EC311: International Economics

What is International Economics About?

Dr. Irfan Ullah

Email: irfanecon@nuist.eud.cn

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What is International Economics About?

International Economics is the branch of Economics which deals with

the economic relations among different nations. These economic
relations can be through:

 Trade of goods and services.

 Short-run flows of money.

 Long-run investment flows.

 Labour movement from one country to another country

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Current International Economic Problems and
Challenges

the most important international economic problems and challenges

facing the world today. These are the problems that the study of
international economic theories and policies can help us understand and
evaluate suggestions for their resolution.

These problems includes

1. Slow Growth and High Unemployment in Advanced Economies after

“the Great Recession”

2. Trade Protectionism in Advanced Countries in a Rapidly Globalizing

World
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3. Excessive Fluctuations and Misalignment in Exchange Rates and Financial Crises

4. Structural Imbalances in Advanced Economies and Insufficient Restructuring in

Transition Economies

5. Deep Poverty in Many Developing Countries

6. Resource Scarcity, Environmental Degradation, Climate Change, and

Unsustainable Development

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Domestic vs International Trade

What is the difference between domestic

and international trade?

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International Trade Principle

‘’For any nation to trade with another, both must gain

from the international trade compared with the

domestic trade’’

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Another Question

Who trades with Whom?

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The Gravity Model: Nation’s Size

One factor can affect the international trade between nations is the
nation’s size. The size of an economy is positively related to the volume
of the International Trade (exports and imports). The nation’s size is
measured by its Gross Domestic Product (GDP).

 Big nations produce more goods and services, so they have more
to sell to other countries in the export market.

 On the other hand, big nations generate more income from the
goods and services sold, so people are able to buy more imports.

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The Gravity Model: Distance

Another factor can affect the international trade between nations is the
distance between markets. The distance between markets influences
the trade between nations negatively because of the following two main
reasons:

 The transportation cost and therefore the cost of imports and

exports.

 The personal contact and communication which also influence

trade.

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The Largest 15 Trading partners for the US

The 15 largest trading partners for the US accounted for 69% of the
value of the US trade in 2012
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The Gravity Model

In its basic form, the Gravity Model assumes that only the size of a nation
and the distance between nations are important for international trade.

Where:
is the value of trade between country and country .
is a constant.
is the GDP of country .
is the GDP of country .
is the distance between country and country .

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The Gravity Model

Taking the natural logarithm of the basic form, the Gravity Model can be
estimated using the following specific form:

The empirical results have shown that increasing the distance between
nations by 1%, decreases the volume of trade between those nations by
around 0.7% to 1%.

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Beyond The Gravity Model

What are the other factors that can affect the trade

between nations?

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Beyond The Gravity Model

In fact, there are other things besides the size and the distance which
can affect the trade between nations such as:

1. Cultural Ties: If two countries have strong cultural ties, it is

likely that they also have strong economic ties.

2. Geography: Ocean ports and a lack of mountain barriers make

transportation and trade easier between nations.

3. Borders: Crossing borders involves formalities that take time and

monetary costs such as tariffs.

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Beyond The Gravity Model

Trade Agreements between

countries are introduced to
reduce the formalities and tariffs
needed to cross borders, and
therefore to increase trade [i.e.
GATT (General Agreement on
Tariffs and Trade) and GATS
(General Agreement on Trade in
Services)].

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