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Chapter 1
Introduction
Slides prepared by Thomas Bishop
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Why is the international economics so
important?
• International economics is an old subject,
but it continues to grow in importance as
countries become tied to the
international economy.
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Can you feel it important?
• Automobiles
• Wal-Mart
• Gulf War
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Discussion
• Form a group with four or five persons
• Introduce yourself to your group members
• Find another two cases around you or your
group members to show how important the
international economics is.
• Select two representatives each group to
come to the front the classroom. One
introduces your group members for us. The
other introduces the case your group figured
out.
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Trade Part
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How about Canada?
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Fig. 1-1: Exports and Imports as a
Percentage of U.S. National Income
Source: U.S. Bureau of Economic Analysis
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Fig. 1-2: Exports and Imports as
Percentage of National Income in 2005
Source: Organization for Economic Cooperation and Development
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Finance Part
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Sub-prime Loan Credit Risk
• The crisis began with the bursting of the
US housing bubble and high default
rates on "subprime" and adjustable rate
mortgages (ARM).
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Sub-prime Loan Credit Risk
• In September 2007, Northern Rock, a
British Bank, experienced an old
fashioned "run on the bank" after it was
revealed that the bank was having
trouble raising liquidity. This was the first
bank run in Britain since 1866.
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Sub-prime Loan Credit Risk
• The Bank of China (the #2 bank in
China) announced in August of 2007,
that it holds $9.7 billion dollars of US
Subprime debt.
• In January of 2008, Korean markets fell
due to the "selling spree" of shares of
US mortgages.
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Sub-prime Loan Credit Risk
• The worldwide losses stemming from
the US subprime mortgage crisis could
run to $945 billion.
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What Is International Economics About?
• International economics is about how nations
interact through trade of goods and services
(trade), through flows of money and through
investment (finance).
• Nations are more closely linked through trade
in goods and services, through flows of money,
and through investment than ever before.
• Is it good for different countries?
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What Is Your Answer?
YES
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Domestic Trade
VS.
International Trade
Case 1: BC buys cars from ON
Case 2: BC imports cars from US or
Europe?
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Common Points?
The same motives
The same behaviors of individuals
Difference?
• The domestic trade happens within one
country.
• The international trade happens between
different sovereign states. (Different
currencies /different trade policies /different
law systems, etc.)
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The Effect of the US-Canadian Border
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Gains from Trade
• Several ideas underlie the gains from
trade
1. When a buyer and a seller engage in a
voluntary transaction, both receive
something that they want and both can be
made better off. (Rationality, cost and
benefit analysis)
.
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Gains from Trade (cont.)
2. How could a country that is the most (least)
efficient producer of everything gain from
trade?
 With a finite amount of resources, countries can
use those resources to produce what they are
most productive at (compared to their other
production choices), then trade those products for
goods and services that they want to consume.
 Countries can specialize in production, while
consuming many goods and services through
trade.
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Gains from Trade (cont.)
3. Trade is predicted to benefit a country by making it
more efficient when it exports goods which use
abundant resources and imports goods which use
scarce resources.
4. When countries specialize, they may also be more
efficient due to large scale production.
5. Countries may also gain by trading current
resources for future resources (lending
and borrowing).
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Gains from Trade (cont.)
• Trade is predicted to benefit countries
as a whole in several ways, but trade
may harm particular groups within a
country.
Trade may therefore have effects on the
distribution of income within a country.
(Imports are always good for consumers)
A conclusion to make: Conflicts about trade
should occur between groups within
countries rather than between countries.
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Patterns of Trade
• Differences in climate (Canada exports ice-wine but
South Africa does not. Or Brazil exports coffee. Do we
have local coffee?)
• Differences in resources (Australia exports iron ore,
while Alberta exports oil.)
• Differences in labor productivity (Japan exports
automobiles, while the U.S. exports aircraft?)
• Differences in relative supplies of capital, labor and
land used in the production of different goods and
services (Labor-intensive industries)
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The Effects of Government Policies
on Trade
• 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 (ex., product specifications)
that exclude foreign products from the market, but still allow
domestic products.
• What are the costs and benefits of these policies?
• How to an answer, as an economist?
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How to analyze this problem as an
economist?
• To design models that try to measure the effects of
different trade policies.
• If a government must restrict trade, which policy
should it use?
• If a government must restrict trade, how much should
it restrict trade?
• If a government restricts trade, what are the costs if
foreign governments respond likewise?
• Etc.
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International Finance Topics
• Governments measure the value of
exports and imports, as well as the
value of financial assets that flow
into and out of their countries.
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International Finance Topics (cont.)
• Exchange Rate --- an important
financial issue for most governments.
 Exchange rates measure how much
domestic currency can be exchanged for
foreign currency.
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International Trade
Vs. International Finance
• International trade focuses on transactions
of goods and services across nations.
 These transactions usually involve a physical movement
of goods or a commitment of tangible resources like
labor services.
• International finance focuses on financial or monetary
transactions across nations.
 For example, purchases of U.S. dollars or financial assets
by Europeans.
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A Road Map
• International trade topics
 International trade theory (chapters 2–7)
 International trade policy (chapters 8–11)
• International finance topics
 Exchange rates and open economy macroeconomics
(chapters 12–14)
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