L1_IOC - Copy

International Economic Cooperation

Introduction

• Definition: International economics is an applied field focusing on:

  • Gains from trade

  • Patterns of trade

  • Protectionism

  • Balance of payments

  • Exchange rate determination

  • Coordination in international policy

  • International capital markets

• Purpose: Studies how independent economies interact in allocating scarce resources to satisfy human wants.

Scope of International Economics

• Focuses on the flow of:

  • Goods

  • Services

  • Payments

  • Money

  • People between nations

• Examines policies regulating these flows and their impact on national welfare.

• Explores the effects of economic and financial interdependence on:

  • Political relations

  • Social relations

  • Cultural relations

  • Military relations among nations.

Two Main Areas of International Economics

Traditional View

• International Trade

• International Finance

Modern World Economy Windows

• International Trade

• International Production

• International Finance

• International Development

Specializations in International Economics

International Trade

• Focuses on microeconomic aspects:

  • Individual nations as single units

  • Relative prices of commodities

• Trade Theories and Policies

  • Absolute advantage

  • Comparative advantage

International Production

• Involves cross-country production of goods.

• Modes of International Production:

  • Contracts: Licensing, franchising

  • Foreign Direct Investment (FDI): Conducted by multinational enterprises.

International Finance

• Focuses on macroeconomic aspects of:

  • Exchange of assets among countries.

• Key Topics:

  • Balance of Payments (BoP): Total receipts and payments.

  • Adjustment policies affecting national income and general prices.

  • Also termed Open Economy Macroeconomics.

International Development

• Evaluates the impact of trade, production, and finance on:

  • Improved welfare and living standards

  • Support or undermine global development goals

• Aims for equitable development across nations.

Connections in International Economics

• International Trade

• International Finance

• International Production

• International Development

Common Fallacies of International Trade

1. Trade is a zero-sum activity.

2. Imports are bad, exports are good.

3. Tariffs and quotas save jobs and promote higher levels of employment.

Historical Development of International Economics

• Emerged as a specialized field over the last two centuries.

• Key Contributors:

  • Thomas Munn (1571–1641): Influential mercantilist writer; authored "England’s Treasure by Foreign Trade."

  • Adam Smith, David Ricardo: Established early foundations of trade theory.

  • Further expansion by John Stuart Mill, Alfred Marshall, John Maynard Keynes, and Paul Samuelson.

Mercantilists’ View on Trade

• Emerged in 17th–18th centuries in key European nations.

• Claimed that:

  • Nations can grow rich and powerful by exporting more than importing.

  • Surplus leads to inflow of bullion (gold/silver).

Core Principles of Mercantilism

• Export > Import: Emphasizes more exports than imports.

• Goals:

  • Accumulate bullion (gold & silver).

• Government Role:

  • Stimulate exports

  • Discourage/restrict imports.

• Zero-Sum Perspective:

  • Fixed wealth; one nation's gain equals another's loss.

Features of Mercantilism

• Wealth and Prosperity:

  • Accumulation of gold as the essence of wealth.

• Trade and Industry:

  • Regulate trade to maximize social welfare.

  • Encourage exports, restrict imports.

  • Import cheap raw materials but minimal food items.

• Colonialism and Power:

  • Promote colonialism for resource access.

  • Use gold reserves for military strength.

• State Intervention:

  • State regulates economic activity; advocates nationalism.

Criticisms of Mercantilism

1. Excessive Focus on Bullion:

   • Overemphasizes gold/silver as wealth.

2. Neglect of Agriculture:

   • Undermines agricultural importance.

3. Misconceptions About Trade:

   • Believes in favorable trade balances only.

   • Assumes zero-sum dynamics.

4. Ignored Adverse Effects:

   • Overlooks long-term negative impacts of trade.

5. Short-Term Policy:

   • Temporary solutions that laid capitalism's foundation.

Trade Restrictions

Claim vs. Reality

• Nations advocate free trade yet impose restrictions.

• Protectionist Policies:

  • Import restrictions on key sectors (agriculture, textiles).

  • Subsidies to maintain competitiveness.

  • Shift to indirect methods (tax benefits, R&D subsidies).

• Result: Persistent global trade disputes.

Key Trade Disputes (U.S. vs. EU)

• Hormone-Treated U.S. Beef: EU import ban.

• Banana Import Preferences: EU favoring African over U.S. suppliers.

• Airbus vs. Boeing: EU subsidies affecting U.S. sales.

• Steel Tariffs and Tax Rebates: U.S. tariffs and incentives for exporters.