International Economics

International economics are becoming increasingly complicated as foreign economies continue to expand and become more interdepependent on each other.  Economists are less able to make accurate predictions for the future as unstable countries suddenly become world suppliers, trade deficits grow increasingly unbalanced, and countries scramble to gain control of diminishing natural resources.  Different socio-economic beliefs like capitalism, socialism and communism further exacerbate the situation, and often puts countries at even greater odds with each other when it comes to practising international economics.

The science of international economics attempts to understand a global economy through the study of international trade, monetary theory and international finance.  This may sound straightforward at first, but international economic transactions like trade, investment, and finances also includes the randomness of ever-changing people in power and the instutions and philosophies that influence them.

International trade is the exchange of goods and services across international boundaries and territories.  While it has always been a part of the global economy, it has slowly come to the forefront as a dominating factor in global concerns because of the advances in transportion of goods, people, and services through multinational corporations and free trade agreements.   

There are many hypothetical models to explain who will benefit from international trade in any given situation, but the logistics of international trade change faster than economists can theorize.  For example, the Ricardian model, which focuses on trade theory, makes the assumption that countries will simply produce and export goods that are specific to that country and not branch out or diversify. The Hesker-Olin model is similar in the fact that it works on the theory that a country will export what it has in abundance and import anything that is scarce in the area. Both theories address the distibution of goods and income, but do not take into account two of the most important factors of modern international trade.  These are economic sanctions like tarrifs and free trade.

Historically, countries have traded goods and services by by sticking to a bilateral trade agreement.  This usually stemmed from the fact that one country was larger and more powerful than the other.  Economic sanctions like tarriffs protected the smaller country from being flooded with cheap imports of goods that it already had supplies of.  This practice also protected the smaller country’s domestic manufacturing and labor from being outsourced and thus protected the smaller country’s economy.  Now that many nations favor free trade and are happy to let the World Trade Organization and other agencies regulate international trade, quite a few economic theories concerning this subject are no longer relevant.

Monetary theory, also part of international economics, is a branch of macroeconomics and focuses on how the monetary system of an individual country functions.  By looking at a country’s production, employment and level of prices within the macroeconomy of a specific population, economists can predict how they will react to different trade stategies introduced by the global economy.  This includes understading how much money is being circulated within the population.  “Broad money” refers to currency such as deposit certificates and and treasury bills.  “Shallow money” is what the people have to spend on goods and services.  Knowing this information helps other countries decide what approach to take when engaging in trade talks.

International finance is the third area of concentration in international economics.  It focuses on how exchange rates and foreign investments can be used to accelerate or jepeordize a nation’s economy.  This branch also studies futures, options and currency swaps. 

Posted in Economic Growth & Development