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The Scope of International Economics

International trade serves as an adjunct to domestic trade. Most economic activity in the world is domestic in nature.

Output of the World Economy

The size of the world economy is measured as the sum of GDP for each country. Using this measure world output was projected in 2002 to be $32.3 trillion. This number does not include such things as domestic labor or any illegal or underground activity.
The world bank classifies countries into Low, middle, and high income economies. (table 1.1 on pg 4)

Imports and Exports of Goods in the World Economy

The total world value of exports and imports in 2002 was $6,454,929 and $6,590,272 respectively. This amounts to around 20 percent of the world output.
One aspect of globalization: The amount of domestic consumption produced in other countries and the amount of production shipped to other countries.
Export growth is far exceeding GDP growth. By 2002, exports had grown by 267 percent since 1975, while GDP had only grown by 118 percent (Figure 1.1, pg 6).

International Trade in Services

As an economy grows, services take a bigger share of the nation’s GDP. This growth comes at the expense of manufacturing and other goods based industries.

3 reasons why international trade in services is harder to report than international goods trade:

Trade in goods can be physically seen. It is harder to see the international purchase of car insurance, as opposed to the purchase of an actual car. There are documented procedures for exporting / importing goods. The exchange of a service as part of international trade does not have a set procedure (example: tourism).
Goods are easier to measure. Each good much past through a country’s system of customs and shipping. There it is counted and taxed. However services could be counted as exports, even if the service is consumed within the home country. It is hard to monitor where tourists or other businesses abroad spend service related money.
International trade in services is in its infancy. Even the theory of what constitutes an international service transaction has not been concretely defined. This leads to international services being downplayed.
International trade until recently comprised a small total of total trade. This had led to the subject generally being ignored until recently.

Capital Flows in the World Economy

The forms of capital flows (not related to buying or selling goods or services):

Domestic residents purchase equities or bonds in a foreign financial market.
Multinational corporations own, control, or manage production in several countries. They may store money in bank accounts in several different countries.
Foreign direct investment (FDI).
Governments may buy or sell foreign currencies.

Capital flows are not included in when discussing international trade.
Currency trading runs about 1.2 trillion a day. The volume of traditional trade for a year is less than a week’s worth of foreign exchange currency trading.

Key Terms

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