Lecture 1 (ch. 1 & 13)

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Chapter 1 - Introduction

"Off the Balance of Trade" - David Hume. First real exposition of an economic model. Debates over British trade policy in the 19th century lead to a model-oriented economics subject.

Nations are closely linked through trade, flows of money and foreign investment -> Unprecedented importance of international economic relations.

International trade (imports and exports) has tripled in importance compared with the economy as a whole.

Large excess of imports over exports are paid with money supplied by large inflows of capital (money invested by foreigners willing to take a stake in an economy).

Gap between imports and exports is also an indicator of growing linkages between national capital markets.

Close links between world trade and the overall state of the world economy (in a crisis imports and exports take a plunge)

Size and diversity of the resources of a country determine largely how much it relies on international trade.

Subject matter of international economics: issues raised by the special problems of economic interaction between sovereign states

Recurrent themes:

1) Gains from trade. Counties selling goods and services to each other results in gains, it is mutually beneficial. There is a misconception that if large disparities exist then trading isn't beneficial for one side if it is unable to compete technologically or else-wise. Specialisation leads to benefits regardless due to efficiency considerations. Intangible goods are also traded, labour for goods and services, trade of current goods for the promise of future goods (international borrowing and lending).

International exchanges of risky assets such as stocks and bonds can benefit by allowing each country to diversify its wealth and reduce the variability of its income.

It is nevertheless possible that although nations gain from international trade, it may hurt particular groups within nations (effects on the distribution of income) -> Concern of international trade theorists -> effects on owners of resources that are specific to industries that compete with imports and that cannot find alternative employment in other industries.

2) Pattern of trade. To discuss the effects of international trade or recommend changes in government policies economists must be confident in knowing their theory explains the international trade that is actually observed. Climate and resources for example explains what some countries export. Much of the pattern of trade, however, is more subtle.

Ricardo offered an explanation of trade in terms of international differences in labour productivity.

Another explanation links trade patterns to an interaction between the relative supplies of national resources such as capital, labour, and land on one side and the relative use of these factors in the production of different goods on the other.

3) Protectionism. The idea of gains from trade is the most important theoretical concept, and the debate over how much trade to allow is the most important policy theme in international economics. Governments are worried about the effect of international competition on the prosperity of domestic industries and have tried to shield industries from foreign competition by placing limits on imports or to help them by subsidising exports. International economics analyses the effects of these so-called protectionist policies.

After WWII removing barriers to trade started to be seen not only as economically beneficial but also as a way to promote world peace. NAFTA and the Uruguay Round agreement, which established the WTO in 1994 were negotiated in the 1990's. Since that time, however, a political movement opposing globalisation has gained many adherents.

International economists have developed an analytical framework for determining the effects of government policies that affect international trade. This also allows for a cost-benefit analysis and defining criteria for when government intervention is good for the economy. Conflicts of interest within nations are usually more important in determining trade policy than conflicts between nations.

4) Balance of payments. A country's balance of payments must be placed in the context of an economic analysis to understand what it means.

5) Exchange rate determination. Relative values of currencies can change over time. Since for much of modern economic history exchange rates were fixed by government action rather than determined in the marketplace, exchange rate determination is a relatively new part of international economics.

protectionism, balance of payments, exchange rate determination, international policy coordination, international capital markets.