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  • Print publication year: 2016
  • Online publication date: May 2018

5 - Applications of the economic way of thinking: international economics

from Book II - Applications of basic economic theory

Summary

Money moves over, around and through them [national borders] with the speed of light. The flows of capital are now in the range of 30 to 50 times greater than world trade. The world's capital market that moves along this electronic highway goes where it is wanted and it stays where it is well-treated … As long as our free-market system permits and delivers an acceptable rate of return on investment in an environment of political stability that is competitive with other areas of investment, the capital will keep coming.

Walter Wriston (long-time CEO of Citicorp)

In this chapter we extend our applications of the economic way of thinking to international trade and finance and environmental economics, relying again extensively on supply and demand graphs. We cover international economics early in the book for a straightforward reason: international trade and finance have become progressively more important issues for business. Moreover, national economies have become integrated and interdependent to a degree not imagined just a few decades back. Much business has become global in scope because of technological gains in transportation and telecommunications. The extent of the integration of national economies has been dramatized in recent years through the rapid spread of the financial crisis, attributable to the bursting of the housing price bubble and the collapse of the market for mortgage-backed securities, that became evident in the US banking system in late 2007, only to cause a growing list of major banks around the world to hover on the brink of bankruptcy in 2008 and 2009. One national economy after another, mainly in Europe, like dominos fell into a financial crisis and substantial recession. In effect, the United States metaphorically sneezed, and the rest of the world caught pneumonia.

Many CEOs and lower-ranking managers learned then that they could no longer see their role as one of allocating resources within the walls of their firms, or even within their local, geographically bound markets. They had to think across national boundaries with the intent of minimizing costs and maximizing sales and profits globally. Managers at all levels also had to consider the costs of various government policies, treating them in much the same way as labor-cost considerations that affect where goods are produced and sold.