INTERNATIONAL ECON CHAOT 1-2

International Economics

The study of how nations interact through trade and finance, including imports, exports, financial flows, and policy effects on economies.

Gains from Trade

When two parties voluntarily trade, both can benefit. Even countries efficient in all production can gain by specializing in what they do best and trading for other goods.

Specialization

Countries focus on producing goods where they are most productive, increasing efficiency, and allowing access to a greater variety of goods through trade.

Abundant vs. Scarce Resources

Countries export goods made with abundant resources and import goods made with scarce resources.

Scale Economies

Specialization allows for larger-scale production, lowering costs and improving efficiency.

Intertemporal Trade

Trading current resources for future returns (e.g., borrowing or investing across countries).

Migration Gains

Labor migration contributes to trade benefits by reallocating resources (like workers) to where they are most productive.

Distributional Effects

While trade benefits the overall economy, it may hurt specific groups, especially those in import-competing industries.

Trade Patterns

Differences in climate and resources influence trade flows. Example: Brazil exports coffee; Australia exports iron ore.

International Finance

Focuses on cross-border financial transactions like bonds and stocks to reduce income volatility through diversification.

Balance of Payments (BOP)

A record of all transactions between one country and the rest of the world

Trade Deficit

Occurs when imports > exports. It may be offset by financial inflows.

Exchange Rate

The price of one country's currency in terms of another's. It affects trade by making imports/exports more or less expensive.

Capital Markets

Markets where money is exchanged now for promises to repay in the future. Subject to currency risk and default, especially in developing countries.

Trade

Exchange of goods/services

Finance

Movement of money and financial assets

Abundant goods

Goods that a country produces using resources it has a lot of.

scarce resources

Goods that a country imports because it doesn't have enough resources to produce them.

Trade Deficit

When a country imports more than it exports in terms of value.

Gravity Model of Trade

explains trade patterns based on economic size and distance.

Tij = A × (Yi × Yj) / Dij

Gravity model formula

size, distance, cultural affinity, geography, multinational corporations, borders

factors affecting trade

Distance effect

A 1% increase in distance reduces trade by about 0.7% to 1%.

Shrinking World Effect

Technology reduces the impact of distance on trade (e.g., internet, air travel, container shipping).

Political wars

Wars and global crises (e.g., WWI, WWII, the Great Depression) disrupted trade more than technology advanced it.

55%: Manufactured goods, 20% Services, Minerals

Modern trade composition

Service Outsourcing

occurs when companies relocate service operations, like customer support, to other countries where tasks can be done electronically.

nontradable Jobs

they require physical presence or local knowledge.

GDP

A key factor in the gravity model that measures economic output.

distance

The factor in the gravity model that affects transportation and communication costs.

cultural affinity

Shared language or history that strengthens trade relations.

geography

an advantage that reduces barriers to trade, such as harbors.

multinational corporation

Corporations that operate in multiple countries and trade internationally.

borders

Legal and financial barriers are created by crossing national boundaries.

1970

The period when world trade recovered fully after WWII.

manufactured goods

The largest category of goods traded internationally in 2008.

services

Type of trade involving activities like tourism, legal services, and insurance.

mineral and agricultural products

A smaller part of modern trade is made up of petroleum, coal, and crops.

Trade Balance, Financial Account, Official Settlements

factors of the balance of payments

Trade Balances

Value of exports - imports;

Financial Accounts

Capital flows in and out

Official settlements

Central bank transactions for international payments.

north American free trade agreement

a free trade agreement signed in 1994 between the United States, Canada, and Mexico. Its main goal was to reduce or eliminate trade barriers like tariffs and import quotas among the three countries, making it easier and cheaper to trade goods and services across their borders.

currency risk

is the possibility that the value of one currency will change compared to another. This matters in international trade and finance because if the exchange rate moves unfavorably, a company or country might lose money.

currency default

refers to a country’s failure to repay its foreign debt, often because it runs out of foreign currency reserves. This is common in developing countries that borrow in foreign currencies. If they can’t earn enough through exports or foreign investments, they may default on their payments.