Basics of International Economics

This book gives you an easily accessible overview of basic international economics.

Most of the book can be understood by readers with a basic understanding of economics. While more advanced readers may use the book as an overview of the most important topics.

Download the exercise book and test what you have learned.

During the entire post-war period, bilateral agreements as well as multilateral trade liberalization in the GATT/WTO has made the world economy ever more interdependent. In particular after the collapse of communism, ideologies that favoured national self-sufficiency have almost disappeared and countries have opened their economies to international trade, investments and competition and have in general gained from this.

However, one need only witness the recurring events of violent protest at meetings of organizations such as the World Economic Forum and the World Trade Organization to realize that a non-negligible part of civic society does not view the increasing internationalization and globalization with a positive attitude. Protesters are not simple bullies, but often well-educated people with a view of globalization and international economics quite different from that which is provided by the economics profession. At the same time, many textbooks offer advanced mathematical models and econometric studies on a perplexing plethora of topics within international economics, but fail to teach the basic lessons of the discipline. Undergraduates therefore may run the risk of passing exams without understanding fundamental problems in the field. As useful as they are, what is needed is therefore not another textbook with mathematical propositions.

Instead of providing advanced theory, the idea of this book is to give an easily accessible overview of basic international economics with the aim of giving readers a simple framework in which they can evaluate the many exciting developments that dominate current research, policy debates, and media coverage of the global economy. Most of the book can be understood by readers with no more than a basic understanding of economics while more advanced readers may use the book for gaining an overview of the topics and as a handbook in which they can find answers to questions simply and quickly. The language of the book is therefore kept as non-technical as possible, and all explanations focus on the basic mechanisms. It is my hope that readers from different parts of the universities and business schools as well as those without a degree can benefit from this book. In the course of reading the book, some may even be provoked to rethink their attitude towards globalization and similar developments in the world economy. This book can therefore also be seen as a primer and simple background for understanding the more advanced textbooks.

The book is divided into four main sections. Section one introduces the theory of trade in goods and services, and includes three chapters. Chapter one presents the theory of trade between countries with different characteristics and includes the theory of absolute and comparative advantages. Chapter two presents modern trade theories explaining trade between countries with similar characteristics. Chapter three closes the section by discussing the effects of various instruments in trade policy. Section two next turns to the movements of production factors and includes three chapters. Chapter four presents the Heckscher-Ohlin model and derives the factor price equalization theorem, which forms the basis for most discussions of capital mobility. Chapter five presents the background for capital movements and foreign direct investments while chapter six presents and discusses a theory of unilateral transfers of capital - i.e. foreign aid - that most policy prescriptions from international donors rely upon.

Section three of the book then turns the attention to economic policy in open economies, specifically looking at the short-run consequences. It is divided into three chapters. Chapter seven provides the needed background for understanding open economies by presenting simple exchange rate theory. Chapter eight introduces Mundell and Fleming’s IS-LM model and uses it to analyse the effects of monetary and fiscal policy in small countries with either floating or fixed exchange rate systems. Chapter nine then outlines the effects of policies when countries are large. The final section of the book then analyses the effects of economic policy on long-run performance in open economies. This section is divided into two chapters. Chapter ten deals with the long-run inflation-unemployment nexus, while chapter eleven discusses the effects of international trade and investments on the growth rates of countries in the very long run, and the channels through which different factors work.

Århus, July 26, 2005

Christian Bjørnskov