International Economics Introduction

Adam Smith, regarded as the father of economics, published his renowned multi-volume Stacked deckeconomics book entitled “Wealth of Nations” in 1776. Among his widely recognized concepts, the invisible hand theory, which suggests that markets converge to their equilibrium as if an invisible hand forces the market towards the point where the supply of goods and services is equal to the demand. Smith’s absolute advantage concept in economics suggests nations should take advantage to market goods they have higher productivity to produce and trade, when compared to other nations. His lesser-known concept in economics is absolute advantage that suggests the nations should produce and trade the goods that they have higher productivity than other nations. His idea of absolute advantage was a revolution and has changed the general belief of mercantilists who argue the wealth of a nation should be measured in terms of the amount of precious metals they own; hence promoting exports but opposing imports. Half century after Smith, David Ricardo presented yet another concept, the comparative advantage in his book entitled “The Principles of Political Economy and Taxation”. Ricardo suggested a nation can benefit from trading even though they are not the most productive in producing a good or a service. What matters is the relative productivity or opportunity cost of production. A nation can benefit from trading with another nation if the opportunity cost of production is lower than the other; which leads to complete specialization of production for the nation. These innovative ideas along with the industrial revolution led to exponential increase in international trade coupled with demise of protectionist policies across the nations. Indeed, exports were only $58 billions in 1946 but increased to $15 trillion 2010 according to the World Trade Organization (WTO).

In the last century, international trade has become an integral part of the economics field. The literature on topics related to international trade and finance is vast, and the courses in international economics, trade, and finance are highly sought among economics, political science, sociology, and finance students. In this special issue, papers by students who were enrolled in the International Economics and Trade course at Eastern Michigan University Department of Economics in 2011 are presented. Students in this special issue have addressed different issues in international economics such as the impact of political stability, corruption, and militarism; or the impact of free trade agreements and European Union membership on trade performance of different countries.

For instance, Christopher Smith examined the relationship between militarism and trade. His results suggest the classic liberal hypothesis is half correct: an increase in trade does decrease militarism; however, his study shows the effects of relative democracy and freedom are not significantly different from zero. Likewise, in his paper, Samy Lounis provides an analysis on foreign direct investment, political instability (i.e. civil war), and international trade in Algeria. He concluded that foreign direct investment (FDI) and trade are positively related, and even during times of political instability Algeria was able to achieve economic growth. Ty Woodruff examined the effects of corruption on Brazil’s ability to progress as a global economic power. He concluded that Brazil’s historical pattern of corruption has been forged through its reliance on heavy regulation and multiple levels of government agencies.

Pauline Loeff conducted a research on the impact of the US - Peru Free Trade Agreement on both the United States and Peru. She examined the impact on export, import, labor rights, biodiversity and the indigenous people. She suggested it is difficult to disentangle the effects from the trade agreement and the general economic circumstances on the economic performance. Loeff concluded that the recent economic recession in US might have contributed to the fact that Peru was not able to profit as much for the agreement as predicted. Chenzi Song has examined the controversial issue of trade relationship between US and China and she concluded that exchange rate doesn’t impact the trade strongly; however the fast growing GDP of China is the major cause of the unbalanced trade. Zdenka Bartscht showed a positive correlation between Slovakia’s entry in the European Union (as well as adoption of the common currency - Euro) and the car manufacturing industry. Finally, Nathan Cornett explored the implications and policy considerations associated with the question as to whether or not Switzerland should forego their national currency (Swiss Franc) and pursue membership in European Monetary Union. Cornett indicated the possible loss in monetary policy efficiency from switching to a more collective national banking system such as the European National Bank. The debt crisis in Greece and the ineffectiveness of monetary policy and lack of sharp currency depreciation in Greece make Cornett’s study even more relevant today.


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