Introduction to International Economics

Introduction

International Economics is a specialized branch of Economics focusing on the external trading relations of nations. Generally external trade involves the exchange of goods and services among nations crossing the national territories. Trade not only strengthens the economic interdependence among nations but promotes consumer welfare also by providing a variety of commodities. Since it involves several countries a different set of rules and regulations are necessary for the smooth functioning of the system. This is why international economics is treated as a separate branch of study.

Broadly the subject matter in International Economics can be categorized into five broad groups.

1. International Trade Theory: It concentrates on the theoretical aspects of trade like reasons of trade, gains of trade etc. Different schools of theories are discussed in this section.

2. International Trade Policy: This area also deals with the international rules and regulations regarding the flow of transactions. It includes various trade restrictions like tariffs, quotas, changes in exchange rates etc. The regulatory mechanisms and various international institutions for monitoring it are also come under this section.

3. Balance of Payment: With the progress of trade, nations have to make and receive payments. All these economic transactions of a nation with the rest of the world are systematically recorded in this account. The fluctuations in BOP and the associated policy regulations are also included in this section.

4. Balance of Payment Adjustments or Open Economy Macroeconomics: With the progress of transactions, sometimes either the credit or the debit may outweigh the other side. It will lead to imbalances in BOP. This situation is normally coined BOP disequilibrium which demands correction either automatically or externally imposed by the governments. These external repercussions are also brought into the study.

5. International Organizations: International trade is a complex activity involving multiple countries and currencies. Commodities and capital flow across countries. Hence it requires separate rules and regulations. It should be monitored by international level organizations also. All these aspects are monitored under the head global economic organizations.

Internal Trade and International Trade

Trade is an economic concept that deals with buying and selling of goods. Trade is conducted between two or more parties (individuals or business entities). Internal trade is the trade that takes place between two parties within the geographical boundaries of a nation. It is also known as domestic trade or home trade. International trade is the trade where two or more individuals from two different countries are involved or two different countries are involved in the trade. It is also known as foreign trade.

Trade And Development

International trade is closely linked to development. Most fast growing economies also have a dynamic trade sector. When a firm or an individual buys a good or a service produced more cheaply abroad, living standards in both countries increase. There are other reasons, those consumers and firms who buy abroad that also make them better off, it is because of the product may better fit their needs than similar domestic offerings or it may not be available domestically. In any case, the foreign producer also benefits by making more sales than it could selling solely in its own market and by earning foreign exchange (currency) that can be used by itself or others in the country to purchase foreign-made products. The gains (importance) from trade is generally reflected in the following manner.

• Acquisition of Capital Goods Industries: The under-developed countries (UDCs) are enabled by foreign trade to obtain in exchange for their goods capital equipment and heavy engineering machines to foster their countries’ economic development. For example, India exports spices, cotton and cotton textiles, marine products, germs and jewellery and in exchange we import heavy machinery, defence equipments, and other capital equipment from the developed countries.
• Market Extension: The foreign trade can extend the scope of the business to the international market. The domestic market is limited; the foreign trade sector opens new vistas, new marketing channels and new markets. When the markets are extended, the economies of scale are reaped; the efficiency and productivity will increase. Accordingly, the forces of development will set themselves in motion.
• Foreign Investment: The foreign trade is also helpful in attracting foreign investment. The foreign investors are attracted towards active trading countries and invest in the form of capital goods and technical expertise. In this way, the assembling plants, the manufacturing plants and the latest technology will come into the country. Foreign Direct Investments (FDI) and off shoring will stimulate the economic climate of a nation.
• National Income: When there is imports and exports of goods and services, the government can earn the revenue in form of tariffs, custom duty, import licence fees, etc.
• Employment Opportunities: Moreover, the external sector also opens the employment opportunities for the country-men in the foreign countries. Hundreds of thousands of Indians are working abroad. India is earning billions of dollars through foreign exchange remittances and stands in the second position just behind China. Therefore, such remittances are proved to be a major source of foreign exchange earnings.