International economics - Concerned with International Differences


International trade studies goods-and-services flows across international boundaries from supply-and-demand factors, economic integration, international factor movements, and policy variables such as tariff rates and trade quotas.


International monetary economics and macroeconomics studies money and macro flows across countries.

International political economy from international relations studies issues and impacts from for example international conflicts, international negotiations, and international sanctions; national security and economic nationalism; and international agreements and observance.

International trade

Scope and methodology


The branch of trade theory which is conventionally categorized as "classical" consists mainly of the application of deductive logic, originating with Ricardo s Theory of Comparative Advantage and developing into a range of theorems that depend for their practical value upon the realism of their postulates. "Modern" trade theory, on the other hand, depends mainly upon empirical analysis.

Classical theory





Modern theory

Modern trade theory moves away from the restrictive assumptions of the H-O theorem and explores the effects upon trade of a range of factors, including technology and scale economies. It makes extensive use of econometrics to identify from the available statistics, the contribution of particular factors among the many different factors that affect trade. The contribution of differences of technology have been evaluated in several such studies. The temporary advantage arising from a country s development of a new technology is seen as contributory factor in one study.

Other researchers have found research and development expenditure, patents issued, and the availability of skilled labor, to be indicators of the technological leadership that enables some countries to produce a flow of such technological innovations and have found that technology leaders tend to export hi-tech products to others and receive imports of more standard products from them. Another econometric study also established a correlation between country size and the share of exports made up of goods in the production of which there are scale economies. It is further suggested in that study that internationally traded goods fall into three categories, each with a different type of comparative advantage:

goods that are produced by the extraction and routine processing of available natural resources such as coal, oil and wheat, for which developing countries often have an advantage compared with other types of production which might be referred to as "Ricardo goods";




Factor price equalisation



Terms of trade

There has also been concern that international trade could operate against the interests of developing countries. Influential studies published in 1950 by the Argentine economist Raul Prebisch and the British economist Hans Singer suggested that there is a tendency for the prices of agricultural products to fall relative to the prices of manufactured goods; turning the terms of trade against the developing countries and producing an unintended transfer of wealth from them to the developed countries.

Their findings have been confirmed by a number of subsequent studies, although it has been suggested that the effect may be due to quality bias in the index numbers used or to the possession of market power by manufacturers. The Prebisch/Singer findings remain controversial, but they were used at the time - and have been used subsequently - to suggest that the developing countries should erect barriers against manufactured imports in order to nurture their own infant industries and so reduce their need to export agricultural products. The arguments for and against such a policy are similar to those concerning the protection of infant industries in general.

Infant industries

The term "infant industry" is used to denote a new industry which has prospects of becoming profitable in the long-term, but which would be unable to survive in the face of competition from imported goods. That is a situation that can occur because time is needed either to achieve potential economies of scale, or to acquire potential learning curve economies. Successful identification of such a situation followed by the temporary imposition of a barrier against imports can, in principle, produce substantial benefits to the country that applies it a policy known as import substitution industrialization . Whether such policies succeed depends upon governments skills in picking winners, and there might reasonably be expected to be both successes and failures. It has been claimed that South Korea s automobile industry owes its existence to initial protection against imports, but a study of infant industry protection in Turkey reveals the absence of any association between productivity gains and degree of protection, such as might be expected of a successful import substitution policy. .

Another study provides descriptive evidence suggesting that attempts at import substitution industrialisation since the 1970s have usually failed, but the empirical evidence on the question has been contradictory and inconclusive. It has been argued that the case against import substitution industrialisation is not that it is bound to fail, but that subsidies and tax incentives do the job better. It has also been pointed out that, in any case, trade restrictions could not be expected to correct the domestic market imperfections that often hamper the development of infant industries

Trade policies


The largest of the remaining trade-distorting policies are those concerning agriculture. In the OECD countries government payments account for 30 per cent of farmers receipts and tariffs of over 100 per cent are common. OECD economists estimate that cutting all agricultural tariffs and subsidies by 50% would set off a chain reaction in realignments of production and consumption patterns that would add an extra $26 billion to annual world income.


International finance

Scope and methodology



Exchange rates and capital mobility



The outcome was not what had been expected. In making an influential case for flexible exchange rates in the 1950s, Milton Friedman had claimed that if there were any resulting instability, it would mainly be the consequence of macroeconomic instability, but an empirical analysis in 1999 found no apparent connection. Economists began to wonder whether the expected advantages of freeing financial markets from government intervention were in fact being realised.



Policies and institutions

Although the majority of developed countries now have "floating" exchange rates, some of them together with many developing countries maintain exchange rates that are nominally "fixed", usually with the US dollar or the euro. The adoption of a fixed rate requires intervention in the foreign exchange market by the country s central bank, and is usually accompanied by a degree of control over its citizens access to international markets.





International financial stability


One of their effects has been greatly to increase the international inter-connectedness of the financial markets and to create an international financial system with the characteristics known in control theory as "complex-interactive". The stability of such a system is difficult to analyse because there are many possible failure sequences. The internationally systemic crises that followed included the equity crash of October 1987, the Japanese asset price collapse of the 1990s the Asian financial crisis of 1997 the Russian government default of 1998(which brought down the Long-Term Capital Management hedge fund) and the 2007-8 sub-prime mortgages crisis. The symptoms have generally included collapses in asset prices, increases in risk premiums, and general reductions in liquidity.




There have been many econometric studies intended to quantify those gains. A Copenhagen Consensus study suggests that if the share of foreign workers grew to 3% of the labour force in the rich countries there would be global benefits of $675 billion a year by 2025. However, a survey of the evidence led a House of Lords committee to conclude that any benefits of immigration to the United Kingdom are relatively small. Evidence from the United States also suggests that the economic benefits to the receiving country are relatively small , and that the presence of immigrants in its labour market results in only a small reduction in local wages.









Globalisation can also have a significant influence upon the conduct of macroeconomic policy. The Mundell Fleming model and its extensions are often used to analyse the role of capital mobility (and it was also used by Paul Krugman to give a simple account of the Asian financial crisis). Part of the increase in income inequality that has taken place within countries is attributable - in some cases - to globalisation. A recent IMF report demonstrates that the increase in inequality in the developing countries in the period 1981 to 2004 was due entirely to technological change, with globalisation making a partially offsetting negative contribution, and that in the developed countries globalisation and technological change were equally responsible.


Globalisation is seen as contributing to economic welfare by most economists but not all. Professor Joseph Stiglitz of the Columbia Business School has advanced the infant industry case for protection in developing countries and criticised the conditions imposed for help by the International Monetary Fund. And Professor Dani Rodrik of Harvard has noted that the benefits of globalisation are unevenly spread, and that it has led to income inequalities, and to damaging losses of social capital in the parent countries and to social stresses resulting from immigration in the receiving countries. An extensive critical analysis of these contentions has been made by Martin Wolf, and a lecture by Professor Jagdish Bhagwati has surveyed the debate that has taken place among economists




Investment banking

An investment bank is a financial institution that assists individuals, corporations, & governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities.

Mergers and acquisitions

Mergers & acquisitions (abbreviated M & A) is an aspect of corporate strategy, corporate finance & management dealing with the buying, selling, dividing & combining of different companies

Hedge fund

Hedge funds are private, actively managed investment funds. They invest in a diverse range of markets, investment instruments, & strategies & are subject to the regulatory restrictions of their country.

Tag Cloud

Shares     Share Market     Cash Flow     Industries     Saving Account     Debt Funds     Equity     Hedge Fund     Income Tax     Money     Balance Fund     Children Plans     Corporate Taxes     Real Estate Rate     systematic Investment Plans     Audit     Mutual Funds     Market Rates     Home Loans     Commodity