ECONOMICS MIDTERM L1

international economics definition

importance of international economics 2026

explain rising trade fragmentation, supply-chain realignment, and energy-price volatility.

discuss how these external developments can affect domestic growth, prices, and policy decisions.

International economics studies how countries are linked through trade, finance, investment, and exchange rates.

It is important because domestic economies are affected by external developments.

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because globalization has made economies more interconnected and economic shocks in one country can spread quickly to others through trade and supply chains

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Trade fragmentation- means more tariffs, restrictions, and geopolitical tensions

Supply-chain realignment- means firms shift production to reduce risk, for ex moving factories away from overdependence on one country.

Energy-price volatility- transport and production costs rise and creates uncertainty for firms and households.

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Growth may slow down if export demand weakens or firms face higher input costs

Prices may rise because imported goods become more expensive.

Governments may respond through trade policy, subsidies, monetary policy, or exchange-rate management

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real life ex: Red Sea shipping disruptions increased transportation costs and delayed deliveries, leading to higher business cots & inflationary pressure.

discuss the gains from trade

explain why benefits of trade may be unevenly distributed within an economy

relate answer to recent tariff escalation, reshoring pressures, and growing protectionist sentiment

Define:

Trade allows countries to specialize & exchange goods and services which can give benefits:

• efficiency

• lower prices

• wider choice

• more output

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Gains:

• Producers gain larger markets.

• Consumers benefit from cheaper or better products.

• Resources allocated more efficiently.

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Why benefits are uneven:

• Export industries may gain, but import-competing industries may lose market share.

• Some workers may lose jobs/face wage pressure.

Certain industries suffer more from adjustment costs

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recent tariff escalation

reshoring pressures

growing protectionist sentiment

• ·      Recent tariff escalation and reshoring pressure show that many governments worry about domestic job losses and industrial decline.

  Protectionist sentiment rises when people believe the gains from trade are not shared fairly.

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  real ex:

• The United States uses tariffs and subsidies to support domestic semiconductor and clean tech industries.

analyze forms of government intervention (international trade through tariffs, quotas, subsidies, and regulatory barriers) in:

economic motivations

political motivations

in:

refer to current trade tensions, strategic competition, and national-security concerns.

and give example

govs use tariffs

• quotas

• subsidies

• regulations

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economic motiv:

Protect infant industries

Protect employment

Improve trade balance

Encourage local production

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political motiv:

Governments respond to:

• voters

• lobbying

• pressure groups

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latest issue:

Trade policy today is influenced not only by economic efficiency but also by national security and strategic competition. Governments may restrict technology exports, protect critical resources, and support domestic industries to reduce dependence on other countries and improve resilience.

Examine the significance of exchange rates & balance of payments

and maintaining macroeconomic stability in a small open economy

discuss recent capital-flow uncertainty, external shocks, and currency fluctuations can influence trade performance, inflation, and economic stability.

role of international policy coordination

real ex

Exchange rates affect the price of exports and imports.

The balance of payments records a country’s transactions with the rest of the world.

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Small open economies depend heavily on external trade, imported inputs, and capital flows.

They are more exposed to global financial and trade shocks.

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Capital outflows can weaken currency and create financial pressure.

External shocks such as global inflation or slower world demand can hurt exports and growth.

Currency depreciation can raise import prices and increase inflation.

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role of ipc:

Policy coordination matters because one country’s interest-rate or trade policy can affect others.

Coordination may reduce instability and improve confidence in global markets.

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ex: High interest rates by major central banks can cause capital outflows from smaller economies, putting pressure on their exchange rates and imported inflation