Athens University of Economics and Business

Course: International Economics

Lecturer: Dr George Economides

Email: gecon@aueb.gr, webpage: www.aueb.gr/users/gecon
Main textbook: Krugman, P. and M. Obstfeld (1997): International Economics:
Theory and Policy. 4th edition, Addison-Wesley.

Autumn Semester 2004-2005

¾ What is international economics about? The subject matter of international

economics consists of issues raised by the special problems of economic
interaction between sovereign states.

¾ International Economics use the same fundamental methods of analysis as

other branches of economics, because the motives and behaviour of
individuals and firms are the same in international trade as they are in
domestic transactions.

¾ Seven themes recur throughout the study of international economics:

(a) The gains from trade

Some international trade is beneficial – nobody would suggest that
Norway should grow its own oranges.
Many people, however, are skeptical about the benefits of trading for
goods that a country could produce for itself.

(b) The pattern of trade

Economists cannot discuss the effects of international trade or recommend
changes in government policies toward trade with any confidence unless
they know their theory is good enough to explain the international trade
that is actually observed.

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 (c) Protectionism
If the idea of gains from trade is the most important theoretical concept in
international economics, the seemingly eternal battle between free trade
and protection is its most important policy theme.

(d) The Balance of Payments

The record of a country’s transactions with the rest of the world is called
the Balance of Payments.

(e) Exchange-Rate Determination

One of the key differences between international economics and other
areas of economics is that countries have different currencies. It is usually
possible to convert one currency into another but relative prices of
currencies may change over time, sometimes drastically.

(f) International Policy Coordination

In an integrated world economy one country’s economic policies usually
affect other countries as well.

(g) International Capital Market

International capital markets differ in important ways from domestic
capital markets. They must cope with special regulations that many
countries impose on foreign investment. Also some special risks are
associated with international capital markets (for example currency
fluctuations).

¾ Countries engage in international trade for two basic reasons each of which
contributes to their gain from trade:
(a) They trade because they are different from each other.
(b) They trade to achieve economies f scale (if the economy produces only a
limited range of goods, it can produce each of these goods at a larger scale
and hence more efficiently than if it tried to produce everything).
¾ In the real world, patterns of international trade reflect the interaction of both
these motives.