Chapter 1
THE INTERNATIONAL ECONOMY AND GLOBALIZATION
CHAPTER OVERVIEW
This chapter introduces students to the international economy and to globalization. The first part of the chapter
emphasizes the high degree of economic interdependence that characterizes today’s economies. Economic
interdependence includes international trade and international finance.
The chapter also focuses on the United States as an open economy. Data is provided that shows U.S. exports
as a percent of gross domestic product and the value of U.S. trade with its major trading partners. The chapter
notes that many U.S. firms source a portion of the production of their goods in foreign countries, and that goods
from all over the world are available in our local stores.
The chapter discusses the nature of international competitiveness—for firms, industries, and nations. It is noted
that exposure to global competition tends to improve the efficiency of firms.
A new section discusses the ongoing debate about whether free trade should apply to cigarettes. Free trade
normally increases consumption of a product, but where cigarettes are concerned, is this a good thing? Do
countries have the right to ban products they deem unhealthy?
BRIEF ANSWERS TO STUDY QUESTIONS
1. Interdependence among today’s economies reflects the historical evolution of the world’s economic and
2. Proponents of an open trading system maintain that free trade leads to lower prices, the development of
more efficient production methods, and a greater range of consumption choices. Free trade permits
3. For the United States, growing economic interdependence has resulted in exports and imports increasing
5. The chapter describes three fallacies of international trade:
6. International competitiveness refers to the extent to which the goods of a firm or industry can compete in
the marketplace; this competitiveness depends on the relative prices and qualities of products. No nation
7. Researchers have found that global competitiveness is a bit like sports. You get better by playing against
8. International trade benefits most workers, especially those in exporting industries. In addition to providing them
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However, workers in import-competing industries often feel threatened from competition of cheap foreign labor.
9. Among the challenges confronting the international trading system are maintaining fair standards for labor and
promoting environmental quality.
10. The threat of international terrorism tends to slow the degree of globalization and also make it become costlier.
With terrorism, companies must pay more to insure and provide security for overseas staff and property.