Chapter 1. Chapter 1

Work It Out
Chapter 1
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The quotation from Federal Reserve Chairman Ben Bernanke at the beginning of the chapter is from a speech that he delivered in Jackson Hole, Wyoming, on August 25, 2006, titled “Global Economic Integration: What’s New and What’s Not?” The full transcript of the speech is available Chairman Ben S. Bernanke's Speech. Read this speech and answer the following questions:

Question

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a. List five ways in which international trade today does not differ from the trade that occurred before World War I.
Intra-industry trade was not common before World War I, and the prevalence of intra-industry trade today is a significant difference between trade today and trade that occurred before World War I. The information and communication technologies that permit trade in services today were not developed before World War I, and therefore trade in services did not exist then as it does today. The scale and pace of growth in trade is faster today than it was before World War I. The core-periphery pattern characterized trade before World War I, but it is not relevant today, as global trade has expanded and economies have become more integrated and interdependent. Before World War I, production processes were centralized, not fragmented as they are today. Capital markets are more mature today, and gross flows are larger, than they were before World War I.

The physical distances between locations are the same today as they were before World War I. New transportation methods continue to be developed that allow for more trade. Governments today in general foster open trade and financial flows, which is a similarity to the actions of governments before World War I, when open trade was embraced and encouraged. Just as before World War I, there are groups today that are opposed to free trade. Before World War I, the range of tradable goods continually expanded, and the same is true today.
Video transcript

Work It Out, Chapter 1, Question 1

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
This problem will ask you to identify the similarities between international trade today and trade before World War I, according to former Chairman of the Federal Reserve Ben Bernanke. Here are some potential similarities.

(Description)
The following text is shown on the slide: - Physical distance is the same. - New transportation methods allow for more trade. - Intra-industry trade has increased. - Governments foster open trade, as well as financial flows. - Information and communication technologies permit trade in services. - Scale and pace of growth in trade is faster. - Some groups are opposed to free trade. - Core-periphery pattern is no longer relevant. - Fragmentation of production processes has occurred. - The range of goods that are tradable has broadened. - Capital markets are more mature, and gross flows are larger.

(Speaker)
Now let’s consider the list and identify the ways that international trade today does not differ from the trade that occurred before World War I. Physical distance is the same is a way that international trade today does not differ from the trade that occurred before World War I.

(Description)
The text 'Physical distance is the same' is briefly highlighted.

(Speaker)
The physical distance between two places, for instance London and New York, is fixed and does not change. Therefore, physical distance is a way that international trade today does not differ from the trade that occurred before World War I. New transportation methods allow for more trade is also a way that international trade today does not differ from the trade that occurred before World War I.

(Description)
The text 'New transportation methods allow for more trade' is briefly highlighted.

(Speaker)
Advances in transportation technology, such as steam and rail, before World War I are similar to advances in jet and intermodal shipping today. The constant evolution in transportation methods is why “new transportation methods allow for more trade” is a way that international trade today does not differ from the trade that occurred before World War I. Governments foster open trade, as well as financial flows is another way that international trade today does not differ from the trade that occurred before World War I.

(Description)
The text 'Governments foster open trade, as well as financial flows' is briefly highlighted.

(Speaker)
Then, as now, governments favored polices, such as reducing tariffs, to foster open trade and financial flows. Some groups are opposed to free trade is another way that international trade today does not differ from the trade that occurred before World War I.

(Description)
The text 'Some groups are opposed to free trade' is briefly highlighted.

(Speaker)
Just as there are groups today that oppose free trade, there were groups before World War I that also opposed trade and favored protectionist policies. Yet another way that international trade today does not differ from the trade that occurred before World War I is that the range of goods that are tradable has broadened.

(Description)
The text 'The range of goods that are tradable has broadened' is highlighted.

(Speaker)
Trade, both prior to World War I and today, has been characterized by an ever-increasing range of tradable goods.

Question

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b. List six ways in which international trade today does differ from the trade that occurred before World War I.
Intra-industry trade was not common before World War I, and the prevalence of intra-industry trade today is a significant difference between trade today and trade that occurred before World War I. The information and communication technologies that permit trade in services today were not developed before World War I, and therefore trade in services did not exist then as it does today. The scale and pace of growth in trade is faster today than it was before World War I. The core-periphery pattern characterized trade before World War I, but it is not relevant today, as global trade has expanded and economies have become more integrated and interdependent. Before World War I, production processes were centralized, not fragmented as they are today. Capital markets are more mature today, and gross flows are larger, than they were before World War I.

The physical distances between locations are the same today as they were before World War I. New transportation methods continue to be developed that allow for more trade. Governments today in general foster open trade and financial flows, which is a similarity to the actions of governments before World War I, when open trade was embraced and encouraged. Just as before World War I, there are groups today that are opposed to free trade. Before World War I, production processes were centralized, whereas today they are fragmented.
Video transcript

Work It Out, Chapter 1, Question 2

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
This problem will ask you to identify the differences between international trade today and trade before World War I, according to former Chairman of the Federal Reserve Ben Bernanke. Here are some potential differences.

(Description)
The following text is shown on the slide: - Physical distance is the same. - New transportation methods allow for more trade. - Intra-industry trade has increased. - Governments foster open trade, as well as financial flows. - Information and communication technologies permit trade in services. - Scale and pace of growth in trade is faster. - Some groups are opposed to free trade. - Core-periphery pattern is no longer relevant. - Fragmentation of production processes has occurred. - The range of goods that are tradable has broadened. - Capital markets are more mature, and gross flows are larger.

(Speaker)
Now let’s consider the list and identify the ways that international trade today differs from the trade that occurred before World War I. Intra-industry trade has increased is a way that international trade today differs from the trade that occurred before World War I.

(Description)
The text 'Intra-industry trade has increased' is briefly highlighted.

(Speaker)
Researchers in the late 1960s and the 1970s noted that an increasing share of global trade was taking place between countries with similar resource endowments, trading similar types of goods—mainly manufactured products traded among industrial countries. Unlike international trade in the nineteenth century, these flows could not be readily explained by the perspectives of Ricardo or of the Swedish economists Eli Heckscher and Bertil Ohlin that emphasized national differences in endowments of natural resources or factors of production. Information and communication technologies permit trade in services is another way that international trade today differs from the trade that occurred before World War I.

(Description)
The text 'Information and communication technologies permit trade in services' is briefly highlighted.

(Speaker)
The information and communication technologies that permit trade in services today were not developed before World War I, and therefore trade in services did not exist then as it does today. Another way that international trade today differs from the trade that occurred before World War I is that the scale and pace of growth in trade is faster.

(Description)
The text 'Scale and pace of growth in trade is faster' is briefly highlighted.

(Speaker)
Today, the scale and pace of trade is unprecedented. For example, in recent years, global merchandise exports have been above 20% of world gross domestic product, compared with about 8% in 1913 and less than 15% as recently as 1990; and international financial flows have expanded even more quickly. The scale and pace of growth in trade is a significant way that international trade today differs from the trade that occurred before World War I. Core-periphery pattern is no longer relevant is a way that international trade today differs from the trade that occurred before World War I.

(Description)
The text 'Core-periphery pattern is no longer relevant' is briefly highlighted.

(Speaker)
Today, the traditional distinction between the core and the periphery is becoming increasingly less relevant, as the mature industrial economies and the emerging-market economies become more integrated and interdependent. Notably, the nineteenth-century pattern, in which the core exported manufactures to the periphery in exchange for commodities, no longer holds, as an increasing share of world manufacturing capacity is now found in emerging markets. Today, production processes are becoming geographically fragmented to an unprecedented degree.

(Description)
The text 'Fragmentation of production processes has occurred' is briefly highlighted.

(Speaker)
Rather than producing goods in a single process in a single location, firms are increasingly breaking the production process into discrete steps and performing each step in whatever location allows them to minimize costs. For this reason, fragmentation of production processes has occurred is a way that international trade today differs from the trade that occurred before World War I. Capital markets are more mature, and gross flows are larger is also a way that international trade today differs from the trade that occurred before World War I.

(Description)
The text 'Capital markets are more mature, and gross flows are larger' is highlighted.

(Speaker)
International capital markets have become substantially more mature, and although the net capital flows of a century ago, measured relative to global output, are comparable to those of the present, gross flows today are much larger.