BEC 420 International

Economics

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 1.Introduction

• What is international economics about?

• International trade topics
– Gains from trade, explaining patterns of
trade, effects of government policies on trade
• International finance topics
– Balance of payments, exchange rate
determination, international policy
coordination and capital markets
• International trade versus finance

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 What Is International Economics
• International economics is about how nations
interact through:
• trade of goods and services, flows of money, and
investment.
• International economics is an old subject, but
continues to grow in importance as countries
become tied more to the international economy.
• Nations are now more closely linked than ever
before.
 What Is International Economics
(cont.)
• U.S. exports and imports as shares of gross domestic
product have been on a long-term upward trend.
• International trade has roughly tripled in
importance compared to the economy as a whole
in the past 50 years.
• Both imports and exports fell in 2020 due to the
Covid 19.
Exports and Imports as a Percentage of U.S.
National Income
 What Is International Economics
(cont.)
• Compared to the United States, other countries are
even more tied to international trade.
• Their imports and exports as a share of GDP are
substantially higher.
• The United States, due to its size and diversity of
resources, relies less on international trade than
almost any other country.
• Zambia’s exports and imports % of GDP, though
declining recently is significantly higher.
Exports and Imports % of Zambia’s GDP
(constructed from WDI)

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Average of Exports and Imports as Percentage of
National Income in 2011
 Gains from Trade
• That there are gains from trade is probably the
most important insight in international
economics.
• Countries selling goods and services to each other
almost always generates mutual benefits.
1. When a buyer and a seller engage in a voluntary
transaction, both can be made better off.
• Norwegian consumers import oranges that they would have a
hard time producing.
 Gains from Trade (cont.)
2. How could a country that is the most (least)
efficient producer of everything gain from
trade?
• Countries use finite resources to produce what they are
most productive at (compared to their other production
choices), then trade those products for goods and
services that they want to consume.
• Countries can specialize in production, while
consuming many goods and services through trade.
 Gains from Trade (cont.)
3. Trade benefits countries by allowing them to
export goods made with relatively abundant
resources and imports goods made with relatively
scarce resources.
4. When countries specialize, they may be more
efficient due to larger-scale production.
5. Countries may also gain by trading current
resources for future resources (international
borrowing and lending) and due to international
migration.
 Gains from Trade (cont.)
• Trade is predicted to benefit countries as a
whole in several ways, but trade may harm
particular groups within a country.
• International trade can harm the owners of
resources that are used relatively intensively in
industries that compete with imports.
• Trade may therefore affect the distribution of
income within a country.
 Patterns of Trade
• The pattern of trade describes who sells what to
whom.
• Differences in climate and resources explain why
Brazil exports coffee and Saudi Arabia exports oil.
• But why does Japan export automobiles, while the
U.S. exports aircraft?
• Why some countries export certain products can
stem from differences in:
• Labor productivity
• Relative supplies of capital, labor and land and their use in the
production of different goods and services
 Effects of Government Policies on
Trade
• Policy makers affect the amount of trade through
• tariffs: a tax on imports or exports,
• quotas: a quantity restriction on imports or exports,
• export subsidies: a payment to producers that export,
• or through other regulations (ex., product specifications)
that exclude foreign products from the market, but still
allow domestic products.
• What are the costs and benefits of these policies?
The Effects of Government Policies
on Trade (cont.)
• If a government restricts trade, what are the costs if
foreign governments respond likewise?
• Trade policies are often chosen to cater to special
interest groups, rather than to maximize national
welfare.
• Governments tend to adopt tariffs, then negotiate
them down in exchange for reduction in trade
barriers of other countries.
 International Finance Topics
• Exchanging risky assets such as stocks and bonds
can benefit all countries by diversification that
reduces the variability of income – another source of
gains from trade.
• Most international trade involves monetary
transactions.
• Many monetary events have important consequences
for international trade.
 Balance of Payments
• Governments measure the value of exports and imports,
as well as the value of financial assets that flow into and
out of their countries.
• Trade deficits, where countries import more than they
export in value, may be offset by net inflows of financial
assets.
• The official settlements balance, or the balance of
payments, measures the balance of funds that central
banks use for official international payments.
• All three values are measured in the government’s
national income accounts.
 Exchange Rate Determination
• Exchange rates are an important financial issue for
most governments.
• Exchange rates measure how much domestic currency
can be exchanged for foreign currency and thus affect:
• how much goods denominated in foreign currency (imports) cost in the
domestic country.
• how much goods denominated in domestic currency (exports) cost in
foreign markets.

• Some exchange rates change continually (float) while

others are fixed for periods of time.
 International Policy Coordination
• In an integrated economy, one country’s economic
policies usually affect other countries as well, leading
to the need for some degree of policy coordination.
• Depends on type of exchange rate regime.
• Capital markets, where money is exchanged for
promises to pay in the future, have special concerns in
an international setting:
• Currency fluctuations can alter the value paid.
• Countries, especially developing ones, might default on debt.
 The International Capital Market
• Capital markets are arrangements by which
individuals and firms exchange money now for
promises to pay in the future.
• International capital markets cope with special
regulations that countries impose on foreign
investments
• Special risks of currency fluctuations and national default;
• Sometimes offer opportunities to evade regulations placed
on domestic markets.
 International Trade Versus
Finance
• International trade focuses on transactions involving
movement of goods and services across nations.
• International finance focuses on financial or
monetary transactions across nations.