International economics

International economics is a branch of economics including international trade and international finance.

International trade is a study of the exchange of goods and services across international boundaries. It has existed for ages, for example Silk Road¹ and Amber Road². However, its importance has greatly increased recently as a result of advanced transportation, globalization and facilities of transnational corporations. The increase in international trade is the main aim of globalization.

Traditionally trade was regulated through bilateral treaties signed between two nations. For centuries most nations had high tariffs and many restrictions on international trade. However, after World War 11 a number of multilateral treaties were able to create a globally regulated trade structure. Nowadays the regulation of international trade is done through the World Trade Organization (the WTO) at the global level and through other regional organizations such as the NAFTA³ between the United States, Canada and Mexico, and the European Union with its 27 member-countries.

Free trade is most strongly supported by economically powerful nations but they may often follow the policy of selective protectionism⁴. There is sometimes strong domestic pressure to increase tariffs that can protect domestic industries. For example, the protective tariffs have been applied to agriculture and textiles by the United States and Europe. Today the greatest supporters of free trade are the US, Australia and Japan. Moreover, some other countries such as India, China and Russia are becoming more economically powerful and they also begin to support free trade.

International finance as a branch of economics studies exchange rates of currencies and foreign investment, and how these can affect international trade. In finance, the foreign exchange rate between two currencies shows how much one currency is worth in terms of the other⁵. The foreign exchange market is one of the largest markets in the world. Foreign direct investment (FDI) is investment made to get control over a foreign affiliate. The FDI relationship consists of a parent⁶ enterprise and a foreign affiliate which together form a transnational corporation.