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Introduction to International Economics

An economics field of study that applies both macroeconomic and microeconomic principles to
international trade, which is the flow of trade among nations, and to international finance, which
is the means of making payment for the exchange of goods among nations. International
economics studies the economic interactions among the different nations that make up the global
economy. Often this interaction is viewed in terms of the domestic economy and the foreign
sector. The key economic principle underlying international economics is the law of comparative
International economics is the study of how the production of one nation is purchased by another
nation and how the currency of one nation is exchanged for the currency of another nation to pay
for this production. In one sense, international economics is the application of standard economic
principles with one key qualification -- the buyers are in one nation and the sellers are in another.
Trade and Finance
International economics is a broad field of study that is divided between two subfields -international trade and international finance. Economists can and do spend their entire careers in
either subfield, but usually have a keen understanding of both.

International Trade: This is the study of the flow of goods and services among the
nations of the globe. The primary focus is on how and why goods are traded, especially
the identification of key principles such as the law of comparative advantage.

International Finance: This is the study of the payment for the goods and services
traded among nations. This subfield is concerned with identifying the principles
important to the exchange of the currencies used to pay for the traded goods, with
particular focus on the foreign exchange market.

A Macro-Micro Bridge
The study of international economics bridges the divide between the two primary branches of
economics -- macroeconomics and microeconomics.

Macroeconomics: This is the study of the aggregate economy, with particular emphasis
on business-cycle instability that triggers problems of unemployment and inflation. While

restrict imports. and thus create the biggest possible net exports difference between exports and . with particular emphasis on the efficiency of market exchanges. applications.  Imports: Imports are goods (or services) produced by the foreign sector and purchased by the domestic economy. These are goods that flow out of a domestic economy. The Trading Game The starting point for the study of international economics is the trade than takes place among nations. especially assorted trading policies. such as the law of comparative advantage. This is the difference between goods flowing out of the domestic economy and goods flowing into a domestic economy. Some of these issues include migration of the population. The result of such applications provides insight into a number of extremely important issues. and topics are studied under the heading of microeconomics. and net exports. The international trade term is the more generic of the two. The foreign trade term is a bit more specific.exports. the goal of a given nation is usually to promote exports. And it so doing it emphasizes the interaction between the domestic economy and the foreign sector.macroeconomics is primarily concerned with domestic production that is purchased by the domestic sector. trade with the foreign sector can also play a pivotal role.  Microeconomics: This is the study of parts of the economy. And in so doing it focuses on the essential principles of trade among nations.  Exports: Exports are goods (or services) produced by the domestic economy and purchased by the foreign sector. These are goods (or services) that flow into a domestic economy.  Net Exports: Net exports are the difference between exports and imports. imports. taking a domestic view of the trading process. important applications of market principles apply to international trade and international finance. While a wide range of issues. termed either international trade or foreign trade. competition among oligopoly firms. taking a more global view of the trading process. both within and beyond the venue of international economics. From the domestic view of foreign trade. and wage differentials in labor markets. The study of foreign trade also gives rise to three related terms -.

which means that trade between the two nations can be beneficial to both if each specializes in the production of a good with lower relative opportunity cost. . The Law of Comparative advantage This law states that every nation has a production activity that incurs a lower opportunity cost than that of another nation.imports. that could produce all sorts of goods. find it beneficial to purchase some of those goods from less advanced nations. From the global view of international trade. The global sum of exports necessarily equals the global sum of imports. The central economic principle underlying the study of international trade is the law of comparative advantage. net exports are zero. This difference between exports and imports is indicated by what is termed a nation's balance of trade. For the global economy. the exports of one nation are the imports of another. The law of comparative advantage indicates why it is that technologically advanced nations. In the same way the exchanges among buyers and sellers within a nation can be beneficial to both sides. international trade among nations can also be beneficial to both sides. When one nation exports the other nation imports.