Contents
International Economics
Rationale
International economics is a branch of economics with two main subdisciplines international trade and international finance.
- International trade is a study of the exchange of goods and services across international boundaries.
- International finance is a study of the exchange of currencies and flows of money or capital across international boundaries.
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Today's Videos
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Teaching and Learning Resources
Introduction to Global Economy
- Issues, Definitions & Strategies
- Understanding the Global Economy
- UK Trading Position
- Comparative Advantage - How Nations Can Gain from International Trade
The world- or global economy generally refers to the economy, which is based on economies of all of the world's countries, national economies. Also global economy can be seen as the economy of global society and national economies - as economies of local societies, making the global one. It can be evaluated in various kind of ways. For instance, depending on the model used, the valuation that is arrived at can be represented in a certain currency, such as 2006 US dollars.
It is inseparable from the geography and ecology of Earth, and is therefore somewhat of a misnomer, since, while definitions and representations of the "world economy" vary widely, they must at a minimum exclude any consideration of resources or value based outside of the Earth. For example, while attempts could be made to calculate the value of currently unexploited mining opportunities in unclaimed territory in Antarctica, the same opportunities on Mars would not be considered a part of the world economy—even if currently exploited in some way—and could be considered of latent value only in the same way as uncreated intellectual property, such as a previously unconceived invention.
Beyond the minimum standard of concerning value in production, use, and exchange on the planet Earth, definitions, representations, models, and valuations of the world economy vary widely.
It is common to limit questions of the world economy exclusively to human economic activity, and the world economy is typically judged in monetary terms, even in cases in which there is no efficient market to help valuate certain goods or services, or in cases in which a lack of independent research or government cooperation makes establishing figures difficult. Typical examples are illegal drugs and other black market goods, which by any standard are a part of the world economy, but for which there is by definition no legal market of any kind.
However, even in cases in which there is a clear and efficient market to establish a monetary value, economists do not typically use the current or official exchange rate to translate the monetary units of this market into a single unit for the world economy, since exchange rates typically do not closely reflect worldwide value, for example in cases where the volume or price of transactions is closely regulated by the government.
Rather, market valuations in a local currency are typically translated to a single monetary unit using the idea of purchasing power. This is the method used below, which is used for estimating worldwide economic activity in terms of real US dollars. However, the world economy can be evaluated and expressed in many more ways. It is unclear, for example, how many of the world's 6.8 billion people have most of their economic activity reflected in these valuations.
In 2009, the largest economies in the world are the United States, Japan, China, Germany, the United Kingdom and France.
Activities
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- External
Shocks to the Global Economy: Oil Prices
Oil prices per barrel in US dollars, 1970-2005
Data source: Energy Information Administration
A member of the Clandestine Rebel Clown Army protesting during the week of
the July 2005 G8 Summit, held at Gleneagles, near Edinburgh, Scotland.
Title: Edinburgh Prepares For Influx Of Protestors To G8 Summit.
Copyright: Getty Images, available from Education Image Gallery
Comparative Advantage - How Nations can Gain from International Trade
Tutorials
- Sources of Comparative Advantage
- Regulating International Trade - Trade Policies and Their Effects
- Protectionism and Trade Liberalisation
- Regionalism and Multilateralism
- The European Union 1
- European Union 2
Readings
International trade is exchange of capital, goods, and services across international borders or territories.[1] In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries.
Global Competitiveness Index (2008-2009): competitiveness is an important
determinant for the well-being of states in an international trade environment.
Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders.
International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.
Another difference between domestic and international trade is that factors of production such as capital and labour are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Then trade in goods and services can serve as a substitute for trade in factors of production.
Instead of importing a factor of production, a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor the United States is importing goods from China that were produced with Chinese labor.
International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.
- Models
- Top trading nations
- Top traded commodities (exports)
- Regulation of international trade
- Risk in international trade
- Gallery
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The economy of the European Union generates a GDP of over €11,805.66 billion ($16,447.26 billion in 2009) according to the IMF, making it the largest economy in the world. The EU economy consists of a single market and is represented as a unified entity in the WTO.
- Currency
- Budget
- Economic variation
- Economies of member states
- Economic growth
- Energy resources
- Trade
- Unemployment
- Industries
- Companies
- Gini index
- Regional variation
- Richest & Poorest NUTS Regions (GDP PPP 2007)
Activities
Image: As the EU gets larger the problems may
also get bigger - does the EU have the strength
to address these problems or will it make the situation
worse by getting involved in policy making -
government failure at a European level?
Copyright: Alberto Villén, stock.xchng
International Finance: Enduring Issues
Tutorials
- Keeping Up with a Changing World — Trade Flows, Capital Flows, and the Balance of Payments
- International Economics
- The Market for Foreign Exchange
- Exchange-Rate Systems, Past to Present
- The Power of Arbitrage-Purchasing Power and Interest Rate Parities
- Global Money and Banking-Where Central Banks Fit into the World Economy
Readings
International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits. It includes the study of futures, options and currency swaps. International finance is a branch of international economics.
Important theories in international finance include the Mundell-Fleming model, the optimum currency area (OCA) theory, as well as the purchasing power parity (PPP) theory. Whereas international trade theory makes use of mostly microeconomic methods and theories, international finance theory makes use of predominantly macroeconomic methods and concepts.
See also
- Global financial system
- International Finance Corporation
- International Monetary Fund
- Interest rate parity
- World Bank
- Double taxation
External links
- Center for International Finance & Development University of Iowa research center, includes a 300 page E-book.
- Institute of International Finance The Global Association of Financial Institutions; fostering global financial stability.
The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.[1]
The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries.[2]
In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of
- its huge trading volume, leading to high liquidity;
- its geographical dispersion;
- its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
- the variety of factors that affect exchange rates;
- the low margins of relative profit compared with other markets of fixed income; and
- the use of leverage to enhance profit margins with respect to account size.
As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007.
The $3.98 trillion break-down is as follows:
- $1.490 trillion in spot transactions
- $475 billion in outright forwards
- $1.765 trillion in foreign exchange swaps
- $43 billion currency swaps
- $207 billion in options and other products
- Market size and liquidity
- Market participants
- Trading characteristics
- Determinants of FX rates
- Algorithmic trading in foreign exchange
- Financial instruments
- Speculation
- Risk aversion in forex
Activity
Image: The falling dollar may mean
a rise in tourism to the US but the effect
might be mitigated by the increased
security measures being introduced by
US authorities.
Source: Jake Levin, stock xchng
International Financial Instruments, Markets and Institutions
Tutorials
- The Forward Currency Market and International Financial Arbitrage.
- Interest Yields, Interest-Rate Risk, and Derivative Securities.
- International Banking, Central Banks and Supranational Financial Policymaking Institutions.
- The International Financial Architecture and Emerging Economies
Readings
A financial instrument is either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument.
- Off-balance-sheet issues
- xternal links
Interest rate risk is the risk (variability in value) borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa. Interest rate risk is commonly measured by the bond's duration.
Asset liability management is a common name for the complete set of techniques used to manage risk within a general enterprise risk management framework.
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How International Banking Works
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You've probably heard of offshore bank accounts and Swiss bank accounts. You may have heard there’s great wealth to be found in these foreign bank investments. But what's really so special about these esoteric banking opportunities? An international bank is a financial entity that offers financial services, such as payment accounts and lending opportunities, to foreign clients. These foreign clients can be individuals and companies, though every international bank has its own policies outlining with whom they do business. |
See also
Read more ...
Exchange Rate and Balance of Payments Determination
Tutorials
- Balance of Payments and Exchange Rates
- Traditional Approaches to Balance-of-Payments and Exchange-Rate Determination.
- Monetary and Portfolio Approaches to Balance-of-Payments and Exchange-Rate Determination
Readings
The Balance of Payments: This is a measure of the extent of trade between the United Kingdom (UK) and the rest of the world. This trade is referred to as imports and exports, which in balance of payments accounting is looked at in terms of the change of ownership of resources linked to the payment for the change of ownership.
Imports represent the purchase of items from abroad that result in sterling being sold to acquire the foreign currency used to purchase the item. This is recorded as an outflow of funds.
Exports are the sale of items to other countries leading to sterling being purchased by foreign buyers to complete the transaction.
This is recorded as an inflow of funds.
It is important to think of imports and exports in terms of the flow of funds as it helps to avoid the confusion that can arise when thinking of goods and services being traded. For example, a foreign tourist coming to visit Britain represents export earnings to the UK as they are changing their currency to spend sterling whilst on their visit. In summary, exports lead to a demand for sterling on the foreign exchange markets and imports lead to an increase in supply of sterling on the foreign exchange markets.
The trade is divided into different categories.
1. Trade in goods records the import and export of items such as cars, animals, timber, minerals, chemicals, food, textiles, glass, leather products, paper products, fuels, plastics, metal products, machinery, weapons, electrical goods, transport equipment, sports goods, watches and waste products amongst others! The difference between the value of imports and the value of exports is called the 'Balance of Trade' or the 'Trade in Goods'.
2. Trade in services records transactions in what used to be referred to as 'invisible trade' - the 'invisible' term aiming to describe the non-physical nature of the trade. Such transactions may include transportation - payments made to a haulage contractor to deliver goods abroad; the hire by a UK company of a freight ship to transport items; the payments made to use an aircraft for transporting items; payments to use pipelines or cables; travel by foreign visitors or by UK residents to other countries; the purchase and sale of communication services, insurance, financial and banking services; royalty payments; government services, license fees, payments for the use of TV programmes and so on.
3. Income flows measure the payments and receipts of dividends and interest and financial flows measure the payment and receipt of funds associated with investments in shares, loans and other securities.
Together all these inflows and outflows comprise the balance of payments on Current Account. It is this figure that comprises the major bulk of the balance of payments but often the trade figures highlighted will relate just to the trade in goods and services as this serves to illustrate the key trends in our trading patterns.
The Exchange Rate is the value of one currency expressed in terms of another - for example, £1 = $1.60. The exchange rate is determined by the demand for and supply of sterling on the foreign exchange markets. Note, it is NOT the same as the supply of money in circulation! The foreign exchange market exists to enable those who wish to buy foreign currency to 'meet' with those who wish to sell it. Currency exchange markets are truly global, in any one-day around $1.5 trillion worth of currencies are traded. A trillion is one thousand billion! So that is $1,500,000,000,000 or £900,000,000,000 traded every day world wide! This is almost as much as UK Gross Domestic Product (GDP) in a year. A large proportion - possibly as much as 70 - 80% of this trade is for speculative purposes rather than to finance trade; brokers simply moving funds from one financial centre to another in search of the best return on behalf of clients. Increases in the demand for GBP leads to an appreciation of sterling - each £1 will buy more of the foreign currency than previously whereas if the supply of GBP exceeds the demand, sterling will depreciate - each £1 will buy less of a foreign currency than before.
Changes in the exchange rate have an effect on the apparent prices of imports and exports. The term 'apparent' is used because the price in the originating country may not have changed but for the buyer or seller the fact that they may have to give up more of their own currency to acquire the same amount of pounds, or if they can get the same amount of the foreign currency by giving up less pounds, then prices will appear to change. An appreciation or strengthening of a currency will have the effect of reducing import prices, but increasing export prices, whereas a depreciation of the currency (a weakening) will lead to import prices rising but export prices appearing to fall. The impact on the economy as a whole and of individual businesses therefore depends on the amount of trade they carry out with the rest of the world and the proportion of that trade that is accounted for by exports and imports. A firm may, for example, buy in some component parts from China but sell the vast majority of its output in Europe. What is happening to the exchange rate between the Yuan and the Euro will have a significant effect on its overall position.
- Appreciation of the £ - buys more of a foreign currency; Import prices fall; Export prices rise.
- Depreciation of the £ - buys less of a foreign currency; Import prices rise; Export prices fall.
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Open Economy Macroeconomics and Policy Analysis
Tutorials
- An Open Economy Framework.
- Economic Policy with Fixed Exchange Rates.
- Economic Policy with Floating Exchange Rates.
- The Price Level, Real Output, and Economic Policymaking.
Readings
An open economy is an economy in which there are economic activities between domestic community and outside, e.g. people, including businesses, can trade in goods and services with other people and businesses in the international community, and flow of funds as investment across the border. This contrasts with a closed economy in which international trade and finance cannot take place.
The act of selling goods or services to a foreign country is called exporting. The act of buying goods or services from a foreign country is called importing. Together exporting and importing are collectively called international trade.
There are a number of advantages for citizens of a country with an open economy. One primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose. Additionally, consumers have an opportunity to invest their savings outside of the country.
In an open economy, a country's spending in any given year need not to equal its output of goods and services. A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners.[1]
Making the impossible possible
GREG MANKIW is a proponent of the idea, and I'm paraphrasing here, that economists are good at economics and not politics, and they should therefore tell politicians what should ideally be done, rather than what is the best politically possible action. I have pushed back against this idea in the past. Not all policies are equally sensitive to political mangling; the structure of a cap-and-trade system, for instance, is such that permits can be given away to favoured interests without diminishing the effect of the cap. It's a politically hardy policy while a carbon tax is politically brittle. Other things equal, then, economists would be wise to push a cap-and-trade plan.
But Mr Mankiw does have a point. What is and is not politically impossible is unknowable, and by failing to argue for the ideal policy, economists may reduce public awareness of the fact that it is, actually, the ideal policy. And in doing so they may make the politically maybe-possible impossible.
Read more ...
Contemporary Global Economic Issues and Policies
Tutorials
- Globalization
- The Global Economy
- Can Globalization Lift All Boats?
- Industrial Structure and Trade in the Global Economy- Businesses without Borders
- The Public Sector in the Global Economy
- Domestic Economic Policymaking in a Global Economy
- Policy Coordination, Monetary Union, and Target Zones
- Rules versus Discretion-Can Policymakers Stick to Their Promises?
- Dealing with Financial Crises-Does the World Need a New International Financial Architecture
Readings
Globalisation (or globalization) describes the process by which regional economies, societies, and cultures have become integrated through a global network of political ideas through communication, transportation, and trade. The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence.[1] However, globalization is usually recognized as being driven by a combination of economic, technological, sociocultural, political, and biological factors.[2] The term can also refer to the transnational circulation of ideas, languages, or popular culture through acculturation. An aspect of the world which has gone through the process can be said to be globalised.
- Definitions
- Effects
- The Debate over Globalization
- The Anti-globalization Movement
- History
- Measurement
Recommended Texts
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International Monetary and Financial Economics (with Printed Access Card) 3rd
Edition Check
the availability and buy your books from our Bookshop. |
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Global
Economic Issues and Policies with Economic Applications Check
the availability and buy your books from our Bookshop. |
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International
Economics Check
the availability and buy your books from our Bookshop. |
Resources
- Deardorff's Glossary of International Economics
- Foreign Exchange Markets
- Foreign Exchange Calculations and Arbitrage
- Foreign Exchange Markets
- International Financial Markets and Institutions
- Portfolio Balance Models
- Asset Market Approach to Exchange Rates
- Exchange Rate Changes and Current Account Reactions
- Institute for International Economics
- International Economics and Affairs
- International Economics Network
- Web Resources for International Economics and Business
Welcome to the International Economics Study Center
The IE Study Center textbooks haved moved to a new home. The International Trade and Finance texts are now being served and supported by Flat World Knowledge. Flat World offers textbooks that are free online, affordable offline, open-licensed and customizable by adopters. It is the newest innovation in textbook publishing that will solve the problem of soaring textbook prices while offering remarkable flexibility for instructors. The approach benefits teachers and students alike.
If you are an instructor please visit this webpage for more information about the benefits of adopting a Flatworld textbook.
If you are a student, go here to learn more about Flatworld's benefits for students.
Use the following links to be taken directly to the welcomes pages for the new online textbooks:
International Trade: Theory and Policy
The Trade text is useful for students and professionals at many levels. It is especially useful for college students taking an intermediate level international trade course. Topics include comparative advantage, analysis of tariffs, quotas and subsidies, and arguments for free trade and protection.
International Finance: Theory and Policy
The Finance text contains information about international finance theory and policy. It can be used for a full semester international finance course or as a supplement to a one semester trade and finance course. Topics include analysis of trade deficits, exchange rate determination, and exchange rate policy.International Economics: Theory and Policy
One book combining both Trade and Finance described above.
Written by Steve Suranovic, an Associate Professor of Economics and International Affairs and former Director of the MA Program in International Trade & Investment Policy at The George Washington University in Washington, DC.