The Scope of International Economics

While general economic theory Opens in new window deals with the problems of a single, closed economy, international economics is concerned with the problems of two or more open economies.

In particular, international economics deals with the same economic problems as those studied by general economic theory, but it deals with these problems in their international setting.

Thus,

International economics studies how a number of distinct economies interact upon each other in the process of allocating scarce resources to satisfy human wants.

Clearly, international economics is more general than the economics of a closed economy, the latter being a special case of international economics where the number of trading countries has been reduced to one.

Further, the study of general economic theory dealing with the problems of a closed economy is only a first (but necessary) step toward the study of the behavior of a real economy, because there is actually no closed economy except the world economy.

Parallel to the division of economic theory into microeconomics and macroeconomics Opens in new window is the breakdown of international economics into two major branches:

  1. International monetary economics, and
  2. International trade theory (or the pure theory of trade).

1.   International Monetary Economics

International monetary economics is oriented towards the monetary aspects of international monetary relations.

Its approach is mainly macroeconomic in nature, and it particularly deals with the short-run problems of balanced-of-payments disequilibrium and adjustment.

2.   International Trade Theory

The international trade (or pure theory of trade), in contrast to international monetary economics, is a long-run, static-equilibrium theory of barter.

Here the short-run monetary adjustment process is assumed completed, with money having no influence whatsoever on the nature or position of long-run equilibrium.

Its approach is basically microeconomic in nature.

Like microeconomics, the pure theory of trade can be divided into two main branches:

Thus, the analysis of the effects of free trade on domestic consumption, production, commodity prices, factor rewards, and so on belongs to what might be called international positive economics.

On the other hand, the question of whether free trade is better than restricted or no trade is clearly an issue which belongs to the realm of (international) welfare economics.