17.1 International Economics and Trade Finance

Increased international trade in goods and services and the international movement of productive resources like capital and labour are among the primary features of globalization. Associated with such international flows of products and resources is a set of international financial flows. International economics helps us to make sense of these real and financial flows. Specifically, international economics is a field of study that examines the implications of international trade in goods and services, international investment, and international lending and borrowing. Within international economics, there are two broad areas: the study of international trade and the study of international finance.

The study of international trade uses microeconomic models to examine why countries trade as well as the implications of trade for consumers, businesses, governments, the nation, and the world. Standard theories suggest that countries trade with each other because they have a comparative advantage in producing specific goods. That is, countries tend to export goods they can be produced at a lower cost and import those they can only be produced at a relatively high cost.

The study of international finance uses macroeconomic models to understand the domestic economy and the financial implications of its relationship with other countries. Therefore, international finance is concerned with financial flows among countries, reflecting trade in products, inward and outward foreign direct investment, and international borrowing and lending. Major areas of focus include the determinants of exchange rates, the performance of the economy, and the effectiveness of monetary and fiscal policies under different exchange rate systems.

International economics is a special field of study in economics. Because nations are sovereign each can adopt its own policies to serve its national interest or the interests of specific groups within the economy. As such, there is no international entity that can effectively govern the global economy. While there are international institutions (e.g., the International Monetary Fund (IMF), the World Bank, the World Trade Organization) whose objectives include managing aspects of the global economy, sovereignty allows nations to ignore international rules that are inconsistent with national goals.

Attributions

“17.1 International Economics and Trade Finance” is adapted from “1.2 International Trade and Finance as Parts of International Economics” in “International Trade and Finance, Part 1,” by Kenrick H. Jordan, published by Conestoga College Open Learning in 2024, and is used under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International license.