International economics is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and the international institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and transaction.
International trade studies goods and services flows across international boundaries from supply-and-demand factors, economic integration, international factor movements, and policy variables such as tariff rates and trade quotas.• James E. Anderson (2008). "international trade theory," The New Palgrave Dictionary of Economics, 2nd Edition.Abstract. • Devashish Mitra, 2008. "trade policy, political economy of," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. • A. Venables (2001), "International Trade: Economic Integration," International Encyclopedia of the Social & Behavioral Sciences, pp. 7843-7848. Abstract. International finance studies the flow of capital across international financial markets, and the effects of these movements on exchange rates.Maurice Obstfeld (2008). "international finance," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. International monetary economics and international macroeconomics study flows of money across countries and the resulting effects on their economies as a whole.• Giancarlo Corsetti (2008). "new open economy macroeconomics," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. • Reuven Glick (2008). "macroeconomic effects of international trade," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. • Mario I. Blejer and Jacob A. Frenkel (2008). "monetary approach to the balance of payments," The New Palgrave Dictionary of Economics, 2nd Edition. • Bennett T. McCallum (1996). International Monetary Economics. Oxford. Description. • Maurice Obstfeld and Kenneth S. Rogoff (1996). Foundations of International Macroeconomics. MIT Press. Description. International political economy, a sub-category of international relations, studies issues and impacts from for example international conflicts, international negotiations, and international sanctions; national security and economic nationalism; and international agreements and observance.As at the JEL classification codes, JEL: F51-F55. Links to article-abstract examples for each subclassification are at JEL Classification Codes Guide JEL:F5 links.
International trade
Scope and methodology The economic theory of international trade differs from the remainder of economic theory mainly because of the comparatively limited international mobility of the capital and labour."A note on the scope and method of the theory of international trade" in the appendix of Jacob Viner Studies in the Theory of International Trade : Harper and Brothers 1937] In that respect, it would appear to differ in degree rather than in principle from the trade between remote regions in one country. Thus the methodology of international trade economics differs little from that of the remainder of economics. However, the direction of academic research on the subject has been influenced by the fact that governments have often sought to impose restrictions upon international trade, and the motive for the development of trade theory has often been a wish to determine the consequences of such restrictions.
The branch of trade theory which is conventionally categorized as "classical" consists mainly of the application of deductive logic, originating with Ricardo's Theory of Comparative Advantage and developing into a range of theorems that depend for their practical value upon the realism of their postulates. "Modern" trade analysis, on the other hand, depends mainly upon empirical analysis.
Classical theory The theory of comparative advantage provides a logical explanation of international trade as the rational consequence of the comparative advantages that arise from inter-regional differences - regardless of how those differences arise. Since its exposition by David RicardoDavid Ricardo On the Principles of Political Economy and Taxation Chapter 7 John Murray, 1821. Third edition.(First published: 1817) the techniques of neo-classical economics have been applied to it to model the patterns of trade that would result from various postulated sources of comparative advantage. However, extremely restrictive (and often unrealistic) assumptions have had to be adopted in order to make the problem amenable to theoretical analysis.
The best-known of the resulting models, the Heckscher-Ohlin theorem (H-O)The Heckscher-Ohlin Theorem depends upon the assumptions of no international differences of technology, productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies. On those assumptions, it derives a model of the trade patterns that would arise solely from international differences in the relative abundance of labour and capital (referred to as factor endowments). The resulting theorem states that, on those assumptions, a country with a relative abundance of capital would export capital-intensive products and import labour-intensive products. The theorem proved to be of very limited predictive value, as was demonstrated by what came to be known as the "Leontief Paradox" (the discovery that, despite its capital-rich factor endowment, America was exporting labour-intensive products and importing capital-intensive productsWassily Leontief, Domestic Production and Foreign Trade: The American Capital Position Re-examined Proceedings of the American Philosophical Society, vol. XCVII p332 September 1953) Nevertheless, the theoretical techniques (and many of the assumptions) used in deriving the H–O model were subsequently used to derive further theorems.
The Stolper–Samuelson theorem, which is often described as a corollary of the H–O theorem, was an early example. In its most general form it states that if the price of a good rises (falls) then the price of the factor used intensively in that industry will also rise (fall) while the price of the other factor will fall (rise). In the international trade context for which it was devised it means that trade lowers the real wage of the scarce factor of production, and protection from trade raises it.
Another corollary of the H–O theorem is Samuelson's factor price equalisation theorem which states that as trade between countries tends to equalise their product prices, it tends also to equalise the prices paid to their factors of production. Those theories have sometimes been taken to mean that trade between an industrialised country and a developing country would lower the wages of the unskilled in the industrialised country. (But, as noted below, that conclusion depends upon the unlikely assumption that productivity is the same in the two countries). Large numbers of learned papers have been produced in attempts to elaborate on the H–O and Stolper–Samuelson theorems, and while many of them are considered to provide valuable insights, they have seldom proved to be directly applicable to the task of explaining trade patterns.See also the Rybczynski theorem, in
Modern analysis Modern trade analysis moves away from the restrictive assumptions of the H-O theorem and explores the effects upon trade of a range of factors, including technology and scale economies. It makes extensive use of econometrics to identify from the available statistics, the contribution of particular factors among the many different factors that affect trade. One example of such an econometric model is the gravity equation. The contributions of differences of technology have been evaluated in several such studies. The temporary advantage arising from a country's development of a new technology is seen as contributory factor in one study.Michael Posner International Trade and Technical Change Oxford Economic Papers 13 1961
Other researchers have found research and development expenditure, patents issued, and the availability of skilled labor, to be indicators of the technological leadership that enables some countries to produce a flow of such technological innovations• Luc Soete: "A General Test of Technological Gap Trade Theory", Review of World Economics December 1981 • Raymond Vernon (Ed): The Technology Factor in International Trade National Bureau of Economic Research 1970 and have found that technology leaders tend to export hi-tech products to others and receive imports of more standard products from them. Another econometric study also established a correlation between country size and the share of exports made up of goods in the production of which there are scale economies.Gary Hufbauer: "The Impact of National Characteristics and Technology on the Commodity Composition of Trade in Manufactured Goods" in Vernon op cit 1970 The study further suggested that internationally traded goods fall into three categories, each with a different type of comparative advantage: goods that are produced by the extraction and routine processing of available natural resources—such as coal, oil and wheat, for which developing countries often have an advantage compared with other types of production—which might be referred to as "Ricardo goods"; low-technology goods, such as textiles and steel, that tend to migrate to countries with appropriate factor endowments—which might be referred to as "Heckscher-Ohlin goods"; and, high-technology goods and high scale-economy goods, such as computers and aeroplanes, for which the comparative advantage arises from the availability of R&D resources and specific skills and the proximity to large sophisticated markets.
There is a strong presumption that any exchange that is freely undertaken will benefit both parties, but that does not exclude the possibility that it may be harmful to others. However (on assumptions that included constant returns and competitive conditions) Paul Samuelson has proved that it will always be possible for the gainers from international trade to compensate the losers. Moreover, in that proof, Samuelson did not take account of the gains to others resulting from wider consumer choice, from the international specialisation of productive activities - and consequent economies of scale, and from the transmission of the benefits of technological innovation. An OECD study has suggested that there are further dynamic gains resulting from better resource allocation, deepening specialisation, increasing returns to R&D, and technology spillover. The authors found the evidence concerning growth rates to be mixed, but that there is strong evidence that a 1 per cent increase in openness to trade increases the level of GDP per capita by between 0.9 per cent and 2.0 per cent. They suggested that much of the gain arises from the growth of the most productive firms at the expense of the less productive. Those findings and othersMurray Kemp The Gains from Trade and the Gains from Aid: Essays in International Trade Theory: Routledge 1995 have contributed to a broad consensus among economists that trade confers very substantial net benefits, and that government restrictions upon trade are generally damaging.
Factor price equalisation