IMPORTANCE OF

STUDY OF
INTERNATIONAL
ECONOMICS
Submitted to :
Prof. Madan Lal
Submitted By :SIDDHANT KAPOOR
Roll No. - 40

What Is International
Economics About?
International

economics is about how

nations interact through trade of goods
and services, through flows of money and
through investment.
International economics uses the same
fundamental methods of analysis as other
branches of economics, because the
motives of individuals and firms are the
same in international trade as they are in
domestic transactions.

What Is International
Economics About? (contd.)
International economics is an old subject,

but it continues to grow in importance as

countries become tied to the international
economy.
Nations are more closely linked through

international trade than ever before.

Importance of IE
The subject matter of international economics
consists of issues raised by the economic
interaction between sovereign states. Seven
themes recur throughout the subject :
The Gains from Trade
The Pattern of Trade
Protectionism
The Balance of Payments
Exchange-Rate Determination
International Policy Coordination
The International Capital Market

The Gains from Trade

When a buyer and a seller engage in a voluntary

transaction, both receive something that they

want and both can benefit from it.
With a finite amount of resources, countries can
use those resources to produce what they are
most productive at, then trade those products for
goods and services that they want to consume.
Trade is predicted to benefit a country by making
it more efficient when it exports goods which use
abundant resources and imports goods which use
scarce resources.
When countries specialize, they may also be more
efficient due to large scale production.

The Pattern of Trade

Who sells what to whom
Climate and resources determine the trade

pattern of several goods.

Protectionism
Many governments are trying to shield certain

industries from international competition.

This has created the debate dealing with the
costs and benefits of protection relative to free
trade.
Policy makers affect the amount of trade through

tariffs: a tax on imports or exports,

quotas: a
exports,

export subsidies: a payment to producers that

export.

quantity

restriction

on

imports

or

The Balance of Payments

The record of a country's transactions with

the rest of the world is called the balance

of payments.
Explaining the balance of payments, and

diagnosing its significance, is a

theme of international economics.

main

Exchange-Rate Determination
One

of
the
key
differences
between
international economics and other areas of
economics is that countries have different
currencies.
It is usually possible to convert one currency
into another, although relative prices of
currencies may change over time, sometimes
drastically.
Some of the world's most important exchange
rates fluctuate minute by minute and the role of
changing exchange rates remains at the center
of the international economics story.

International Policy
Coordination
The

international
economy
comprises
sovereign nations, each free to choose its own
economic policies. Unfortunately, in an
integrated world economy one country's
economic policies usually affect other
countries as well.
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.

The International Capital

Market
In any sophisticated economy there is an

extensive
capital
market:
a
set
of
arrangement by which individuals and firms
exchange money now, for promises to pay in
the future.
International

capital
markets
differ
in
important ways from domestic capital
markets. They must cope with special
regulations that many countries impose on
foreign investment; they also offer the benefit
of higher returns and cheaper borrowing

True/False
International economics is about how

nations interact through trade.

International capital markets do not provide
any benefits as compared to a domestic
capital markets.
A quota is a quantity restriction on imports
or exports.
Climate and resources do not affect the
pattern of trade of a country.
Nations are more closely linked through
international trade.

Multiple Choice Questions

Capital market is a set of arrangement by which

individuals and firms exchange :

1. Goods
2. Money
3. Services
4. None of the above
. Policy makers control the amount of trade through :
1.
2.
3.
4.

Quotas
Export Subsidies
Tariffs
All of the above

The subject matter of International Economics

includes :
1. The Gains from Trade
2. Protectionism
3. The Balance of Payments
4. All of the above
When countries specialize in production, they

become :
1. less efficient.
2. more efficient
3. No effect

References
International Economics by Francis

Cherunilam
International Economics Theory &
Policy by Krugman, Obstfeld & Melitz

THANK YOU