FACULTY OF ECONOMICS

Kardan University

International
Economics
Chapter 1: Introduction

Ahsanullah Mohsen M.Sc.

a.mohsen@Kardan.edu.af
Ahsanullah.Mohsen@rub.de

Kardan.edu.af
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What is International Economics?

• International economics is a field of study which

assesses the implications of international trade in goods
and services and international investment. 
• There are two broad sub-fields within international
economics: international trade and international
finance.
• International trade is a field in economics that
applies microeconomic models to help understand the
international economy.
• International finance applies macroeconomic models to
help understand the international economy.
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Introduction

• Globalization of the world economy:

The world is globalizing rapidly which
provide several opportunities and
challenges.
We begin our study of international
economics with brief overview of
globalization.

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Globalization
– Increasing international economic
connections
• International Trade
• International Asset Ownership
– Increasing role of International Organizations
in constraining domestic policies
– Increasing cultural homogeneity
– Increased domestic economic growth caused
by expanded international connections

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The globalization challenges:

1. although labor migration increases efficiency, it
causes job losses for unskilled labors in advanced
countries.
2. International investment is advisable, but it creates
various financial crises. Such as crisis in Asia 1997,
subprime housing mortgage crisis in US 2007
3. We are running out of resources, such as
petroleum…
4. What do you think about the climate disaster?
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• The Anti-Globalization movement

– A loose coalition of groups opposed to
globalization
– Concerns
• Environmental damage
• Loss of domestic labor protections
• Erosion of domestic sovereignty

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International trade and the nation’s Standard of

Living
• The International Economy generates Interdependence
• Economic growth in the USA/Afghanistan spurs increased
demand for imports
• Increased import demand by the USA/Afghanistan
generates economic growth in other countries

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Standard of Living
• The International Economy generates Interdependence
• Sources of potential gain
– Access to items not available domestically
– Access to lower cost products: since countries are specialized
they can produce good with lower cost and export to other
countries.
– Access to greater product variety: through adopting
international trade, more than one type of the same product can
be available.

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Standard of Living

• The International Economy generates

Interdependence
• Sources of potential gain
• Is it always a gain?
– Import competing sectors may experience production
and job losses
– This loss is at least partially (and potentially,
completely) offset by gains in the exporting sectors

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Interdependence in the world economy is reflected in

the flow of goods, services, labor, and capital across
national boundaries
International trade in goods and services:
– A key issue – its not just imports!
– Its also not just for consumers!
– Services, not just goods!
– International trade is expanding

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Source: World Trade Organization
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International trade in goods and services:

The Gravity Model
• We have seen that international trade is of growing importance to the
nation’s well-being
• But which are the major U.S./ Afghanistan trade partners and
why?
• In general, we would expect nations to trade more with larger
nations, with nations that are geographically closer
(transportation costs), with nations with more open economic
systems, and with nations with similar language and cultural
background

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International trade in goods and services:

The Gravity Model
In its simplest form, the gravity model suggests that
(other things equal), the bilateral trade between two
countries is proportional, or at least positively related, to
the product of the two countries’ GDPs and to be smaller
the greater the distance between the two countries (just
like in Newton’s law of gravity in physics). That is, the
larger (and the more equal in size) and the closer the two
countries are, the larger the volume of trade between
them is expected to be.

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Top 10 export countries Top 10 import countries

for Afghanistan
Country Export USD$ Country Import USD$
Pakistan $283,316,886 Iran $1,265,139,067
India $230,037,526 Pakistan $1,198,759,334
Iran $18,822,947 China $1,092,707,519
Turkey $12,147,012 Kazakhstan $621,624,666
Iraq $11,184,770
Uzbekistan $399,144,420
United Arab $9,368,012
Emirates Turkmenistan $355,401,308

China $4,754,161 Malaysia $264,863,333

Germany $4,405,604 Japan $248,690,628
Kazakhstan $3,988,416 United Arab $200,385,452
Russia $3,486,361 Emirates

India $152,876,873
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What is International
Economics?

• International trade in goods and services

• International ownership of assets: owning the
assets of other countries
• Currency exchange
• International organizations
– World Trade Organization
• WWW link
– International Monetary Fund
• WWW link
– European Union
• WWW link
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Current International Economic Problems

1. Trade Protectionism in Industrial Countries
• Reasons for protectionism:
Securing jobs, trade surplus, accumulation of gold

• What are the implications of this protection for the industrial

countries?
Fear of large job losses, not remaining competitive

• How do regional trade blocks (the NAFTA, 1994 the European Union,
etc.) complicate efforts to reduce this protection?

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Current International Economic Problems

2. Excessive Fluctuations and Large Disequilibria in
Exchange Rates
Large exchange rate fluctuations may disrupt international
trade and harm economic growth
– Sources of fluctuation:
• Trade movements
• Capital movement
• Political conditions
• Demand and supply
• Monetary policy
• Stock exchange operations
– Solution to the fluctuation

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Current International Economic Problems

3. Financial Crises in Emerging Market Economies

– A currency crisis is brought on by a decline in the value
of a country's currency. This decline in value negatively
affects an economy by creating instabilities in exchange
rates.
Read more: 
What Causes A Currency Crisis? | Investopedia 
https://www.investopedia.com/articles/economics/08/cu
rrency-crises.asp#ixzz5SrRwtEuO
 

– The causes and consequences of a sudden collapse in the

value of a currency of an emerging economy (investors 19
perception, insecurity…)
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Current International Economic Problems

4. High Structural Unemployment and Slow Growth in Europe

and Stagnation in Japan
• Job Insecurity from Restructuring and Downsizing in the United
States

5. Restructuring Problems of Transition Economies

refers to the phenomenon of urban areas shifting from a
manufacturing to a service sector economic base

6. Deep Poverty in Many Developing Countries

7. Resource Scarcity, Environmental Degradation, Climate
Change and Unsustainable Development

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Subjects in International Economics

1. International Trade Theory
2. International Trade Policy
– Examines the reasons for and the effects of restrictions on
international trade
– Analyzes the implications for International
Trade Theory of such restrictions
3. Balance of Payments
– A summary statement of all the international transactions
of the residents of a nation with the rest of the world during
a particular period of time, usually a year.
– Provides a statistical summary of the size of international
trade and international asset ownership for a country

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Subjects in International Economics

4. Foreign Exchange Markets

– The institutional framework for the exchange of one
national currency into another
– Part of the study of International Finance (or Open-
Economy Macroeconomics) that is concerned with the
macroeconomic implications of the International
Economy
5. Adjustments in the Balance of Payments
– Focuses on the relationship between internal and
external aspects of the economy
– Examines how disequilibria lead to macroeconomic
adjustment under difference international monetary
systems
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