In September 2008, the oldest investment bank on Wall Street, Lehman Brothers, declared bankruptcy. Immediately, the world’s financial system seized up. Hundreds of billions of dollars’ worth of financial assets were frozen in place, the value of securities made uncertain, and the solvency of seemingly rock-solid financial institutions called into question. By the end of 2008, the United States’ economy was in freefall, shrinking at an annualized rate of 8%. Growth rates in other major industrialized economies also plummeted as well. The recession was so deep, and the recovery so labored that it took more than a decade for output to return to full employment levels. Figure 19.1 illustrates the situation rather dramatically.

We live in an era of globalization, in which most producers operate internationally on a global scale. We, as consumers, are affected by events taking place on distant shores – to say we live in an age of interconnectedness is a cliché, but it is still true. Just check out the labels on the clothes in your closet. Your shirts, sweaters, jackets, and jeans were probably not produced in the United States. More likely, they were made in China, Bangladesh, Vietnam, India, Sri Lanka, or Mexico. The same is true for your shoes.

You may not know it, but the tomato has always been the subject of controversy. Botanists debate whether the tomato is a vegetable or a fruit (it is actually a fruit). Linguists debate whether it is pronounced as to-may-toe or to-mah-toe (who cares!). Meanwhile, agricultural economists debate where the best place to produce this nutritious and delicious crop might be.

In 2014, Fabrice Brégier, then chief operating officer of Airbus, called for the European Central Bank to intervene as the strength of the euro was “crazy.” He wanted them to push it down against the dollar by 10% from an “excessive” $1.35 to between $1.20 and $1.25. We learned in Chapter 14 how a strong currency makes it harder for domestic manufacturers to export goods, so we can understand why a European executive trying to sell commercial airplanes might worry that a strong euro was making his job harder. And it is a fact that in 2014, Airbus was registering disappointing sales compared to its rival across the Atlantic, Boeing. But why would it be “crazy” for the euro to be worth $1.35, and yet normal and acceptable for the euro to be worth 10% less than that? And how did Fabrice Brégier expect the European Central Bank to adjust the euro’s value, when the euro is under a floating, rather than a fixed, exchange rate regime?

In January 2017, just three days after taking office, President Donald Trump withdrew the United States from the Trans-Pacific Partnership, or TPP. This trade agreement involving about a dozen Pacific Rim countries would have reduced trade barriers and established rules governing trade in the region. “We’re going to stop the ridiculous trade deals that have taken … companies out of our country,” he stated. Trump had consistently argued that trade agreements such as the North American Free Trade Agreement (NAFTA) with Canada and Mexico were “a bad deal” for US workers and unfair to American business, allowing other countries “to take advantage of us.”

In times of turmoil, one would think that a stable, or relatively stable, exchange rate would be a boon to policymakers, soothing the anxieties of international investors. However, keeping the value of the currency stable against a foreign currency such as the US dollar, when buffeted by shocks, entails sometimes painful tradeoffs.

There is a parable about an entrepreneur who invents an amazing machine. Wheat, soybeans, lumber, and oil are fed into one end of the contraption. As if by magic, smartphones, coffee, and tea, and all manner of clothing and apparel come out the other end. The inventor is praised as a genius – until further investigation reveals that the wheat and the other inputs were being secretly shipped to other countries in exchange for the electronics and apparel that later emerged. When this news is made public, the inventor is denounced as an unpatriotic fraud who is destroying jobs.

In January 2017, just three days after taking office, President Donald Trump withdrew the United States from the Trans-Pacific Partnership, or TPP. This trade agreement involving about a dozen Pacific Rim countries would have reduced trade barriers and established rules governing trade in the region. “We’re going to stop the ridiculous trade deals that have taken … companies out of our country,” he stated. Trump had consistently argued that trade agreements such as the North American Free Trade Agreement (NAFTA) with Canada and Mexico were “a bad deal” for US workers and unfair to American business, allowing other countries “to take advantage of us.”

The automobile industry has long captured America’s imagination. Not only are cars an iconic part of national culture, but they are also essential for moving around – unless you happen to live in New York City.

The auto industry is dominated by a handful of large firms. Toyota, Volkswagen, Daimler, General Motors (GM), Ford, Honda, Fiat Chrysler, Nissan, and BMW are the global sales leaders. Each firm produces a wide array of vehicles: small and large sedans, minivans, SUVs, and pickups. And then there are specialty producers such as Tesla and Lamborghini.

After decades of roaring growth, the “East Asian Miracle” – as touted in a 1993 book published by the World Bank – seemed to be in full swing. Yet a mere four years later, the region was engulfed in chaos. What became known as the Asian Financial Crisis unfolded in July 1997. As foreign exchange reserves were depleted, the Bank of Thailand was forced to let the Thai baht float freely. The currency immediately depreciated by 21%. By January 1998, the baht was 54% weaker against the dollar than it had been six months earlier. The turmoil was not restricted to Thailand; Singapore, Malaysia, Indonesia, and the Philippines also experienced stresses on their balance of payments as capital flows reversed course, with net flowing out rather than in. In November 1997, the Bank of Korea floated its currency after years of keeping its currency, the won, tightly managed against the dollar. By January 1998, the won had fallen in value by 39%. Figure 18.1 tells the story graphically.

In June of 2016, voters in the United Kingdom narrowly approved a referendum on leaving the European Union (EU), a common market wherein labor, capital, and goods and services are free to move between countries without impediment. The vote in favor of Britain’s exit – or “Brexit” – set in motion a process by which the country would leave the EU within two years.

When you switch on your smartphone, you are probably not aware of all the minerals that have been dug up around the world to make the electronics work. An iPhone screen has been polished with lanthanum and cerium, a magnet inside is made with neodymium and praseodymium, the circuitry in semiconductors uses arsenic metals, rechargeable batteries depend on cadmium, and light bulbs and heating elements rely on tungsten. It turns out that these so-called “rare earth” minerals are essential for modern life and are used in products ranging from smartphones to MRI machines to advanced defense technology to hair dryers.

You may not know it, but the tomato has always been the subject of controversy. Botanists debate whether the tomato is a vegetable or a fruit (it is actually a fruit). Linguists debate whether it is pronounced as to-may-toe or to-mah-toe (who cares!). Meanwhile, agricultural economists debate where the best place to produce this nutritious and delicious crop might be.