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,Maria Gómez – IBE International Economics 2022/2023TOPIC 0
INTRODUCTION
International Economics: what is it?
All trade in Inter-partners, including households, firms or even countries. Any trade involves a
possibly implicit contract.
International Trade is related to the trade in goods and services, factor movement across space,
economic integration, exporters, and importers (trade balance of 0). Said in other words, it is
the exchange of goods or services across borders. It’s part of the process of globalization,
which also includes movements of capital, labor or even ideas.
Governments can impose barriers to international trade. The movement of goods and
services is more restricted across countries than within them because of different factors
such as the geography, language, or legislation barriers (contract enforcement).
What is globalization?
Globalization means many things, such as the flow of goods and services across borders, the
movement of people and firms, the spread of culture and ideas among countries, and the tight
integration of financial markets around the world. Not all countries are equally open to
globalization, meaning that some countries tend to be more open than others.
Along history, there have been some trends that have supported the rise in globalization after
World War 2. Some examples of them are the following:
Technological improvements in communication and transport
Fall in tariffs and non-tariff barriers (GATT) because of a better political environment
and integration.
Developed and integrated financial markets
How can we measure the grade of openness of a country?
Imports+ Exports
2
Trade=
2 GDP
,Maria Gómez – IBE International Economics 2022/2023
We can measure it throughout the trade to GDP ratio. The higher the ratio, the smaller in
economic size the country.
This ratio can be larger than 1 whenever the country imports a lot of intermediate goods for a
low value, to sell them for a much more valuable final good. Note that the trade balance is
included in the GDP.
Moreover, globalization is not a new trend. Some professionals tend to describe globalization as
in 3 different waves:
1) “First Golden Age” of Trade (1890-WW1)
a. Steamships and the railroad development. Thanks to these things, transportation
costs declined during that first wave of globalization
b. The rate stayed constant. Then during WW1, it was a null ratio and then started
a decreasing trend since 1929.
After WW1 ended, countries tended to go back to the Gold Standard System and, consequently,
tariffs increased. Then, from 1929 (crash) to nowadays, worldwide tariffs decreased (especially
after WW2 & over 2000 when China joined the World Trade Organization)
2) Interwar Period
a. There was the promotion of the Smoot-Hawley Tariff Act
b. Null ratio
3) “Second Golden Age of Trade (1950-Now)
a. General Agreement on Tariffs and Trade (GATT)
b. The shipping contains (1956)
c. Increasing ratio
Since 1960 the previous ratio has increased in most countries all
over the world, especially in China and South Korea.
Trends supporting rise in globalization post World War 2
Technology
During the last few decades, there have been some technological improvements in
communication and transports.
3
, Maria Gómez – IBE International Economics 2022/2023
Political Context
There is a better political context for cooperation and integration after the second World War 2,
followed with an increase in multilateralism.
o Economic policies: a fall in tariffs and non-tariff barriers
o Countries that trade with each other don’t go to war with each other
Economic Context
More developed and integrated financial markets than before.
Who trades with whom?
Distance between countries matters when determining who trades with whom. This can be
explained through the “Gravity model”.
Gravity model: if two countries are big and close to each other, they tend to trade more
between them (and vice versa).
Spain’s example: the top 2 countries from which Spain imports and
exports more are Germany and France
∝ β
AYi Y j
We will suppose is trade between country “i” and country T ij =
T ij γ
D ij
“j”:
And taking logarithms to both sides of the equation we obtain that α , β ≈ 1∧γ ≈ 0.94
The kind of goods that are traded most are goods (80%) in comparison to services (20%).
Foreign Direct Investment (FDI)
We can distinguish between two types of FDI
Horizontal FDI
Most of the foreign direct investment tends to be horizontal. It is when a firm from an industrial
country starts owning a plant in another industrial country.
4
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