International Economics

International economics is the study of effects upon economic activity of different countries due to the international differences in their productive resources & consumer preferences and the factors & institutions that affect them. It explains the patterns and consequent results of transactions and interactions between the different countries, including transactions in trade, investment and migration. International economics can be studied further under following sub-fields:

• International trade: It studies the flow of goods and services across international boundaries covering supply-and-demand factors and policy variables such as tariff rates and trade quotas. It also concerns with the size and distribution of gains from trade.
• International finance: It studies the flow of capital across international boundaries, and also the effects of these movements on exchange rates.
• International monetary economics and macroeconomics studies money and macro flows across countries.

International Trade:

• Classical Theory:   The comparative advantages arising from inter-regional differences provide a logical explanation of international trade as a mere consequence of these differences. The Heckscher-Ohlin theorem (H-O) assumes no international differences of technology, productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies. Thus, on these assumptions, it derives a model of the trade patterns that arise only from international differences in the relative abundance of labour and capital (also called factor endowments). So, the resulting theorem states that a country with a relative abundance of capital would export capital-intensive products and import labour-intensive products. In other words, it simply means that the trade between an developed country and a developing country would lower the wages of the unskilled labour in the developed country. This conclusion depends upon the unlikely assumption that productivity is the same in the two countries.
• Modern Theory:      Modern trade theory studies the effects of technology and scale economies on international trade. The contribution of differences of technology and subsequent advantages to the more technologically advanced countries has been evaluated in several studies. Researchers have found research and development expenditure, patents, and the availability of skilled labour, to be indicators of the technological leadership that enables these leader countries to come up with such technological innovations. Studies have also revealed that technology leaders export hi-tech products to the developing / less developed world and receive imports of more standard products from them.
• Gains from Trade:  There is a strong belief that any exchange that is freely undertaken will benefit both parties, but also there is a much greater danger that it will be harmful to others not involved in the transaction. However, it has been evident that it is always possible for the gainers from international trade to compensate the losers. There are also strong evidences that a single per cent increase in opening the trade barrier increases the level of GDP per capita income between 1 - 2 per century There is always a general consensus amongst economists that open trade confers very considerable net benefits to the parties involved, and that government restrictions upon trade are generally harmful to the economic growth.

International Finance:

• The economics of International finance involve capital and money instead of goods and services as in international trade. The practice of international finance tends to involve greater uncertainties and risks because the assets that are traded are more of liquid nature. Markets in financial assets are more volatile than markets in goods and services as decisions are more often revised and more quickly put into effect.

Exchange Rates and Capital Mobility

Although the majority of developed countries now have "floating" exchange rates, some of them and many developing countries have ‘fixed’ exchange rates.                     The adoption of a fixed rate vis-a-vis a dollar or a euro requires involvement in the foreign exchange market by the country’s central bank, and usually requires some control over its citizens’ access to international markets. The economic policies promoted by the International Monetary Fund (IMF) have had a major influence on the systems of exchange rates followed by different countries, and especially the developing countries.

Migration

Basically, it is assumed that international migration results in a net gain in economic welfare. As economic theory also indicates that the move of a skilled worker from a less developed nation where the price of his skills are relatively low to a place where they are relatively high should produce a net gain.

From a developing country’s viewpoint, the emigration of skilled workers is a loss of human capital (known as brain drain), which also leaves the remaining workforce without the benefit of their support. This negative effect upon the welfare of the parent country is to some extent compensated by the remittances that are sent home by the emigrants, and by the enhanced technical know-how with which some of them return. One more compensatory factor can be to suggest that the opportunity to migrate promote enrolment in education thus accounting for "brain gain" which counteracts the lost human capital associated with emigration. Also the emigration of unskilled and semi-skilled workers is of economic benefit to countries of origin, by reducing pressure for employment creation. But skilled emigration in specific highly skilled sectors, such as medicine, leads to severe consequences and even catastrophic in cases where 50% or so of trained doctors emigrate.

Unlike movement of capital and goods, government policies have tried to restrict migration flows, often without any economic rationale. Such restrictions have had negative and damaging effects on the society as a whole as it channelises the great majority of migration flows into illegal migration. Since such migrants work for lower wages and often zero social insurance costs, the resultant effects are significant which include political damage to the idea of immigration, lower unskilled wages for the host population, and increased policing costs and lower tax receipts.

Globalization

The term globalization refers to the move that is taking place in the direction of complete mobility of capital, goods & services and labour. The world's economies are on the way to becoming totally integrated, mainly due to lifting of politically-imposed barriers and reduction in the costs of transport and communication. A reduction in economic activity in one country can lead to a reduction in activity in its trading partners as a result of its consequent reduction in demand for their exports, so, increased globalisation has also made it easier for recessions to spread from country to country. Empirical findings and research confirms that the greater the trade linkage between countries, the more coordinated and related are their business cycles.