KOM Chapter01

8/10/2019 KOM Chapter01

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Copyright 2012 Pearson Addison-Wesley. All rights reserved.

Chapter 1

Introduction


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Copyright 2012 Pearson Addison-Wesley. All rights reserved.1-2

Preview

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 ratedetermination, international policy coordinationand capital markets

International trade versus finance


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What Is International Economics About?

International economics is about hownations interact through: trade of goods and services, flows of money,

and investment. International economics is an old subject,

but continues to grow in importance ascountries become tied more to theinternational economy.

Nations are now more closely linked thanever before.


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What Is International Economics About?(cont.)

International trade as a fraction of thenational economy has tripled for the U.S. inthe past 40 years.

Both imports and exports fell in 2009.

Compared to the U.S., other countries areeven more tied to international trade.


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Fig. 1-1: Exports and Imports as aPercentage of U.S. National Income

Source: U.S. Bureau of Economic Analysis


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Fig. 1-2: Exports and Imports asPercentage of National Income in 2007

Source: Organization for Economic Cooperation and Development


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Gains from Trade

Several ideas underlie the gains fromtrade.

1. When a buyer and a seller engage in a

voluntary transaction, both can be madebetter off. Norwegian consumers import oranges that they

would have a hard time producing. The producer of the oranges receives income that it

can use to buy other things that it desires.


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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 aremost productive at (compared to their other productionchoices), then trade those products for goods andservices that they want to consume.

Countries can specialize in production, while consumingmany goods and services through trade.


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3. Trade benefits countries by allowing them toexport goods made with relatively abundantresources and imports goods made withrelatively scarce resources.

4. When countries specialize, they may be moreefficient due to larger-scale production.

5. Countries may also gain by trading current

resources for future resources (internationalborrowing and lending) and due to internationalmigration.


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Copyright 2012 Pearson Addison-Wesley. All rights reserved. 1-10


Trade is predicted to benefit countries as awhole in several ways, but trade may harm

particular groups within a country .

International trade can harm the owners ofresources that are used relatively intensively inindustries that compete with imports.

Trade may therefore affect the distribution ofincome within a country.


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Patterns of Trade

Differences in climate and resources can explainwhy Brazil exports coffee and Australia exportsiron ore.

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


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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 allowdomestic products.

What are the costs and benefits of these policies?


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The Effects of Government Policieson Trade (cont.)

If a government must restrict trade, which policyshould it use and how much should it restricttrade?

If a government restricts trade, what are the costsif foreign governments respond likewise?

Trade policies are often chosen to cater to specialinterest groups, rather than to maximize nationalwelfare.

Governments tend to adopt tariffs, then negotiatethem down in exchange for reduction in tradebarriers of other countries.


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International Finance Topics

Exchanging risky assets such as stocks andbonds can benefit all countries bydiversification that reduces the variability

of income another source of gains fromtrade.

Most international trade involves monetary

transactions. Many monetary events have important

consequences for international trade.


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Balance of Payments

Governments measure the value of exports andimports, as well as the value of financial assetsthat 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 financialassets.

The official settlements balance , or the balance ofpayments, measures the balance of funds thatcentral banks use for official internationalpayments.

All three values are measured in the governmentsnational income accounts .


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Exchange Rate Determination

Exchange rates are an important financial issue formost governments.

Exchange rates measure how much domestic

currency can be exchanged for foreign currencyand 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.


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International Policy Coordination

In an integrated economy, one countrys economicpolicies usually affect other countries as well,leading to the need for some degree of policycoordination. Depends on type of exchange rate regime.

Capital markets, where money is exchanged forpromises 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 ondebt.


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International Trade Versus Finance

International trade focuses on transactionsinvolving movement of goods and servicesacross nations.

International trade theory (chapters 2 8) andpolicy (chapters 9 12)

International finance focuses on financial or

monetary transactions across nations. International monetary theory (chapters 13 18)

and policy (chapters 19 22)

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