Chapter 1

Introduction

Prepared by Iordanis Petsas

To Accompany
International Economics: Theory and Policy,
Policy Sixth Edition
by Paul R. Krugman and Maurice Obstfeld

Chapter Organization
Introduction
What is International Economics About?
International Economics: Trade and Money

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.

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

Introduction
Figure 1-2: Exports and Imports as Percentages of National Income in 1994

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.

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.

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.

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.

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.

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

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 Europes subsidized exports of agricultural
products

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

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