International Economics: Theory
and Policy
Eleventh Edition
Chapter 2
World Trade: An
Overview
Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights
Reserved
What Is International Economics About?
International economics is about how nations interact
through trade of goods and services, through flows of
money and through investment.
International economics is an old subject, but it
continues to grow in importance as countries become
tied to the international economy.
Nations are more closely linked through trade in goods
and services,through increasing mobility, through flows
of money, and through investment than ever before.
Prof. Dr. Hanjo Allinger: International Economics 1-2
Who Trades with Whom?
German trade volume 2015 in billion Euros
Southafrica 25,6
Hongkong 26,0
Belgium 29,3
Denmark 36,9
Cannada 37,2
Australia 37,3
Mexico 45,6
Switzerland 51,5
Poland 65,2
Turkey 75,8
Sweden 78,0
Italy 91,7
Saudi-Arabia 95,4
Korea 96,8
Spain 107,1
United Arab Emirates 127,6
Austria 163,1
France 167,4
United Kingdom 169,9
United States 173,6
0,0 20,0 40,0 60,0 80,0 100,0 120,0 140,0 160,0 180,0 200,0
source of data: destatis 2016
3 Prof. Dr. Hanjo Allinger: International Economics
Exports and Imports as a Percentage of U.S. National
Income
(Shaded areas indicate U.S. recessions.) Both imports and exports
have risen as a share of the U.S. economy, but imports have risen
more.
Source: U.S. BureauProf.ofDr.Economic Analysis
Hanjo Allinger: International Economics
Average of Exports and Imports as
Percentages of National Income in 2015
International trade is even more important to most other countries
than it is to the United States.
Source: World Bank
Prof. Dr. Hanjo Allinger: International Economics
Topics to be covered in this course
Benefits of free trade
The consequences of Globalisation
International Trade and National goals
Consequences of Trade Tariffs
Free Trade Areas and Customs Unions
The European monetary union
Optimal currency areas and the Future of the
Euro
Prof. Dr. Hanjo Allinger: International Economics 6
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.
Norwegian consumers could buy oranges through
international trade that they otherwise would have a difficult
time producing.
The producer of the oranges receives income that it can
use to buy the things that it desires.
Prof. Dr. Hanjo Allinger: International Economics 7
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.
Prof. Dr. Hanjo Allinger: International Economics 8
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).
Prof. Dr. Hanjo Allinger: International Economics 9
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.
International trade can adversely affect the owners of resources
that are used intensively in industries that compete with imports.
Trade may therefore have effects on the distribution of income
within a country.
Conflicts about trade should occur between groups within
countries rather than between countries.
Prof. Dr. Hanjo Allinger: International Economics 10
Patterns of Trade
Differences in climate and resources can explain why Brazil exports
coffee and Australia exports iron ore.
But why does Japan export automobiles, while the US exports
aircraft?
Differences in labor productivity may explain why some countries
export certain products.
How relative supplies of capital, labor and land are used in the
production of different goods may also explain why some countries
export certain products.
Prof. Dr. Hanjo Allinger: International Economics 11
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 (e.g., product specifications)
that exclude foreign products from the market, but still allow domestic
products.
What are the costs and benefits of these policies?
Prof. Dr. Hanjo Allinger: International Economics 12
The Effects of Government Policies on Trade
(cont.)
Economists 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?
Prof. Dr. Hanjo Allinger: International Economics 13
International Finance Topics (cont.)
Besides international financial capital flows and the official
settlements balance, exchange rates are also an important financial
issue for most governments.
Exchange rates measure how much domestic currency can be
exchanged for foreign currency.
They also affect how much goods that are denominated in foreign
currency (imports) cost.
And they affect how much goods denominated in domestic currency
(exports) cost in foreign markets.
Prof. Dr. Hanjo Allinger: International Economics 14
International Trade
Versus International Finance
International trade focuses on transactions
of real 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 US dollars or financial assets
by Europeans.
Prof. Dr. Hanjo Allinger: International Economics 15
Your task for today
Have a break
Change to room K 106
Find out how exports and imports of Germany, England and Italy
developed in recent 20 years. Make sure, you find a database that
Is quotable in scientific context
Provides all data you need
Allows you easy export of data
Illustrate your results for every country in a suitable diagram with the
help of excel.
Prof. Dr. Hanjo Allinger: International Economics 16
