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Global Economic Issues and Policies First edition Global Economic Issues and Policies First edition

On the Front side 1. Your Name (First and Last); Include your ID # On the Front side 1. Your Name (First and Last); Include your ID # 2. List of Economics course you have taken so far 3. Briefly describe how you want the lectures/ discussions/tests on this course to be organized University of Minnesota-Duluth, Department of Economics, Summer 2005 2

On the back side 1. What is the most Important GLOBAL ISSUE today? Why? On the back side 1. What is the most Important GLOBAL ISSUE today? Why? University of Minnesota-Duluth, Department of Economics, Summer 2005 3

Global Economic Issues and Policies First edition Chapter 1 Understanding the Global Economy Global Economic Issues and Policies First edition Chapter 1 Understanding the Global Economy

1. Why study global economic issues and policies? 2. How important is the global 1. Why study global economic issues and policies? 2. How important is the global market for goods and services? 3. How important are the international monetary and financial markets? University of Minnesota-Duluth, Department of Economics, Summer 2005 5

4. What are market supply and demand? 5. What are consumer surplus and producer 4. What are market supply and demand? 5. What are consumer surplus and producer surplus? 6. How are market prices determined? University of Minnesota-Duluth, Department of Economics, Summer 2005 6

Global Economic Policy and Issues • Globalization Ø The increasing interconnectedness of peoples and Global Economic Policy and Issues • Globalization Ø The increasing interconnectedness of peoples and societies and the interdependence of economies, governments, and environments. • Economic Integration Ø The extent and strength of REAL-SECTOR and FINANCIAL-SECTOR linkages among national economies. University of Minnesota-Duluth, Department of Economics, Summer 2005 7

The Global Market for Goods and Services • Real Sector Ø A designation for The Global Market for Goods and Services • Real Sector Ø A designation for the portion of the economy engaged in the production and sale of goods and services. • Financial Sector Ø A designation for the portion of the economy in which people trade financial assets. University of Minnesota-Duluth, Department of Economics, Summer 2005 8

Global Economic Policy and Issues • Economic Integration Ø The extent and strength of Global Economic Policy and Issues • Economic Integration Ø The extent and strength of REAL-SECTOR and FINANCIAL-SECTOR linkages among national economies. Ø Depends on… v The volume of international trade in the real sector v The global market for goods and services v The volume of trade in the international monetary, and financial markets University of Minnesota-Duluth, Department of Economics, Summer 2005 9

Table 1 -1 The Top Twenty Globalized Nations Source: Foreign Policy http: //www. foreignpolicy. Table 1 -1 The Top Twenty Globalized Nations Source: Foreign Policy http: //www. foreignpolicy. com. University of Minnesota-Duluth, Department of Economics, Summer 2005 10

Figure 1 -1 Growth of Global Trade in Goods and Services: Source: International Monetary Figure 1 -1 Growth of Global Trade in Goods and Services: Source: International Monetary Fund, World Economic Outlook, various issues. University of Minnesota-Duluth, Department of Economics, Summer 2005 11

Figure 1 -2 Selected Individual Nations’ Trade in Goods and Services Source: International Monetary Figure 1 -2 Selected Individual Nations’ Trade in Goods and Services Source: International Monetary Fund, International Financial Statistics, various issues. University of Minnesota-Duluth, Department of Economics, Summer 2005 12

The International Monetary and Financial Markets • Foreign Exchange Market Ø A Market (involving The International Monetary and Financial Markets • Foreign Exchange Market Ø A Market (involving private banks, foreign exchange brokers, and central banks) through which households, firms, and governments buy and sell national currencies. • Foreign Direct Investment Ø The acquisition of assets that involves a long-term relationship and controlling interest of 10 percent or greater in an enterprise located in another economy. University of Minnesota-Duluth, Department of Economics, Summer 2005 13

Table 1 -2 Annual Turnover (Value) in Foreign Exchange Markets Source: Held, David, Anthony Table 1 -2 Annual Turnover (Value) in Foreign Exchange Markets Source: Held, David, Anthony Mc. Grew, David Goldblatt, and Jonathan Perraton, Global Transformations, p. 209; Bank for International Settlements, Central Bank Survey of Foreign Exchange and Derivatives Market Activity, 1998, International Monetary Fund, World Economic Outlook, 1998, 2001. University of Minnesota-Duluth, Department of Economics, Summer 2005 14

Table 1 -3 Global Foreign Direct Investment Flows Source: UNCTAD, Handbook of Statistics, various Table 1 -3 Global Foreign Direct Investment Flows Source: UNCTAD, Handbook of Statistics, various issues and author’s estimates. University of Minnesota-Duluth, Department of Economics, Summer 2005 15

Figure 1 -3 Private Capital Flows to Emerging Economies Source: International Monetary Fund, Annual Figure 1 -3 Private Capital Flows to Emerging Economies Source: International Monetary Fund, Annual Report, and International Capital Markets, various issues. University of Minnesota-Duluth, Department of Economics, Summer 2005 16

Understanding Global Markets: Some Basic Economic Concepts University of Minnesota-Duluth, Department of Economics, Summer Understanding Global Markets: Some Basic Economic Concepts University of Minnesota-Duluth, Department of Economics, Summer 2005 17

Some Basic Economic Concepts • Demand Ø The relationship between the prices that consumers Some Basic Economic Concepts • Demand Ø The relationship between the prices that consumers are willing and able to pay for various quantities of a good or service for a given time period, all other things constant. University of Minnesota-Duluth, Department of Economics, Summer 2005 18

Table 1 -4 An individual Consumer’s Demand Schedule University of Minnesota-Duluth, Department of Economics, Table 1 -4 An individual Consumer’s Demand Schedule University of Minnesota-Duluth, Department of Economics, Summer 2005 19

Some Basic Economic Concepts • Law of Demand Ø An economic law that states Some Basic Economic Concepts • Law of Demand Ø An economic law that states that there is an inverse, or negative, relationship between the price that consumers are willing and able to pay and the quantities that they desire to purchase, Ceteris paribus. University of Minnesota-Duluth, Department of Economics, Summer 2005 20

Some Basic Economic Concepts • Supply Ø The relationship between the prices of a Some Basic Economic Concepts • Supply Ø The relationship between the prices of a good or service and the quantities supplied to the market by producers within a given time period, all other things constant. University of Minnesota-Duluth, Department of Economics, Summer 2005 21

Some Basic Economic Concepts Table 1 -5 An individual Firm’s Supply Schedule University of Some Basic Economic Concepts Table 1 -5 An individual Firm’s Supply Schedule University of Minnesota-Duluth, Department of Economics, Summer 2005 22

Some Basic Economic Concepts • Law of Supply Ø An economic law that states Some Basic Economic Concepts • Law of Supply Ø An economic law that states that there is a positive or direct relationship between the prices producers receive and the quantities that they are willing to supply to the market. University of Minnesota-Duluth, Department of Economics, Summer 2005 23

Some Basic Economic Concepts • Presenting Demand Supply Ø Various forms: v Table: v Some Basic Economic Concepts • Presenting Demand Supply Ø Various forms: v Table: v Graph: v Mathematical Equation: University of Minnesota-Duluth, Department of Economics, Summer 2005 Schedule Curve Function 24

Some Basic Economic Concepts • The Demand Schedule Table 1 -4 An individual Consumer’s Some Basic Economic Concepts • The Demand Schedule Table 1 -4 An individual Consumer’s Demand Schedule Ø tabulates the price the consumer is willing and able to pay for various quantities of a good or service during a specified time period, all other things held constant. University of Minnesota-Duluth, Department of Economics, Summer 2005 25

Some Basic Economic Concepts • The Supply Schedule Table 1 -5 An individual Firm’s Some Basic Economic Concepts • The Supply Schedule Table 1 -5 An individual Firm’s Supply Schedule Ø tabulates the minimum price a supplier is willing to accept for various quantities supplied of a good or service. University of Minnesota-Duluth, Department of Economics, Summer 2005 26

Figure 1 -4 The Demand for and Supply of Gasoline University of Minnesota-Duluth, Department Figure 1 -4 The Demand for and Supply of Gasoline University of Minnesota-Duluth, Department of Economics, Summer 2005 27

Some Basic Economic Concepts • Determinants of demand supply Ø What factors influence demand Some Basic Economic Concepts • Determinants of demand supply Ø What factors influence demand and/or supply? University of Minnesota-Duluth, Department of Economics, Summer 2005 28

Factors Influencing Demand Supply • Demand Factors Ø Changes in consumer preferences Ø Changes Factors Influencing Demand Supply • Demand Factors Ø Changes in consumer preferences Ø Changes in income Ø Changes in the prices of related goods Ø Changes in the number of consumers University of Minnesota-Duluth, Department of Economics, Summer 2005 29

Factors Influencing Demand Supply • Supply Factors Ø Changes in the cost and availability Factors Influencing Demand Supply • Supply Factors Ø Changes in the cost and availability of inputs Ø Advances in technology Ø Changes in the prices of related goods of services Ø Taxes and producer subsidies Ø Change in the number of producers University of Minnesota-Duluth, Department of Economics, Summer 2005 30

Table 1 -6 Factors Influencing Demand University of Minnesota-Duluth, Department of Economics, Summer 2005 Table 1 -6 Factors Influencing Demand University of Minnesota-Duluth, Department of Economics, Summer 2005 31

Table 1 -7 Factors Influencing Supply University of Minnesota-Duluth, Department of Economics, Summer 2005 Table 1 -7 Factors Influencing Supply University of Minnesota-Duluth, Department of Economics, Summer 2005 32

Market Demand And Supply • Market Demand Ø A curve that illustrates the prices Market Demand And Supply • Market Demand Ø A curve that illustrates the prices that consumers are willing and able to pay for various quantities of a good or service for a given time period, all other things constant. v Always downward slopping Price Demand Curve Quantity University of Minnesota-Duluth, Department of Economics, Summer 2005 33

Market Demand And Supply (cont’d) • Market Supply Ø A curve that illustrates the Market Demand And Supply (cont’d) • Market Supply Ø A curve that illustrates the prices that producers are willing to accept for various quantities of a good or service they supply to the market for a given time period, all other things constant. v Always upward slopping Price Supply Curve Quantity University of Minnesota-Duluth, Department of Economics, Summer 2005 34

Market Price Supply P 0 Demand 0 Qd = University of Minnesota-Duluth, Department of Market Price Supply P 0 Demand 0 Qd = University of Minnesota-Duluth, Department of Economics, Summer 2005 Qs Quantity 35 Copyright© 2003 Southwestern/Thomson Learning

Some Basic Economic Concepts • Why do consumers and producers participate in the market? Some Basic Economic Concepts • Why do consumers and producers participate in the market? Ø Consumer and producer surplus University of Minnesota-Duluth, Department of Economics, Summer 2005 36

Consumer and Producer Surplus • Consumer Surplus Ø The benefit that consumers receive from Consumer and Producer Surplus • Consumer Surplus Ø The benefit that consumers receive from the existence of a market price. v The difference between what consumers are willing and able to pay for a good or service and the market price University of Minnesota-Duluth, Department of Economics, Summer 2005 37

Consumer and Producer Surplus • Producer Surplus Ø The benefit that producers receive from Consumer and Producer Surplus • Producer Surplus Ø The benefit that producers receive from the existence of a market price. v The difference between the price that producers are willing to accept to supply a particular quantity and the market price. University of Minnesota-Duluth, Department of Economics, Summer 2005 38

Figure 1 -5 Consumer and Producer Surplus University of Minnesota-Duluth, Department of Economics, Summer Figure 1 -5 Consumer and Producer Surplus University of Minnesota-Duluth, Department of Economics, Summer 2005 39

Some Basic Economic Concepts • How Market Prices Are Determined Ø Market prices have Some Basic Economic Concepts • How Market Prices Are Determined Ø Market prices have the tendency to move to the equilibrium (center) University of Minnesota-Duluth, Department of Economics, Summer 2005 40

Surplus( Excess Quantity Supplied) Price Supply Surplus P 1 P 0 Demand 0 Qd Surplus( Excess Quantity Supplied) Price Supply Surplus P 1 P 0 Demand 0 Qd University of Minnesota-Duluth, Department of Economics, Summer 2005 Qs Quantity 41 Copyright© 2003 Southwestern/Thomson Learning

Shortage (Excess Quantity Demanded) Price Supply P 0 P 1 Shortage Demand 0 Quantity Shortage (Excess Quantity Demanded) Price Supply P 0 P 1 Shortage Demand 0 Quantity supplied University of Minnesota-Duluth, Department of Economics, Summer 2005 Quantity demanded 42 Copyright© 2003 Southwestern/Thomson Learning

How Market Prices Are Determined • Market Clearing or Equilibrium Price Ø The price How Market Prices Are Determined • Market Clearing or Equilibrium Price Ø The price at which quantity supplied equals quantity demanded because neither an excess quantity demanded nor an excess quantity supplied exists at this price. Ø Prices have a tendency to move to the center (Excess demand keeps upward pressure on prices, and excess supply keeps a downward pressure on supply) University of Minnesota-Duluth, Department of Economics, Summer 2005 43

The Global Market • The Global Market Place Ø Global prices are determined based The Global Market • The Global Market Place Ø Global prices are determined based the interaction between the supply (export) and demand (import) of quantities in excess of domestic demand or supply University of Minnesota-Duluth, Department of Economics, Summer 2005 45

EXPORT Price Supply Excess domestic supply P 1 P 0 Demand 0 Qd University EXPORT Price Supply Excess domestic supply P 1 P 0 Demand 0 Qd University of Minnesota-Duluth, Department of Economics, Summer 2005 Qs Quantity 46 Copyright© 2003 Southwestern/Thomson Learning

IMPORT Price Supply P 0 P 1 Excess Domestic Demand 0 Quantity supplied University IMPORT Price Supply P 0 P 1 Excess Domestic Demand 0 Quantity supplied University of Minnesota-Duluth, Department of Economics, Summer 2005 Quantity demanded 47 Copyright© 2003 Southwestern/Thomson Learning

How Market Prices Are Determined (cont’d) • Global Markets: Ø Exchange of goods and How Market Prices Are Determined (cont’d) • Global Markets: Ø Exchange of goods and services beyond national borders • For Nations Engaged in International Trade Ø The global equilibrium market price arises when excess quantities demanded, or imports, equal excess quantities supplied, or exports. University of Minnesota-Duluth, Department of Economics, Summer 2005 48

Figure 1 -7 The Global Coffee Market University of Minnesota-Duluth, Department of Economics, Summer Figure 1 -7 The Global Coffee Market University of Minnesota-Duluth, Department of Economics, Summer 2005 49