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

Chapter Organization Introduction What is International Economics About? International Economics: Trade and Money Copyright © 2003 Pearson Education, Inc.

Introduction The study of international economics has never been as important as it is now. At the beginning of the 21st 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. Copyright © 2003 Pearson Education, Inc.

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

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

What is International Economics About? 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. Copyright © 2003 Pearson Education, Inc.

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. Copyright © 2003 Pearson Education, Inc.

What is International Economics About? 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. Copyright © 2003 Pearson Education, Inc.

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. Copyright © 2003 Pearson Education, Inc.

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. Copyright © 2003 Pearson Education, Inc.

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 Copyright © 2003 Pearson Education, Inc.

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 Copyright © 2003 Pearson Education, Inc.

International Economics: Trade and Money 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 Copyright © 2003 Pearson Education, Inc.

International Economics: Trade and Money International trade issues Part I: International Trade Theory Part II: International Trade Policy International monetary issues Part III: Exchange Rates and Open-Economy Macroeconomics Part IV: International Macroeconomic Policy Copyright © 2003 Pearson Education, Inc.