What is international economics?

Economics: is a study of how people and society end up choosing with or without the use of
money, to employ scarce productive resources that could have alternate uses

Microeconomics Macroeconomics

International eco: Models of international trade and international finance

World economy is a dead sum of countries and their relations

International economics is different, because countries are sovereign, political boundaries

matter

 Countries can influence international trade, capital flows, migration etc.

 They have different currencies, different taxes, and different laws, etc.

Int. eco. is the study of:

 international economic processes (such as globalization)

 economic relations between countries (such as international trade, international factor
flows), the emergence and influence of non-state actors (such as multinational
corporations)
 the international institutions that govern these relationships and processes (such as the
IMF, the WTO)
 Four Controversies or stories from international economics
Four controversial developments that frame the scope of what you will learn

1. U.S. Exports of Natural Gas

2. Immigration
3. China’s Exchange Rate
4. Euro Crisis

1) U.S. Exports of Natural Gas

 U.S. production of natural gas had been about flat from the mid-1990s to the mid-2000s.
As consumption increased imports rose from 13% to over 19% in 2006, with nearly all of
the imports from Canada through pipelines

 A new extraction technology, fracking, was introduced which enabled natural gas to be
extracted from shale deep underground

 U.S. production of natural gas increased by 31% during 2006-2013 and imports fell to 11%
of U.S. consumption

o Should the U.S. export more natural gas?

o Are larger amounts of natural gas exports in the U.S. public or national interest?
o How would the gas exports be transported and what does that do to the overall cost?

What would happen if the U.S. government permitted substantial amounts of ongoing U.S.
exports?

1. The U.S. would not export all of its gas—the international natural gas market would
reach equilibrium
2. U.S. gas producers and export distributors would benefit and U.S. consumers would be
harmed
3. If environmental effects are ignored, U.S. producers gain more than the U.S. consumers
lose
Environmental effects (negative externalities)

 Noxious chemicals are introduced during the fracking process that can leak into
groundwater
 Burning natural gas releases carbon dioxide, a greenhouse gas, contributing to global
warming
 Risk of leaking methane, another greenhouse gas, during extraction

Relevance for B&M students:

 Externalities can influence the long term prospects of fracking

 If the US exports natural gas, this could create additional supply and lower prices

2) Immigration

 About 230 million people, 3% of the world’s population live outside the country of their
birth
 For most industrialized countries (an exception is Japan) the percentage of the country’s
population that is foreign-born is high
 Immigration policies have been set in place to reduce and restrict immigration

Opponents of immigration stress a range of problems they believe arise from immigration,
including:

 General losses to the economy

 The fiscal burden from immigrants’ use of government services (health care, schooling,
etc.) Slow integration of immigrants into the new national culture, values, and language
 Potential of increased crime
 Links of some immigrants into terrorism

Proponents of immigration argue:

 Increased competition will spur long term growth

 Jobs which are not taken by locals will be filled in
  R&D levels are likely to increase
 Diversity helps the country

How much harm do immigrants do to the economies of the countries they move into?

 Job-seeking brings net economic benefits not only to the immigrants, but to the receiving
country overall
o Winners include the firms that employ the immigrants and consumers who buy the
products
o The group that loses is the workers who compete with the immigrants for jobs
o Putting this together, the net effect is positive (the winners win more than the losers
lose)

 Relevance for B&M students:

o It matters quite a lot whether you can hire good quality workforce AND how much you
have to pay for it.

3) China’s Exchange Rate

 An exchange rate is the value of a country’s currency in terms of some other country’s
currency
 In 1994 the Chinese government switched from a system of several different exchange
rates, each applying to different kinds of international transactions, to fixed rate to the
U.S. dollar
o Locked at about 8.28 yuan per dollar from 1997-2005
 By 2003 the U.S. government began to complain that China’s fixed-rate policy was
unacceptable currency manipulation
o U.S. threatened large new tariffs on imports from China if the yuan wasn’t revalued
Was there proof of manipulation? (i.e. the exchange rate value should have changed, but did
not)

 The Chinese government continually had to go into the foreign exchange market to buy
dollars and sell to yuan to keep the market rate equal to the fixed-rate target
 If it had not done so, the private demand for yuan would have lead to a rise in the price
(the exchange-rate value) of the yuan

Estimates of the undervaluation (of the exchange rate) were 15-40% but there are challenges in
making this estimate

 China has substantial trade surpluses with the U.S. and European Union, but had trade
deficits with many other countries.
Overall, China had a trade surplus
China has a very high national saving rate
 Private speculators moved “hot money” into the country in hopes of profiting when the
value of the yuan increased

 As the world recovered from the worst of the global crisis, pressure was put back on China
to increase the exchange-rate value of the yuan, which was estimated to be 15-30%
undervalued
 In 2010 the Chinese government resumed allowing a slow increase in the exchange-rate
value of the yuan
 The foreign pressure may have had some effect, but conditions in China were beginning to
change
o The yuan money supply in China grew too rapidly, encouraging local borrowing and
spending that created upward pressure of the inflation rate
 By increasing the exchange-rate value of the yuan, the Chinese government was able to
better manage its domestic economy
o It lowers import prices in China, reducing inflation pressures
o Slows the growth of China’s exports, removing demand pressure on the prices of
resources and products Reduces the amount of intervention needed, reducing the
pressure for growth of the money supply
 The exchange rate is a key price that affects international trade flows of goods and
services and international financial flows
  Relevance for B&M students:
o It is likely that your company which you will work for or own, will have dealings in
foreign currencies. If it is over or undervalued you are going to get a different value
than you might expect

4) Euro Crisis

 The European Union is the most successful regional trade agreement (27 countries, 28-UK)
and has largely eliminated barriers to goods and services and movement of financial
capital among its member countries
 In 1999, 11 EU countries established the euro as their common currency with the
European Central Bank (ECB) in charge of monetary policy for the euro area. The ECB’s
primary objective is price stability (low inflation rate of about 2 %)

 The global and financial economic crisis began in 2007

The recession drove increased fiscal deficits into most euro-area countries

o Greece’s fiscal deficit was almost 16% of its GDP in 2009 and its outstanding
government debt rose to 130% of its GDP

Burst housing bubbles in some euro-area countries led to rising defaults on mortgages,
threatening the solvency of the banks that had made the loans

o The Irish government decreed that the government guaranteed all the deposits and
debts of large Irish banks. As bank losses mounted, the government provided
assistance. Ireland’s fiscal debt jumped to 30% of its GDP in 2010 and outstanding
government debt rose to over 100% by 2011

 Prior to 2008 the interest rates on government debts of different countries were relatively
close to each other
 In 2009 with the realization that the Greek deficit was much larger than previously
reported, the interest rates on Greek government debt began to rise well above those for
Germany’s government debt

The Greek government concluded that it could not take on such expensive financing and the
euro crisis began In 2010 the Greek government received a bailout package of 110 billion
 euros funded by the other euro-area countries through the newly formed European
Financial Stability Facility (EFSF), the EU, and International Monetary Fund

 In March 2012 the Greek government received a 2nd bailout that added 130 billion euros
to the 1st one, and the Greek government defaulted on its privately held bonds

 Contagion spread the crisis to the government bonds of Spain and Italy. Spain and Italy are
too large to receive bailout packages comparable to those of Greece, Ireland, and Portugal

 In late July 2012, ECB President Draghi pledged that “the ECB is ready to do whatever it
takes to preserve the euro. And believe me, it will be enough”

 In September the ECB approved the new Outright Monetary Transactions program, in
which the ECB is willing to purchase large amounts of national government bonds

 By 2014 the interest rates on Italian, Spanish, Greek, Portuguese, and Irish bonds went
into decline and all except Greece were within 2 percentage points of the rates on German
bonds

 The worst of the crisis appeared to be over

 What has happened in Greece recently? What does that mean for the future of the euro?
 Relevance for B&M students:
o The EZ does create a policy straightjacket for its members, but it also provides stability.
Being a member will prevent larger volatility especially in times of crisis