International Economics: Introduction

International Economics

Learning Objectives

♥ Coverage of International Economics.

♥ International Trade.

♥ International Finance.

♥ India & International Economy.


1.1 Introduction
With revolutionary advances in transport,
communications coupled with disappearance of
distances all countries are economically inter
connected.
It is not certain whether even big countries
like USA, India or China can survive if they
were to close their borders to any overseas
trade. Other countries cannot even think of any
such possibility.
If countries were to decide to be self
sufficient it would bring about drastic
lowering of standard of living if not economic
catastrophe.


1.1 Introduction

This economic interdependence of countries
is indicated by continuous rise in volumes
of

Imports and exports;
Capital inflows;
Overseas travel;
Multinational companies etc.


1.1 Introduction

This increasing economic interdependence of
countries has serious implications on the
domestic economy caused by international
division of labour.

Some countries are forming economic groups
[like OPEC] to protect their common
interests.

These issues are addressed in ‘International
Economics’.


1.2 Coverage of International Economics

$ Analysis & study of theory of comparative
costs.
$ Modern theory of international trade.
$ Modern version of the above theory.

The theory of comparative cost advantage is
basically a static theory. Dynamic variables
that affect the trade like capital flows,
new technology, population [& therefore
labour] changes, etc are gradually
introduced


1.2 Coverage of International Economics

International trade is unique since
transactions are carried in different
currencies.

Steps taken by one country to improve its
balance of trade/payment position has rebound
effect on others.

All these factors make ‘International
Economics’ as ‘Applied Economics’ requiring
study of foreign currencies, commercial policy,
quota fixation, price stabilization, formation
of regional groups & their trade policies.


1.3 International Economics, a Branch of General
Economics?

Yes.
General Economics has several branches like
- theory of consumption,
- theory of value, exchange and
distribution,
- theory of money and banking,
- public finance,
- and International Economics.
These branches are inter linked, hence
knowledge of others is essential for study of
International Economics.


1.4 The subject of International Economics

All branches of general economics
have some international aspects in
their study, these all form a part
of international economics which is
considered a subject in itself.
Even international trade cannot be
considered in isolation without
considering its effects on
domestic trade and vice versa.



Main difference between domestic and
international trade is caused by the fact
that factors of production are perfectly
mobile within the country but not so among
the countries.

Hence when there is a movement of these
factors from one country to another, it has
many interesting implications both
favourable and adverse.



International Economics, therefore, attempts
to
1] show benefits of international
economic policy to the nation within
itself and with others,
2] identify areas of conflict of
interest among nations and
3] point out ways for their mutual
resolution.


1.5 The scope and nature of International Economics

International Economics studies how
independent economies of the world interact
with one another in the process of
allocating scarce resources to satisfy human
wants.

The subject matter can be studied in two
parts :

International Trade &
International Finance.



International Trade :

International trade deals with the long-run
static equilibrium theory of barter.

It relies heavily on concepts of demand,
supply, indifference curves, opportunity
costs from micro economics to explain why
nations trade, how do they gain, and why do
they resort to protectionism, in which form
etc.


International Trade [IT]:
The gains from the trade : It is fact that
if two nations trade with each other, it is
for the mutual benefit. IT theory explains
circumstances under which these gains are
maximized.

The pattern of trade: IT theory explains how
climate, availability of resources and other
such factors decide items that are traded
among nations.


International Trade [IT]:
Protectionism : Countries, especially
developing countries, are always worried about
possible ill effects of international
competition on domestic growth and try to
restrict free competition through economic
barriers. IT theory studies pros and cons of
such protectionist mechanisms and explores
means of minimizing their effects to enhance
gains from IT.
Commercial Policy: International economics
analyzes all aspects of the policy to examine
how it can assist domestic growth and encourage
free trade.


It is a macro economic theory that studies
monetary aspects of international economic
relations.
It deals with international monetary system
that permits smooth working of international
economy operating on different currencies.
One major issue it has to handle is that of
balance of payments. In their international
operations each nation has either surplus or
deficit in foreign exchange payments.


One method to manage this balance of
payments is through determination of optimum
exchange rate for its currency.

One country’s economic policy immediately
affects economy of other countries it is
reacting with. This calls for coordination
of these sovereign economies to establish
healthy harmony and theory of international
economics explores ways and means available
for this purpose.


1.6 India in the International Economy

Until 1990s issues discussed so far under
international economics were affecting
Indian economy on a conservative basis.
But with economic reforms implemented by the
Central Government, Indian economy is
closely aligned with global economic
activities. International boundaries have
opened up as seen by reduction in % of
import duties to total imports.
There is no field in Indian economy that is not
touched by International Economics.
The End

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