Transcript Slide 1

Ch. 1: Introduction
International Economics

International economics is about how nations interact
through trade of goods and services, through flows of
money and through lending/borrowing.

International Trade explores the principles and policies
of trade.
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International Finance concentrates on payment flows
and exchange rates.

Domestic policies affect both International Trade and
Finance.

Policies abroad, through their impact on trade and
international finance, affect domestic economies.
In 1965, US exports were 5%
and US imports were 4.3% of NI
http://research.stlouisfed.org/publications/iet/us/us.pdf
http://www.economist.com/opinion/displaystory.cfm?story_id=E1_GRVGQTT
.
http://www.economist.com/research/articlesBySubject/displayStory.cfm?story_id=5025883&subject=Singapore
Gains From Trade

Exchange between two parties creates
gains for both.
Persons living in Ohio can buy bananas.
 Central Americans can earn more income
from their bananas and buy products they
didn’t have before.
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Trade

International trade differs from domestic
trade because
Sovereign states can impose protectionist
policies.
 Exchange rates can change and make the
product cheaper or more expensive.

Gains From Trade
Even if a region is more efficient than
another in everything it produces, because
limited resources restrict production, trade
still benefits both.
 Trade allows heavier utilization of
abundant resources for exports and less
concentration on scarce resources through
imports.

Gains from Trade

Well written explanations for noneconomists about the gains from trade:
http://www.economist.com/surveys/displaystory.cfm?story_id=E1_GDVTQQ
http://www.economist.com/finance/displaystory.cfm?story_id=E1_PQQGNNG
http://dallasfed.org/fed/annual/2002/ar02.pdf p. 3-26
Gains From Trade
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Specialization increases efficiency.
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Large scale production may lower unit costs.
Migration and borrowing/lending are forms
of mutually beneficial trade.

Countries will be exchanging current
resources for future resources.
Income Distribution
Trade can reduce the incomes of those
whose resources compete with imports
and cannot be substituted to other uses.
 Trade can also change income distribution
between workers and capital owners.
 These changes reflect vigorous political
activity to preserve the status quo and give
rise to protectionist policies.

Protectionism
“Conflicts of interest within nations are
usually more important in determining
trade policy than conflicts of interest
between nations.”
 Economic theory isolates the gains and
losses of policies and allows better
evaluation of different policies.

Patterns of Trade
Climate determines some of the flow of
trade.
 Differences in labor productivity explains
why certain products flow in one direction.
 Relative supplies of resources (land, labor,
capital) account for some of the trade
flows.
 Economies of scale forces specialization
in some section of an industry.

Government Policies
Tariffs, quotas, export subsidies, labor and
environmental restrictions, product
specifications are means of favoring
domestic products over foreign ones.
 The course will evaluate the costs and
benefits of government policies.
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Balance of Payments
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Flows of payments to other countries and flows
of receipts from other countries determine the
Balance of Payments for a country.
If Current Account and Financial Account don’t
match, Central Banks either accumulate or lose
International Reserves.
In-flows boost domestic currency; out-flows
reduce the value of domestic currency.
Exchange Rates

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The price of one currency in terms of another is
the exchange rate.
Changes in the exchange rate will make our
products cheaper or more expensive to
foreigners.
Explaining why exchange rates change and the
effects of these changes on the national
economy and specific industries are part of the
concern of international finance.