Global economic interdependence

ABSTRACT:

International Economics generally explains the patterns and consequences of transactions and interactions between inhabitants and different countries. It broadly covers international trade studies, international finance studies, international monetary economics and macroeconomic studies, as well as international migration. (Wikipedia 2012).

This paper seeks to explain to students the existence of global economic interdependence. It also seeks to explain to students that global economic interdependence occurs through trade, labor migration and capital flows.

The description of the course as explained in the paper covers international economy and globalization. The course also introduces students to international trade relations and international monetary relations.

The researcher will attain the objectives of the course description in the following manner: the researcher will research on the course and compile a research paper with a minimum of 15 pages.

The source for the description of this course is from Carbangh website. The text for this course was obtained from carbough, R.J, (2008). International economics. Milson Education Ltd: Canada.

Wikipedia (2012) explained that international economics encompasses ; international trade studies of goods and services and how commodities flow across international boundaries from supply and demand factors, economic integration, international factor movements , as well as policy variables such as tariff rates and trade quatas; international finance studies of the flow of capital across international finance markets, and the effects of these movements on exchange rates and international monetary economics and macro flows’ across countries. What this means is that international economics deals with everything that has to do with the management of scarce recourses in relation to the unlimited needs of the saviors countries of the world. It has to do with the interaction of demand and supply of the various factors of production to determine the fundamental relation between countries and among countries. It also requires the use of policy variables to secure protect the interest of the individual countries. What it also means is that governments intervene by using such policy variables as tariffs instead of looking up to the forces of the market alone.

Henry (2001) looked at global markets and international competition in his attempt to explain international economics. In try to do that he explained international markets; in which Henry discussed demand and supply from different countries. He also explained comparative advantage as the foundation for international trade. He further explained balance of trade and net receipts from trade in goods. According to him, the most impotent tools of economics are markets demand and supply” (Henry, 2001, p.3).

Henry indicated that a market is any place or mechanizing in which goods and services are traded. he further stand that markets determine prices both in “nominal currency terms and relative to one another “ 9p.3). What the foregoing means is that international trade occurs when the buyer and seller are in different countries. in other words, when one buys from or sells to a foreign partner, one engages in international transaction. Henry pointed out that international markets involve economic agents in different countries. He also indicated that, two currencies are usually involved in international transactions the buyer’s currency and the seller’s currency must be exchanged.

Henry (2001) raised certain critical issues about international economics which are worth nothing. According to Henry, one distinctive feature of international economics is that governments easily impose tax on transactions with quotas or use other non tariff barriers. And that, international economics is also characterized by the lack of labor mobility between countries. He added that, workers can more within a country with relative ease, where as international migration is more difficult and typically restricted by law. He equally stated that investment is also inhibited across national boundaries. 1 personally don’t international migration is totally absent in international economics, so to say there is lack of labor mobility is to over state the point about the relative ease with which labor moves.

Henry (2001) explained that comparative advantage is the cornerstone of international trade. He indicated that comparative advantage is a relative advantage in the production efficiency and is therefore the basic cause of international trade. The theory of comparative advantage rests on the important idea of opportunity costs. The opportunity cost of an action is the valve of its next best alternative. This happens when a country turns its resources to producing a particular goods or service that away from another goods or service that serves as best alternations to the one produced. The alternative forgone constitutes the opportunity cost.

According to Henry 92001) the balance of trade of a country comprises the country’s export revenue ming import expenditure on manufactured goods within a given period of time. Trade deficits occur if import revenue.

Henry (2001) pointed out that “one important issue is how a country can finance a trade deficit when its spending on imports is more than its revenue from exports. “ (P.337). Henry added that the issue of the effect of government deficits surpluses on balance of payment is also crucial. Government policy potential in influencing the balance of payment of a country is explained in the follow; import and export elasticity’s and the trade balance, the government budget and the balance of payment, as well as international roles of monetary and fiscal policy.

Jeffrey (2009) in explain the dynamics of international markets stated that “it is much easier to get goods that it is to get money”. (p.115). Jeffery like Henry also tries to explain the like between international trade and international economics. Jeffrey pointed out that all nations of the world have found it necessary to indulge in trade with their neighboring countries at one point in time, he cited the case of Japan which requires raw materials for its development, which she has veritable capacity to manufacture finished goods. What it means is that, Japan will have to import raw materials and export her finished goods to those countries she import from or other countries.

Jeffrey also cited United States which is said to be the largest economy in the world today, which imports raw materials not because she lacks them the way Japan lacks raw materials, but condition, in united stated states encourage the consumption of imparted goods that could be produced in US” American culture and living conditions encourage consumptions at all levels.” (p.116).

Parker (2012) explained international monetary relation as being interchangeable with international finance or international macroeconomics. He pointed out in the course dexription that international monetary relations deals with foreign exchange markets and why dollar rises and falls. Parker also explained that balance of payments accounting and the associated causes of trade deficits, capital mobility, government fiscal and monetary policies, exchange rate regimes and they sometimes change how economics behave are all covered under international monetary relations. Additionally, models of international macroeconomic cooperation and integration, the rules of international institutions such as international monetary fund are also part of the discussion of international monetary relations.

Schiller (1997) explained international economics by first looking at international trade. Schiller looks at international trade finding out why United States imports goods she could produce and does in fact produce. For example, United States imports televisions, fax machines, personal computers and calculators. The other way to ask the question of imports is, why dues the rest of the would buy computers, tractors, chemicals, airplanes and wheat from United States when many of such countries could produce such items for themselves? Better still, we need to understand whether their are some advantage to be gained from international trade?.

Schiller did not provide answers to these questions but went ahead to ask a few more questions:

- “What benefit, if any do we get from international trade?”
- “How much harm do imports cause, and to whom ?”
- “Should we protect our selves from ‘unfair trade’ trade by limiting imports”(P.771)

Schiller (1997) they moved on to discuss the motivation to international trade by explaining three issues. First why America involves in trade so much when she can produce many of the imported goods such as computers and cloths, Secord why America is not too curious about trade imbalances. Some people wonder why America will not produce many of the things she needs and can produce and only import a few things in order to balance the trade. But Schaller argued that it is absolutely rational to engage in trade in goods even if say the two countries could both produce such goods. According to Schaller, the reasoning behind America’s involvement in trade stems from the same reasons individuals specialize production of some goods, satisfying their remaining needs in the market place. He posed a question “why don’t you become self-sufficient, growing all your own food, building your own shelter, recording your songs? “. He indicated individuals don’t bother to become self-sufficient as posited above, perhaps for the simple reason, it makes more sense, and results in the enjoyment higher living standards and better music to produce just a few and purchasing the rest in the market. There is no gain saying that, when countries involve in international trade, they are seeking to express the same kind of commitment to specialization and to benefit from the fact that specialization culminates in increase total output. In other wards, when countries involve in international trade by practicing specialization, world total output increases over and above that produce by individual countries trying to produce most goods they need.

According to Schiller (1997), we can demonstrate the gain obtainable from international trade by examining the production possibilities of food countries; this demonstration shows that two countries that trade can together produce more output they could in the absence of trade. Schiller further explained that “is the increased world output and a high Handed of living in all trading countries.” (p.774). the principle in economics that illustrates the foregoing is called the theory of comparative advantage.

Schiller (1997) defined comparative advantage on the relative cost of producing different goods. The concept of opportunity cost explains the reasoning behind the theory of comparative advantage also described in other text as least cost disadvantage. Schiller used an example of US and France production of bread and wine. He showed that United and States can produce a maximum of 100 zillion loaves of bread per year of 50 zillion barrels of wine. He went on to say that the domestic opportunity cost of producing 100 loaves of bread is the 20 zillion of wine US has for gone.

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Fig.1 Wine Production

From the foregoing illustration in figure l , it is observed that the opportunity out of a loot of bread is ½ barrel of wine. While the opportunity cost of producing a loot of bread in France is a staggering 4 barrels of wine. Clearly, even if the production of bread in US is expensive, it is still far for bread production and France in wine production. By comparing the opportunity costs prevailing the two countries, we are exposed to the native of the theory of comparative advantage in this regard, the United States has comparative advantage in bread production, while France has comparative advantage in wine production because less wine has to be given up to produce bread in United States than in France. Where as the opportunity costs of producing bread is less in United States than in France. Schiller concludes that countries should specialize in what they are more efficient at producing. That is, goods for which they have the lowest opportunity cost, as in the foregoing illustration, United States should produce bread for which her opportunity cost (1/2 bared of wine as opposed to France, 4 barrels of wine). Schiller further stated that the comparative advantage argument is superior to that of absolute advantage, in the sense that, “it does not matter to us whether France could resources than United States and so long as the opportunity cost of wine is lower than bread, France should produce wine and trade in bred trade in bread. In the other words although France has absolute advantage in the production of both bread and wine, united states still have comparative advantage in bread production.(P.776).

The other concept of international trade Schiller (1997) explained was the terms of trade (ToT). According to Schiller, “terms of trade are the rate at which goods are exchanged.” That is, the amount good A given up for good B in trade. (P.777). Schaller indicated that opportunity cost is not only used to explaining the comparative advantage theory but also the concept of terms of treads. He further pointed out that the first clue to terms of terms of trade, lies in each country’s domestic opportunities. Recall that, in the bread and wine example, the opportunity cost of 1 barrel of wine in United States is 2 loaves of bread. While the opportunity cost of producing bread is ½ barrel of wine. What this means is that, United States will only export bread, when she gets at least I barrel of wine in exchange for 2 lowest of bread she ships over seas. In other words, United States need not involve in trade unless the international terms of trade are superior to her domestic opportunity costs. Schiller also further explained that because all counties will want to gain from trade, it is possible to predict that the terms of trade of any two countries will lie somewhere between their respective opportunity costs in production. The is to say, a loot of bread international trade will be worth at least 1/2 barrel of wine (the opportunity cost of united States) but not more than 4 barrels of wine (France Opportunity costs).

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