International economy

economic-dictionary

The international economy is the branch of the economy that analyzes commercial transactions between two or more countries. These can refer to exchanges of goods or services or financial operations.

That is to say, the international economy's object of study is the evolution of exports and imports, as well as the inflow and outflow of capital between different stock markets.

Seen in another way, this branch of economics studies how nations establish their trade relations with the rest of the world. This includes not only the purchase and sale of merchandise, but also the financial system, cooperation for the development of knowledge, among others.

Global economy

Branches of the international economy

The international economy is mainly divided into two branches:

  • Foreign trade: It is the exchange of goods and services between nations. On this subject, theories can be developed on the variables that facilitate business between nations. One of them may be, for example, comparative advantages.
  • International finance: Refers to the global purchase and sale of financial assets. These can be stocks, bonds, financial derivatives, commodities, among others.

Characteristics of the international economy

Among the main characteristics of the international economy are:

  • It is a branch of knowledge that is related, and has been driven, by the phenomenon of globalization. Thus, it is becoming easier and easier to trade with the rest of the world.
  • Study the advantages and disadvantages that trade openness can bring to a country.
  • Analyze the effects of trade agreements in the markets that bet on them.
  • It studies not only the impact of taxes on imports, but also non-tariff barriers such as phytosanitary requirements.
  • It is related to geopolitics. There are countries that associate for common diplomatic interests. However, their economies are not necessarily complementary. In other words, the nations that are integrated do not always have comparative advantages in different sectors.

Basic theories

Throughout history, the theory of international economics has advanced, presenting several milestones such as the following:

  • Mercantilism: Thought that emerged in Europe in the 16th and 17th centuries and the first half of the 18th century. Its main foundation was that, to achieve prosperity, countries had to accumulate wealth in the form of precious metals. In practice, governments that followed this trend boosted local industries and restricted imports.
  • Adam Smith: Considered the father of modern economics, defended free trade between nations as a way to deepen the specialization of labor. In addition, he supported the theory of absolute advantage, which states that a country produces what it is most efficient at.
  • David Ricardo: In response to Smith, he developed the theory of comparative advantage. It argued that countries specialize in the production and export of those goods that they can manufacture at relatively lower costs.

To understand the difference between Smith and Ricardo's theory, let's imagine that in country A it costs 5 and 7 euros to produce an apple and an orange, respectively. Meanwhile, in country B, the cost of both fruits is 8 euros.

Then, according to the theory of absolute advantage, country A should dedicate itself to growing apples and oranges and not import from B. However, for the theory of comparative advantages, country A could take advantage of the fact that it is relatively more efficient in the field. cultivation of apple trees, dedicating more to that activity and importing oranges from B.

International division of labor Dependency theory Difference between international trade and foreign trade

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