international economics - introduction - 1.ppt

1. CHAPTER 1 INTRODUCTION
INTERNATIONAL ECONOMICS: THEORY AND POLICY, 6TH
EDITION
BY: PAUL R. KRUGMAN AND MAURICE OBSTFELD
DR. ARIFA SAEED

2. CHAPTER ORGANIZATION
 Introduction
 What is International Economics About?
 International Economics: Trade and Money

3. 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.

4. INTRODUCTION
Figure 1-1: Exports and Imports as a Percentage of U.S. National Income

5. INTRODUCTION
Figure 1-2: Exports and Imports as Percentages of National Income in 1994

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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

12. 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

13. 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

14. 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