Chapter 1
The United States in a Global Economy
◼ Outline
Introduction: International Economic Integration
Elements of International Economic Integration
The Growth of World Trade
Capital and Labor Mobility
Features of Contemporary International Economic Relations
Multilateral Organizations
Regional Trade Agreements
Trade and Economic Growth
Twelve Themes in International Economics
The Gains from Trade and New Trade Theory (Chapters 3, 4, and 5)
Wages, Jobs, and Protection (Chapters 3, 6, 7, and 8)
Trade Deficits (Chapters 9, 11, and 12)
Regional Trade Agreements (Chapters 2, 13, and 14)
The Resolution of Trade Conflicts (Chapters 2, 7, and 8)
The Role of International Institutions (Chapters 2, 8, and 12)
Exchange Rates and the Macroeconomy (Chapters 10 and 11)
Financial Crises and the Global Contagion (Chapter 12)
Capital Flows and the Debt of Developing Countries (Chapters 2, 9, and 12)
Latin America and the World Economy (Chapter 15)
Export-Led Growth in East Asia (Chapter 16)
China and India in the World Economy (Chapter 17)
2 Gerber • International Economics, Seventh Edition
◼ Learning Objectives
After studying this chapter, students will be able to:
1.1 Discuss historical measures of international economic integration with data on
trade, capital flows, and migration.
1.2 Compute the trade-to-GDP ratio and explain its significance.
1.3 Describe three factors in the world economy today that are different from the
economy at the end of the first wave of globalization.
1.4 List the three types of evidence to support the idea that trade supports economic
growth.
◼ What Students Should Know after Reading Chapter 1
The goal of Chapter 1 is to examine international economic integration in historical perspective. Most
features of globalization aren’t new, and international economic integration is described as re-emerging
after a period of disruption during World War I, the Great Depression, and World War II. The chapter adds
a brief discussion of new features in the current wave of globalization, including regional trade agreements
and multilateral organizations. It also briefly discusses three types of evidence to support the idea of gains
from trade: historical experiences of similar countries such as North and South Korea; economic theory;
and large statistical comparisons of countries.
There are three aspects of international economic integration considered:
1. The growth of world trade. World trade has grown over the last sixty or seventy years but is roughly
comparable in percentage terms to trade in 1900.
Trade has become a larger share of national economies as measured by the:
This index does not tell us about a nation’s trade policies. Nations with higher figures for the index
of openness do not necessarily have lower trade barriers. Large economies are less dependent on
international trade and often have lower measures of openness than small countries do.
Figure 1.1 shows the openness index for six nations at different points in time. It shows the drop
Chapter 1 The United States in a Global Economy 3
2. Capital and labor mobility. Labor is much less mobile internationally now than it was in 1900.
For capital, it is somewhat more mobile. There is a difference between financial capital and physical
3. Movement of prices in different markets. The text does not develop this, but points out that in the
late 1800s wheat farmers, meat packers, and fruit growers all produced for a global market where
New issues in international trade and investment:
1. Deeper integration. Barriers to manufactured goods have fallen significantly as a result of a process
that began at the end of WWII. As formal restrictions on imports have been reduced, domestic
policies on issues such as the environment, labor, and fair market conditions have become the barriers
Economists are in agreement that the benefits of trade outweigh the costs, although there is a great deal of
disagreement over the form that trade agreements should take (and if preferential agreements are even
desirable), the role that multilateral institutions should play, and the optimal trade policy for developing
countries.
4 Gerber • International Economics, Seventh Edition
movement was centered in populist movements that are reminiscent of the rhetoric of some politicians and
commentators today.
This is not an argument about history repeating itself. Rather, it is an attempt to encourage students to
think of the period from World War I to the end of World War II as an aberration in the last 150 years of
world history. The long-run trend is toward integration, punctuated by protests and nationalistic
movements that temporarily halt or reverse the trend. When students are asked what they think is new
about today’s economy, they inevitably answer “technology.” E-mail, faxes, satellite systems, jet aircraft,
It is useful for students to realize two points. First, much of what has happened over the last fifty years has
been aimed at fixing something that was broken, not creating a new phenomenon. Second, the
international institutions that deal with the global economy are new and were created because of a shared
◼ Assignment Ideas
1. I like to use the trade-to-GDP ratio to contrast the importance of trade to various nations and to drive
home the fact that relative value matters. The United States is a huge participant in trade in dollar
terms, but it is not as dependent on trade as many other countries. Some countries’ entire economies
are dependent on international trade. I find students need some practice calculating and interpreting
the trade-to-GDP ratio.
Country
Exports
Imports
GDP
Goods
Services
Goods
Services
Bahrain
19.6
3.0
12.7
1.8
25.9
Brazil
256.0
36.7
236.9
73.1
2,492.9
Cambodia
6.9
2.2
9.3
1.4
12.9
Chad
4.6
0.2
2.4
1.9
9.3
New Zealand
37.7
9.9
37.1
10.8
158.9
Chapter 1 The United States in a Global Economy 5
Nigeria
116.0
2.3
55.0
22.5
244.0
2. For homework very early in the course, I sometimes assign each student a nation to study, with its
trade-to-GDP ratio as one of the pieces of information to collect. I also ask them to find out its
currency and its current exchange rate with the U.S. dollar, primary exports, imports, major trading
3. The chapter also lends itself to students developing some factual knowledge about U.S. trade history.
One possibility is to look at U.S. trade policy through various time periods. The U.S. had relatively
high tariffs (greater than 40 percent on average) throughout the second half of the nineteenth century.
In 1890, Congress passed the McKinley Tariff, followed in 1897 by the Dingley Tariff. Both tariffs
raised rates further from their already high base. President Wilson tried to reduce tariffs but was
thwarted by World War I. Rates in the 1920s fell, but the Tariff Act of 1930 (Smoot-Hawley Tariff)
◼ Answers to End-of-Chapter Questions
1. How can globalization and international economic integration be measured?
flows; (2) factor movements; and (3) convergence of prices (goods, factors, and assets).
2. In what sense is the U.S. economy more integrated with the world today than it was a century ago?
In what ways is it less integrated?
Answer: The WTO’s Trade Profile for the United States gives an average trade–to-GDP ratio of
28.3 for 2009-2011. That implies that the United States’ ratio is about 150 percent greater
6 Gerber • International Economics, Seventh Edition
Copyright © 2018 Pearson Education, Inc.
cross international boundaries (lower transaction costs) and the much greater variety of
assets that are traded. The need to protect against exchange rate risk is a key component
of today’s international financial markets and is a primary difference from the fixed
exchange rate standard of the past. The incidence of financial crises has not increased and,
as a metric of integration, it implies no increase in capital market integration.
The growth of regional trade agreements is also an indicator of increased integration.
A growing role for international institutions such as the IMF or World Bank may
also indicate an increase in international integration.
3. What does the trade-to-GDP ratio measure? Does a low value indicate that a country is closed to
trade with the outside world?
Answer: The trade-to-GDP ratio is a measure of the relative importance of trade to a national
economy. It is measured by the ratio of exports plus imports to GDP.
4. Describe the pattern over the last century shown by the trade-to-GDP ratio for leading industrial
economies.
Answer:
The ratio fell between 1913 and 1950, but then began to rise relatively rapidly. The main
causes of the pattern shown in Figure 1.1 are the two world wars and the Great Depression
5. Trade and capital flows were described and measured in relative rather than absolute terms. Explain
the difference. Which term seems more valid—relative or absolute? Why?
Answer:
Absolute values are the dollar amounts of trade and capital flows. Relative values are the
ratio of dollar values to GDP. Relative values are a better indicator of the importance of
trade and capital flows since they are proportional to the size of national economies. Large
Chapter 1 The United States in a Global Economy 7
6. In relative terms, international capital flows may not be much greater today than they were
a hundred years ago, although they are certainly greater than they were fifty years ago. Qualitatively,
however, capital flows are different today. Explain.
Answer: Major qualitative difference between late nineteenth and late twentieth century capital
flows include the fact that there are many more types of financial instruments available
7. What are the new issues in international trade and investment? In what sense do they expose national
economies to outside influences?
Answer: The new issues involve policy differences between nations that until recently were
considered the exclusive responsibility of local or national governments. Examples
8. Describe three kinds of evidence that economists use to support the assertion that economies open to
the world economy grow faster than economies that are closed.
Answer: Economists base these conclusions on three types of evidence: causal empirical evidence
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8. Describe the three kinds of evidence economists use to support the assertion that economies open to
the world grow faster than economies that are closed.
Answer: These are: (1) casual empirical evidence of historical experience; (2) economic logic and
deductive reasoning; and (3) evidence of statistical comparisons of countries.
(1) The historical evidence examines the experiences of countries that tried to isolate
themselves from the rest of the world. First, not only did trade protection exacerbate
the Depression of the 1930s, but it also led to the misery and tragedy of World War II.
(3) Even though the statistical evidence is not quite conclusive (mainly due to measuring