Introduction

Prepared by Lauren Rhodes, Phd. 1

• These slides are based on the chapter 1 of Krugman and Obstfeld (8th
edition)

Prepared by Lauren Rhodes, Phd. 2

Learning Goals
• Distinguish between international and domestic economic issues.

• Explain why seven themes recur in international economics, and discuss their
significance.

• Distinguish between the trade and monetary aspects of international

economics.

Prepared by Lauren Rhodes, Phd. 3

Introduction
• Today, the global economy is linked through international trade and
the investment in foreign economies.

• Consider Figure 1-1

Prepared by Lauren Rhodes, Phd. 4

Figure 1-1: Exports and Imports as a Percentage of
U.S. National Income

Prepared by Lauren Rhodes, Phd. 5

Introduction
• What does Figure 1-1 tell us?

• International trade has roughly tripled in importance compared with

the economy as a whole.

• A trend has occurred where imports exceed exports.

• Financed through large inflows of capital invested by foreigners willing to
take a stake in the U.S. economy.

Prepared by Lauren Rhodes, Phd. 6

Figure 1-2: Exports and Imports as Percentage of
National Income in 1994

Prepared by Lauren Rhodes, Phd. 7

What is International Economics About?
• International economics deals with the interaction between
sovereign nations.

• Seven themes in the study of international economics:

• The Gains from Trades
• The Pattern of Trade
• How Much Trade?
• Balance of Payments
• Exchange Rate Determination
• International Policy Coordination
• The International Capital Market

Prepared by Lauren Rhodes, Phd. 8

The Gains from Trade
• There are many reasons that countries choose to support domestic
production of some goods.
• Food and energy security
• Job creation
• Income protection
• Industry protection
• Etc.

• But are all these reasons justified?

Prepared by Lauren Rhodes, Phd. 9

The Gains from Trade
• International trade is almost always mutually beneficial.

• True even when one country is more efficient in all areas of production.

• Allows countries to export goods that are locally abundant and import locally
scarce goods.

• Allows for more efficiencies from large scale production as countries

produce a narrower range of goods.

• Not limited to tangible goods.

Prepared by Lauren Rhodes, Phd. 10

The Gains from Trade
• Potential drawbacks from trade
• Some groups within a country may be hurt as income is redistributed.

Prepared by Lauren Rhodes, Phd. 11

The Pattern of Trade
• Climate and natural resources explain a lot of trade.

• Why some countries trade in particular goods that have nothing to

do with climate and natural resources is not so obvious.
• We will discuss this more in a few lectures.

Prepared by Lauren Rhodes, Phd. 12

How Much Trade?
• Important policy theme.
• Protectionist policies may include limiting imports or promoting exports.
• International economics looks at the effect of these types of policies.

• Move towards globalization in the 1990s

• North American Free Trade Agreement (NAFTA)
• Uruguay Round’s establishment of the World Trade Organization

Prepared by Lauren Rhodes, Phd. 13

Balance of Payments
• The balance of payments must be placed in the context of an
economic analysis to fully understand it.

• Emerges in a variety of contexts

• International capital movements
• Relating international transactions to national income accounting.
• Most aspects of international monetary policy

• We will come back to this idea throughout the course.

Prepared by Lauren Rhodes, Phd. 14

Exchange Rate Determination
• The relative value of currencies can vary over time.

• The role of changing exchange rates is at the center of international

economics.

Prepared by Lauren Rhodes, Phd. 15

International Policy Coordination
• Policies from one country effects the economy of another.
• Example: Germany raised interest rates in 1990 due to the reunification of
East and West Germany which helped precipitated a recession in the rest of
Western Europe.

• A fundamental problem in international economics is how to produce

an acceptable degree of harmony among the international trade and
monetary policies of different countries without a world government
that tells countries what to do.

Prepared by Lauren Rhodes, Phd. 16

The International Capital Market
• There are risks associated with international capital markets:
• Currency depreciation
• National default

Prepared by Lauren Rhodes, Phd. 17

International Economics: Trade and Money
• International Economics has two main subfields
• International trade
• International monetary Analysis

• International trade
• Primarily concerned with the movement of tangible goods.

• International monetary analysis

• Focuses on the monetary side
• Ex: Financial transactions such as the purchase of US dollars.

Prepared by Lauren Rhodes, Phd. 18