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Abel197

introduction to international economics 1

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
...
International economics focuses on the international
aspects of economic activities
...
The core of international economic relationship comprises the
exchange of goods and services between people belonging to different nations
...

Consequently, international economic relation and international trade may be treated as synonymous for most
purposes
...
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
...

International Economics
Theoretical Aspects
Pure theories

Monetary theories

Descriptive aspects
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 bases or causes of international trade and the pattern of trade
...
Effect of trade on production, consumption and distribution of income
...
Effect of trade on relative factor prices and product prices
...
Gains from trade and the distribution of the gains
...
Effect of trade barriers on trade, factor and product prices and income distribution
...
Effects of trade on economic growth and vice versa
...
It covers areas such as:
1
...

2
...


3
...

4
...

5
...

Descriptive aspects:
The descriptive aspects of international economics are concerned with the description of international economic
transactions and the relevant institutional environment
...
Business strategies such as
multinational investments, production sharing and global sourcing, joint venturing and other alliances etc
...

The basic contents or subject matter of international economics may be summed up as follows:
1
...
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
...
Theories of commercial policy
It analyses the reasons for and the effects of tariff and non-tariff restrictions on international trade
...

3
...
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
...
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
...

5
...
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)
...
Open economy macroeconomics
It deals with the mechanisms of adjustment in balance of payment disequilibria
...

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
...
There has been an unequal distribution of productive
resources by the nature on the surface of earth
...
Given these diversities, no country has the potential to produce all the commodities in the most efficient
manner
...
A nation can consume a wider variety of products at a cost less than that which could be achieved in
the absence of international trade
...

Just as there is division of labour in the case of individuals, the countries also adopt this principle at the international
level
...
They export such products to others and in return import those products in the
production of which they have comparative disadvantage
...
" The basic reasons by which nations engage in
international trade are as follows:
1
...
Some resources may be available in some countries while other
countries may be in possession of some other resources
...
So, they have to import these goods from countries where the production of such
commodities is comparatively advantageous because of the favourable factor endowments
...
Differences in costs:
One of the significant causes of international trade is the differences in costs
...
A country will specialize in the production and export of a
particular commodity in which it has greater comparative advantage and it imports a particular commodity from other
countries because its production is comparatively costlier in the domestic economy
...

3
...
It
does mean that different countries of the world specialise in the production of those goods in whose production they
possess special resources
...
When division of
labour crosses national boundaries, there arises international specialisation in production and export and ultimately to
gainful international trade
...

Trade
Trade is the basic economic concept that involves multiple parties participating in the voluntary negotiation and then
the exchange of one's goods and services for desired goods and services that someone else possesses
...

In financial markets, trading also can mean performing a transaction that involves the selling and purchasing of a
security
...

Internal trade/Domestic trade/interregional trade
Domestic trade is the exchange of goods, services, or both within the confines of a national territory
...
It always deals with only one set of competitive, economic, and market issues
...

Internal trade or home trade or Domestic trade may be sub-divided into Wholesale trade, and Retail trade
...

Retail trade is concerned with the sale of goods in small quantities to the actual users or consumers
...
In actual practice, however, manufacturers and wholesalers may
also undertake retail distribution of goods to bypass the intermediary retail
International trade

introduction to international economics 4

The economic interaction among different nations involving the exchange of goods and services, that is, exports and
imports
...
A summary of
international trade undertaken by a particular nation is given with the balance of trade
...
Among the items commonly traded
are consumer goods, such as television sets and clothing; capital goods, such as machinery; and raw materials and
food
...
International trade
transactions are facilitated by international financial payments, in which the private banking system and the central
banks of the trading nations play important roles
...

Much of the modern history of international relations concerns efforts to promote freer trade between nations
...
00

1

United States

3,225
...
00

3

Germany

2,402
...
30

5

France

1,107
...
9

7

Italy

921
...
9

9

South Korea

886
...
6

10

Canada

793
...
8

12

Russia

648
...
7

14

Mexico

604
...
3

16

Spain

568
...
8

18

Switzerland

458
...
1

20

Brazil

383
...


$2,183,079,941

2

Electrical, electronic equipment

$1,833,534,414

3

Machinery, nuclear reactors, boilers, etc
...
apparatus

$465,101,524

7

Pharmaceutical products

$443,596,577

8

Iron and steel

$379,113,147

9

Organic chemicals

$377,462,088

10

Pearls, precious stones, metals, coins, etc
...
Both are based upon the principle of division of labour and specialisation
...
Both aim at producing goods at comparatively low cost and thus provide maximum satisfaction at low price
...
The aim of both inter-regional and international trade is the mutual exchange of a variety of goods and services
...
Both aim at procuring those goods which are not available at all or available in very small quantity at a particular
place in exchange for its surplus production
...
Both aim at a spirit of economic mutual cooperation which also facilitates the mutual cooperation in social and
political spheres as well
...
Both aim at securing maximum profit by satisfying the tastes and preferences of the consumers
...
Both involve voluntary transactions - that is, transactions in both inter-regional and international trade depend on
the discretion of the people
...
The major differences between them may be summed up under the following heads:
1
...
The inter-regional mobility of factors can completely wipe out the differences in prices of factors in different
regions and ensures the same price throughout the country
...

There are severe constraints upon the mobility of factors - labour and capital - such as immigration laws, restrictions
on the international flow of capital and legal restrictions
...
Mobility of products:
In the case of inter-regional trade, there is relatively more mobility of the products within different regions of the same
country
...
But, in the case of international trade, there are several man-made barriers to the free movement of the
products apart from the distance and transportation costs
...

3
...
But, in the case of international trade, the
markets lack homogeneity on account of differences in languages, tastes, fashions, customs and the system of weights
and measures
...
For instance, the right-hand driven motor

introduction to international economics 6

cars produced in India can be easily marketed in India but it may be difficult to sell them in the foreign markets like
those of USA and Canada
...
Resource endowments:
Different countries have been endowed with different types of natural resources
...
Each
country specialises in the production and export of those commodities which are well-endowed to them
...

Differences in resource endowments account for differences in cost of production in every country
...

5
...
The geographical and
climatic conditions which differ from country to country influence their specialisation in production
...

But, in the case of international trade, due to the differences in geographic and climatic conditions, there arises
differences in comparative costs of production
...
For example,
India exports tea, Malaysia exports rubber, Australia exports wheat and Brazil exports coffee
...
Production conditions:
The production conditions including technology, taxation systems, labour laws, social customs and other facilities do
not have much difference in the same country and therefore, unaffects interregional trade
...
The prices of commodities may be different in different countries due to
differences in production conditions
...
Nature of currencies:
The distinction between inter-regional and international trade becomes more explicit because of the existence of
different currencies in different countries
...
But, in its trade with countries like USA and Japan, the payments
have to be made in terms of Dollars and Yens respectively
...
Economic environment:
The economic environment of a country consists of the legal and institutional framework governing production,
consumption, exchange and distribution; the monetary, fiscal and commercial policies; techniques of production,
factor proportions, factor prices and the production functions; the pattern of tastes and preferences and the degree of
competition
...

In the case of inter-regional trade, the economic environment constitutes a relatively stable entity whereas it differs in
the case of international trade
...

9
...
It is relatively small
in the case of inter-regional trade but may be generally higher in the case of international trade because of the vast
geographical distances among different countries
...

10
...
Within the
country, there are certain uniform national policies in the form of fiscal, monetary and trade policies
...


introduction to international economics 7

11
...
But, in the case of
international trade, transactions take place at the macro level or the international plane where there comes the problem
of deficits or surpluses in balance of payments of the trading countries
...

12
...
The spirit of nationalism makes
them subserve their regional clashing interests
...

13
...
Whereas such factors can
work out their full efforts in the case of internal trade
...
Artificial Barriers to Trade:
The natural difficulties may be increased by artificial barriers to trade, either through prohibitive laws as in war time
through customs duties or protective tariffs in the context of international trade
...
Different Banks and Monetary policy:
Each country is under the control of a separate central bank, each following a separate monetary policy which may
greatly affect the foreign trade of the country
...
Scope:
Scope of international business is quite wide
...
Domestic business pertains to a limited territory
...

17
...
Domestic business has lesser benefits when compared to the
former
...
Domestic
business as it is conducted locally there would be no much involvement of foreign currency
...

To the firms: The advantages to the firms carrying business globally include prospects for higher profits,
greater utilization of production capacities, way out to intense competition in domestic market and improved business
vision
...

•

16
...
Though they face losses in one area they may get profits in other areas, this provides for stabilizing during
seasonal market fluctuations
...

19
...
These range from
exporting/importing to contract manufacturing abroad, licensing and franchising, joint ventures and setting up wholly
owned subsidiaries abroad
...
Restrictions
such as custom procedures do not bother domestic entities but whereas globally operating firms need to follow
complicated customs procedures and trade barriers like tariff etc
...
Legal provisions:
To establish business internationally firms initially have to complete many formalities which obviously are a tedious
task
...
It doesn't require processing any difficult
formalities
...
Sharing of Technology:
International business provides for sharing of the latest technology that is innovated in various firms across the globe
which in consequence will improve the mode and quality of their production
...
Political relations:
International business obviously improves the political relations among the nations which gives rise to Cross-national
cooperation and agreements
...
Area:
In the case of internal trade, the produced commodities of a country are sold in different parts of that country
...

International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties
involved in a trade do not change fundamentally regardless of whether trade is across a border or not
...
The reason is that a border typically
imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences
such as language, the legal system or culture
...
For example,
• Buyer insolvency (purchaser cannot pay);
Non-acceptance (buyer rejects goods as different from the agreed upon specifications);
• Credit risk (allowing the buyer to take possession of goods prior to payment);
•
•

Regulatory risk (e
...
, a change in rules that prevents the transaction);

•

Intervention (governmental action to prevent a transaction being completed);

Political risk (change in leadership interfering with transactions or prices); and
• War, piracy and civil unrest or turmoil;
•
•

Natural catastrophes, freak weather and other uncontrollable and unpredictable events,

In addition, international trade also faces the risk of unfavorable exchange rate movements (and, the potential benefit
of favorable movements
IMPORTANCE OF INTERNATIONAL TRADE - TRADE AS AN ENGINE OF GROWTH
Alfred Marshall states that the causes which determine the economic progress of nations belong to the study of
international trade
...

According to Haberler, "international trade has made a tremendous contribution to the development of less developed
countries in the 19th and 20th centuries and can be expected to make an equally big contribution in the future
...
The importance of
international trade may be summed up as follows:
1
...

2
...
As a result, goods are produced in large quantity at low price and in fine quality
...
When each country specialises in the production and export of those goods which is most suited for it to produce
and import those goods which it can procure cheaper from the others, it derives gains from trade in the form of an
increase in real income and improvements in the consumption standard of its people
...
International trade promotes the product and factor specialisation in various countries which will lead to optimum
allocation and utilisation of all the productive resources in the world
...
Because of international trade, all countries obtain goods at cheap prices because every country produces those
goods in which it has greater comparative advantage or to incur less comparative cost
...
By virtue of international trade, consumers get an opportunity to consume a large variety of goods produced by
different countries
...

7
...
Every country makes an attempt to produce different goods in
large quantity and thereby enjoys internal and external economies
...
It ensures a greater degree of stability in prices by eliminating inflationary and
deflationary pressures in the economy
...
International trade promotes technical progress and can bring about steady expansion in the productive capacity of
the countries
...
International trade stimulates the spirit of competition among the entrepreneurs and hence, novel techniques of
production are devised
...
International trade promotes mutual cooperation among different countries and creates an atmosphere of goodwill,
cordiality and friendship among the trading countries and thus promotes world peace
...
International trade promotes competition among different countries which increases the efficiency of the
production structure of the economy
...
International trade devises bilateral agreements to serve the common interests of the trading countries so as to
resolve their problems related to balance of payments, international debt, economic fluctuations, tariff and non-tariff
barriers and shortage of investible funds for development
...
International trade promotes export-led growth that provides sufficient export earnings
...
Both the advanced and poor countries reach higher production frontiers through international trade
...
International trade acts as the basis of economic survival of several advanced and poor countries
...
It facilitates international flows of capital
...
International trade promotes the growth of international financial institutions for promoting restriction-free
international trade, for ensuring an efficient system of exchange and payments and for filling the shortage of
international liquidity
...
International trade provides for the flow of technology which increases the total factor productivity and creates
some short-run effects for the countries with unemployed labour
...
International trade allows the fullest utilisation of capacity, increased exploitation of economies of scale,
separation of production patterns from domestic demand and increasing familiarity with absorption of new
technologies
...
International trade generates pressure for dynamic change through (i) competitive pressure from imports, (ii)
pressure of competing for export markets and (iii) a better allocation of resources
...

INDIA AND FOREIGN TRADE
Largest economy in the world-emerging largest market in the world-good growth rate of the economy-seventh rank in
the amount of nominal GDP-Until 1991 India was intentionally isolated from world market-trade and investment was
restricted-in 1991 liberalisation policies were introduced-trade increased
...

Features of India’s foreign trade
1
...


introduction to international economics
10

2
...

India now exports over 7,500 commodities
...

3
...
But now India exports its
goods to as many as 190 countries and imports from 140 countries
...
Change in Imports:
Earlier we used to import food-grains and manufactured goods only
...

5
...
Trade through land routes is possible with
neighbouring countries only
...

6
...

7
...
This shows the insignificant place of India in the world’s overseas trade
...

8
...

Major import items:- Crude oil, Electronic goods, Machinery, electrical and non electrical, Pears, precious and semi
precious stones, coal, gold and silver etc
...
84

9
...
31

17
...
15

Import

459
...
59

105
...
74

565
...
83

44
...
66

14
...
17



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