the world, considering trade,
capital flows, and exchange rates. International finance focuses on financial transactions across
countries, including currency markets, foreign investment, and the effects of exchange rate
changes on economies.
7. What is the purpose of economic theory in general? of international economic theories
and policies in particular?
Purpose of Economic Theory in General: Economic theory aims to explain how economies
function by developing models that describe the behavior of individuals, firms, and governments.
It helps predict the effects of economic policies and external changes, enabling better decision-
making.
Purpose of International Economic Theories and Policies: These theories explain why
countries trade, how resources are allocated internationally, and the effects of trade and financial
policies on economies. The purpose of international economic policies is to guide governments
in managing trade and capital flows to maximize economic welfare, stability, and growth.
8. What simplifying assumptions do we make in studying international economics? Why
are these assumptions usually justified?
Common Simplifying Assumptions:
 Perfect competition: Many buyers and sellers with no market power.
 Constant returns to scale: Output changes proportionally with inputs.
 Two-country, two-good models: To simplify analysis.
 No transportation costs or trade barriers: For clearer theoretical insights.
 Full employment: Resources are fully utilized.
 Rational behavior: Agents maximize utility or profit.
Why Justified: These assumptions simplify complex realities to focus on fundamental economic
principles. They help build clear, tractable models to understand key mechanisms. Though
unrealistic in some respects, the insights gained often apply qualitatively to real-world situations.
9. Why does the study of international economics usually begin with the presentation of
international trade theory? Why must we discuss theories before examining policies?
Which aspects of international economics are more abstract? Which are more applied in
nature?
Starting with Trade Theory: Trade theory provides foundational understanding of why trade
occurs, how countries gain, and the factors shaping trade patterns. This theoretical foundation is
essential before analyzing policy effects.
Why Discuss Theories Before Policies: Policies are designed and evaluated based on
theoretical expectations. Without understanding the theory, it is impossible to predict or interpret
the outcomes of trade policies or to design effective interventions.
More Abstract Aspects:
 Theoretical models of trade patterns, gains from trade, and resource allocation are more
abstract.
 Macroeconomic models of exchange rates and balance of payments also tend to be abstract.
More Applied Aspects:
 Trade policy analysis (tariffs, quotas, trade agreements).
 Practical issues of exchange rate management, international monetary systems, and financial
crises are more applied.
10. Which are the most important international eco nomic challenges facing the world
today? What are the benefits and criticisms of globalization?
Important International Economic Challenges Today:
 Trade tensions and protectionism: Threaten free trade and economic cooperation.
  Climate change and sustainable development: Need global coordination for
environmental protection.
 Global inequality: Economic disparities within and between countries.
 Technological disruption: Impact on labor markets and global supply chains.
 Financial instability: Risks of currency crises and cross-border capital flows.
 Health crises (e.g., pandemics): Affect trade, travel, and economic activity worldwide.
Benefits of Globalization:
 Promotes economic growth and poverty reduction.
 Enhances access to goods, services, technology, and capital.
 Facilitates cultural exchange and global cooperation.
Criticisms of Globalization:
 Worsens income inequality and job insecurity in some sectors.
 Can lead to exploitation of labor and environmental degradation.
 Reduces national policy autonomy.
 Cultural homogenization and loss of local identity.
11. From your previous course(s) in economics, do you recall the concepts of demand,
supply, and equilibrium? Do you recall the meaning of the elasticity of demand? perfect
competition? factor markets? the production frontier? the law of diminishing returns? the
marginal productivity theory? (If you do not remember some of these concepts, quickly
review them from your principles of economics text or class notes.)
Demand: The quantity of a good or service consumers are willing and able to purchase at
various prices during a given period.
Supply: The quantity of a good or service producers are willing and able to offer for sale at
various prices during a given period.
Equilibrium: The point where quantity demanded equals quantity supplied, determining the
market price and quantity traded.
Elasticity of Demand: A measure of how much the quantity demanded of a good responds to a
change in its price. If demand changes a lot with price, it is elastic; if it changes little, it is
inelastic.
Perfect Competition: A market structure characterized by many buyers and sellers,
homogeneous products, free entry and exit, and perfect information, leading to firms being price
takers.
Factor Markets: Markets where factors of production (labor, capital, land) are bought and sold.
Production Frontier (Production Possibility Frontier, PPF): A curve showing the maximum
possible output combinations of two goods that an economy can produce using available
resources and technology efficiently.
Law of Diminishing Returns: As more units of a variable input are added to fixed inputs, the
additional output (marginal product) from each new unit eventually decreases.
Marginal Productivity Theory: The theory that factors of production are paid according to the
additional output they produce (marginal product).

12. From your previous course(s) in economics, do you recall the concepts of inflation,
recession, growth? marginal propensity to consume, multiplier, accel erator? monetary
policy, budget deficit, fiscal pol icy? (If you do not remember some of these con cepts,
quickly review them from your principles of economics text or class notes.)
Inflation: A general rise in prices of goods and services in an economy over time, reducing
purchasing power.
Recession: A period of declining economic activity, typically defined as two consecutive
quarters of negative GDP growth.
Growth: Increase in an economy’s capacity to produce goods and services, measured by rising
GDP over time.
Marginal Propensity to Consume (MPC): The fraction of additional income that households
consume rather than save.
Multiplier: The process by which an initial change in spending leads to a larger overall change
in national income.
Accelerator: The idea that investment demand is related to the rate of change of output or
income, meaning faster growth leads to higher investment.
Monetary Policy: Actions by a central bank to control money supply and interest rates to
influence economic activity and inflation.
Budget Deficit: When government spending exceeds its revenue in a given period.
Fiscal Policy: Government decisions about taxation and spending to influence the economy.