This document provides an introduction and overview of the scope of international economics. It discusses key concepts like globalization, patterns of trade, and different economic institutions. It also summarizes different theories of international trade, including absolute advantage, comparative advantage, and theories exploring the effects of technology and scale economies on trade patterns. Modern analyses use econometrics to identify various trade factors. The document also briefly mentions terms of trade, infant industries, and debates around trade policies.

1. Introduction to International
economics
Meeting 1

2. • Diharapkan mahasiswa dapat memahami garis besar perkuliahan
yang akan ditempuh sesuai SAP dan tata tertib yang berlaku.
• Mahasiswa mampu memahami dan menjelaskan tentang ruang
lingkup Ekonomi Internasional serta globalisasi.
• It is expected that the students can understand the outline of the
course that will be pursued according to SAP and the prevailing rules.
Students are able to understand and explain about the scope of
International Economy as well as globalization.

3. The scope of international economy
• International economics is a field concerned with economic interactions of
countries
• International trade involves the exchange of goods or services and other
factors of production across borders
• International finance studies the flow of financial assets or investment
across borders
• Globalization can be defined as an integration of economics all over the
world
• *International political economy, studies issues and impacts from for
example international conflicts, international negotiations, and
international sanctions

4. The scope of international economy
• The scope of international economics is wide as it includes various
concepts:
• globalization
• gains from trade
• pattern of trade
• balance of payments
• FDI
• Apart from this, international economics describes production, trade,
and investment between countries

5. Different international economic institutions
• World Trade Organization (WTO)
• International Monetary Fund (IMF)
• United Nations Conference on Trade and Development (UNCTAD)
• H/w: List more?
• …

6. Concept of International Economics
• it studies the economic interdependence between countries and its
effects on economy

7. International economics is divided into two
parts: theoretical and descriptive
• (a) Theoretical International Economics
• Deals with the explanation of international economic transactions as they take
place in the institutional environment.
• (i) Pure Theory of International Economics
• The pure theory of international economics deals with trade patterns, impact of
trade on production, rate of consumption, and income distribution.
• (ii) Monetary Theory of International Economics
• The monetary theory of international economics is concerned with issues related
to balance of payments and international monetary system.
• (b) Descriptive International Economics
• Deals with institutional environment in which international transactions take
place between countries. In addition, it covers the study of various international
economic institutions, such as IMF, WTO, World Bank, and UNCTAD.

8. International economics:
international trade

9. Classical theory
• The theory of absolute advantage
• The theory of comparative advantage provides a logical explanation
of international trade as the rational consequence of the comparative
advantages that arise from inter-country differences
• The Heckscher-Ohlin theorem
• Leontief's paradox
• Rybczynski theorem

10. Absolute advantage
• By Adam Smith
• refers to the ability of a nation to produce a product or service more
cheaply than another nation
• This might be a result of inputs, such as natural resources, or because
of the cost or productivity levels of labour. Absolute advantage may
also arise from the level of available capital, such as factories or
infrastructure.
• For example, India has an absolute advantage in operating call centres
compared to the Philippines because of its low cost of labour and
abundant labour force

11. Comparative advantage vs Absolute advantage
• Absolute advantage has some limitations.
• For example, if everyone simply does what they're best at and trades
with the rest of the world, it is possible that some countries aren't
best at anything (or at least maybe they haven't discovered it yet)

12. Comparative advantage vs Absolute advantage
• If Japan and the United States can both produce cars, but Japan can
produce cars of a higher quality at a faster rate, then it is said to have an
absolute advantage in the auto industry
• The focus on the production of those goods for which a nation's resources
are best suited is called specialization
• Given limited resources, a nation's choice to specialize in the production of
a particular good is also largely influenced by its comparative advantage
• Whereas absolute advantage refers to the superior production capabilities
of one nation versus another, comparative advantage is based on the
concept of opportunity cost

13. Example
• Assume that both France and Italy have enough resources to produce
either wine or cheese, but not both. France can produce 20 units of wine
or 10 units of cheese. The opportunity cost of each unit of wine, therefore,
is 10 / 20, or 0.5 units of cheese. The opportunity cost of each unit of
cheese is 20 / 10, or 2 units of wine. Say Italy can produce 30 units of wine
or 22 units of cheese. Italy has an absolute advantage for the production of
both wine and cheese, but its opportunity cost for cheese is 30 / 22, or
1.36 units of wine, while the cost of wine is 22 / 30, or 0.73 units of cheese.
Because France's opportunity cost for the production of wine is lower than
Italy's, it has the comparative advantage despite Italy being the more
efficient producer. Italy's opportunity cost for cheese is lower, giving it both
an absolute and comparative advantage. Since neither nation can produce
both items, the most efficient strategy is for France to specialize in wine
production because it has a comparative advantage and for Italy to
produce cheese.

14. France Opportunity costs Italy Opportunity costs
Wine 20 units 10/20 units of wine
or 0.5 units of
cheese
30 units 22/30 units of wine
or 0.73 units of
cheese
Cheese 10 units 20/10 of cheese or 2
units of wine
22 units 30/22 units of
cheese or 1.36 units
od wine

15. Comparative advantage 1
• By David Ricardo
• A country should focus on the industry in which it has the largest
comparative advantage
• When it comes to trade, absolute advantage is not as important as
comparative advantage. Comparative advantage takes into account
the opportunity cost of specializing in one activity over another
• It might be cheaper for India to operate call centres compared to the
Philippines, but the potential gains from another activity, such as
information technology services, might be far greater

16. Opportunity cost
• Opportunity cost, which is what you have to give up in order to make
a choice
• Nations should specialize in producing the good in which they have
the lowest opportunity cost

17. Comparative advantage 2: Ricardo example
For example, England was able to manufacture cheap cloth.
Portugal had the right conditions to make cheap wine.
Ricardo predicted that England would stop making wine and Portugal
stop making cloth.
England made more money by trading its cloth for Portugal's wine, and
vice versa.
It would have cost England a lot to make all the wine it needed because
it lacked the climate.
Portugal didn't have the manufacturing ability to make cheap cloth.

18. Comparative advantage 3
• Is when a country produces a good or service for a lower opportunity
cost than other countries
• A country with a comparative advantage isn’t necessarily the best at
producing something
• The advantages of buying their good or service just outweigh the
disadvantages

19. Comparative advantage 4: modern example
• For example, oil-producing nations have a comparative advantage in
chemicals. That's because the oil provides a cheap source of material for
the chemicals when compared to countries without it
• As a result, Saudi Arabia, Kuwait and Mexico compete well with U.S.
chemical production firms. Their opportunity cost is low. That makes their
chemicals less expensive
• Another example is India's call centers. U.S. companies buy this service
because it is cheaper than locating the call center in America. Indian call
centers aren't better than U.S. call centers. Their workers don't always
speak English very clearly. But they can do it cheap enough to make the
tradeoff worth it
• H/w: another examples

20. H/w:
• Find the top 10 export and the top 10 import products for Indonesia
(2016 at least)
• Check the dynamics (10 years ago like in 2006)

21. Modern analysis
• Explores the effects upon trade of a range of factors, including
technology and scale economies
• It makes extensive use of econometrics to identify from the available
statistics, the contribution of particular factors among the many
different factors that affect trade

22. Comparative advantage: modern approach
• goods that are produced by the extraction and routine processing of
available natural resources – such as coal, oil and wheat
• low-technology goods, such as textiles and steel, that tend to migrate
to countries with appropriate factor endowments
• high-technology goods and high scale-economy goods, such as
computers and aeroplanes, for which the comparative advantage
arises from the availability of R&D resources and specific skills

23. Factor price equalisation
• If productivity were the same in both countries, the effect of trade
would be to bring about equality in wage rates
• Trade between an industrialised country and a developing country
would lower the wages of the unskilled in the industrialised country
• However, it is unreasonable to assume that productivity would be the
same in a low-wage developing country as in a high-wage developed
country
• A 1999 study has found international differences in wage rates to be
approximately matched by corresponding differences in productivity

24. Terms of trade
• There has also been concern that international trade could operate
against the interests of developing countries

25. Infant industries
• The term "infant industry" is used to denote a new industry which has
prospects of gaining comparative advantage in the long-term, but
which would be unable to survive in the face of competition from
imported goods

26. Trade policies
• Economists’ findings about the benefits of trade have often been
rejected by government policy-makers, who have frequently sought
to protect domestic industries against foreign competition by barriers,
such as tariffs and quotas, against imports