International Economics

NODE 01

International Trade

• Exchange of goods and services between countries.
• E.g., India exports medicines, imports oil.
• Driven by differences in resources, tech, costs.

NODE 02

Domestic vs Int'l Trade

vs

• Domestic: Within same country.
• Int'l: Across borders.
• Introduces exchange rates, tariffs, BoP.

NODE 03

Why Countries Trade

↔

• Differences in natural resources, climate.
• Labour skills, capital, technology.
• Allows specialization and exchange.

NODE 04

Absolute Advantage

• Producing a good using fewer resources.
• Or at a higher productivity than another country.

NODE 05

Comparative Advantage

LOW OP HIGH OP

• Producing at a lower opportunity cost.
• Leads to specialization and mutually beneficial trade.
• Even if one country is absolutely more productive in everything.

NODE 06

Opportunity Cost & Trade

A: 1 CLOTH = 2 WHT

B: 1 CLOTH = 4 WHT

• Country A gives up 2 wheat for 1 cloth.
• Country B gives up 4 wheat for 1 cloth.
• Country A has comparative advantage in cloth.

NODE 07

Specialisation

• Concentrating where opportunity costs are lower.
• Benefits: Efficiency, higher productivity, variety.
• Risk: Increased dependence on external suppliers.

NODE 08

Gains from Trade

DOM

→

INT

• Consume combinations impossible domestically.
• Specialisation → Higher prod → Exchange → Gains.

NODE 09

Terms of Trade

EXP PRICE

IMP PRICE

• Relationship between export and import prices.
• Index = (Export Price Index ÷ Import Price Index) × 100.
• Increase = export prices rose relative to import prices.

NODE 10

Exports (X)

• Produced domestically, sold to foreign buyers.
• Brings foreign exchange earnings.
• E.g., Indian pharma, IT services.

NODE 11

Imports (M)

• Produced abroad, purchased domestically.
• Allows access to unavailable/costly goods.
• E.g., Crude oil, electronics.

NODE 12

Net Exports (NX)

NX = X - M

• NX = Exports − Imports.
• X > M → Trade surplus.
• X < M → Trade deficit.

NODE 13

Trade Balance

• Focuses on merchandise exports vs imports.
• A country can have a merchandise deficit but a services surplus.

NODE 14

Services Trade

• Trade in intangible activities.
• IT, consulting, tourism, financial services.
• Substantial part of modern economies.

NODE 15

Global Value Chains

• Design → Component Prod → Assembly → Sale.
• Spread across multiple countries.

NODE 16

Globalisation

• Increasing economic integration across countries.
• Involves trade, investment, tech, info.
• Production networks.

NODE 17

Multinational Corps

• Operate across multiple countries.
• Invest abroad, source globally, transfer tech.
• Connects trade with FDI.

NODE 18

Foreign Direct Invest (FDI)

→

• Investment into a business in another country.
• With lasting interest and significant influence.
• E.g., Establishing a factory or tech center.

NODE 19

Foreign Portfolio Invest

→

• Investment in financial assets (shares, bonds).
• No direct managerial control.
• Part of the broader capital account.

NODE 20

Free Trade

• Fewer government restrictions on trade.
• Benefits: Specialisation, competition, lower prices.
• Access to foreign markets, variety.

NODE 21

Trade Barriers

• Restrictions: Tariffs, quotas, licensing.
• Standards, subsidies, import restrictions.

NODE 22

Tariff

TAX %

• A tax imposed on imports.
• Makes importing more expensive.
• Govt gains revenue, consumers face higher prices.

NODE 23

Quota

• Quantitative limit on amount of import.
• Directly restricts quantity rather than taxing it.

NODE 24

Protectionism

• Policies to protect domestic producers from foreign competition.
• Args: Infant-industry, employment, national security.

NODE 25

Against Protectionism

P↑

• Creates higher prices, reduced choice.
• Inefficiency, retaliation, higher input costs.
• Trade policy involves trade-offs.

NODE 26

Export Subsidy

↑

• Financial assistance to support exporters.
• Increases competitiveness but has fiscal costs.
• Can distort trade.

NODE 27

Trade Agreements

🤝

• Reduces barriers via bilateral, regional, multilateral deals.
• Establishes rules for participating countries.

NODE 28

World Trade Organization

WTO

• Institutional framework for international trade rules.
• Dispute settlement mechanism.
• Facilitates predictable, rules-based trade.

NODE 29

Exchange Rate

1 US$=₹83

• Price of one currency in terms of another.
• Direction of quotation matters.

NODE 30

Appreciation

₹85→₹80↑

• Currency becomes MORE valuable relative to another.
• Fewer rupees needed to buy one dollar.

NODE 31

Depreciation

₹80→₹85↓

• Currency becomes LESS valuable relative to another.
• More rupees needed to buy one dollar.

NODE 32

Fixed Exchange Rate

⚓

• Maintained around a specified level.
• Done through policy intervention.

NODE 33

Floating Exchange Rate

~₹~

• Value determined largely by market demand and supply.
• Subject to exchange-rate regime rules.

NODE 34

Demand for FX

IMPT

→$

• Arises from: Imports, foreign travel, overseas ed.
• Foreign asset purchases, external debt payments.

NODE 35

Supply of FX

$→

EXPT

• Enters through: Exports, foreign investment.
• Remittances, foreign borrowing, tourism.

NODE 36

Foreign-Exchange Market

• Enables currencies to be bought and sold.
• Rate reflects interaction of D & S for currency.

NODE 37

Effect of Depreciation

EXPCOMPET↑

IMPPRICEY↑

• Imports become more expensive domestically.
• Exports can become more competitive internationally.

NODE 38

Effect of Appreciation

IMPCHEAP↓

EXPPRICEY↑

• Imports become cheaper in domestic currency.
• Exports become more expensive for foreign buyers.

NODE 39

J-Curve Effect

• After depreciation, trade balance initially worsens.
• Then improves as quantities adjust.
• Depends on demand elasticities.

NODE 40

Balance of Payments

• Records economic transactions with Rest of World.
• Over a specified period.
• Broader than just the trade balance.

NODE 41

Current Account

GDS

SVC

1° INC

2° INC

• Goods + Services + Primary Inc + Sec Inc (Transfers).

NODE 42

Goods Balance

EXP(G) - IMP(G)

• Exports of goods − Imports of goods.
• Produces the merchandise / trade balance.

NODE 43

Services Balance

↔

• Services exports − Services imports.
• E.g., IT, tourism, finance, transport.

NODE 44

Primary Income

→₹

• Income earned from providing factors across borders.
• Interest, dividends, profits, employee comp.

NODE 45

Secondary Income

→₹→

• Transfers with no corresponding exchange of goods.
• E.g., Workers' remittances.

NODE 46

Capital Account

CAP TRNS

• Records specific capital transfers.
• Transactions in non-produced, non-financial assets.
• Not the same as all financial flows in IMF terminology.

NODE 47

Financial Account

+

• Transactions involving financial assets/liabilities.
• FDI, portfolio investment, loans, reserve assets.

NODE 48

FX Reserves

• Foreign currencies, gold, SDRs held by central bank.
• Manage external liquidity, support confidence.

NODE 49

BoP Deficit

GAP

• Imbalance indicates external financing needs.
• Accounting system records full set of transactions.
• Current-account deficit ≠ overall BoP crisis automatically.

NODE 50

Current-Acct Deficit

OUT > IN

• Current-account outflows > inflows.
• Financed by FDI, portfolio flows, borrowing.
• Persistent CAD can raise external vulnerability.

NODE 51

Trade Deficit vs CAD

TRADEGDS ONLY

CADGDS+SVC+INC

• Trade deficit: Goods only.
• CAD: Goods, services, income, transfers.
• Can have trade deficit but services surplus.

NODE 52

Remittances

₹→

• Transfers sent by individuals (migrants).
• Important part of external inflows for India.

NODE 53

Terms of Trade Shock

$$$↑

• Import prices rise significantly (e.g., oil).
• Worsens terms of trade, increases CAD pressure.

NODE 54

Oil & External Balance

P↑

• For oil importers: Oil P ↑ → Import Exp ↑.
• Widens trade/CAD pressures.
• Increases domestic inflation (Realm 11 connection).

NODE 55

Global Supply Shock

⚡

• Disruption affects imports, prod, exports, inflation.
• Int'l economics connects to domestic macro.

NODE 56

Globalisation Benefits

↑

• Larger markets, specialisation, tech transfer.
• Foreign investment, cheaper inputs, consumer choice.

NODE 57

Globalisation Risks

↓

• External shocks, import dependence.
• Job displacement, regional inequality, volatility.

NODE 58

Trade & Employment

EXP SECJOBS ↑

IMP SECJOBS ↓

• Expands export industries, pressures import-competing ones.
• Effects depend on skills, mobility, region.

NODE 59

Trade & Consumers

+

• Lower prices, greater variety.
• Access to foreign products/better inputs.

NODE 60

Trade & Growth

• Contributes via specialisation, economies of scale.
• Tech transfer, competition, investment.

NODE 61

Capital Flows

$$$

• FDI, portfolio invest, bank lending, borrowing.
• Finance investment but risk sudden reversals.

NODE 62

Capital Inflow

$$$

• FX inflow, Investment ↑, Capital formation ↑.
• Can cause currency appreciation pressure.

NODE 63

Capital Outflow

$$$

• FX demand ↑, currency depreciation pressure.
• Domestic asset prices may weaken.

NODE 64

External Debt

• Debt owed to non-residents.
• High foreign-currency debt increases vulnerability.

NODE 65

External Vulnerability

!

• High FX debt, short-term capital dependence.
• Low reserves, high import dependence.

NODE 66

Global Institutions

WTO

IMF

WB

• IMF: Monetary coop, BoP support, stability.
• World Bank: Development, financing, knowledge.
• WTO: Rules-based framework for trade.

NODE 67

Trade & ER Conn.

• Exports ↑ → FX supply ↑ → ER pressure.
• Imports ↑ → FX demand ↑ → ER pressure.
• Also depends on capital flows & central banks.

NODE 68

Int'l Econ Master Chain

• Advantage → Specialisation → Trade → X/M.
• FX Flows → Exchange Rate → Current Account.
• Capital Flows → BoP → External Stability.

NODE 69

Globalisation Master Chain

• Trade+FDI+Tech+GVCs → Integration.
• Leads to Productivity + Market Access.
• But creates External Shocks + Vulnerabilities.

NODE 70

Core Formula Bank

NX = X - M

• Net Exports = Exports − Imports.
• ToT = (Export Price Idx / Import Price Idx) × 100.
• Y = C + I + G + (X − M).