1. Chapter 1 Introduction Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld

2. Copyright © 2003 Pearson Education, Inc.Slide 1-2 Chapter Organization  Introduction  What is International Economics About?  International Economics: Trade and Money  General equilibrium analysis of close economy

3. Copyright © 2003 Pearson Education, Inc.Slide 1-3  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

4. Copyright © 2003 Pearson Education, Inc.Slide 1-4 Figure 1-1: Exports and Imports as a Percentage of U.S. National Income Introduction

5. Copyright © 2003 Pearson Education, Inc.Slide 1-5 Figure 1-2: Exports and Imports as Percentages of National Income in 1994 Introduction

6. Copyright © 2003 Pearson Education, Inc.Slide 1-6  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. What is International Economics About?  There are several issues that recur throughout the study of international economics.

7. Copyright © 2003 Pearson Education, Inc.Slide 1-7  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?

8. Copyright © 2003 Pearson Education, Inc.Slide 1-8  Protectionism 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?