International trade is the buying and selling of goods among countries. This type of trade allows countries to have access to goods that may not have been available domestically. Since the market is expanded and more competitive, consumers in different countries can access a variety of goods at a cheaper price.
International trade plays a critical role in the global economy. Global events impact the supply, demand, and prices of goods. For example, Nike, a sneaker manufacturing company relies on cheap labor in Asia. A political change in Asia would increase the cost of labor. This would then result in a hike in the price of sneakers Americans purchase at the local mall.
Monetary economics is based on the theory of an increase in a country’s supply of money increases the economic activity of the country, and vice-versa. This theory is governed by a simple formula: MV = PQ, where M is the money supply, V represents velocity, P is the price of goods, and Q is the number of goods and services. If we assume that the velocity is constant, an increase in M will lead to an increase in either P, Q, or both.
In an economy that is closer to full employment, price levels tend to rise more than the production of goods and services. Under the monetary theory, the number of goods and services will increase at a faster rate than the price of goods. Many developing economies have entrusted the central government with the task of controlling monetary theory and making most monetary policy decisions. For example in the US, it is the Federal Reserve Board (FRB) that sets monetary policies without the intervention of the government.
Also known as international macroeconomics, international finance deals with the monetary interactions between two or more countries. It focuses on concepts such as currency exchange rates and foreign direct investment. International finance does not narrow down to individual markets. Instead, it is more concerned with how multiple countries economically interact. International finance research is done by top-rated institutions like IFC (International Finance Corp) and NBER (National Bureau of Economic Research).
The US Federal Reserve has a dedicated division that analyzes policies germane to the development of global markets, external trade, and capital flow in the US. International finance deals with specific areas such as the Mundell-Fleming model, the international Fisher effect, the optimum currency area theory, purchasing power parity, and interest rate parity.
Political economy deals with the interrelationships among governments, public policy, and individuals. It is a subject that tries to explain how theories such as socialism, capitalism, and communism in the real-world. The term political economics was previously used by economists such as Jean-Rousseau, John Stuart Mill, and Adam Smith to describe their theories. However, in the early 20th century, it was dropped for a briefer term, economy. Also, rigorous statistical methods were developed to study and analyze economic factors.
Today, the term political economy is still widely used to refer to government policies that greatly affect the economy. It focusses on three essential subareas, namely:
- 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.
The current approach applied in the political economy does not consider political ideologies as a framework that should be analyzed. Instead, it strives to create political assumptions that can lead to political debates regarding societal preferences.