international economic

1. Chapter 1Chapter 1
IntroductionIntroduction
Prepared by Iordanis Petsas
To Accompany
International Economics: Theory and PolicyInternational Economics: Theory and Policy, Sixth Edition
by Paul R. Krugman and Maurice Obstfeld

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Chapter Organization
 Introduction
 What is International Economics About?
 International Economics: Trade and Money

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 The study of international economics has never been
as important as it is now.
• At the beginning of the 21st
century, nations are more
closely linked through trade in goods and services,
through flows of money, and through investment in
each others’ economies than ever before.
• Figure 1-1 shows that international trade for the
United States has roughly tripled in importance
compared with the U.S. economy as a whole.
Introduction

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Figure 1-1: Exports and Imports as a Percentage of U.S. National Income
Introduction

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Figure 1-2: Exports and Imports as Percentages of National Income in 1994
Introduction

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 International economics deals with economic
interactions that occur between independent nations.
• The role of governments in regulating international trade
and investment is substantial.
• Analytically, international markets allow governments to
discriminate against a subgroup of companies.
• Governments also control the supply of currency.
 There are several issues that recur throughout the study
of international economics.
What is
International Economics About?

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 The Gains from 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.
• Trade and income distribution
– International trade might hurt some groups within
nations.
– Trade, technology, and wages of high and low-skilled
workers.
What is
International Economics About?

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 The Pattern of Trade (who sells what to whom?)
• Climate and resources determine the trade pattern of
several goods.
• In manufacturing and services the pattern of trade is more
subtle.
• There are two types of trade:
– Interindustry trade depends on differences across
countries.
– Intraindustry trade depends on market size and occurs
among similar countries.
What is
International Economics About?

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 How Much Trade?
• 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.
– Advanced countries’ policies engage in industrial targeting.
– Developing countries’ policies promote industrialization:
– Import substitution versus export promotion industrialization.
What is
International Economics About?

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 The Balance of Payments
• Some countries run large trade surpluses.
– For example, in 1998 both China and South Korea ran
trade surpluses of about $40 billion each.
• Is it good to run a trade surplus and bad to run a trade
deficit?
 Exchange Rate Determination
• The role of changing exchange rates is at the center of
international economics.
What is
International Economics About?

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What is
International Economics About?
 International Policy Coordination
• 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
• There are risks associated with international capital
markets:
– Currency depreciation
– National default

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International Economics:
Trade and Money
 International trade analysis focuses primarily on the
real transactions in the international economy.
• These transactions involve a physical movement of
goods or a tangible commitment of economic
resources.
–Example: The conflict between the United States and
Europe over Europe’s subsidized exports of agricultural
products

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 International monetary analysis focuses on the
monetary side of the international economy.
• That is, financial transactions such as foreign
purchases of U.S. dollars.
– Example: The dispute over whether the foreign
exchange value of the dollar should be allowed to float
freely or be stabilized by government action
International Economics:
Trade and Money

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 International trade issues
• Part I: International Trade Theory
• Part II: International Trade Policy
 International monetary issues
• Part III: Exchange Rates and Open-Economy
Macroeconomics
• Part IV: International Macroeconomic Policy
International Economics:
Trade and Money