Meaning of International Economics
Theoretical aspects
Importance of international Economic
Trade
SIMILARITIES BETWEEN INTER-REGIONAL & INTERNATIONAL TRADE
DISTINCTION BETWEEN INTER-REGIONAL & INTERNATIONAL TRADE
Risk in international trade
IMPORTANCE OF INTERNATIONAL TRADE - TRADE AS AN ...
INTRODUCTION TO INTERNATIONAL ECONOMICS
Meaning of International Economics
The basic concepts and analytical tools of international economics are precisely the same as those used in the
principles of economics. Their difference lies only in the focus. International economics focuses on the international
aspects of economic activities. The basis of all domestic and international economic relationships involves mostly the
exchange of goods and services between people. The core of international economic relationship comprises the
exchange of goods and services between people belonging to different nations. International trade may be defined as
the exchange of goods and services between different independent or sovereign states or countries in the world.
Consequently, international economic relation and international trade may be treated as synonymous for most
purposes.
SCOPE/SUBJECT MATTER OF INTERNATIONAL ECONOMICS
World economy is made up of more than 200 politically independent nations which have different types and degree of
interdependencies and very diverse economic characteristics between and within them. Since international economics
deals with the economic and financial interdependence among different nations and examine the effect of such
interdependence on them, it emerged as a specialised branch of economics. As a separate branch of study, it has two
distinct parts - theoretical and descriptive.
International Economics
Theoretical Aspects Descriptive aspects
Pure theories Monetary theories International transactions Institutional environment
Theoretical aspects
The theoretical aspects attempt to seek the general principles and logical frameworks which can serve as a guide to the
understanding of actual events so as to influence them through policy interventions. The theoretical part can be divided
into (i) pure theories and (ii) monetary theories
The pure theories of international economics are primarily microeconomic in nature and cover a very wide area,
including the following:
1. The bases or causes of international trade and the pattern of trade.
2. Effect of trade on production, consumption and distribution of income.
3. Effect of trade on relative factor prices and product prices.
4. Gains from trade and the distribution of the gains.
5. Effect of trade barriers on trade, factor and product prices and income distribution.
6. Effects of trade on economic growth and vice versa.
The monetary theories of international economics are primarily macroeconomic in nature and deal with matters
pertaining to the balance of payments and international monetary system. It covers areas such as:
1. Causes of balance of payments disequilibrium.
2. Different methods for the correction of balance of payments disequilibrium.
3. Exchange rate determination.
4. International liquidity.
5. Relationship between balance of payments position and other macroeconomic variables.
Descriptive aspects:
The descriptive aspects of international economics are concerned with the description of international economic
transactions and the relevant institutional environment. This covers the international trade flow of goods and services,
flow of international financial and other resources, international institutions like IMF; World Bank, Regional
, introduction to international economics 2
Development Banks, UNCTAD and WTO, international economic agreements and so on. Business strategies such as
multinational investments, production sharing and global sourcing, joint venturing and other alliances etc. have been
increasingly fostering economic integration and transnationalization.
The basic contents or subject matter of international economics may be summed up as follows:
1. Theories of international trade
The theories of international trade highlight the basis of trade or as to why international trade takes place. The entire
structure of the classical theories rests upon the principle of comparative cost advantage and the modern theories
investigate in a more systematic and scientific way the issues related to terms of trade, gains from trade, capital
movements, technical progress and the implications of international trade for growth and welfare.
2. Theories of commercial policy
It analyses the reasons for and the effects of tariff and non-tariff restrictions on international trade. Economic
integration, organisation of regional economic groupings, global sourcing or production sharing, international
investments and the resultant international production, trade pacts and agreements, transplanting of production
facilities in foreign markets and certain business strategies which promote internationalisation.
3. Foreign exchange markets
Since international transactions take place through different currencies, the rates of exchange among various
currencies have to be determined. International economics investigates the theories of determination of exchange rates,
different systems of exchange rates, conditions in the foreign exchange markets and issues' connected with the
exchange control.
4. Balance of payments:
Balance of payments is a detailed account of the receipts and payments to the rest of the world by a particular country
on account of transactions of goods, services and capital. International economics deals with the complete framework
of balance of payments accounts, effects of disequilibrium upon the economic performance and welfare of the people
of a given country and the alternative mechanisms for correcting the balance of payments disequilibria under different
international monetary systems.
5. International institutions
International economics examines the working and policies of the international institutions that have been created to
deal with the problems regarding stabilisation of exchange rates, correction of balance of payments disequilibria and
meeting the shortages of international liquidity so as to promote the growth and development of nations across- the
globe. The most prominent institutions include the International Monetary Fund (IMF), International Bank for
Reconstruction and Development (IBRD), International Development Authority (IDA), International Finance
Corporation (IFC), United Nations Commission on Trade and Development (UNCTAD) and the World Trade
Organisation (WTO).
6. Open economy macroeconomics
It deals with the mechanisms of adjustment in balance of payment disequilibria. It analyses the relationship between
the internal and external sectors of the economy of a nation and how are they interrelated or interdependent with the
rest of the world economy under different international monetary systems.
Importance of international Economics
• Broaden the mental outlook of the people
• Development of international outlook
• Emphasis on international cooperation
• Study of specific problems
WHY NATIONS TRADE?
Economic transactions have become inevitable because no nation can be self-sufficient or self-reliant in all respects.
The basic reason for different nations entering into trade is that no nation has the capacity to produce by itself all the
commodities and services that are required by its people. There has been an unequal distribution of productive
resources by the nature on the surface of earth. Countries differ in respect of climatic conditions, availability of arable
land, forests, mines, mineral products, labour, capital, technological capabilities and managerial and entrepreneurial
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