International Economics
Li Yumei
Economics & Management School
of Southwest University
International Economics
Chapter 1
Introduction
Organization
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1.1 Importance of International Economics
1.2 International Trade and the Nation’s
Standard of Living
1.3 The Subject Matter of International
Economics
1.4 Purpose of International Economic
Theories and Policies
1.5 Current International Economic Problem
1.6 Organization and Methodology of the Text
Chapter Summary
Exercises
1.1 Importance of International
Economics
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Economic Interdependence
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Globalization of Economic Activities
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International Competition
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Consequences of Increased Openness
 Economic Interdependence
It means that in today’s world, no nation exists in economic isolation.
All aspects of a nation’s economy-its industry, service sectors,
levels of income and employment , living standard-are linked to the
economics of its trading partners. This linkage takes the form of
international movements of goods and services, labor, business
enterprise, investment funds, and technology.
Facts: After World War Ⅱ,USA was economically and politically the
most powerful nation in the world, a situation expressed in the saying,
“When USA sneezes, the economies of other nations catch a cold.”
Then EEC was formed in 1950s, international corporations in 1960s,
OPEC in 1970s.
Conclusion: In recent years, the character of global economic
interdependence has become much more sophisticated.
 Globalization of Economic Activities
It means that national economies rely on international trade in
overall economic activity . World trade expand faster than world
output in the last 50 years by a significant margin.
Reasons:
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Technological Change
Technological innovation led to the increase of productivity, and the
advances in transport technology brought people and enterprises closer
together so that the boundary of tradable goods and services has been
greatly extended.
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Continuing liberalization of trade and investment
It led to more and more companies to globalize production structure
through investment abroad.
 Globalization of Economic Activities
Present Situation: Slower global economic growth in 2007;
continued robust growth in developing countries; insufficient
employment growth; higher oil price crisis; current-account
Imbalances; merchandise trade imbalance; global imbalance
widening further; term of trade. In addition: net financial transfer;
net international investment.
China foreign trade relationship: more dispute with EU and USA;
FDI in China.
Slower global economic growth
continued robust growth in developing countries
Current-account imbalances have widened further in
2006
Higher oil prices on the impact of welfare costs
current-account Imbalances
Global imbalance widening further
Net Financial Transfer
Net International Investment
2005 foreign trade relationship
2001-2005 real used FDI and growth rate
 International Competition
International Competitiveness: It is a hot issue these days.
Intense debate has focused on how firms based in a
particular nation can create and maintain competitiveness
against the world’s leaders in a particular industry.
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Firm (Industry) Competitiveness
Competitiveness refers to the extent to which the goods of a firm or
industry can compete in the market place; this competitiveness
depends on the relative prices and qualities of products.
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A Nation’s Competitiveness
National competitiveness refers to the achievement of high productivity
of its employed resources and the increasing of living standard for its
people.
 Consequences of Increased Openness
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To curtail inflationary pressures at home (e.g. U.S.dollar)
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To increase constraints on those sectors which facing
intense foreign competition (e.g. Wage concession)
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To reduce or eliminate the crowding out of private
investment
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To make the domestic economy vulnerable to
disturbances initiated overseas (e.g. Skyrocketing
gasoline prices of 2000)
Conclusion:
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Need for macroeconomic coordination policy
International policy coordination can facilitate an orderly adjustment
of the global imbalances while minimizing the economic growth costs
(United Nations, International Monetary Fund, World Bank).
-A new Plaza agreement: the Group of Twenty(20Group, including
industrial and emerging-market economies)
-Cross-country effects of national policies: The national policies can’t be
considered in isolation but need to be seen in the context of the
cross-border spillover effects they give rise to by decreasing the
barriers to trade and capital flows.
Conclusion:
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Obstacles for macroeconomic coordination policy
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the urgency of adjusting the imbalance
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the current position of economies
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domestic interest groups
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perceived lack of effective policy instrument
Reading materials:
1. World Economic Situation and Prospects 2007
2. World Economic Situation and Prospects 2006
Conclusion:
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What can be done?
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To develop a consensus on common goals through international
consultations with outside mediation
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To enhance the context for mediation and the perceived legitimacy
of the mediator
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To address commitment problems by using multi-year schedules for
policy adjustment
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To initiate systemic reforms in the field of international monetary
and financial affairs for a long-run solution
1.2 International Trade and the
Nation’s Standard of Living
Measure of the economic relationship
among nations
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Close relationship between international
trade and the Nation’s standard of living
Conclusion:
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International trade is of very importance either for
small countries or large countries.
(see the following data)
 Measure of the economic relationship
among nations
Interdependence Degree: it is given by the ratio of their
imports and exports of goods and services to their gross
domestic product (GDP).
GDP: It refers to the total value of all goods and services
produced in the nation.
The economic interdependence among nations are in general
measured by the more rapid growth of world trade than world
production.
Close relationship between international
trade and the Nation’s standard of living
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Higher interdependence among small countries
FIGURE 1-1 Imports and Exports as a Percentage of GDP in Various Countries
in 2001.
Close relationship between international
trade and the Nation’s standard of living
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World trade growth rate more rapid than world
production
FIGURE 1-2 Growth of World Production and Trade,
1990-2001 (annual percentage changes).
Close relationship between international
trade and the Nation’s standard of living
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The importance of foreign trade in a large country
FIGURE 1-3 Imports and Exports as a Percentage of U.S. GDP, 1965-2001.
1.3 The Subject Matter of
International Economics
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International Trade Theory
International Trade Policy
International Monetary Theory
International Monetary Policy
Major Economists’ Theory in
International economics ( Adam Smith,
David Ricardo, John Stuart Mill, Alfred
Marshall, John Maynard Keynes, and
Paul Samuelson)
 International Trade Theory and Policy
International trade theory: it analyzes the basis of trade , the
gains from trade, the patterns of trade.
International trade policy: It examines the reasons for and the
effects of trade restrictions and new protectionism.
International economics: It deals with the economic and
financial interdependence among nations. It analyzes the flow
of goods, services, payments, and monies between a nation
and the rest of the world, the policies directed at regulating
these flows, and their effect on the nation’s welfare. At the
same time the economic and financial interdependence is
affected by the political, social, cultural and military relations
among nations.
1.4 Purpose of International
Economic Theories and Policies
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Theories are used to examine the basis for and the
gains from trade, the reasons for and the effects of
trade restrictions; also examine the effectiveness of
macroeconomic policies under different types of
international monetary arrangements or monetary
systems.
Policies are used to direct at regulating the flows of
international payments and receipts, and the effects
of these policies on a nation’s welfare and on the
welfare of other nations.
1.5 Current International Economic
Problem
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Trade Protectionism in Industrial Countries
Excessive Fluctuations and Large Disequilibria
in Exchange Rates
Financial Crisis in Emerging Market Economies
High Structure 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
1.6 Organization and Methodology
of the Text
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Part Ⅰ(Chapter 2-7)
It deals with international trade theory. Chapter 2 comparative
advantage theory, Chapter 3 basis and gains from trade,
Chapter 4 equilibrium –relative prices, Chapter 5 HeckscherOhlin theory, Chapter 6 new trade theories, Chapter 7 growth
and Trade.
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Part Ⅱ(Chapter 8-12)
Chapter 8 tariffs, Chapter 9 non-tariffs trade restrictions,
Chapter 10 economic integration, Chapter 11 international
trade on the impacts of economic development, Chapter 12
international resource movements and multinational
corporations.
 Part Ⅲ (Chapters 13-15)
It deals with the balance of payments, foreign exchange
markets, and exchange rate determination. A clear grasp of
these three chapters is crucial for understanding Part Four,
which focuses on the adjustment to balance-of-payments
disequilibria and open-economy macroeconomics. Chapter 13
deals with the measurement of a nation’s balance of payments.
Besides presenting the theory, Chapter 14 also examines the
actual operation of foreign exchange markets and therefore is
of great practical relevance to students of international
economics, particularly business majors. Chapter 15 deals
more closely with some of the monetary and financial
determinants of exchange rates and the reason for exchange
rate volatility
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Part Ⅳ(Chapter 16-21)
It examines the various mechanisms for adjusting balance-ofpayments disequilibria, which are often referred to as openeconomy macroeconomics. Chapter 16 covers the adjustment
mechanism that operates by changing the relationship between
domestic and foreign prices, while Chapter 17 examines the
income adjustment mechanism and presents a synthesis of the
automatic adjustment mechanisms. Chapter 18 and 19 deal with
adjustment policies and open-economy macroeconomics
proper. Chapter 20 compares fixed versus flexible exchange
rates, it examines the European Monetary System, and it
discusses international macroeconomic policy coordination.
Finally, Chapter 21 examines the operation of the international
monetary system over time, especially its present functioning ,
and it offers possible solutions for the major international
economic problems facing the world today.
International trade statistics
2009
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World Trade Developments
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Merchandise trade and GDP
 Overview
2008 international crisis
International trade by products
Chapter Summary
 Some Knowledge of International
Economics
 The Importance of International Trade and
Finance Among Countries
 The Purpose of International Economics
 The Present Major Problems of International
Economics
 The Organization and Methodology of the
Text
 Present Situation of International Economy
Exercises
How do international economic relations differ from interregional
economic relations?
In what way are they similar?
Nations usually impose restrictions on the free international flow of
trade, services and factors. Differences in language, customs and laws
also hamper these international flows. In addition, international flows may
involve receipts and payments in different currencies, which may change
in value in relation to one another through time.
This is to be contrasted with the interregional flow of goods, services and
factors which face no such restrictions as tariffs and are conduced in
terms of the same currency, usually in the same language, and under
basically the same set of customs and laws.
(1)
(2) Both international and interregional economic relations
involve the overcoming
of space or distance. Indeed, they both arise from the
problems created by
distance. This distinguishes them from the rest of economics,
which abstracts from space and treats the economy as a
single point in space, in which production, exchange, and
consumption take place.
Exercises
Can you think of some ways of by which a nation can gain
at the expense of other nations from trade restrictions?
A nation can subsidize exports of the commodity to other nations
until it drives the competing nation’s industry out of business, after
which it can raise its price and benefit from its newly acquired
monopoly power.
Exercises
When the value of the U.S. dollar falls in relation to the currencies of
other nations, what do you think will happen to the quantity of U.S.
(1) imports?
(2) exports?
(1) Imports become more expensive for Americans and so they
would purchase a smaller quantity of imports.
(2) U.S. exports become cheaper for foreigners and so they would
purchase a greater quantity of U.S. exports.
Exercises
Additional Reading:
1. World Economic Situation and Prospects 2007
2. World Economic Situation and Prospects 2006
3. World Trade Report 2007, 2008
Internet Materials
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http://www.imf.org
http://www.wto.org
http://www.oecd.org
http://www.worldbank.org
http://www.un.org/depts/unsd/mbsreg.htm
http://www.census.gov/statab/www
http://www.bea.doc.gov
http://www.federalreserve.gov
http://www.iie.com