8/9/2019 Introduction International Economics From Salvatore

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Introduction

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International Flow o

Goods and Services

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Gravity Model

 Postulates that (other things are equal), the bilatrade between two countries is proportional, or a

positively related, to the product of two countrie he larger (and the !ore equal in si"e) and the

the two countries are, the larger the volu!e of between the! is e#pected to be.

  e.g. $S to trade !ore with its neighbors %anad&e#ico and !ore with large econo!ies such as %

 'apan and Ger!any than with s!aller ones.

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International cono!ic

 heories and Policies

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International cono!ic heory

 assu!es a two nation, two co!!odity, and twofactor world

 assu!es no trade restrictions to begin with, perfect capital factors within nations but no international !obility, perfect coin all co!!odity and factor !ar*ets, and no transportation c

e#a!ines the basis for and the gains fro! trade, the reasothe e+ects of trade restrictions, policies directed at regulating

of international pay!ents and receipts, and the e+ectspolicies on a nation-s welfare and on the welfare of other nat

  also e#a!ines the e+ectiveness of !acroecono!ic policdi+erent types of international !onetary arrange!ents orsyste!s.

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Subect &atters of Internationalcono!icsInternational trade theory

 analy"es the basis and the gains fro! trade.

International trade policy

• e#a!ines the reasons for and the e+ects of trade restrictions.

The balance of payments

• !easures a nation-s total receipts fro! and the total pay!ents to the

Foreign exchange markets

•

are the institutional fra!ewor* for the e#change of one national currenOpen-economy macroeconomics

• deals with the !echanis!s of adust!ent in balanceofpay!ents dise(de/cits and surpluses).

• It analy"es the relationship between the internal and the e#ternal sectecono!y of a nation, and how they are interrelated or interdependent the world econo!y under di+erent international !onetary syste!s. 

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&ercantilis!

&ercantilists !aintained that the way for a nation to beco!epowerful was to e#port !ore than it i!ported

• 0ith !ore gold, rulers could !aintain larger and better ar!iconsolidate their power at ho!e1 i!proved ar!ies and navie!ade it possible for the! to acquire !ore colonies.

•  In addition, !ore gold !eant !ore !oney (i.e., !ore gold ccirculation and greater business activity. Further!ore, by ene#ports and restricting i!ports, the govern!ent would sti!unational output and e!ploy!ent.

 ho!as &unn 2 perhaps the !ost inuential of the !ercantiwriters and England’s Treasure by Foreign Trade as outstande#position of !ercantilists thought on trade.

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3bsolute 3dvantage

•

3ccording to 3da! S!ith• 0hen one nation is !ore e4cient than (or has a

absolute advantage over) another in the productone co!!odity but is less e4cient than (or has absolute disadvantage with respect to) the othe

in producing a second co!!odity, then both natcan gain by each specializing in the production oco!!odity of its absolute advantage and e#chapart of its output with the other nation for theco!!odity of its absolute disadvantage.