INTRODUCTION

Why study International Economics?

 Countries are linked via trade (goods and services)

and capital (international lending and borrowing,
foreign direct investment). In the last decade we have
observed the emergence of a ‘Global Economy’

 It is a discipline that deals with economic interactions

between sovereign (independent) countries.
Governments regulate: trade, investment, the
movement of capital (and other factors of production)
and the supply of currency (exchange rate).

 Main areas:

o INTERNATIONAL TRADE (gains from trade,

pattern of trade, how much trade, protectionism)

o INTERNATIONAL MONETARY ECONOMICS

(open economy macroeconomics and policy):
balance of payments, exchange rate determination,
international capital markets, international policy
coordination)

Why study International Trade?

Trade theory helps address many pressing issues:

 Why do countries trade with each other and what

determines what is being traded?

 Across countries: do all countries gain from trading

or does trade perpetuate global inequalities?

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 Within the same country: how does trade affect the
distribution of income among different groups?

 In terms of trade policy

- Can we explain why some sectors tend to

receive more protection than others?

- Is it best to retaliate against countries that

impose unilateral tariffs?

- What are trade blocks? What are the effects on

the welfare of their members and the rest of the
world?

 Other issues

- Does international trade undermine the

protection of the environment?

- Ethical considerations like: is trade fair with

poor countries? Does trade foster the
exploitation of children in poorer countries?

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 World Exports and Imports of Goods and Services as
percentage of GDP

35

30

25

20 Exports/GDP
15 Imports/GDP

10

0
1998 1999 2000 2001

Source: World Bank

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World Pattern of Trade.

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 Exports and Imports of Goods and Services as
percentage of GDP, 2001

160

140

120

100
Exports/GDP
80
Imports/GDP
60

40

20

0
UK

Italy
Germany

Japan
USA2000

Netherland

Hong Kong
China
France

canada

Source: World Bank

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 Who are the leading exporters and importers?

Source: World Trade Organisation

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Source: World Trade Organisation

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  Changing structure of world trade

 What type of products do nations trade?

Recently:

Manufactured products such as automobiles, computers, clothing and

machinery account for more than 60% of the volume of world trade.
Services such as shipping, insurance, legal fees and spending by tourists
account for 20% of the volume of world trade.
Mineral products (e.g., petroleum, coal, copper) and agricultural
products are a relatively small part of world trade.

In the past:

A large fraction of the volume of trade came from agricultural and

mineral products.

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In 1910:
UK: imports were mainly in agricultural and mineral products, exports
were mainly in manufactured products.
USA: imports and exports were both mainly agricultural and mineral
products.

In 2002:
UK and USA exports and imports are mainly in manufactured products.

Developing countries (low and middle-income countries), have also

changed their trade composition

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 In 1960, about 58% of exports from developing countries were
agricultural products and only 12% of exports were manufactured
products

In 2001, about 65% of exports from developing countries were

manufactured products, and only 10% of exports were agricultural
product

 Multinationals and Outsourcing:

Recent media and political attention

Multinationals played a small role in world trade before 1945. Thereafter,

they have increased their role by selling/buying from one subsidiary
to another.

Outsourcing:

o It occurs when a firm moves business operations out of the

domestic country.
o The operations could be run by a subsidiary of a multinational
corporation, or they could be subcontracted to a foreign firm.
Outsourcing of either type increases the amount of trade

Outsourcing of services i.e. jobs moving from industrial countries like

USA and UK to developing countries like India is causing concerns about
job losses in USA and UK.

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 Gravity Model

Can we predict the volume of trade between two countries?

 Size Matters

Note that 3 of the top 10 trading partners with the US in 2003 were
also the 3 largest GDP in Europe: Germany, UK and France.
Why does USA trade with these countries and not other European
countries?

The size of an economy is directly related to the volume of imports

and exports:

- Larger economies produce more goods and services, so they have

more to sell in the export market.

- Larger economies generate more income from the goods and services
sold, so people are able to buy more imports.

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 Distance Matters

Distance between markets influences transportation costs (also

personal contact and communication) and therefore the cost of imports
and exports.

Basic form of the gravity model

Assumes that only size and distance are important for trade

Tij = A Yi Yj /Dij
where

Tij is the value of trade between country i and country j

A is a constant
Yi the GDP of country i
Yj is the GDP of country j
Dij is the distance between country i and country j

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 Other factors

- Countries with cultural ties are likely to have strong economic ties.

- Geography (harbors, landlocked, mountain barriers, etc)

- Multinational corporations: corporations spread across different nations

import and export many goods between their divisions.

- Borders: crossing borders involves formalities that take time and

perhaps monetary costs like tariffs and different currencies. These
implicit and explicit costs reduce trade.

Note that

- Trade agreements between countries are intended to reduce the

formalities and tariffs needed to cross borders, and therefore to
increase trade. E.g. Free trade agreement NAFTA between USA,
Canada and Mexico signed in 1994.

However, has trade between USA and Canada increased? There seems
to be much more trade between regions of the same country than
between equivalently situated regions in different countries. Why?
What is the effect of international currency transaction costs on
international trade?

- The negative effect of distance on trade is important but it has grown

smaller over time (modern transportation, technological advances in
communication e.g. fax, internet, etc)

- Political factors (e.g. wars) might be as or more important than

transportation and communication.

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