International Economics

Li Yumei
Economics & Management School
of Southwest University

International Economics

Chapter 1
Introduction

Organization

1.1 Importance of International Economics

1.2 International Trade and the Nations
Standard of Living
1.3 The Subject Matter of International
Economics
1.4 Purpose of International Economic
Theories and Policies
1.5 Current International Economic Problem
1.6 Organization and Methodology of the Text
Chapter Summary
Exercises

1.1 Importance of International

Economics

Economic Interdependence

Globalization of Economic Activities

International Competition

Consequences of Increased Openness

 Economic Interdependence
It means that in todays world, no nation exists in economic isolation.
All aspects of a nations economy-its industry, service sectors,
levels of income and employment , living standard-are linked to the
economics of its trading partners. This linkage takes the form of
international movements of goods and services, labor, business
enterprise, investment funds, and technology.
Facts: After World War ,USA was economically and politically the
most powerful nation in the world, a situation expressed in the saying,
When USA sneezes, the economies of other nations catch a cold.
Then EEC was formed in 1950s, international corporations in 1960s,
OPEC in 1970s.
Conclusion: In recent years, the character of global economic
interdependence has become much more sophisticated.

 Globalization of Economic Activities

It means that national economies rely on international trade in
overall economic activity . World trade expand faster than world
output in the last 50 years by a significant margin.
Reasons:

Technological Change
Technological innovation led to the increase of productivity, and the
advances in transport technology brought people and enterprises closer
together so that the boundary of tradable goods and services has been
greatly extended.

Continuing liberalization of trade and investment

It led to more and more companies to globalize production structure
through investment abroad.

 Globalization of Economic Activities

Present Situation: Slower global economic growth in 2007;
continued robust growth in developing countries; insufficient
employment growth; higher oil price crisis; current-account
Imbalances; merchandise trade imbalance; global imbalance
widening further; term of trade. In addition: net financial transfer;
net international investment.
China foreign trade relationship: more dispute with EU and USA;
FDI in China.

Slower global economic growth

continued robust growth in developing countries

Current-account imbalances have widened further in

2006

Higher oil prices on the impact of welfare costs

current-account Imbalances

Global imbalance widening further

Net Financial Transfer

Net International Investment

2005 foreign trade relationship

2001-2005 real used FDI and growth rate

 International Competition
International Competitiveness: It is a hot issue these days.
Intense debate has focused on how firms based in a
particular nation can create and maintain competitiveness
against the worlds leaders in a particular industry.

Firm (Industry) Competitiveness

Competitiveness refers to the extent to which the goods of a firm or
industry can compete in the market place; this competitiveness
depends on the relative prices and qualities of products.

A Nations Competitiveness
National competitiveness refers to the achievement of high productivity
of its employed resources and the increasing of living standard for its
people.

 Consequences of Increased Openness

To curtail inflationary pressures at home (e.g. U.S.dollar)

To increase constraints on those sectors which facing

intense foreign competition (e.g. Wage concession)

To reduce or eliminate the crowding out of private

investment

To make the domestic economy vulnerable to

disturbances initiated overseas (e.g. Skyrocketing
gasoline prices of 2000)

Conclusion:

Need for macroeconomic coordination policy

International policy coordination can facilitate an orderly adjustment
of the global imbalances while minimizing the economic growth costs
(United Nations, International Monetary Fund, World Bank).

-A new Plaza agreement: the Group of Twenty(20Group, including

industrial and emerging-market economies)
-Cross-country effects of national policies: The national policies cant
be considered in isolation but need to be seen in the context of the
cross-border spillover effects they give rise to by decreasing the
barriers to trade and capital flows.

Conclusion:

Obstacles for macroeconomic coordination policy

the urgency of adjusting the imbalance

the current position of economies

domestic interest groups

perceived lack of effective policy instrument

Reading materials:
1. World Economic Situation and Prospects 2007
2. World Economic Situation and Prospects 2006

Conclusion:

What can be done?

To develop a consensus on common goals through international

consultations with outside mediation

To enhance the context for mediation and the perceived legitimacy

of the mediator

To address commitment problems by using multi-year schedules for

policy adjustment

To initiate systemic reforms in the field of international monetary

and financial affairs for a long-run solution

1.2 International Trade and the

Nations Standard of Living

Measure of the economic relationship

among nations

Close relationship between international

trade and the Nations standard of living
Conclusion:

International trade is of very importance either for

small countries or large countries.
(see the following data)

 Measure of the economic relationship

among nations
Interdependence Degree: it is given by the ratio of their
imports and exports of goods and services to their gross
domestic product (GDP).
GDP: It refers to the total value of all goods and services
produced in the nation.
The economic interdependence among nations are in general
measured by the more rapid growth of world trade than world
production.

Close relationship between international

trade and the Nations standard of living

Higher interdependence among small countries

FIGURE 1-1 Imports and Exports as a Percentage of GDP in Various Countries

in 2001.

Close relationship between international

trade and the Nations standard of living

World trade growth rate more rapid than world

production

FIGURE 1-2 Growth of World Production and Trade,

1990-2001 (annual percentage changes).

Close relationship between international

trade and the Nations standard of living

The importance of foreign trade in a large country

FIGURE 1-3 Imports and Exports as a Percentage of U.S. GDP, 1965-2001.

1.3 The Subject Matter of

International Economics

International Trade Theory

International Trade Policy
International Monetary Theory
International Monetary Policy
Major Economists Theory in
International economics ( Adam Smith,
David Ricardo, John Stuart Mill, Alfred
Marshall, John Maynard Keynes, and
Paul Samuelson)

 International Trade Theory and Policy

International trade theory: it analyzes the basis of trade , the

gains from trade, the patterns of trade.

International trade policy: It examines the reasons for and the
effects of trade restrictions and new protectionism.
International economics: It deals with the economic and

financial interdependence among 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 nations welfare. At the
same time the economic and financial interdependence is
affected by the political, social, cultural and military relations
among nations.

1.4 Purpose of International

Economic Theories and Policies

Theories are used to examine the basis for and the

gains from trade, the reasons for and the effects of
trade restrictions; also examine the effectiveness of
macroeconomic policies under different types of
international monetary arrangements or monetary
systems.
Policies are used to direct at regulating the flows of
international payments and receipts, and the effects
of these policies on a nations welfare and on the
welfare of other nations.

1.5 Current International Economic

Problem

Trade Protectionism in Industrial Countries

Excessive Fluctuations and Large Disequilibria
in Exchange Rates
Financial Crisis in Emerging Market Economies
High Structure Unemployment and Slow
Growth in Europe and Stagnation in Japan
Job Insecurity from Restructuring and
Downsizing in the United States
Restructuring Problems of Transition
Economies
Deep Poverty in Many Developing Countries

1.6 Organization and Methodology

of the Text

Part (Chapter 2-7)

It deals with international trade theory. Chapter 2 comparative

advantage theory, Chapter 3 basis and gains from trade,
Chapter 4 equilibrium relative prices, Chapter 5 HeckscherOhlin theory, Chapter 6 new trade theories, Chapter 7 growth
and Trade.

Part (Chapter 8-12)

Chapter 8 tariffs, Chapter 9 non-tariffs trade restrictions,

Chapter 10 economic integration, Chapter 11 international
trade on the impacts of economic development, Chapter 12
international resource movements and multinational
corporations.

 Part (Chapters 13-15)

It deals with the balance of payments, foreign exchange
markets, and exchange rate determination. A clear grasp of
these three chapters is crucial for understanding Part Four,
which focuses on the adjustment to balance-of-payments
disequilibria and open-economy macroeconomics. Chapter 13
deals with the measurement of a nations balance of payments.
Besides presenting the theory, Chapter 14 also examines the
actual operation of foreign exchange markets and therefore is
of great practical relevance to students of international
economics, particularly business majors. Chapter 15 deals
more closely with some of the monetary and financial
determinants of exchange rates and the reason for exchange
rate volatility

Part (Chapter 16-21)

It examines the various mechanisms for adjusting balance-ofpayments disequilibria, which are often referred to as openeconomy macroeconomics. Chapter 16 covers the adjustment
mechanism that operates by changing the relationship between
domestic and foreign prices, while Chapter 17 examines the
income adjustment mechanism and presents a synthesis of the
automatic adjustment mechanisms. Chapter 18 and 19 deal with
adjustment policies and open-economy macroeconomics
proper. Chapter 20 compares fixed versus flexible exchange
rates, it examines the European Monetary System, and it
discusses international macroeconomic policy coordination.
Finally, Chapter 21 examines the operation of the international
monetary system over time, especially its present functioning ,
and it offers possible solutions for the major international
economic problems facing the world today.

International trade statistics

2009

World Trade Developments

Merchandise trade and GDP

 Overview

2008 international crisis

International trade by products

Chapter Summary
Some Knowledge of International
Economics
The Importance of International Trade and
Finance Among Countries
The Purpose of International Economics
The Present Major Problems of International
Economics
The Organization and Methodology of the
Text
Present Situation of International Economy

Exercises
How do international economic relations differ from interregional
economic relations?
In what way are they similar?
Nations usually impose restrictions on the free international flow of
trade, services and factors. Differences in language, customs and laws
also hamper these international flows. In addition, international flows may
involve receipts and payments in different currencies, which may change
in value in relation to one another through time.
This is to be contrasted with the interregional flow of goods, services and
factors which face no such restrictions as tariffs and are conduced in
terms of the same currency, usually in the same language, and under
basically the same set of customs and laws.
(1)

(2) Both international and interregional economic relations

involve the overcoming
of space or distance. Indeed, they both arise from the
problems created by
distance. This distinguishes them from the rest of economics,
which abstracts from space and treats the economy as a
single point in space, in which production, exchange, and
consumption take place.

Exercises
Can you think of some ways of by which a nation can gain
at the expense of other nations from trade restrictions?
A nation can subsidize exports of the commodity to other nations
until it drives the competing nations industry out of business, after
which it can raise its price and benefit from its newly acquired
monopoly power.

Exercises
When the value of the U.S. dollar falls in relation to the currencies of
other nations, what do you think will happen to the quantity of U.S.
(1) imports?
(2) exports?
(1) Imports become more expensive for Americans and so they
would purchase a smaller quantity of imports.
(2) U.S. exports become cheaper for foreigners and so they would
purchase a greater quantity of U.S. exports.

Exercises
Additional Reading:
1. World Economic Situation and Prospects 2007
2. World Economic Situation and Prospects 2006
3. World Trade Report 2007, 2008

Internet Materials

http://www.imf.org
http://www.wto.org
http://www.oecd.org
http://www.worldbank.org
http://www.un.org/depts/unsd/mbsreg.htm
http://www.census.gov/statab/www
http://www.bea.doc.gov
http://www.federalreserve.gov
http://www.iie.com