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Semester 6: INTERNATIONAL ECONOMICS
Introduction: Nature, Scope, Globalization, Current Issues
INTERNATIONAL ECONOMICS
B.A.
ECONOMICS
6
PERIYAR UNIVERSITY
Core Course - XIII
Introduction: Nature, Scope, Globalization, Current Issues
Nature of International Economics
International economics involves the study of economic interactions between countries, including trade, investment, and currency exchange. It examines how countries allocate resources and how goods and services are distributed globally.
Scope of International Economics
The scope of international economics covers various fields such as international trade theory, international finance, the impact of globalization, trade policy, and the role of international institutions. It also encompasses the analysis of global economic trends and their implications.
Globalization
Globalization refers to the increasing interconnectedness of economies, cultures, and populations worldwide. It has led to a significant rise in international trade and investment, and it influences various economic policies and practices.
Current Issues in International Economics
Current issues include trade wars, protectionism, the impact of technology on job displacement, environmental concerns, and the effects of global pandemics on trade and supply chains. Additionally, economic disparities between countries pose challenges for equitable globalization.
International Trade Theories: Absolute, Comparative, Opportunity Cost, Factor Endowments, Economic Growth
INTERNATIONAL ECONOMICS
B.A.
ECONOMICS
6
PERIYAR UNIVERSITY
Core Course - XIII
International Trade Theories
Item
Ability of a country to produce a good more efficiently than another country.
If Country A can produce 10 units of cloth while Country B produces 5 units with the same resources, A has an absolute advantage in cloth production.
Item
Ability of a country to produce a good at a lower opportunity cost than another country.
If Country A gives up 1 unit of cloth to produce 2 units of wine, while Country B gives up 2 units of cloth for the same 2 units of wine, A has a comparative advantage in wine.
Item
Value of the next best alternative foregone when a choice is made.
If a country chooses to produce 100 units of wine instead of 50 units of cloth, the opportunity cost is the 50 units of cloth it could have produced.
Item
Availability of factors of production in a country that influence its trade patterns.
A country rich in capital tends to export capital-intensive goods, while a labor-rich country exports labor-intensive goods.
Item
Increase in the production of goods and services over a specific period.
Economic growth can lead to increased trade as countries produce more goods to sell internationally.
Foreign Exchange Market: Structure, Exchange Rates, Mint Parity, PPP, BOP Theory
Structure of the Foreign Exchange Market
The foreign exchange market is a global decentralized or over-the-counter market for trading currencies. It includes various participants such as banks, financial institutions, corporations, governments, and individual traders. The market operates through a network of banks and brokers, which facilitate the exchange of one currency for another.
Exchange Rates
Exchange rates determine the value of one currency in relation to another. They can be classified as floating, fixed, or pegged exchange rates. Exchange rates are influenced by factors such as interest rates, economic stability, and inflation. The forex market is the largest and most liquid financial market in the world.
Mint Parity
Mint parity refers to the economic principle that the exchange rate between two currencies should be equal to the ratio of their respective purchasing power. This is based on the idea that currency values should reflect the relative prices of goods and services in different countries. The concept is closely related to the law of one price.
Purchasing Power Parity (PPP)
Purchasing Power Parity is an economic theory that compares different countries' currencies through a market 'basket of goods' approach. It suggests that in the long run, exchange rates should move toward the rate that would equalize the prices of identical goods and services in different countries.
Balance of Payments (BOP) Theory
The Balance of Payments is a comprehensive statement that summarizes a country's economic transactions with the rest of the world over a specific time period. It includes the trade balance, capital flows, and financial transfers. Understanding BOP is crucial for analyzing a country's economic health and exchange rate stability.
Balance of Payments: Account, Disequilibrium, Adjustment, Mechanisms, Export Promotion, Import Substitution
Balance of Payments
Definition and Components
Balance of Payments refers to a systematic record of all economic transactions between residents of a country and the rest of the world over a specific period. It consists of two main accounts: the current account, which includes trade in goods and services, income receipts, and current transfers; and the capital and financial account, which records capital transfers and transactions in financial assets.
Disequilibrium
Disequilibrium occurs when there is a persistent imbalance between inflows and outflows in the Balance of Payments. This can result from various factors such as trade deficits, changes in foreign investment, or economic instability. Disequilibrium can lead to depletion of foreign exchange reserves and may necessitate policy responses.
Adjustment Mechanisms
Adjustment mechanisms refer to the methods through which a country corrects its Balance of Payments disequilibrium. These may include fiscal and monetary policies, exchange rate adjustments, and structural reforms. The goal is to restore equilibrium, which may involve reducing import demand or increasing export capacity.
Export Promotion
Export promotion strategies aim to enhance a country's exports through various means such as providing incentives, investing in infrastructure, and facilitating trade agreements. These strategies can potentially lead to improved Balance of Payments, generating foreign exchange and stimulating economic growth.
Import Substitution
Import substitution refers to a policy aimed at reducing dependency on foreign goods by promoting domestic production. It includes tariffs on imports, subsidies for local industries, and investment in local manufacturing. While it can help improve the Balance of Payments, it may also lead to inefficiencies if local industries are not competitive.
Terms of Trade & Policy: Determinants, Barriers, Quotas, Free Trade, Protection, Economic Development
INTERNATIONAL ECONOMICS
B.A.
ECONOMICS
6
PERIYAR UNIVERSITY
Core Course - XIII
Terms of Trade & Policy
Determinants of Terms of Trade
Factors influencing the terms of trade include productivity levels in exporting and importing countries, demand and supply of goods, and changes in global market conditions. Economic development and technological advancements also play crucial roles in shaping trade terms.
Barriers to Trade
Trade barriers are government-imposed restrictions on the free exchange of goods and services between countries. Common barriers include tariffs, import quotas, and administrative regulations. These practices can protect domestic industries but may lead to trade disputes.
Quotas
Quotas are limitations on the quantity of goods that can be imported or exported during a given timeframe. They serve to protect local industries from foreign competition and ensure a favorable balance of trade.
Free Trade
Free trade refers to an economic policy of allowing goods and services to be exchanged across international borders with minimal or no restrictions. It is believed to promote economic efficiency, enhance consumer choice, and foster better international relations.
Protectionism
Protectionism is an economic policy that aims to protect domestic industries from foreign competition through tariffs, quotas, and other regulations. While it may benefit certain sectors, it can also lead to higher prices for consumers and retaliation from trading partners.
Economic Development
The interplay between terms of trade and economic development is significant. Developing countries may face unfavorable terms of trade, hindering their growth potential. Policies focusing on improving trade conditions can enhance economic development outcomes.
