Understanding the Basic Concept of International Economics

Internationals Economics deal with the economic interaction among the nation including exchange of goods and services. 

The study of international economics has never been as important as it is now. At the beginning of the 21st century, nations are more closely linked through trade in goods and services, through flows of money, and through investment in each others’ economies than ever before

Introduction 

“International economics is that branch of Economic Science  which studies the causes & consequences of economic interactions between the nations.” 

“International economic studies how economic interactions leads to inter-country & intra-country allocations of the scarce resources aimed at increasing the economic well-being of their people.”

Subject Matter of International Economics

   The subject matter of international economics consists of  the issues raised by the special problems of economic and financial interaction among sovereign nations. It analyzes the flow of goods, services, payments, and monies between a nation and the rest of the world, the policies directed at regulating these flows, and their effect on the nation’s welfare.
             International Economics divided into microeconomics and macroeconomics

   International trade theory and policies are the microeconomic aspects of international economics because they deal with individual nations treated as single units and with the relative price of individual commodities. 

   On the other hand, since the balance of payments deals with total receipts and payments, as well as with adjustment and other economic policies that affect the level of national income and the general price of the nation as a whole, they represent the macroeconomic aspects of international economics.

Importance of International Economics

         Many products we use, or parts of them, were in fact produced abroad. To travel abroad, we need to exchange our currency for the designated countries currencies. Problems like legal and illegal migration, operation of multinational corporations, the risk of complete economic collapse and deep poverty in the poorest countries of the world. Knowledge of international economics is necessary to understand what goes on in the world of today and to be informed consumers, citizens and voters. On a more practical level, the study of international economics is required for numerous jobs in multinational corporations, international banking, government agencies like the United Nations, the World Bank, and the International Monetary Fund.

Theories of International Trade

Different factor endowments mean some countries can produce goods and services more efficiently than others – specialization is therefore possible:

Absolute Advantage:

Adam Smith Propounded the theory in which one country can produce goods with fewer resources than another.

Comparative Advantage:

Where one country can produce goods at a lower opportunity cost – it sacrifices less resources in production. Developed by David Ricardo in the early nineteenth century to provide intellectual support for the abolition of Corn Laws in Great Britain – that is, to promote the benefits of free trade (in grain) – the principle of comparative advantage remains one of the enduring insights of economic Theory. 

The example uses two countries, Portugal and England, and the production and trade of two products, namely wine and cloth. It is used  to show the mutual gains from trade (and specialization) which arise  even when one of the countries is more efficient in the production of both goods. 

Advantages of the Ricardo model

It is a particularly clear account of the principle of comparative advantage and how trade and specialization according to comparative advantage will generate mutual gains from trade.

 It offers a demonstration that a regime of free trade will actually generate a trade and specialization pattern in accordance with comparative advantage.

 It provides an understanding of the roles of wages and productivity in international competitiveness 

It gives an introduction to a methodology which is used in the development of many other propositions in trade theory 

It is a working example of a simple general equilibrium model.

The Heckscher–Ohlin model

The Heckscher–Ohlin (HO) model of international trade was originally developed by two Swedish economists Eli Heckscher and Bertil Ohlin in the early part of the twentieth century. Like the Ricardian model, it is a comparative advantage model of international trade where differences between countries are the basis for trade.

The Stolper–Samuelson (SS) theorem

The Stolper–Samuelson theorem states that if both goods continue to be produced (incomplete specialization), an increase in the relative price of a good will increase the real return of the factor used intensively in the production of that good and a decrease in the real return to the other factor of production.

Empirical Result

The result appeared to contradict the intuition that the US was a capital-abundant country relative to the rest of the world and quickly became known as the Leontief paradox.

Trade Policies

• Instruments
• Free Trade vs Protectionism
• Economic Integration

 Balance of Payments

The record of a country's transactions with the rest of the world is called the balance of payments.

• Trade in goods
• Trade in services
• Income flows 

                      = Current Account

• Transfer of funds and sale of assets and liabilities

            = Capital Account

Exchange Rates

An exchange rate is the price of one country's currency in terms of another country's  currency. Exchange rates play a role in spending decisions because they enable us to translate different countries' prices into comparable terms.

Exchange rates are determined in the foreign-exchange market. The major participants in that market are commercial banks, international corporations, nonbank financial institutions, and national central banks.