Core Concepts in National and International Economics
National Economy
The domestic economy comprises numerous smaller economic units. It’s an entity that can operate within its own sphere while maintaining a common unitary nature.
The national economy has been defined as an organized unit of individual and corporate economies existing in a superimposed state, encompassing the financial economy within the state itself.
International Economics
This field studies the economic behavior of entire economies by examining fundamentals such as:
- Total economic output
- General price levels
- Employment and unemployment rates
- Interest rates
- Wage rates
- Exchange rates
It involves the comparative analysis of international transactions. Much discussion focuses on how government policies affect macroeconomic variables.
Pure Theory of International Trade
Key international trade theories have evolved through historical stages:
Historical Economic Stages
- Domestic or Feudal Economy: Transformed into a national economy by uniting fiefdoms under a single economic policy.
- Transition to National Economy: This stage corresponds to the shift from feudalism through mercantilism to free trade.
Classical Theory: Trade and Development
Classical economists argued that little is required—apart from peace, low taxes, and a tolerable administration of justice—for a country to develop from barbarism to the highest degree of prosperity.
According to these theories, countries should exploit their natural resources and specialize in producing goods where they enjoy comparative advantages. These nations should export these goods to import others produced under better conditions elsewhere. This establishes an international division of labor beneficial to all, resulting in higher global income distributed among nations.
Trade Theory and Monetary Policy
The theoretical study of commerce comprises two main parts:
Pure Theory
This refers to value analysis applied to international trade, considering various aspects.
Policy Approach
This approach focuses on explaining and predicting events, addressing questions such as:
- Why and how does a country trade?
- What determines the structure, direction, and volume of trade between countries?
- What forces determine whether a country imports or exports specific product types?
- How much of each commodity will be exchanged?
Welfare Analysis
This investigates the effects of demand changes on a country’s terms of trade, analyzing questions like:
- What are the benefits of international trade?
- Does international trade increase or decrease the rate of consumption and economic development?
Comparative Costs and Advantages
This principle states that the benefits obtainable through specialization and trade, replacing economic isolation, are maximized if each country or region specializes in producing goods and services where it has the greatest comparative advantage (i.e., its comparative cost of production is minimal).