C01_international Krugman_12e_accessible.pptx

International Economics: Theory and
Policy
Twelfth Edition
Chapter 1
Introduction
Copyright © 2022, 2018, 2015 Pearson Education, Inc. All Rights Reserved

Learning Objectives
1.1 Distinguish between international and domestic
economic issues.
1.2 Explain why seven themes recur in international
economics and discuss their significance.
1.3 Distinguish between the trade and monetary aspects
of international economics.

Preview
• What is international economics about?
• International trade topics: Gains from trade, explaining
patterns and volume of trade, effects of government
policies on trade
• International finance topics: Balance of payments,
exchange rate determination, international policy
coordination, capital markets
• International trade versus finance

What Is International Economics
About? (1 of 3)
• International economics is about how nations interact
through trade of goods and services, flows of money,
and investment.
• International economics is an old subject, but continues
to grow in importance.
• Nations are now more closely linked than ever before.

About? (2 of 3)
• U.S. exports and imports as shares of gross domestic
product have been on an upward trend.
– International trade has roughly tripled in importance
compared to the economy as a whole in the past 60
years.
– Both imports and exports fell substantially in 2009
due to the recession.
– Both imports and exports fell again in 2020 due to
the COVID-19 pandemic.

Figure 1.1 Exports and Imports as a
Percentage of U.S. National Income
(Shaded areas indicate U.S. recessions.) Both imports and exports have
risen as a share of the U.S. economy, but imports have risen more.
Source: U.S. Bureau of Economic Analysis, research.stlouisfed.org

About? (3 of 3)
• Compared to the United States, other countries are even
more tied to international trade.
– Their imports and exports as a share of GDP are
substantially higher.
– The United States, due to its size and diversity of
resources, relies less on international trade than
almost any other country.

Figure 1.2 Average of Exports and Imports
as Percentages of National Income in 2018
International trade is even more important to most other countries than
it is to the United States.
Source: World Bank

The Gains from Trade (1 of 4)
• The most important insight of all international economics
is that there are gains from trade.
• Countries selling goods and services to each other
almost always generate mutual benefits.
1. When a buyer and a seller engage in a voluntary
transaction, both can be made better off.
▪ Norwegian consumers import oranges that they
would have a hard time producing.

2. How could a country that is the most (least) efficient
producer of everything gain from trade?
▪ Countries use finite resources to produce what
most productive at (compared to their other
production choices), then trade those products for
what they want to consume.
▪ Countries can specialize in production, while
consuming many goods and services through
trade.

3. Trade benefits countries by allowing them to export
goods made with relatively abundant resources and
imports goods made with relatively scarce resources.
4. When countries specialize, they may be more efficient
due to large-scale production.
5. Countries may also gain by trading current resources
for future resources (international borrowing and
lending) and due to international migration.

• Trade is predicted to benefit countries as a whole in
several ways, but trade may harm particular groups
within a country.
– International trade can harm the owners of resources
that are used relatively intensively in industries that
compete with imports.
– Trade may therefore affect the distribution of income
within a country.

The Pattern of Trade
• The pattern of trade describes who sells what to whom.
• Differences in climate and resources explain why Brazil
exports coffee, and Saudi Arabia exports oil.
• But why does Japan export automobiles, while the U.S.
exports aircraft?
• Why some countries export certain products can stem from
differences in:
– Labor productivity
– Relative supplies of capital, labor, and land and their
use in the production of different goods and services

Effects of Government Policies on
Trade (1 of 2)
• Policy makers affect the amount of trade through
– Tariffs: a tax on imports or exports,
– Quotas: a quantity restriction on imports or exports,
– Export subsidies: a payment to producers that
export, or
– Through other regulations (e.g., product
specifications)
that exclude foreign products from the market, but still
allow domestic products.
• What are the costs and benefits of these policies?

Effects of Government Policies on
Trade (2 of 2)
• If a government restricts trade, what are the costs if
foreign governments respond likewise?
• Trade policies are often chosen to cater to special
interest groups, rather than to maximize national welfare.
• Governments tend to adopt tariffs, then negotiate them
down in exchange for reduction in trade barriers of other
countries.

International Finance Topics
• Exchanging risky assets such as stocks and bonds can
benefit all countries by diversification that reduces the
variability of income—another source of gains from trade.
• Most international trade involves monetary transactions.
• Many monetary events have important consequences for
international trade.

Balance of Payments
• Governments measure the value of exports and imports,
as well as the value of financial assets that flow into and
out of their countries.
– Trade deficits, where countries import more than they
export in value, may be offset by net inflows of
financial assets.
• The official settlements balance, or the balance of
payments, measures the balance of funds that central
banks use for official international payments.
• All three values are measured in the government’s
national income accounts.

Exchange Rate Determination
• Exchange rates are an important financial issue for most
governments.
• Exchange rates measure how much domestic currency
can be exchanged for foreign currency and thus affect
how much:
– Goods denominated in foreign currency (imports) cost
in the domestic country.
– Goods denominated in domestic currency (exports)
cost in foreign markets.
• Some exchange rates change continually (float) while
others are fixed for periods of time.

International Policy Coordination
• In an integrated economy, one country’s economic
policies usually affect other countries as well, leading to
the need for some degree of policy coordination.
– Depends on type of exchange rate regime.
• Capital markets, where money is exchanged for promises
to pay in the future, have special concerns in an
international setting:
– Currency fluctuations can alter the value paid.
– Countries, especially developing ones, might default
on debt.

The International Capital Market
• Capital markets are arrangements by which individuals
and firms exchange money now for promises to pay in
the future.
• International capital markets cope with special
regulations that countries impose on foreign investments.
– Special risks of currency fluctuations and national
default and
– Sometimes offer opportunities to evade regulations
placed on domestic markets.

International Trade Versus Finance
• International trade focuses on transactions involving
movement of goods and services across nations.
– International trade theory (Econ/Trade Chapters
2–8) and policy (Econ/Trade Chapters 9–12).
• International finance focuses on financial or
monetary transactions across nations.
– International monetary theory (Econ Chapters
13–18/Finance Chapters 2–7) and policy (Econ
Chapters 19–22/Finance Chapters 8–11).

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C01_international Krugman_12e_accessible.pptx

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