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Theoretical international economics – Descriptive international economics deals with international economic transactions as they happen in the institutional environment. Theoretical international economics is divided into;
- Pure theory of international economics
- Monetary theory of international economics
- Descriptive international economics – Descriptive international economics deals with the institutional environment which facilitates international transactions between countries. It studies issues related to the international flow of goods and services.
Scope of international economics
- International trade
- International political economics
- International monetary economics
- International finance
Major elements of international economics
|Globalization||With the current change in globalization, there is an increase in the flow of capital, goods and services, finance and labor between countries.|
|Economic activities||Economic activities between nations differ because of different aspects, such as sanctions imposed by different countries.|
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Factors affecting international trade
|Impact of inflation||If a nation’s inflation rate goes up relative to other countries, its trading with its current account will decrease. This will lead to more imports and fewer exports.|
|Government policies||Decisions made by a government can highly affect its international trade. If a government puts in place high taxes on imports, then imports will be low.|
|National income||If the national income increases by a more significant margin than other countries, its current account will decrease. This will lead to more demand for foreign goods.|
|Restrictions on imports||If a government decided to control imports by increasing taxes, the prices of imports would go up. In many cases, government impose import restrictions to protect local manufacturing.|
|Subsidies for exports||Governments often offer their local manufacturers subsidies to produce goods at a lower price than their international competitors. This majorly happens by governments giving manufacturers free loans. There are also fewer requirements for local production. This helps companies become more competitive on the international front.|
|Impact of exchange rates||The value of a countries currency affects it in the international market. If the current value is low, the prices of goods tend to go up. The vice versa is true.|
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- Economic models of political processes and how various factors linked to each other
- The role of government in the allocation of resources for each type of economic system
- The international political economy and the impact of international relations.
Classical theories in international political economics
- Economic liberalism – In this theory, economics should benefit all, leading to societal progress. Economics in this theory thinks that the wants of a community are more important than those of an individual.
- Neo-Marxism – This theory notes that inequality is not good. It does not support the private ownership of resources. This is because it believes that private ownership of resources leads to inequality and works in favor of the elite.
- Mercantilism – In this theory, international politics and economics are seen as a zero-sum game. This means that what matters to the countries is the relative gains and not the absolute gains.
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- Money and inflation
- Interest rate rules
- Fiscal theory of the price level
- Effects of monetary policy
- Unconventional monetary policy
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Importance of international finance
International finance is an important tool in finding;
- Exchange rates
- Compare inflation rates
- Know how to invest in international debt securities
- International finance is also important in determining the values of currencies.
- It helps investors in determining whether their money is safe with foreign debt securities.
- It helps many countries in having a similar model of reporting financed. E.g. Using the IFRS
- International finance helps countries have peace with each other. Without an excellent global financial system, governments would work for their self-interest, which would lead to problems.
- There is a big range of options in international finance to manage the capital of a business.
International finance vs domestic finance
|International finance||Domestic finance|
|Transactions occur across international borders.||Transactions occur in a domestic boundary or within the boundaries of a nation.|
|Derivatives of current and currency rates are involved.||In domestic finance, financial instruments are not used as much.|
|In international finance, there is diversity in culture, values and language among stakeholders.||In domestic finance, there is similar culture, beliefs and language.|
|There are many ways to raise capital in international finance.||There are limited ways to raise capital in domestic finance.|
Disadvantages of international finance
- Political turmoil in one nation in which a major stakeholder of international trade is resident affects stakeholders in other counties running that similar business.
- Credit risk should be careful because of international trade because it can affect profitability in a big way.
- In international finance, because different cultures are involved, if now well-tracked, it can damage your brand's reputation.
- In international finance, local players do not have the muscle to compete with big global players because of the quality of products and services.
- International finance requires disclosure of sensitive data as compared to domestic finance. In the international space, there is a big chance of confidential information being stolen. This is because of the exposure of information to the global space.