International economics is one of the major branches of economic study and it’s easy to see why.
We live in an era of increased globalisation; an era in which international trade and transactions are not only commonplace but are subject to scrutiny through various global institutions:
- The World Trade Organisation (WTO);
- The International Monetary Fund (IMF); and
- The United Nations Conference on Trade and Development (UNCTAD).
Although many economics classes you take at school may focus on other economic topics and areas like behavioural economics or more general areas such as macroeconomics or microeconomics, that doesn’t mean that international economics isn’t an important economic theory.
As we will see below, often international economics is an interesting theoretical topic for students.
The field examines current international political events, economic activity, and economic problems, including the United Kingdom’s proposed Brexit from the European Union or the United States’ latest changes to tariffs.
Of course, if the economics courses that you or your friends' study don’t place much emphasis on international economics, or you would like to learn more about this area, then you can always reach out to a Superprof tutor.
Superprof has a number of trained economics tutors near me and you who are experienced in teaching international economics, so there are plenty of tutors to choose from, whether you’d like private or group tuition, or whether you'd like to learn about:
- The implications of economic crises on multinational businesses;
- How international trade can impact national income; or
- How financial markets are becoming increasingly globalised, and whether they should be subject to greater governance.
In this article, we treat you to a preview of some topics discussed in International Economics.
What Is International Economic Trade?
To illustrate this concept, let’s time-travel to the 16th Century when European powers founded their empires. Once those were firmly established, their explorers sailed the world and discovered new lands to colonise.
The commonly-held belief that conquerors subjugated the natives so those empires could take what they wanted is inaccurate.
Often, policies were put in place to ensure that natives traded with no other nation, that natives loaded only ships that flew the mother-country’s flag and that natives undertake no initiative to manufacture or produce goods they could profit from themselves.
In return for natives’ acquiescence to these terms, their goods would bear lower duties or, in some cases, be declared duty-free. A failure to agree meant that natives would be forced to surrender their lands’ bounty with no benefit.
That was the start of international trade.
Although Marco Polo had travelled the Silk Road with Oriental goods to sell a couple of centuries before – what some might consider the first forays into international trade, he was one person, making trade deals for himself.
Toward the end of the 16th Century, economic trade found its foothold between countries/empires, as well as with poorer nations that became colonies for which trade terms were one-sided, with the majority of the benefit going to the wealthier nations.
That trading system endured for more than 300 years, until fractured states in Europe brought about the evolution of trade.
Napoleon had decimated German land holdings; in the early 19th Century, there were only about 40, mostly non-contiguous German states that, somehow, had to trade with one another. They established the world’s first Customs Union, thus removing internal economic and political barriers that stymied trade.
One hundred years after the Germans established their union, Luxembourg set up an agreement with Belgium called the Belgium-Luxembourg Economic Agreement, which later expanded to include the Netherlands.
The Benelux Economic Union was born in 1948.
About a year and a half later, those trading partners aimed to remove any barriers to trade – effectively becoming the world’s first free trade agreement, but they soon ran into problems.
The Dutch had far stricter price controls in place; they didn’t agree with their trading partners’ liberal economic system. Also, the Dutch were reluctant to provide free market access to their agricultural products but by far the biggest problem was that their economies were competitive, not complementary.
The issues those nations encountered in the world’s first multilateral trade agreement are the same that countries across the world face today: unequal goals, uneven access to markets and unfair benefits distribution – real and perceived.
International economic trade represents the mutually beneficial and profitable arrangements made between entities, be they individual countries or nations united under one banner.
Usually, these agreements are negotiated by politicians and/or diplomats.
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Breaking Down the Meaning of International Economics
International economics, like the other main fields in economics, is made up of many different theories and models, some more mathematical than others. It assesses the impact of trade and investment between countries, including international trade agreements or policies in place that can have an effect on said trade and overall economic growth.
International economics can also be considered as part of the sector of international politics and relations, which is discussed in further detail below.
Predominantly, international economics is broken down into two distinct areas – international trade and international finance.
International trade examines how goods and services move across international borders by applying a microeconomic framework that includes models and analysis. As such, it’s not uncommon, when examining international trade issues, to look at factors such as:
- Supply and demand;
- Customer and market behaviour;
- Differences between countries’ trade policies; and
- Trade quotas or trade negotiations in place and their consequences.
International finance, on the other hand, studies how capital flows between international borders by applying macroeconomic principles. Areas that fall within the remit of international finance are:
- Foreign exchange rates and movements, including the differences between fixed and floating FX rates;
- The balance of trade and payments between economies;
- GDP, inflation, and employment rates, within a comparative international context.
As much of the foundations of international economics are based on principles that you would already be familiar with through your microeconomics and macroeconomics studies, it’s not too hard to learn about the basics of international economics quickly.
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Factors of International Economics
When modelling the global economy, experts draw on a host of aspects and indices to project the state and health of the global economy and predict any looming pitfalls.
Foremost on their list of factors is competition.
For economists, it’s a given that every nation aims to outperform its neighbours economically and in every other possible way. As vague as that truism is, it cannot provide exact benchmarks of performance or steps taken towards that goal so that type of competition cannot be economists gauge.
The competition in question revolves around progress – how much a country can improve its infrastructure, educational system and social programmes relative to other countries.
Cold War-era terminology such as ‘first-world’ and ‘third-world’ countries has evolved from its original meaning – who is allied with whom, to represent stages of countries’ progress. The first two ‘worlds’ were seldom used and, more and more, calling a country ‘third-world’ is considered insulting.
Today, economists prefer the more accurate ‘developed’, ‘developing’ and ‘undeveloped’ to signal a given country’s progress.
One critical aspect of competition between nations is the quality of life afforded to their citizens.
Quality of life standards don’t measure only citizens’ standard of living and access to education, freedom of speech and other facets of civilization so commonly associated with high QoL indices. They also factor in environmental qualities – clean air and water, mortality rate and healthcare, and human rights.
That’s one reason why China is still considered a developing country even though, purely economically, it now stands on par with developed nations.
If you’ve ever read a news report about the happiest countries in the world, you’re familiar with all of the variables that contribute to QoL measurements.
If a country has a high Quality of Life Index, it is generally considered far ahead in the competition between nations.
The next factor that economists draw on is comparative advantage.
If Country A can produce a particular good at a higher quality and cheaper than Countries B, C and D, A has a comparative advantage.
Finding and mapping nations’ comparative advantages is a way economists determine each country’s economic strength.
Gains from trade is an extension of comparative advantage. For instance, if Country A grows lovely peaches but can’t grow pears or apples, trading with a country that produces the fruits it can’t is considered a gain from trade.
Economic cooperation works along the same lines.
Let’s suppose the international community has proposed a project beneficial to all nations. Rather than each country footing the bill alone (and possibly competing against one another), each country contributing a portion of the funds allows everyone to benefit.
The International Space Station is a prime example of economic cooperation.
Other factors that play a part in international economics are
- Capital: everything from exchange rates to cross-border investment – not how much money each country has!
- Development: how each country advances its infrastructure, industry and quality of life
- Labour: productivity rates and wage disparity from one country to the next
- Financial stability: the impact of monetary policy, financial leverage and trade on the global economy
- Sustainability: cooperation on issues for the common good, such as clean air and water, and protecting ecosystems.
The Paris Climate Accord, though not an economic pact, affects the global economy because individual nations’ economies must adjust to provide sustainable solutions to environmental concerns.
It is a perfect example of sustainability with regard to international economics.
The Link Between International Relations and Economics
International relations pairs nicely with the study of international economics and you can often see the two areas combined into a joint degree course.
The reason for this is simple enough – often political decisions have a wider impact on international trade and relationships. You need only look at the United States’ economic policies at the moment to see how changes to tariffs or their tax regime have impacted their relations with other nations.
Although international relations as a field often looks beyond purely economic factors as it combines history, politics, and to an extent psychology, economic policy plays a role in how governments and international bodies interact, co-operate and, not unusually, disagree with one another.
Indeed, strained relations between nations can lead to more a more negative economic outlook for the global economy.
Take, for instance, protectionist tariffs. When a country introduces a new tariff on imported goods, for example, steel, then this will have ramifications, both from a political as well as an economic perspective.
On the other hand, economic policies can sometimes benefit nations.
One such example is the customs union in place within the European Union, which allows goods to move within the customs union without being subject to any customs duties. This naturally encourages goods to flow between member countries and is also beneficial for imports and exports within the union.
Politically-speaking, such tariffs may damage international relations between countries, where tariffs are considered unfounded or excessive. Economically-speaking, there will also be an impact on the demand for the affected goods, as well as changes to the prices of those goods.
Globalisation, International Relations and Economics
It wasn’t so long ago that this nation traded with that one and others traded among themselves.
Their economies became interdependent – if Country A stopped buying Country B’s goods, not only would the balance of supply and demand be thrown askew but Country B’s economy might suffer a deficit would Country A could find itself with a monetary surplus.
Such situations generally brought about - or were caused by a cooling of diplomatic relations.
This is, of course, a vastly oversimplified illustration of how intimately intertwined diplomacy and economy are.
While international trade and relations have been carrying on for centuries, globalisation is a relatively new phenomenon and, until now, has been a start-and-stop proposition.
From an economic perspective, the world has seen three eras of globalisation.
The first wave started just at the end of the Industrial Revolution and finished around 1914, right at the start of the First World War. The second globalisation period started at the end of the Second World War and finished in 1971.
The third era of globalisation started in 1989 and continues today.
National economies are now so integrated into the global economy that, barring any catastrophic event, every country will remain plugged into the interdependent web of the globalised economy.
Even presumably isolated nations such as North Korea trade internationally which, in turn, allows the international community to place sanctions on their ability to trade. These financial and commercial penalties are meant to coerce uncooperative governments to modify their actions to better conform to international norms.
As mentioned earlier, the European Union allows for duty-free transport within the Eurozone. However, trade among those countries is not automatic; each country must still work out trade deals with every nation it wishes to trade with, just as it has done throughout history.
Globalisation makes establishing trade and economic ties much more streamlined.
Multilateral trade agreements are a direct result of globalisation but they are not necessarily advantageous to all parties concerned because they are difficult to oversee and enforce.
Furthermore, while they seem to indicate that everyone is getting along well – that international relations are cordial, that is not necessarily the case. Imagine two hostile governments that have the same trading partner.
While each country might have solid diplomatic relations with the same trading partner, there could be allegations of preferential treatment or even accusations that the primary country is giving the hostile nation a better deal or allowing it steal intellectual property.
Those are two reasons why the US president prefers bilateral trade agreements.
While the World Trade Organisation has proven that the US is treated (mostly) fairly, American economic advisers are not half-wrong in saying that one-on-one trade deals are easier to negotiate, faster to implement and require less oversight.
Can an interdependent, globalised economy revert to bilateral trade exclusively? Doing so would be a complex undertaking.
Become Familiar with International Economics Theory and Policy
Although international economics is a wide-reaching field (pardon the pun), students of this particular branch of economics often relish the challenge.
International economics impacts a country’s domestic policies as well as the international political landscape. Students of international economics have a wide range of career opportunities available to them, whether that’s:
- Working as an economic or policy analyst;
- Writing economics articles as a journalist;
- Putting together the latest policies at the civil service; or
- Working within an international organisation, such as the WTO.
These opportunities can be further enhanced by combining international economics with another subject at university, such as international relations, finance, or business management.
The other benefit of studying international economics is that you get to put into practice all that you've learned.
What is the difference between imports and exports? Who pays tariffs on imported goods? What is the gross domestic product (GDP) and how does it relate to the gross national product (GNP)? What's the difference between monetary policy and fiscal policy?
All of these economic variables: what is their place in the theory of international economics?
The theory of international economics focuses on patterns of trade, the effect of trade on production, consumption rates - how often are goods bought/replaced? A final aspect of international economic theory addresses income distribution.
All of these aspects fall under the microeconomic side of trade between nations.
By contrast, international macroeconomics relates to how money flows across countries and that money's impact on individual countries.
If you combine existing economics knowledge with your awareness of current political events and global economic news, you’ll be well-placed to get the most out of your courses on international economics.
As we've mentioned before - and as you surely know, international economics is a far-reaching discipline that studies countries' consumer preferences and production resources and the global institutions that affect them.
Sometimes it can be difficult understanding international economics and the economic issues that this area of economics addresses. For instance, how can two countries be compared if their cost of living is lower, their productivity is higher and they are richer in natural resources?
To understand these concepts, you need at least a basic understanding of micro- and macroeconomics, while also drawing on other areas such as politics and international relations.
Understandably, if you haven't studied these subjects before, it can be a struggle initially to come to terms with some core theories of international economics, such as global economic wealth.
Interpreting wealth as merely financial assets ignores the greater perspective of wealth as a whole. When considering global economic wealth, resources - natural, human and intellectual, as well as cash reserves all come into play.
An inevitable outgrowth of studying global economic wealth is realising economic inequality.
Think about life in the UK. Living in London is posh, privileged and expensive when compared to living elsewhere in our country. The best education, the priciest real estate and highest-paying jobs can all be found in our capital city.
Not everyone in London lives the high life, do they? A substantial portion of that city's inhabitants are not well-off, do not live comfortably and, indeed, struggle to make ends meet.
As in London, so too the rest of the country and, as in the UK, so too the rest of the world. Here's where things get interesting.
The international monetary fund (IMF) has declared, after long studies, that globalisation has increased inequality among the world's nations.
They specifically cite technological change as a key factor in increasing inequality, namely that poorer countries have only minimally benefited from such changes and that the technical advances in developed nations are at least partially responsible.
These inequalities have led to mass migration events which have destabilised both local economies and the global economy as a whole which leads economists to ask: does our international economics theory need to evolve?
As a future economist, you will be on the cutting edge of these discussions whose results will likely dramatically change international policy. Never has the field of economics been so enticing, nor has it ever had the chance to be so impactful.
Study all of the economic data you can, do your research and learn well!
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Superprof's many a economics tutor A level can help you decide which branch of economics is one you'd like to study further or whether you'd be interested in taking economics and international relations as a joint degree course once you've finished your A-Levels.