Globalizing trends have made the world smaller, with goods, services and capital flowing around the world with greater speed and ease than in the past. International economics provides a framework for understanding and explaining other issues in the global economy. International economics studies the economic and political issues surrounding trade, international finance and related issues.
International economics studies the economic interactions of nations and how international issues affect world economic activity. This specialty within the larger discipline of economics examines and explains patterns of interaction among nations in such areas as trade and investment.
Major areas of study in international economics include world trade, international finance and the movement of factors of production, such as labor and capital. Trade is especially important for economists, who contend that international trade benefits all parties involved. Through trade, nations can specialize in producing certain goods and export them to obtain other goods. International finance examines the flow of financial assets across borders, as well as currency exchange rates, such as the value of the U.S. dollar against the euro or the Japanese yen. Finally, international economics also studies migration of labor, such as immigrants moving to other countries in search of better opportunities.
Historically, nations traded agricultural products and mineral-based goods, such as oil, coal and precious metals. Today, however, the majority of trade involves manufactured goods, such as automobiles, computers and clothing, according to economist Paul Krugman and Maurice Obstfeld, authors of "International Economics: Theory and Policy." For some nations, including the United States, the majority of trade involves a small number of countries with which a country has close trade relations. Krugman and Obstfeld identified Canada, Mexico, China, Japan and Germany as the United States’ top trading partners.
Economics has examined international issues since the discipline’s earliest days. In the early 19th century, English economist David Ricardo advocated international trade based on what he called comparative advantage, which refers to the ability to produce a good at a lower cost relative to other goods. Ricardo contended that nations should specialize in producing goods in which they enjoy comparative advantage, while trading for other goods.
Globalization, or the trend toward greater mobility of goods, labor and capital, has forged closer links among the nations of the world, according to Krugman and Obstfeld. Meanwhile, trade pacts such as the World Trade Organization and the North American Free Trade Agreement, as well as actions by more governments, have lowered trade barriers and opened markets around the world. This has resulted in more economic integration, increasing the diversity of goods available for consumers. Thanks to these and related economic trends, international economics has grown in significance.
Krugman and Obstfeld caution that international economics involves politically sensitive areas. Despite globalizing trends since the early 1990s, government policymakers still might enact policies to limit the availability of foreign-made goods to protect domestic industries from foreign competition. They also might restrict the flow of financial assets across borders, as well as limit immigration to keep foreign workers from driving down wages by agreeing to take jobs for lower wages than those paid to native-born workers.