International Trade Theory and Policy
by Steven M. Suranovic

Trade 5-2

What is International Economics?

International economics is a field of study which assesses the implications of international trade in goods and services and international investment.

There are two broad sub-fields within international economics: international trade and international finance.

International trade is a field in economics that applies microeconomic models to help understand the international economy. Its content includes the same tools that are introduced in microeconomics courses, including supply and demand analysis, firm and consumer behavior, perfectly competitive, oligopolistic and monopolistic market structures, and the effects of market distortions. The typical course describes economic relationships between consumers, firms, factor owners, and the government.

The objective of an international trade course is to understand the effects on individuals and businesses because of international trade itself, because of changes in trade policies and due to changes in other economic conditions. The course will develop arguments that support a free trade policy as well as arguments that support various types of protectionist policies. By the end of the course, students should better understand the centuries-old controversy between free trade and protectionism.

International finance applies macroeconomic models to help understand the international economy. Its focus is on the interrelationships between aggregate economic variables such as GDP, unemployment rates, inflation rates, trade balances, exchange rates, interest rates, etc. This field expands macroeconomics to include international exchanges. Its focus is on the significance of trade imbalances, the determinants of exchange rates and the aggregate effects of government monetary and fiscal policies. Among the most important issues addressed are the pros and cons of fixed versus floating exchange rate systems. [Note: A separate collection of web materials on international finance is available at The International Finance Webtext].

International Trade Theory and Policy - Chapter 5-2: Last Updated on 7/17/04