International.Economics
Introduction
You could say that the study of international trade and finance is where the
discipline of economics as we know it began. Historians of economic
thought often describe the essay “Of the Balance of Trade” by the Scottish
philosopher David Hume as the first real exposition of an economic model.
Hume published his essay in 1758, almost 20 years before his friend Adam Smith
published The Wealth of Nations. And the debates over British trade policy in the
early 19th century did much to convert economics from a discursive, informal
field to the model-oriented subject it has been ever since.
Yet the study of international economics has never been as important as it is
now. In the early 21st century, nations are more closely linked through trade in
goods and services, flows of money, and investment in each other’s economies
than ever before. And the global economy created by these linkages is a turbulent
place: Both policy makers and business leaders in every country, including
the United States, must now pay attention to what are sometimes rapidly changing
economic fortunes halfway around the world.
A look at some basic trade statistics gives us a sense of the unprecedented
importance of international economic relations. Figure 1-1 shows the levels of
U.S. exports and imports as shares of gross domestic product from 1960 to
2009. The most obvious feature of the figure is the long-term upward trend in
both shares: International trade has roughly tripled in importance compared
with the economy as a whole.
Almost as obvious is that, while both imports and exports have increased,
imports have grown more, leading to a large excess of imports over exports.
How is the United States able to pay for all those imported goods? The answer is
that the money is supplied by large inflows of capital, money invested by
foreigners willing to take a stake in the U.S. economy. Inflows of capital on that
scale would once have been inconceivable; now they are taken for granted. And
so the gap between imports and exports is an indicator of another aspect
of growing international linkages, in this case the growing linkages between
national capital markets.
Finally, notice that both imports and exports took a plunge in 2009. This decline
reflected the global economic crisis that began in 2008, and is a reminder of the
close links between world trade and the overall state of the world economy.
Exports and Imports as a Percentage of U.S. National Income
Both imports and exports have risen as a share of the U.S. economy, but imports
have risen more.
Source: U.S. Bureau of Economic Analysis.
If international economic relations have become crucial to the United States,
they are even more crucial to other nations. Figure 1-2 shows the average of
imports and exports as a share of GDP for a sample of countries. The United
States, by virtue of its size and the diversity of its resources, relies less on international
trade than almost any other country.
This book introduces the main concepts and methods of international economics
and illustrates them with applications drawn from the real world. Much
of the book is devoted to old ideas that are still as valid as ever: The 19th-century
trade theory of David Ricardo and even the 18th-century monetary analysis of
David Hume remain highly relevant to the 21st-century world economy. At the
same time, we have made a special effort to bring the analysis up to date. Over
the past decade the global economy threw up many new challenges, from the
backlash against globalization to an unprecedented series of financial crises.
Economists were able to apply existing analyses to some of these challenges,
but they were also forced to rethink some important concepts. Furthermore,
new approaches have emerged to old questions, such as the impacts of changes
in monetary and fiscal policy. We have attempted to convey the key ideas
that have emerged in recent research while stressing the continuing usefulness
of old ideas.
Introduction
You could say that the study of international trade and finance is where the
discipline of economics as we know it began. Historians of economic
thought often describe the essay “Of the Balance of Trade” by the Scottish
philosopher David Hume as the first real exposition of an economic model.
Hume published his essay in 1758, almost 20 years before his friend Adam Smith
published The Wealth of Nations. And the debates over British trade policy in the
early 19th century did much to convert economics from a discursive, informal
field to the model-oriented subject it has been ever since.
Yet the study of international economics has never been as important as it is
now. In the early 21st century, nations are more closely linked through trade in
goods and services, flows of money, and investment in each other’s economies
than ever before. And the global economy created by these linkages is a turbulent
place: Both policy makers and business leaders in every country, including
the United States, must now pay attention to what are sometimes rapidly changing
economic fortunes halfway around the world.
A look at some basic trade statistics gives us a sense of the unprecedented
importance of international economic relations. Figure 1-1 shows the levels of
U.S. exports and imports as shares of gross domestic product from 1960 to
2009. The most obvious feature of the figure is the long-term upward trend in
both shares: International trade has roughly tripled in importance compared
with the economy as a whole.
Almost as obvious is that, while both imports and exports have increased,
imports have grown more, leading to a large excess of imports over exports.
How is the United States able to pay for all those imported goods? The answer is
that the money is supplied by large inflows of capital, money invested by
foreigners willing to take a stake in the U.S. economy. Inflows of capital on that
scale would once have been inconceivable; now they are taken for granted. And
so the gap between imports and exports is an indicator of another aspect
of growing international linkages, in this case the growing linkages between
national capital markets.
Finally, notice that both imports and exports took a plunge in 2009. This decline
reflected the global economic crisis that began in 2008, and is a reminder of the
close links between world trade and the overall state of the world economy.
Exports and Imports as a Percentage of U.S. National Income
Both imports and exports have risen as a share of the U.S. economy, but imports
have risen more.
Source: U.S. Bureau of Economic Analysis.
If international economic relations have become crucial to the United States,
they are even more crucial to other nations. Figure 1-2 shows the average of
imports and exports as a share of GDP for a sample of countries. The United
States, by virtue of its size and the diversity of its resources, relies less on international
trade than almost any other country.
This book introduces the main concepts and methods of international economics
and illustrates them with applications drawn from the real world. Much
of the book is devoted to old ideas that are still as valid as ever: The 19th-century
trade theory of David Ricardo and even the 18th-century monetary analysis of
David Hume remain highly relevant to the 21st-century world economy. At the
same time, we have made a special effort to bring the analysis up to date. Over
the past decade the global economy threw up many new challenges, from the
backlash against globalization to an unprecedented series of financial crises.
Economists were able to apply existing analyses to some of these challenges,
but they were also forced to rethink some important concepts. Furthermore,
new approaches have emerged to old questions, such as the impacts of changes
in monetary and fiscal policy. We have attempted to convey the key ideas
that have emerged in recent research while stressing the continuing usefulness
of old ideas.
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