The study of world economics (also called international economics) is the study of all of the factors that influence the movement of goods and money around the world, and because it is so intricately tied, the related politics. This includes trade and trade policies, justifications for protection, currency systems and exchange rates, the monetary and fiscal policies of world governments and economic development.
Trade and trade policies
Trade policies can be most simply divided into two schools of thought: free trade and protected trade. Free trade proponents advocate a system of trade whereby all goods would cross all country borders freely, without restrictive taxes or import duties. In this theory, the efficiency gained by each country producing what it produces best and cheapest overrides any losses by individuals who produce those same goods and will lose their advantage when imported goods are introduced. There are two types of efficiencies addressed in this theory: production efficiency and consumption efficiency. Production efficiency recognizes that some countries that can produce more of a good or service (with the same amount of resources) than others. Consumption efficiency recognizes that consumers in a free trade environment will have a greater collection of goods and services from which to choose. The proponents of protected trade seek to protect individual industries and even companies within a country from what they perceive as unfair competition.
Justifications for protection
The justifications for protection include the potential for unemployment, development of new industries, national security and the threat of foreign monopolies. Some concerns envelope more than one of these aspects. For instance, protection of the American steel industry is deemed important not only for the jobs that are lost when the steel mills close down, but also the concern that a nation such as the United States should not become totally reliant upon foreign steel. In addition, it is charged that foreign steel industry is only successful because of protectionism and the monopolistic policies of foreign governments.
Currency systems and exchange rates
A currency system is the medium of exchange that a country uses to settle its debts with other countries. Most countries have their own exchange rate. (Although, since 2002, most of the member countries of the European Community have agreed to use the same currency, the Euro, and drop the mark, franc, florin, lira, etc.) But many countries that have a currency of their own which they use for domestic settlements may use a benchmark currency to settle international trade or debt. This so-called “settlement currency” is usually the United States dollar.
The exchange rate is a quotation given by stating the number of units of a country’s currency that can be bought in terms of 1 unit of another country’s currency. For example, if we say that the Euro-U.S. Dollar exchange rate is 1.2 USD per Euro, that tells us that it will take 1.2 U.S. Dollars to get 1 Euro.
Monetary and fiscal policies of world governments
Most governments view their role in economics as a balance in which they have to protect their citizens from adverse movements in the economy such as unemployment, inflation and economic hardship with the needs of the security of the nation. Governments use two main tools for achieving these objectives: fiscal policy, which is the level of spending by the government and the imposition of taxes and issuance of debt to fund that spending, and monetary policy, through which governments attempt to manage inflation by managing the supply of money. The fiscal policy of a government determines what the government should be spending money on, the protection of the nation or social programs or which combination of both and, once decided upon, whether taxes will be raised to pay for the programs or whether government bonds will be issued to raise these funds voluntarily. The monetary policy of a government attempts to achieve certain economic goals such as lowering inflation, raising employment levels or spurring economic growth. This is done through managing the money supply by changing interest rates (through buying or selling their own currency) or by changing reserve requirements of banks, (open market operations), and setting the reserve requirements, the amounts banks have to leave on deposit with the central bank, thus loosening or tightening the amount of money in circulation.
Each unit of government, from the national level all the way down to towns and municipalities are interested in fostering the economic development of their constituent area. Even on an international scale, organizations such as the OECD, the Organization for Economic Cooperation and Development, set goals and design programs to spur controlled economic growth. On national and local government levels, governments establish many organizations with the purpose of generating new jobs or retain existing jobs, and stimulating industrial and commercial growth.
A nation’s economic development policy, coupled with its trade policies, economic protection systems, manipulations of currency, monetary and fiscal policies will strongly influence its politics and its relations with other nations.