International economics as a field of study in economics; one may ask:

• What makes economic relations among nation states different from economic relations within a nation state?

Possible answers: Each country identifies itself by a geographical area over

which it claims sovereignty.

Each country has its own government (political system) and its own of rules and regulations. The political systems of most nation states are different.

Activities or transactions leading to movements of people, factors of production (i.e., labor, capital and raw materials), manufactured goods and services across a county's borders are often controlled or restricted and in some cases are prohibited.

Most nation states have their own monies (currencies) and banking systems.

Despite the basic commonalties among all human beings, people of different countries tend to have different cultures, speak different languages, and have different tastes and habits.

==>All of the above have restricting effects on economic interactions among nation states.

• Since the end of the Second World War the world's international trade has been growing steadily.

• Better and less expensive transportation, lower trade barriers, the establishment of international institutions and organizations including trade organizations, reduced levels of international tension, regional economic agreements, and international trade agreements have all contributed to the growth in the in international trade.

More recent developments:

• Trade liberalization ( the establishment of WTO)

• Capital market liberalization

• Economic integrations

European Union

NAFTA

ASEAN

• Emergence of China as an economic force

• Globalization developments

International Economic Relations

• Trade»Exports

»Imports

• International Factor Movements

• International Investment»Direct

»Portfolio

• Unilateral transfers (of goods and services and

capital )

• Official transactions

International Financial Transactions

• Trade-based transactions

• Investment transactions

• Unilateral transactions

• Official transactions

• Speculative transactions

• Hedging transactions

• Trading in FX derivatives

International Financial Institutions

• Markets and exchanges in international financial centers such as London, New York, Paris, Tokyo, Singapore, etc.

• International banks and brokerage firms

• Central banks

• The IMF

• The World Bank

Studying International Economics

• Microeconomics: International Trade and Factor Mobility

• Macroeconomics: International Finance (Balance of Payments, Exchange Rate, and International Monetary System)

• Positive and Normative Analysis

The United States and the World

• From the production possibilities curve analysis we have learned that an economy's output cannot grow beyond its production possibilities unless there an increases in one or more of its economic resources or/and there is an improvement in its technology.

• Trading with other countries allows a country's consumers to consume outside the country’s production possibilities area; that means the country can achieve a consumption level not achievable without trade.

Gains from Trade

Food

Clothes 0

a b

100

50

TT

US and the World Economy 2002

• The World GDP $33.3 (Trillion)

• US $11

• Other Rich $16

• Middle Income $ 5.2

• The Poor $ 1.2

The U.S. and International Trade

• The United States has the largest amount of international trade in the world. In recent years the U.S. has exported (and imported) about 15 percent of its GDP annually.

• Since 1981 the value of the U.S. annual imports has (consistently) been greater than the value of its annual exports resulting in balance of trade deficits.

GDP Exports Imports BOP %Exprts %Imprts1960 527 25.30 22.80 2.50 4.80 4.331965 720 35.40 31.50 3.90 4.92 4.381970 1040 57.00 55.80 1.20 5.48 5.371975 1635 136.30 122.70 13.60 8.34 7.501980 2796 278.90 293.80 -14.90 9.97 10.511985 4213 303.00 417.20 -114.20 7.19 9.901990 5803 557.20 628.60 -71.40 9.60 10.831995 7400 818.60 902.80 -84.20 11.06 12.202000 9825 1131.00 1520.30 -389.30 11.51 15.472002 10446 971.00 1392.00 -421.00 9.30 13.33

U.S. Exports and Imports as % of GDP

0.00

5.00

10.00

15.00

20.00

%Exprts

%Imprts

US Trade Deficits: Selected Regions/Countries2002 (Mil)

World 470,104 EU 97,501 NAFTA 86,962 S. America 19,318 Asia 262,710 Japan 70,055 Korea 12,979 Taiwan 13,805 China 103,115 Rusia 4,426

US Financial Link to the Rest of the World

International CapitalFlow

$MillionSelected US invest. Foreign US GDP

Years Abroad Invst. in US US Inv Ab F Inv In US1960 4,099 2,294 526,600 0.78 0.441970 9,337 6,359 1,035,600 0.90 0.611980 86,967 62,612 2,784,200 3.12 2.251990 74,011 74,160 5,743,800 1.29 1.291997 478,502 477,666 8,111,000 5.90 5.89

US Investment Abroad and Foreign

Investment in US as % of GDP

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

US Inv Ab

F Inv In US

US Net International Investment Position, 1981- 2002

-3000000

-2500000

-2000000

-1500000

-1000000

-500000

0

500000

$ M

illio

n

The World Merchandise Trade (1998): The Major Player

Export Import

$B % Ch $B % ChExtra-EU 813.2 20.1 0 944.4 22.3 5

United States 682.5 16.8 -1 800.7 18.9 5

Japan 387.9 9.6 -8 280.5 6.6 -17

China 183.8 4.5 1 140.2 3.3 -2

Korea 132.3 3.3 -3 93.3 2.2 -35

Mexico 117.5 2.9 6 129.0 3.0 14

Singapore 109.9 2.7 -12 101.6 2.4 -23

The Basic Theory of Trade

• Comparative advantage and the gains from trade

• Specialization and trade as a means to economic efficiency

• Trade as a way of life

• Trade and economic interdependence

• Trade and economic growth

Early Thinking about Trade

• Mercantilism• Advocating exports and accumulation of gold and other

precious metals

• David Hume and the specie-flow mechanism• Accumulation of gold => domestic inflation => decline

of exports and increase in imports

• Adam Smith (1776)• Trade is beneficial for both trading partners (countries) if

each specializes in the production of the good she is more efficient in.