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ECON 3580
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CHAPTER 1What Is International Economics AboutInternational economics is about how nations interact throughTrade of goods and services flows of money and investmentGains from TradeSeveral ideas underlie the gains from trade1When a buyer and a seller engage in a voluntary transaction both can be made better offNorwegian consumers import oranges that they would have a hard time producingThe producer of the oranges receives income that it can use to buy other things that it desires2How could a country that is the most least efficient producer of everything gain from trade Countries use finite 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 trade3Trade benefits countries by allowing them to export goods made with relatively abundant resources and imports goods made with relatively scarce resources4When countries specialize they may be more efficient due to largerscale production5Countries may also gain by trading current resources for future resources international borrowing and lending and due to international migration Trade is predicted to benefit countries as a whole in several ways but trade may harm particular groups within a country International trade can harm the owners of resources that are used relatively intensively in industries that compete with imports Trade may therefore affect the distribution of income within a countryPatterns of TradeDifferences 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 aircraftWhy some countries export certain products can stem from differences inLabor productivityRelative supplies of capital labor and land and their use in the production of different goods and servicesEffects of Government Policies on TradePolicy makers affect the amount of trade through tariffs a tax on imports or exports quotas a quantity restriction on imports or exportsexport subsidies a payment to producers that exportor through other regulations ex product specifications that exclude foreign products from the market but still allow domestic productsTrade policies are often chosen to cater to special interest groups rather than to maximize national welfare Governments tend to adopt tariffs then negotiate them down in exchange for reduction in trade barriers of other countriesInternational Finance TopicsExchanging risky assets such as stocks and bonds can benefit all countries by diversification that reduces the variability of incomeanother source of gains from tradeMost international trade involves monetary transactionsMany monetary events have important consequences for international tradeBalance of PaymentsGovernments measure the value of exports and imports as well as the value of financial assets that flow into and out of their countriesTrade deficits where countries import more than they export in value may be offset by net inflows of financial assetsThe official settlements balance or the balance of payments measures the balance of funds that central banks use for official international paymentsAll three values are measured in the governments national income accountsExchange Rate DeterminationExchange rates measure how much domestic currency can be exchanged for foreign currency and thus affecthow much goods denominated in foreign currency imports cost in the domestic countryhow much goods denominated in domestic currency exports cost in foreign marketsSome exchange rates change continually float while others are fixed for periods of timeInternational Policy CoordinationIn an integrated economy one countrys economic policies usually affect other countries as well leading to the need for some degree of policy coordinationDepends on type of exchange rate regimeCapital markets where money is exchanged for promises to pay in the future have special concerns in an international settingCurrency fluctuations can alter the value paidCountries especially developing ones might default on debtInternational Trade Versus FinanceInternational trade focuses on transactions involving movement of goods and services across nations International trade theory chapters 28 and policy chapters 912International finance focuses on financial or monetary transactions across nations International monetary theory chapters 1318 and policy chapters 1922CHAPTER 2 Who Trades with WhomThe 5 largest trading partners with the US in 2008 were Canada China Mexico Japan and GermanyThe total value of imports from and exports to Canada in 2008 was about 550 billion dollars The largest 15 trading partners with the US accounted for 69 of the value of US trade in 2008Size Matters The Gravity Model3 of the top 10 trading partners with the US in 2008 were also the 3 largest European economies Germany UK and France These countries have the largest gross domestic product GDP in EuropeGDP measures the value of goods and services produced in an economyWhy does the US trade most with these European countries and not other European countriesIn fact the size of an economy is directly related to the volume of imports and exportsLarger economies produce more goods and services so they have more to sell in the export marketLarger economies generate more income from the goods and services sold so they are able to buy more importsThe Gravity ModelOther things besides size matter for trade 1Distance between markets influences transportation costs and therefore the cost of imports and exportsDistance may also influence personal contact and communication which may influence trade 2Cultural affinity if two countries have cultural ties it is likely that they also have strong economic ties3Geography ocean harbors and a lack of mountain barriers make transportation and trade easier4Multinational corporations corporations spread across different nations import and export many goods between their divisions5Borders crossing borders involves formalities that take time and perhaps monetary costs like tariffs
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