INTRODUCTION TO INTERNATIONAL ECONOMICS
Topic 1.1
International economics is divided into two areas:
· International trade
· International macroeconomics/finance
International trade (or ‘real’ trade) is the macroeconomics of trade. It studies topics such as:
· Why do countries trade?
· What determines the pattern of trade (who exports and who imports)
· Who produces what products
· How does technology affect trade?
· Who gains from trade?
· How does trade affect income?
· What determines the ‘terms of trade’ and why does it matter?
· What policies should a country adopt for trade?
· What is the relationship between trade and growth?
The classical theory of trade is based on general equilibrium microeconomic theory.
The advantage of general equilibrium theory is that it captures the essential characteristic of international trade—everything affecting everything else.
There are two limitations to general equilibrium theory:
· It is basically a static equilibrium approach.
· It does not handle ‘imperfect competition’ well.
Other theories of trade allow for some degree of market power.
Yet others incorporate geography, or technology, or use the firm as the unit of analysis.
Theories that are more recent incorporate culture, networks, and other ideas from other disciplines.
International macroeconomics/finance is characterized by the addition of money and financial assets to the classical model.
‘Money’ allows/facilitates exchange between different countries.
Assets (like bonds) allow trade over time. Borrowing/lending requires some form of contract and that is what bonds are. Another aspect of allowing assets is that countries can manage risk/uncertainty.
The difference between macroeconomics and finance is that of emphasis. International finance emphasizes assets and risk. International macroeconomics emphasizes currency and generic ‘bonds’ as a way to shift consumption/production over time.
For convenience, we will use the term ‘international finance’
International finance studies:
· Exchange rates
· ‘Capital flows’ and the balance of payments
· Interaction between global monetary policies and global growth and trade
· International finance and growth
International economics has a long intellectual history – going back to Adam Smith and Davis Ricardo.
It is a dynamic area –falling transportation costs, the internet, and technology have made the world ‘flat’.
International economics is difficult to test econometrically—everything affects everything else.
We will do some experiments in international economics. There is some new work that we’ll look at by Vernon Smith and Bart Wilson on the evolution of exchange and specialization.
