international economics


  • [51] Evidence from the United States also suggests that the economic benefits to the receiving country are relatively small, [52] and that the presence of immigrants in its
    labour market results in only a small reduction in local wages.

  • One of their effects has been greatly to increase the international inter-connectedness of the financial markets and to create an international financial system with the characteristics
    known in control theory as “complex-interactive”.

  • A recent IMF report demonstrates that the increase in inequality in the developing countries in the period 1981 to 2004 was due entirely to technological change, with globalisation
    making a partially offsetting negative contribution, and that in the developed countries globalisation and technological change were equally responsible.

  • 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,
    which is one of the mechanisms by which the business cycle is transmitted from country to country.

  • However, the direction of academic research on the subject has been influenced by the fact that governments have often sought to impose restrictions upon international trade,
    and the motive for the development of trade theory has often been a wish to determine the consequences of such restrictions.

  • Any remaining international wage differences would then be the result of productivity differences, so that there would be no difference between unit labour costs in developing
    and developed countries, and no downward pressure on wages in the developed countries.

  • Flows of financial capital would tend to increase the level of investment in the developing countries by reducing their costs of capital, and the direct investment of physical
    capital would tend to promote specialisation and the transfer of skills and technology.

  • The practice of international finance tends to involve greater uncertainties and risks because the assets that are traded are claims to flows of returns that often extend
    many years into the future.

  • Globalization The term globalization has a variety of meanings, but in economic terms it refers to the move that is taking place in the direction of complete mobility of capital
    and labour and their products, so that the world’s economies are on the way to becoming totally integrated.

  • [16] Moreover, in that proof, Samuelson did not take account of the gains to others resulting from wider consumer choice, from the international specialisation of productive
    activities – and consequent economies of scale, and from the transmission of the benefits of technological innovation.

  • [28] It has also been pointed out that, in any case, trade restrictions could not be expected to correct the domestic market imperfections that often hamper the development
    of infant industries.

  • [20] Terms of trade[edit] There has also been concern that international trade could operate against the interests of developing countries.

  • It has been claimed that South Korea’s automobile industry owes its existence to initial protection against imports,[24] but a study of infant industry protection in Turkey
    reveals the absence of any association between productivity gains and degree of protection, such as might be expected of a successful import substitution policy.

  • It has been argued that, although there may sometimes be short-term pressures on wage rates in the developed countries, competition between employers in developing countries
    can be expected eventually to bring wages into line with their employees’ marginal products.

  • The restrictions that remain are nevertheless of major economic importance: among other estimates,[31] the World Bank estimated in 2004 that the removal of all trade restrictions
    would yield benefits of over $500 billion a year by 2015.

  • Wage differences between developed and developing countries have been found to be mainly due to productivity differences[19] which may be assumed to arise mostly from differences
    in the availability of physical, social and human capital.

  • A Copenhagen Consensus study suggests that if the share of foreign workers grew to 3% of the labour force in the rich countries there would be global benefits of $675 billion
    a year by 2025.

  • [42] Policies and institutions[edit] Although the majority of developed countries now have “floating” exchange rates, some of them – together with many developing countries
    – maintain exchange rates that are nominally “fixed”, usually with the US dollar or the euro.

  • For many decades, that awareness led governments to impose strict controls over the activities and conduct of banks and other credit agencies, but in the 1980s many governments
    pursued a policy of deregulation in the belief that the resulting efficiency gains would outweigh any systemic risks.

  • Since such migrants work in unskilled industries for lower wages and often zero social insurance costs, the gain from labour migration flows is actually higher than the minimal
    gains calculated for legal flows; accompanying side-effects are significant, however, and include political damage to the idea of immigration, lower unskilled wages for the host population, and increased policing costs alongside lower tax

  • Factor price equalisation[edit] Nevertheless, there have been widespread misgivings about the effects of international trade upon wage earners in developed countries.

  • On those assumptions, it derives a model of the trade patterns that would arise solely from international differences in the relative abundance of labour and capital (referred
    to as factor endowments).

  • Those findings and others[18] have contributed to a broad consensus among economists that trade confers very substantial net benefits, and that government restrictions upon
    trade are generally damaging.

  • However (on assumptions that included constant returns and competitive conditions) Paul Samuelson has proved that it will always be possible for the gainers from international
    trade to compensate the losers.

  • [citation needed] Exchange rates and capital mobility[edit] A major change in the organisation of international finance occurred in the latter years of the twentieth century,
    and economists are still debating its implications.

  • International economics is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and the international
    institutions that affect them.

  • But in 1971 the United States government announced that it was suspending the convertibility of the dollar, and there followed a progressive transition to the current regime
    of floating exchange rates in which most governments no longer attempt to control their exchange rates or to impose controls upon access to foreign currencies or upon access to international financial markets.

  • They suggest that net benefits can be achieved by countries that are able to meet threshold conditions of financial competence but that for others, the benefits are likely
    to be delayed, and vulnerability to interruptions of capital flows is likely to be increased.

  • In making an influential case for flexible exchange rates in the 1950s, Milton Friedman had claimed that if there were any resulting instability, it would mainly be the consequence
    of macroeconomic instability,[40] but an empirical analysis in 1999 found no apparent connection.

  • The authors found little evidence either of the benefits of the liberalisation of capital movements, or of claims that it is responsible for the spate of financial crises.

  • [citation needed] The best-known of the resulting models, the Heckscher-Ohlin theorem (H-O)[8] depends upon the assumptions of no international differences of technology,
    productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies.

  • [15] The study further suggested that internationally traded goods fall into three categories, each with a different type of comparative advantage: • goods that are produced
    by the extraction and routine processing of available natural resources—such as coal, oil and wheat, for which developing countries often have an advantage compared with other types of production—which might be referred to as “Ricardo goods”;
    • low-technology goods, such as textiles and steel, that tend to migrate to countries with appropriate factor endowments—which might be referred to as “Heckscher-Ohlin goods”; and, • high-technology goods and high scale-economy goods, such
    as computers and aeroplanes, for which the comparative advantage arises from the availability of R&D resources and specific skills and the proximity to large sophisticated markets.

  • Their recommended economic policies are broadly those that have been adopted in the United States and the other major developed countries (known as the “Washington Consensus”)
    and have often included the removal of all restrictions upon incoming investment.

  • [citation needed] Infant industries[edit] The term “infant industry” is used to denote a new industry which has prospects of gaining comparative advantage in the long-term,
    but which would be unable to survive in the face of competition from imported goods.

  • [5] International trade Scope and methodology[edit] The economic theory of international trade differs from the remainder of economic theory mainly because of the comparatively
    limited international mobility of the capital and labour.

  • Another econometric study also established a correlation between country size and the share of exports made up of goods in the production of which there are scale economies.

  • The adoption of a fixed rate requires intervention in the foreign exchange market by the country’s central bank, and is usually accompanied by a degree of control over its
    citizens’ access to international markets.

  • Their findings have been confirmed by a number of subsequent studies, although it has been suggested that the effect may be due to quality bias in the index numbers used or
    to the possession of market power by manufacturers.

  • [1] • International trade studies goods and services flows across international boundaries from supply-and-demand factors, economic integration, international factor movements,
    and policy variables such as tariff rates and trade quotas.

  • Influential studies published in 1950 by the Argentine economist Raul Prebisch[21] and the British economist Hans Singer[22] suggested that there is a tendency for the prices
    of agricultural products to fall relative to the prices of manufactured goods; turning the terms of trade against the developing countries and producing an unintended transfer of wealth from them to the developed countries.

  • [41] Neoclassical theory had led them to expect capital to flow from the capital-rich developed economies to the capital-poor developing countries – because the returns to
    capital there would be higher.

  • On an international scale, the economic policies promoted by the International Monetary Fund (IMF) have had a major influence, especially upon the developing countries.

  • An OECD study has suggested that there are further dynamic gains resulting from better resource allocation, deepening specialisation, increasing returns to R&D, and technology

  • One study introduces a further offsetting factor to suggest that the opportunity to migrate fosters enrolment in education thus promoting a “brain gain” that can counteract
    the lost human capital associated with emigration.

  • In the international trade context for which it was devised it means that trade lowers the real wage of the scarce factor of production, and protection from trade raises it.

  • [6] In that respect, it would appear to differ in degree rather than in principle from the trade between remote regions in one country.

  • Unlike movement of capital and goods, since 1973 government policies have tried to restrict migration flows, often without any economic rationale.

  • Successful identification of such a situation, followed by the temporary imposition of a barrier against imports can, in principle, produce substantial benefits to the country
    that applies it—a policy known as “import substitution industrialization”.

  • [citation needed] Measures designed to reduce the vulnerability of the international financial system have been put forward by several international institutions.

  • The crucial issues, as recently acknowledged by the OECD, is the matter of return and reinvestment in their countries of origin by the migrants themselves: thus, government
    policies in Europe are increasingly focused upon facilitating temporary skilled migration alongside migrant remittances.

  • Economic theory indicates that the movement of a skilled worker from a place where the returns to skill are relatively low to a place where they are relatively high should
    produce a net gain, although it would tend to depress the wages of skilled workers in the recipient country).

  • Thus the methodology of international trade economics differs little from that of the remainder of economics.

  • [12] Modern analysis[edit] Modern trade analysis moves away from the restrictive assumptions of the H-O theorem and explores the effects upon trade of a range of factors,
    including technology and scale economies.

  • Part of the increase in income inequality that has taken place within countries is attributable – in some cases – to globalisation.

  • In its most general form it states that if the price of a good rises (falls) then the price of the factor used intensively in that industry will also rise (fall) while the
    price of the other factor will fall (rise).

  • [65] Professor Dani Rodrik of Harvard[66] has noted that the benefits of globalisation are unevenly spread, and that it has led to income inequalities, and to damaging losses
    of social capital in the parent countries and to social stresses resulting from immigration in the receiving countries.

  • [29] Trade policies[edit] Economists’ findings about the benefits of trade have often been rejected by government policy-makers, who have frequently sought to protect domestic
    industries against foreign competition by erecting barriers, such as tariffs and import quotas, against imports.

  • That effect upon the welfare of the parent country is to some extent offset by the remittances that are sent home by the emigrants, and by the increased skill and education
    with which some of them return.

  • [59] Increased globalisation has also made it easier for recessions to spread from country to country.

  • The temporary advantage arising from a country’s development of a new technology is seen as contributory factor in one study.

  • As noted above, that theorem is sometimes taken to mean that trade between an industrialised country and a developing country would lower the wages of the unskilled in the
    industrialised country.

  • [11] Those theories have sometimes been taken to mean that trade between an industrialised country and a developing country would lower the wages of the unskilled in the industrialised

  • [17] They suggested that much of the gain arises from the growth of the most productive firms at the expense of the less productive.

  • [3] • International monetary economics and international macroeconomics study flows of money across countries and the resulting effects on their economies as a whole.

  • The Mundell–Fleming model and its extensions[61] are often used to analyse the role of capital mobility (and it was also used by Paul Krugman to give a simple account of the
    Asian financial crisis[62]).

  • [13] Other researchers have found research and development expenditure, patents issued, and the availability of skilled labor, to be indicators of the technological leadership
    that enables some countries to produce a flow of such technological innovations[14] and have found that technology leaders tend to export hi-tech products to others and receive imports of more standard products from them.


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