INTERNATIONAL ECONOMICS AND

BASIS OF INTERNATIONAL
TRADE

Presented by-
INTERNATIONAL
ECONOMICS
INTERNATIONAL ECONOMICS
 International Economics is the study of the
allocation of scarce resources to satisfy
humans’ alternative wants at international
level. It deals with economic interdependence among
nations and how it influences the allocation of scarce
resources both within and between nations.
 International Economics analyzes the flow of goods,
services and payment between a nation and the
rest of the world, the policies directed at regulating
this flow and their effect on the nation’s welfare. This
economic interdependence among nations is affected
by, and in turn influences the political, social, cultural
and military relations.
 International Economics focuses on the
International aspects of economic activities.
WHY IS INTERNATIONAL ECONOMICS
IMPORTANT?
IMPORTANCE OF INTERNATIONAL
ECONOMICS
 International economics deals basically with
those economic principles which govern the
exchange of goods (and services) between
sovereign nations (more accurately, between their
residents) and with special policy problems
which arise in view of this.
 International economics is indispensable for
shaping global economic policies and encouraging
international cooperation. Its significance lies in
the following points:
International economics is essential for
understanding the nature and dynamics of
international trade. Globalization has made the
world a much more connected place, with goods
and services being produced and consumed across
borders. International trade helps countries to
specialize in the production of goods and services
in which they have a comparative advantage,
which leads to increased efficiency and higher
economic growth. Without a clear understanding
of international economics, it would be impossible
to develop effective policies that promote
international trade.
 Global Interconnectedness: In today’s world, economies are
highly interconnected. Understanding international economics
helps in comprehending the complexities of global trade,
finance, and investment, which are essential aspects of the
modern economy.
 Trade and Development: It fosters economic growth and
development by allowing countries to specialize in what they
do best and exchange goods and services with others. It helps
in creating jobs, increasing income, and improving living
standards.
 Policy Formulation: Policymakers rely on international
economics principles to make informed choices about
tariffs, trade agreements, foreign aid, and other economic
policies, considering their far-reaching consequences on their
economies and the world.
 Currency Exchange: The study of exchange rates is crucial
for businesses and governments since fluctuations in exchange
rates impact trade balances, inflation rates, and
overall economic stability.
 Cultural Exchange: It fosters cultural exchange by
encouraging the flow of ideas, traditions, and lifestyles
between trading nations, leading to mutual understanding
and tolerance.
 Investment Opportunities: Understanding international
interaction trends and scope helps investors assess
opportunities and risks in different countries, enabling
them to make informed investment decisions.
 Fosters International Trade: A fundamental aspect of
international economics, promotes economic growth by
facilitating the exchange of goods and services between
nations.
 Comparative Advantage and Resource Allocation: It
encourages specialization in cross-border transactions,
allowing countries to trade products efficiently and allocate
resources effectively on a global scale.
 Global Development: It provides insights into
how countries, especially developing ones, can
integrate into the global economy, attract
investments, and improve their living standards.
 Global Financial Stability: It also contributes
to the viability and stability of the global
financial and economic system by analyzing
financial crises, capital flows, and the impact of
policies across borders.
GLOBAL ECONOMIC DEVELOPMENT

 International economics is crucial for

understanding global economic development.
Countries that are open to international trade
tend to experience higher economic growth rates
than those that are not. This is because
international trade leads to increased
competition, which encourages innovation and
efficiency. Additionally, international trade
provides countries with access to larger markets,
which can help to increase the scale of production
and reduce costs. Therefore, international
economics plays a crucial role in promoting
economic development in both developed and
developing countries.
GLOBAL ECONOMIC STABILITY

 International economics is important for

understanding global economic stability. The
global financial crisis of 2008 demonstrated the
interconnectedness of the global economy and the
need for international cooperation in the
regulation of financial markets. International
economics provides policymakers with the tools
and knowledge necessary to develop effective
policies that promote global economic stability.
IMPACT OF GLOBALIZATION

 International economics is essential for

understanding the impact of globalization on
inequality. While international trade can lead to
increased economic growth, it can also lead to
increased inequality within and between
countries. Understanding the mechanisms
through which globalization affects inequality is
crucial for developing policies that promote
economic growth while also ensuring that the
benefits of growth are shared more equitably.
ROLE OF INTERNATIONAL INSTITUTIONS
AND AGREEMENTS

international economics is important for


understanding the role of international
institutions and agreements. The global economy
is governed by a complex web of international
institutions and agreements, including the
World Trade Organization, the International
Monetary Fund, and the World Bank.
Understanding the nature and function of these
institutions is essential for developing effective
policies that promote international trade,
economic development, and stability
International economics is essential for
understanding the impact of international
migration on the global economy. Migration has
become a crucial driver of economic development,
with millions of people moving across borders in
search of better economic opportunities.
Understanding the economic impact of migration
is essential for developing policies that maximize
the benefits of migration while minimizing the
costs.
 international economics is crucial for
understanding the impact of technology on the
global economy. The digital revolution has
transformed the global economy, with new
technologies enabling greater connectivity,
innovation, and efficiency. Understanding the
impact of technology on the global economy is
essential for developing policies that promote
economic growth and development in the digital
age.
International economics is important for
understanding the impact of international
financial flows on the global economy. The
movement of capital across borders has become
increasingly important in the global economy,
with large amounts of money flowing between
countries every day. Understanding the nature of
these financial flows and their impact on the
global economy is crucial for developing policies
that promote financial stability and sustainable
economic growth.
 International economics is essential for
understanding the impact of geopolitical factors
on the global economy. The global economy is
influenced by a range of geopolitical factors,
including international conflicts, trade disputes,
and political instability. Understanding the
impact of these factors on the global economy is
essential for developing policies that promote
stability and sustainable economic growth in an
increasingly complex and interconnected world.
SUMMING UP
International economics is a complex and
dynamic field of study that is essential for
understanding the global economy. It plays a
critical role in promoting international trade,
economic development, and stability while
addressing issues such as inequality, financial
flows, geopolitics, regional integration, income
distribution, currency exchange rates,
international labor markets, and international
debt. Policymakers, economists, and scholars
must continue to refine their understanding of
international economics to promote a more
prosperous and sustainable global economy.
Basis of International
Trade
 BASIS OF INTERNATIONAL TRADE

 Emergence of international trade is that the

human wants are varied and unlimited and
no single country possesses the adequate
resources to satisfy all these wants. Hence there
arises a need for interdependence between
countries in the form of international trade. So in
order to make effective utilisation of the world's
resources international trade is to be boosted and
the problems faced by the countries should be
dealt with.
 BASIS OF INTERNATIONAL TRADE

 No country is self sufficient in producing all the

required goods and services from its own
resources. This problem can be solved through
international trade where the countries obtain
those goods which it cannot produce or cannot
produce as cheaply as possible in another
country. However this is not the only basis for
doing international trade, there are other reasons
also. Trade economists have laid down different
theories for international trade.
 Theory of absolute cost advantage
 Theory of comparative cost advantage

 Factor endowment theory

 Theory of competitive advantage

 Product life cycle theory

 Theory of identical preferences

 Product differentiation

 Outlet for domestic surplus

 Producing a good with fewer inputs (capital,
labor, land, raw materials, etc.) per unit of output
than other countries
 If input prices are the same in two countries, the
country with an absolute advantage in a good
will have a lower unit cost of production for that
good
 A country should produce and export products in
which it has an absolute advantage
 A country should import products in which it has
an absolute disadvantage
 Focus on comparative cost advantage not on
absolute cost advantage.
 Each country specialises in the production of that
commodity in which its comparative cost of
production is the least.
 A country will export those commodities in which
its comparative costs are less.
 A country will import those commodities in which
its comparative costs are high
 A country that is relatively abundant in a factor
 of production should export goods that use a lot of
that factor in the production process, and import
other goods
 Example: a country like China with a lot of
labour should export labour-intensive goods
 Why? If a factor is relatively abundant, it will be
relatively cheap, and a country will be more
globally competitive in products that use a lot of
that factor
 To sum it up, we can say that there are multiple
basis for international trade. It can also be said
that these are the inevitable factors which force a
country to do international trade.