An Introduction to

International Economics

Dale R. DeBoer 1-1

University of Colorado, Colorado Springs
 What is International Economics?

• International trade in goods and services

– An example: iPhone

Dale R. DeBoer 1-2

University of Colorado, Colorado Springs
 What is International Economics?

• International trade in goods and services

– A key issue – its not just imports!
• Exports of Boeing Aircraft
• Exports of Microsoft Software

Dale R. DeBoer 1-3

University of Colorado, Colorado Springs
 What is International Economics?

• International trade in goods and services

– A key issue – its not just imports!
– Its also not just for consumers!
• Trade in component parts
• Monitors for Dell Computers

Dale R. DeBoer 1-4

University of Colorado, Colorado Springs
 What is International Economics?

• International trade in goods and services

– A key issue – its not just imports!
– Its also not just for consumers!
– Services, not just goods!
• Lloyd’s of London

Dale R. DeBoer 1-5

University of Colorado, Colorado Springs
 What is International Economics?

• 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

Dale R. DeBoer 1-6

University of Colorado, Colorado Springs
 What is International Economics About?

• The study of international economics has never been as important as it is

now.
• International economics is about how nations interact through trade of
goods and services, through flows of money and through investment.
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 trade in goods and services,
through flows of money, and through investment than ever before.
•

Dale R. DeBoer 1-7

University of Colorado, Colorado Springs
 What is International Economics About?

Dale R. DeBoer 1-8

University of Colorado, Colorado Springs
 What is International Economics?

• International trade in goods and services

– A key i
ssue – its
V a lu not
e o f Wjust
o r ld Mimports!
erchandise E xports (1995= 100)
Source: World Trade Organization
– Its also not just for consumers!
140

– Servic es, not just goods!

120

– Interna tional trade is expanding

100

80

60

40

20

1950 1960 1970 1980 1990 2000

Dale R. DeBoer 1-9

University of Colorado, Colorado Springs
 What is International Economics?

• International trade in goods and services

• International ownership of assets
– Examples
• Foreign stock ownership
• Automobile assembly plants
– Toyota WWW link
• US government debt

Dale R. DeBoer 1 - 10
University of Colorado, Colorado Springs
 What is International Economics?

• International trade in goods and services

• International ownership of assets
• Currency exchange
– International transactions require conversions
between currencies
– Foreign exchange markets
• Federal Reserve Bank Exchange Rate Data WWW
link

Dale R. DeBoer 1 - 11
University of Colorado, Colorado Springs
 What is International Economics?

• International trade in goods and services

• International ownership of assets
• Currency exchange
• International organizations
– World Trade Organization
• WWW link
– International Monetary Fund
• WWW link
– European Union
• WWW link

Dale R. DeBoer 1 - 12
University of Colorado, Colorado Springs
 Standard of Living

• The International Economy generates

Interdependence
– Economic growth in the United States spurs increased
demand for imports
– Increased import demand by the United States
generates economic growth in other countries

Dale R. DeBoer 1 - 13
University of Colorado, Colorado Springs
 Standard of Living

• The International Economy generates

Interdependence
• Sources of potential gain
– Access to items not available domestically
• Coffee
• Electronics
• Tin
• Android and ios
• Vehicles etc

Dale R. DeBoer 1 - 14
University of Colorado, Colorado Springs
 Standard of Living

• The International Economy generates

Interdependence
• Sources of potential gain
– Access to items not available domestically
– Access to lower cost products
– Access to greater product variety

Dale R. DeBoer 1 - 15
University of Colorado, Colorado Springs
 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

Dale R. DeBoer 1 - 16
University of Colorado, Colorado Springs
 Subjects in International Economics

• International Trade Theory

– Analyzes the basis of and the gains from international
trade
– Focuses on the microeconomic aspects of the
international economy

Dale R. DeBoer 1 - 17
University of Colorado, Colorado Springs
 Subjects in International Economics

• International Trade Theory

• 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

Dale R. DeBoer 1 - 18
University of Colorado, Colorado Springs
 Subjects in International Economics

• International Trade Theory

• International Trade Policy
• 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

Dale R. DeBoer 1 - 19
University of Colorado, Colorado Springs
 Subjects in International Economics

• International Trade Theory

• International Trade Policy
• Balance of Payments
• 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

Dale R. DeBoer 1 - 20
University of Colorado, Colorado Springs
 Subjects in International Economics

• International Trade Theory

• International Trade Policy
• Balance of Payments
• Foreign Exchange Markets
• 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
Dale R. DeBoer 1 - 21
University of Colorado, Colorado Springs
 Current International Economic
Problems
• Trade Protectionism in Industrial Countries
– What are the reasons for this protection?
– What are the implications of this protection for the
industrial countries?
– What are the implications of this protection for the rest
of the world?
– How do regional trade blocks (the NAFTA, the
European Union, etc.) complicate efforts to reduce this
protection?

Dale R. DeBoer 1 - 22
University of Colorado, Colorado Springs
 Current International Economic
Problems
• Trade Protectionism in Industrial Countries
• Excessive Fluctuations and Large Disequilibria in
Exchange Rates
– Large exchange rate fluctuations may disrupt
international trade and harm economic growth
– What is the source of these fluctuations?
– How can the international financial system be
reformed to eliminate these fluctuations?

Dale R. DeBoer 1 - 23
University of Colorado, Colorado Springs
 Current International Economic
Problems
• Trade Protectionism in Industrial Countries
• Excessive Fluctuations and Large Disequilibria in
Exchange Rates
• Financial Crises in Emerging Market Economies
– The causes and consequences of a sudden collapse in the
value of a currency of an emerging economy

Dale R. DeBoer 1 - 24
University of Colorado, Colorado Springs
 Current International Economic
Problems
• Trade Protectionism in Industrial Countries
• Excessive Fluctuations and Large Disequilibria in
Exchange Rates
• Financial Crises in Emerging Market Economies
• High Structural Unemployment and Slow Growth in
Europe and Stagnation in Japan

Dale R. DeBoer 1 - 25
University of Colorado, Colorado Springs
 Current International Economic
Problems
• Trade Protectionism in Industrial Countries
• Excessive Fluctuations and Large Disequilibria in
Exchange Rates
• Financial Crises in Emerging Market Economies
• High Structural Unemployment and Slow Growth in
Europe and Stagnation in Japan
• Job Insecurity from Restructuring and
Downsizing in the United States

Dale R. DeBoer 1 - 26
University of Colorado, Colorado Springs
 Current International Economic
Problems
• Excessive Fluctuations and Large Disequilibria in
Exchange Rates
• Financial Crises in Emerging Market Economies
• High Structural Unemployment and Slow Growth in
Europe and Stagnation in Japan
• Job Insecurity from Restructuring and
Downsizing in the United States
• Restructuring Problems of Transition
Economies

Dale R. DeBoer 1 - 27
University of Colorado, Colorado Springs
 Current International Economic
Problems
• Excessive Fluctuations and Large Disequilibria in
Exchange Rates
• Financial Crises in Emerging Market Economies
• High Structural Unemployment and Slow Growth in
Europe and Stagnation in Japan
• Job Insecurity from Restructuring and
Downsizing in the United States
• Restructuring Problems of Transition
Economies
• Deep Poverty in Many Developing
Countries
Dale R. DeBoer
University of Colorado, Colorado Springs
1 - 28
 Globalization

• What is globalization?
– Increasing international economic connections
• International Trade
• International Asset Ownership

Dale R. DeBoer 1 - 29
University of Colorado, Colorado Springs
 Globalization

• What is globalization?
– Increasing international economic connections
– Increasing role of International Organizations in
constraining domestic policies

Dale R. DeBoer 1 - 30
University of Colorado, Colorado Springs
 Globalization

• What is globalization?
– Increasing international economic connections
– Increasing role of International Organizations in
constraining domestic policies
– Increasing cultural homogeneity

Dale R. DeBoer 1 - 31
University of Colorado, Colorado Springs
 Globalization

• What is globalization?
– Increasing international economic connections
– Increasing role of International Organizations in
constraining domestic policies
– Increasing cultural homogeneity
– Increased domestic economic growth caused by
expanded international connections
• Potential harm?
– Environmental concerns

Dale R. DeBoer 1 - 32
University of Colorado, Colorado Springs
 Globalization

• What is globalization?
• The Anti-Globalization movement
– A loose coalition of groups opposed to globalization
– Concerns
• Environmental damage
• Loss of domestic labor protections
• Erosion of domestic sovereignty

Dale R. DeBoer 1 - 33
University of Colorado, Colorado Springs
 Gains from Trade

• Several ideas underlie the gains from trade

1. When a buyer and a seller engage in a voluntary transaction,
both receive something that they want and both can be
made better off.
• Norwegian consumers could buy oranges through international trade
that they otherwise would have a difficult time producing.
• The producer of the oranges receives income that it can use to buy
the things that it desires.

Dale R. DeBoer 1-34

University of Colorado, Colorado Springs
 Gains from Trade (cont.)

2. How could a country that is the most (least) efficient

producer of everything gain from trade?
– With a finite amount of resources, countries can use those resources to
produce what they are most productive at (compared to their other
production choices), then trade those products for goods and services
that they want to consume.
– Countries can specialize in production, while consuming many
goods and services through trade.
– Many people are skeptical about importing goods that a country
could produce for itself.
– When countries sell goods to one another, all countries benefit.

Dale R. DeBoer 1-35

University of Colorado, Colorado Springs
 Gains from Trade (cont.)
3. 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.
4. When countries specialize, they may also be more efficient due to
large scale production.
5. Countries may also gain by trading current resources for future
resources (lending
and borrowing).
6. Trade and income distribution – International trade might hurt
some groups within nations.
7. Trade, technology, and wages of high and low-skilled workers.

Dale R. DeBoer 1-36

University of Colorado, Colorado Springs
 Gains from Trade (cont.)

• Trade is predicted to benefit countries as a whole in

several ways, but trade may harm particular groups
within a country.
– International trade can adversely affect the owners of
resources that are used intensively in industries that
compete with imports.
– Trade may therefore have effects on the distribution of
income within a country.
– Conflicts about trade should occur between groups within
countries rather than between countries.

Dale R. DeBoer 1-37

University of Colorado, Colorado Springs
 Trade Policy and Gains – Case of
Export Subsidy (an Example)
• Trade under tariffs, though worse than free trade, is
better than autarky,
• Trade accompanied by an export subsidy can be
worse than autarky.
– This is because the subsidy ends up costing the
government instead of generating revenue.
• Also, unlike an import tariff, an export subsidy
increases the amounts traded.
• This shows that increases in trade that are artificially
instigated by governments can actually leave a country
worse off.

Dale R. DeBoer
University of Colorado, Colorado Springs
 Export Subsidy
Price

Supply Price producers get,

after subsidy
A
Subsidy, per unit
B C D
World Price
E G
Autarky Price F
I
H

Autarky Quantity Demand

Quantity
Exports, free trade
Imports after
subDsaildeRy. DeBoer
University of Colorado, Colorado Exports
Springs after subsidy
 Export Subsidy—Welfare
Autarky Free Export
Trade Subsidy
Consumer ABEF AB AB
Surplus
Producer HI EFGHI BCEFGHI
Surplus
Government -BCD
Total Surplus ABEFHI ABEFGHI ABEFGHI-D
Free Trade is best. Export Subsidy is better (worse)
than Autarky when G is bigger (smaller) than D.
Dale R. DeBoer
University of Colorado, Colorado Springs
 Patterns of Trade

• Differences in climate and resources can explain why Brazil

exports coffee and Australia exports iron ore.
• But why does Japan export automobiles, while the US exports
aircraft?
• Differences in labor productivity may explain why some
countries export certain products.
• How relative supplies of capital, labor and land are used in the
production of different goods may also explain why some
countries export certain products.
• There are two types of trade:
– Interindustry trade depends on differences across countries.
– Intraindustry trade depends on market size and occurs among similar
countries.
Dale R. DeBoer 1-41
University of Colorado, Colorado Springs
 • How Much Trade?
– Many governments are trying to shield certain industrie
from international competition.
– This has created the debate dealing with the costs and
benefits of protection relative to free trade.
• Advanced countries’ policies engage in industrial targeting.
• Developing countries’ policies promote industrialization:
– Import substitution versus export promotion industrialization.

Dale R. DeBoer
University of Colorado, Colorado Springs Slide 1-42
 The Effects of Government Policies
on Trade
• Policy makers affect the amount of trade through
– tariffs: a tax on imports or exports,
– quotas: a quantity restriction on imports or exports,
– export subsidies: a payment to producers that export,
– or through other regulations (e.g., product specifications)
that exclude foreign products from the market, but still allow domestic
products.
• What are the costs and benefits of these policies?

Dale R. DeBoer 1-43

University of Colorado, Colorado Springs
 International Finance Topics

• Governments measure the value of exports and imports, as well as the value of
international financial capital that flows into and out of their countries.
Related to these two measures is the measure of official settlements balance, or
• the balance of payments: the balance of funds that central banks use for official
international payments.
All three values are measured in the government’s national income
• accounts.

Dale R. DeBoer 1-44

University of Colorado, Colorado Springs
 International Finance Topics (cont.)

• Besides international financial capital flows and the official

settlements balance, exchange rates are also an important
financial issue for most governments.
– Exchange rates measure how much domestic currency can be
exchanged for foreign currency.
– They also affect how much goods that are denominated in foreign
currency (imports) cost.
– And they affect how much goods denominated in domestic currency
(exports) cost in foreign markets.

Dale R. DeBoer 1-45

University of Colorado, Colorado Springs
 International Trade
Versus International Finance
• International trade focuses on transactions of
real goods and services across nations.
– These transactions usually involve a physical movement of
goods or a commitment of tangible resources like labor
services.
• International finance focuses on financial or monetary
transactions across nations.
– For example, purchases of US dollars or financial assets by
Europeans.

Dale R. DeBoer 1-46

University of Colorado, Colorado Springs