 The study of international economics has never been as important as it is now. At the beginning of the 21 st 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

Voluntary Trade Creates Wealth - ALWAYS Local trade Regional trade National trade International trade

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

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

Balance of Payments Capital account Current Account Goods & Services Financial flows

 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?

 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?

Economics for Leaders Opening Markets Is Creating Wealth

 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?

 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?

 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?

 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

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

Economics for Leaders Who should produce what?  The Law of Comparative Advantage Through specialization and exchange, both parties can gain from lower costs and greater output – even if one party does both things better. What is your lowest opportunity cost alternative?

Comparative Advantage Producing a Meal Cooking Cleaning BarbieKen 10 min 20 min 40 min 30 min Totals 30 min 70 min

Opportunity Costs Cooking Cleaning BarbieKen 1/2 cleaning 2/1 cooking 4/3 cleaning 3/4 cooking

What Will Ken & Barbie Do?  Working Independently Barbie Produces a Meal in 30 Minutes Ken Produces a Meal in 70 Minutes  Barbie Has An Absolute Advantage  Would Barbie Produce Two Meals?  With Trade/Cooperation Barbie Spends 20 Minutes Cooking Ken Spends 60 Minutes Cleaning They Both Gain!

Remember Nations Are Not Different  Goods are Produced at Least Cost When People Specialize According to the Principle of Comparative Advantage  Lesson - Don’t Try to Do Everything; It is Not Efficient  Trade Between Countries Creates Wealth  Examples Ken and Barbie Have Time for Other Activities

NAFTA

European Monetary Union

Trade Balance Imports Exports

WTO (formerly GATT)

 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