INTERNATIONAL ECONOMICS

MS. MWILA BOWA

 UNIT 1 – INTRODUCTION TO
INTERNATIONAL ECONOMICS
• WHAT IS INTERNATIOAL ECONOMICS
• THE GAINS FROM TRADE
• THE PATTERNS OF TRADE
• PROTECTIONISM
• THE BALANCE OF PAYMENTS
• INTERNATIONAL POLICY COORDINATION
• THE INTERNATIONAL CAPITAL MARKET
 WHAT IS INTERNATIONAL ECONOMICS
• International economics deals with economic
interdependence among nations.
• It analyzes the flow of goods, services and payments
between a nation and the rest of the world, the
policies directed at regulating this flow and their
effect on the nation’s welfare.
• Economic interdependence among nations is
affected by, and in turn influences, the political,
social, cultural, and military relations among nations.
• International economics deals with international
trade theory, international trade policy, and the
balance of payments and foreign exchange markets.
 WHAT IS INTERNATIONAL ECONOMICS
• International trade theory analyzes the basis and gains from
trade.
• International trade policy examines the reasons for and the
effects of trade restriction and new protectionism.
• The balance of payments measures a nation’s total receipt
from and the total payment to the rest of the world, while
foreign exchange markets are the framework for the
exchange of one national currency for another.
• International trade theory and policy are the microeconomic
aspects of international economics because they deal with
individual nations treated as a single units and with the
(relative) price of individual commodities.
• The balance of payments deals with total receipts and
payments while adjustment policies affect the level of
national income and the general price index, they represent
the macroeconomic aspect of international economics.
 WHAT IS INTERNATIONAL ECONOMICS
• International economic relations differ from
interregional economic relations such as the economic
relations among different parts of the same
nation),thus requiring different tools of analysis and
justifying international economics as a distinct branch
of economics.
• Nations usually impose some restrictions on the flow of
goods, services and factors across their borders while
generally imposing no such restrictions internally.
• In addition, international flows are to some extent
disturbed by differences in language, customs and laws.
Furthermore, international flow of goods, services and
resources give rise to payments and receipts in foreign
currencies, which change in value over time.
IMPORTANCE OF INTERNATIONAL ECONOMICS
• International economics deals with the economic relations
among nations. The resulting interdependence is very
important to the economic well being of most nations of the
world.
• Most nations of the world export some goods, services and
factors of production in exchange for imports which can only
be supplied relatively less efficiently at home, or not at all (for
example, copper production in Zambia and cars in Germany).
• Thus, a great deal of the economic well being of most nations
rests on international interdependence.
• These economic relations among nations give rise to different
problems, requiring different tools of analysis. That is, to
analyse the different problems arising from international
relations, we must modify, adopt, extend and integrate the
microeconomic and macroeconomic tools appropriate for the
analysis of purely domestic problems
 PURPOSE OF INTERNATIONAL ECONOMIC THEORIES AND
POLICIES
• The purpose of economic theory in general is to
predict and explain.
• Economic theory abstracts from the details
surrounding an economic event in order to isolate
the few variables and relationships deemed most
important in predicting and explaining the event.
• Along these lines, international economic theory
usually assumes a two-nation, two-commodity,
two-factor world.
• It further assumes no trade restrictions to begin
with, perfect competition in all commodity and
factor markets, and no transportation costs.
 PURPOSE OF INTERNATIONAL ECONOMIC
THEORIES AND POLICIES
• Most of the conclusions reached on the basis of these simplifying
assumptions hold even when they are relaxed so as to deal with a
world of more than two nations, commodities, and factors, a
world where there is some international mobility of factors,
imperfect competition, transportation costs, and trade
restrictions.
• Starting with the simplifying assumptions just mentioned,
international economic theory examines the basis for and the
gains from trade, the reasons for and the effects of trade
restrictions, policies directed at regulating the flows of
international payments and receipts, and the effects of these
policies on a nation’s welfare.
• While most of international economics represents the application
of general microeconomic and macroeconomic principles to
international context, many theoretical advances were made in
the field of international economics itself and only subsequently
found their way into the body of general economic theory.
 THE GAINS FROM TRADE
Exports: In international trade, an export refers to the selling of
goods and services produced in the home country to other markets
(other countries). The seller of the goods and services is referred to
as the “exporter.”
Protecting Exports
• In order to protect exports, commercial goods are subject to
customs authorities for both the exporting and importing
countries. Legal restrictions and trade barriers are in place
internationally to control trade, whether goods are being
exported or imported.
• When legal restrictions and trade barriers are lessened or lifted
the producer surplus increases and so does the amount of the
goods and services that are exported to other countries.
Impact of Exports
• Exporting goods and services has both advantages and
disadvantages for countries involved in international trade.
 THE GAINS FROM TRADE
• Advantages: Exporting allows a country’s producers to gain
ownership advantages and develop low-cost and differentiated
products. It is viewed as a low-risk mode of production and
trade. Exporters also experience internationalization advantages
which are the benefits of retaining a core competence within a
company and threading it through the value chain instead of
obtaining a license to outsource or sell the goods or services.
• Disadvantages of exporting are mainly the result of
manufacturers having to sell their goods to importers. In
domestic sales, manufacturers sell directly to wholesalers or
even directly to the retailer or customer. For exports,
manufacturers face an extra layer in the chain of distribution
which squeezes the margins. As a result, manufacturers may
have to offer lower prices to the importers than to domestic
wholesalers in order to move their product and generate
business.
 THE GAINS FROM TRADE
Imports
• Imports are defined as purchases of good or services by a
domestic economy from a foreign economy.
• The domestic purchaser of the good or service is called an
importer. Imports and exports are critical for many economies
and they are the defining financial transactions of international
trade.
Protecting Imports
• Due to the economic importance of imports, countries enact
specific laws, barriers, and policies in order to regulate
international trade.
• Protectionism is the economic policy of restraining trade
between countries through tariffs on imported goods, restrictive
quotas, and government regulations. When trade barriers and
policies of protectionism are eliminated, consumer surplus
increases. The price of a good or service will decrease while the
 THE GAINS FROM TRADE
Impacts of Buying Imported Goods
• On a national level, in most countries international trade and
importing goods represents a significant share of the gross
domestic product (GDP).
• Imports provide countries with access to goods and services
from other nations. Without imports, a country would be
limited to the goods and services within its own borders.
• International trade is generally less expensive than domestic
trade despite additionally imposed costs, taxes, and tariffs.
However, the factors of production are usually more mobile
domestically than internationally (capital and labour). It is
common for countries to import goods rather than a factor of
production. For example, the U.S. imports labour-intensive
goods from China. Instead of importing Chinese labour, the
U.S. imports goods that were produced in China by Chinese
labour.
 Costs of Trade
Free Trade: Free trade is a policy where governments do not
discriminate against exports and imports. There are few or no
restrictions on trade and markets are open to both foreign and
domestic supply and demand.
Advantages: Free trade is beneficial to society because it
eliminates import and export tariffs. Restricted trade affects the
welfare of society because although producers experience
increases in surplus and additional revenue, the loss faced by
consumers is greater than any benefit obtained.
• When a country trades freely with the rest of the world, it
should theoretically produce a net gain for society and increases
social welfare. Free trade policies consist of eliminating export
tariffs, import quotas, and export quotas; all of which cause
more losses than benefits for a country.
• With free trade in place, the producers of the exported good in
exporting countries and the consumers in importing countries
 Costs of Trade
Disadvantages: Economic inefficiency can be created through trade
diversion. It is economically efficient for a good to be produced in the
country with the lowest production costs. However, this does not always
occur if a high cost producer has a free trade agreement and the low cost
producer does not.
• When free trade is applied to only the high cost producer it can lead to
trade diversion to not the most efficient producer, but the one facing
the lowest trade barriers, and a net economic loss. Free trade is highly
effective and provides society with a net gain, but only if it is applied.
• Due to industry specializations, many workers are displaced and do not
receive retraining or assistance finding jobs in other sectors. The nature
of industries and trade increases economic inequality. As a result of
unskilled workers the wages within the various industries may decline.
• Another disadvantage is that by increasing returns to scale, can cause
certain industries to settle in a geographically area where there is not
comparative advantage. Despite this disadvantage, the level of output
that is generated by free trade for both the “winner” and the “loser” is
increased substantially.
 Costs of Trade
The Results of Free Trade
• Economists have studied free trade
extensively and although it creates winners
and losers, the main consensus is that free
trade generates a large net gain for society.
 THE PATTERN OF TRADE
• The global economy has grown continuously since the Second
World War. Global growth has been accompanied by a change in
the pattern of trade, which reflects ongoing changes in structure
of the global economy.
• These changes include the rise of regional trading blocs, de-
industrialisation in many advanced economies, the increased
participation of former communist countries, and the emergence
of China and India.
Changes in the global economy
The main changes in the global economy are:
• The emergence of regional trading blocs, where members freely
trade with each other, but erect barriers to trade with non-
members, has had a significant impact on the pattern of global
trade. While the formation of blocs, such as the European Union
and NAFTA, has led to trade creation between members,
countries outside the bloc have suffered from trade diversion.
 THE PATTERN OF TRADE
• Like several advanced economies, the UK’s trade in manufactured
goods has fallen relative to its trade in commercial and financial
services. Many advanced economies have experienced de-
industrialisation, with less national output generated by their
manufacturing sectors.
• The collapse of communism led to the opening-up of many former-
communist countries. These countries have increased their share of
world trade by taking advantage of their low production costs,
especially their low wage levels.
• Newly industrialised countries like India and China have dramatically
increased their share of world trade and their share of manufacturing
exports. China, in particular, has emerged as an economic super-
power. China’s share of world trade has increased in all areas, and not
just in clothing and low-tech goods. For example, in 1995, the US had
captured nearly 25% of global trade in hi-tech goods, while China had
only 3%. By 2005, the US share had fallen to 15%, while China’s share
had risen to 15% (SOURCE: EUROPEAN CENTRAL BANK – ECB, OCCASIONAL
PAPER – CHINA AND INDIA’S ROLE IN GLOBAL TRADE AND FINANCE, 2008)
 Costs of Trade
Growth in trade
• Although subject to short term fluctuations as a
result of the economic cycle, the value of trade has
continued to grow, reflecting the increased
significance of trade and globalisation. The chart
below shows that, as a % of world GDP, trade
increased from 40% in 1990 to 60% in 2014.
• The effects of the financial crisis and subsequent
recession can also be seen, as world trade fell as a
% of GDP between 2008 and 2010.
Trade openness: The ratio of trade to GDP – an
indicator of trade ‘openness’ – has increased for most
trading nations, and is a result of globalisation.