University of Minnesota-Duluth, Department of Economics, Summer 2005 1–2
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
On the Front side
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–3
• What is the most Important GLOBAL ISSUE today? Why?
On the back side
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–5
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 1–6
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 1–7
Global Economic Policy and Issues
• GlobalizationThe increasing interconnectedness of peoples and
societies and the interdependence of economies, governments, and environments.
• Economic IntegrationThe extent and strength of REAL-SECTOR and
FINANCIAL-SECTOR linkages among national economies.
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–8
The Global Market for Goods and Services
• Real SectorA designation for the portion of the economy
engaged in the production and sale of goods and services.
• Financial SectorA designation for the portion of the economy in
which people trade financial assets.
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–9
Global Economic Policy and Issues
• Economic IntegrationThe extent and strength of REAL-SECTOR and
FINANCIAL-SECTOR linkages among national economies.
Depends on… The volume of international trade in the real sector The global market for goods and services The volume of trade in the international monetary, and
financial markets
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–10
Table 1-1
The Top Twenty Globalized Nations
Source: Foreign Policy http://www.foreignpolicy.com.
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–11
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 1–12
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 1–13
The International Monetary and Financial Markets
• Foreign Exchange MarketA Market (involving private banks, foreign
exchange brokers, and central banks) through which households, firms, and governments buy and sell national currencies.
• Foreign Direct InvestmentThe 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 1–14
Table 1-2
Annual Turnover (Value) in Foreign Exchange Markets
Source: Held, David, Anthony McGrew, 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 1–15
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 1–16
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 1–17
Understanding Global Markets:Some Basic Economic
Concepts
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–18
Some Basic Economic Concepts
• DemandThe 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 1–19
Table 1-4
An individual Consumer’sDemand Schedule
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–20
Some Basic Economic Concepts
• Law of DemandAn 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 1–21
Some Basic Economic Concepts
• SupplyThe 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 1–22
Some Basic Economic Concepts
Table 1-5 An individual Firm’sSupply Schedule
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–23
Some Basic Economic Concepts
• Law of SupplyAn 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 1–24
Some Basic Economic Concepts
• Presenting Demand and SupplyVarious forms:
Table: Schedule Graph: Curve Mathematical Equation: Function
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–25
Some Basic Economic Concepts
• The Demand Schedule 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.
Table 1-4
An individual Consumer’sDemand Schedule
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–26
Some Basic Economic Concepts
• The Supply Schedule tabulates the
minimum price a supplier is willing to accept for various quantities supplied of a good or service.
Table 1-5 An individual Firm’sSupply Schedule
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–27
Figure 1-4
The Demand for and Supply of Gasoline
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–28
Some Basic Economic Concepts
• Determinants of demand and supplyWhat factors influence demand and/or supply?
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–29
• Demand FactorsChanges in consumer preferencesChanges in incomeChanges in the prices of related goodsChanges in the number of consumers
Factors Influencing Demand and Supply
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–30
Factors Influencing Demand and Supply
• Supply FactorsChanges in the cost and availability of inputsAdvances in technologyChanges in the prices of related goods of
servicesTaxes and producer subsidiesChange in the number of producers
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–31
Table 1-6 Factors Influencing Demand
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–32
Table 1-7 Factors Influencing Supply
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–33
Market Demand And Supply
• Market Demand 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.
Always downward slopping
Price
Quantity
Demand
Curve
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–34
Market Demand And Supply (cont’d)• Market Supply
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. Always upward
slopping
Price
Quantity
Supply Curve
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–35
Copyright©2003 Southwestern/Thomson Learning
Price
0
Supply
Demand
Quantity
P0
Qd Qs
Market Price
=
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–36
Some Basic Economic Concepts
• Why do consumers and producers participate in the market?Consumer and producer surplus
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–37
Consumer and Producer Surplus
• Consumer Surplus
The benefit that consumers receive from the existence of a market price.
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 1–38
Consumer and Producer Surplus
• Producer Surplus
The benefit that producers receive from the existence of a market price.
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 1–39
Figure 1-5 Consumer and Producer Surplus
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–40
Some Basic Economic Concepts
• How Market Prices Are Determined Market prices have the tendency to move to the
equilibrium (center)
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–41
Copyright©2003 Southwestern/Thomson Learning
Price
0
Supply
Demand
Surplus
Quantity
P0
P1
Qd Qs
Surplus( Excess Quantity Supplied)
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–42
Shortage (Excess Quantity Demanded)
Copyright©2003 Southwestern/Thomson Learning
Price
0 Quantity
Supply
Demand
Quantitysupplied
Quantitydemanded
P0
Shortage
P1
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–43
How Market Prices Are Determined
• Market Clearing or Equilibrium PriceThe price at which quantity supplied equals
quantity demanded because neither an excess quantity demanded nor an excess quantity supplied exists at this price.
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 1–45
The Global Market
• The Global Market PlaceGlobal 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 1–46
EXPORT
Copyright©2003 Southwestern/Thomson Learning
Price
0
Supply
Demand
Excess domestic supply
Quantity
P0
P1
Qd Qs
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–47
IMPORT
Copyright©2003 Southwestern/Thomson Learning
Price
0 Quantity
Supply
Demand
Quantitysupplied
Quantitydemanded
P0
Excess Domestic Demand
P1
University of Minnesota-Duluth, Department of Economics, Summer 2005 1–48
How Market Prices Are Determined (cont’d)
• Global Markets:Exchange of goods and services beyond national
borders
• For Nations Engaged in International TradeThe global equilibrium market price arises when
excess quantities demanded, or imports, equal excess quantities supplied, or exports.