Chapter 1: What is international economics?
2 streams
- Real economics ( Discussed in this course)
- Monetary economics ( Not discussed in this course)
Real economics
- Trade flows between countries ( Export + import)
- Increase in trade flows
- Benefits of trade
- Trade patterns
- Impact of government policies on trade ( Tariffs, quota’s, subsidy’s, …)
-…
Definition of international economics
= IE studies the economic interactions between countries + all problems that can prevail
- Significant increase in importance of IE ( Result of globalization)
- Nations are closely linked through trade in goods and services, investment, money flows, …
1. Increase in trade flows
- Global trade in goods has continuously increased from 1980 until 2020
- Temporary decrease of trade in goods in 2007 – 2008 and 2014 – 2018 ( Financial crises)
- Both exports and imports have increased in all regions of the world
- Trade openness Amount of import/export as a percentage of GDP
- Significance of trade is larger for smaller countries ( Larger trade openness)
Current situation
- In Europe, exports & imports have increased at approximately the same level
- A similar trend can be observed in South and Central America and in Asia
- In North America, imports are increasing relatively more compared to exports
- As a result, the trade deficit in North America is increasing
- Africa is also experiencing an increase in trade deficit
- In the Middle East + Commonwealth of Independent States Increase in exports >
increase in imports ( In control of large portion of natural resources)
How to explain this increase in trade flows?
- Decrease of transportation costs in general
- Decrease in trade barriers ( Tariffs, quota’s, …)
- Increase in free trade areas and agreements ( EU, NAFTA, USMCA, …)
Regional trade agreements (= RTA)
- Treaty between 2 or more governments that rules trade
- Most trade agreements are established in Europe and East Asia
- Significant increase in trade agreements due to Brexit
,2. Benefits of trade
Free trade offers several benefits
- All countries can gain from trading Specialize in one good and import all other products
- Trade is beneficial for countries when they export goods that require abundant production
factors and import goods that require scarce production factors
- Larger & more efficient production due to specialization Increasing returns of scale
Benefits of trade can vary for different countries or economic agents
- Trade can negatively impact import competing sectors ( Low skilled workers)
- This can result in different income effects within or between countries
- E.g., Trade between developed and developing countries
3. Trade patterns
Trade patterns can be explained by
- Differences in climate
- Differences in labor productivity
- Differences in availability and use of production factors
- Scale effects ( Intra-industry trade)
4. Impact of government policies on trade
Government policies that determine trade
- Tariffs
- Quota’s
- Subsidy’s
-…
Benefits + costs of these policies
- What instruments to use?
- Degree of restriction of trade?
- Costs of government policies?
- Possible counter measures from third parties?
,Chapter 2: World trade
Gravity model explains trade (in simple terms)
- Large countries engage more in trade
- Countries trade more with other close-by countries ( Geographical proximity)
Changing patterns of world trade
- Is the world becoming smaller?
- Which goods are mainly traded?
- Outsourcing + offshoring
What explains/influences the amount of trade? ( 6 factors)
1. Size of a country
- Most influential factor
- Large economies produce more More export
- Large economies generate more income More import
2. Distance between countries
- Influences transportation costs
- Communication between economic agents in different countries
3. Cultural affinity
4. Geography ( Harbors, mountains, …)
5. Multinational corporations ( High level of global trade)
6. Borders
- Differences in language + currency
- Can result in higher costs + more time required
Gravity model ( Explains trade)
- Tij Value of trade between country i & country j
- A Constant
- Yi GDP of country i
- Yj GDP of country j
- Dij Distance between country i & country j
Gravity model can also assess impact of trade agreements
- Trade agreements lower/eliminate tariffs, quota’s, …
- Trade agreements result in higher levels of trade between countries
Borders can still reduce trade between countries
- Borders create trade barriers between countries ( Language, currency, …)
- Free trade agreements can’t eliminate all trade barriers
- Negative impact of distance on trade has decreased due to modern transportation
, Changing pattern of world trade
Is the world becoming smaller?
- There have been multiple waves of globalization
- World trade as a percentage of GDP has significantly increased
Which goods are traded today?
- Manufactured products (55%) Cars, computers, clothing, …
- Services (25%)
- Mineral products (13%)
- Agricultural products (7%)
- In the past, significant amount of trade came from mineral and agricultural products
- Growth of trade in services > growth of trade in goods ( Increasing importance)
Outsourcing + offshoring ( Moving operations abroad)
- Outsourcing Production of goods/services is performed by an independent company
- Offshoring Production of goods/services is performed by a subsidiary company abroad
- Increasing importance due to the rise of the multinational corporation
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