National and International Economy: Principles and Trade Theory

National Economy in Microeconomics

The national economy constitutes a multitude of states integrated by smaller economic units. It develops with its respective counterpart, yet shares common unitary characteristics.

The national economy is defined as the set of monetarily organized individuals and correlative economies that exist within a state, encompassing both the state's own financial economy and broader structures.

International Economy in Macroeconomics

The international economy studies human behavior in ordinary business life, viewing the whole economy's behavior as a single entity and studying fundamental variables such as:

• Total economic production
• General price level
• Employment and unemployment
• Interest rates and wage rates
• Rate changes and more

It also involves the comparative analysis of international transactions and evaluates how macroeconomic variables are affected by governmental policies.

Pure Theory of International Trade

Main International Trade Theories

From a historical standpoint, economic regions have evolved through distinct stages:

• Domestic or Feudal Economy: Transforms the economy through various lower functions under the sole control of political-economic authorities, evolving toward the first national economy. This stage corresponds to feudalism, mercantilism, and free trade.

Classical Theory of International Trade and Economic Development

Classical economists argued that minimal requirements for peace, tolerable low taxes, and fair administration of justice allow a country to develop from barbarism to a higher degree of occurrence.

Under these theories, nations should leverage their natural resources and specialize in producing articles in which they possess comparative advantages. When exporting, nations must also import goods produced under better conditions. This establishes the first international division of beneficial labor, resulting in a worldwide increase in income and a fair distribution among all nations.

Pure and Monetary Theory of International Trade

The study of international trade is understood through two main parts:

• Pure Theory: Refers to value analysis applied to international exchange, considering several key aspects.

The Political Approach

Refers to the explanation and prediction of events, providing answers and addressing questions such as:

• Why does a country trade in a specific manner?
• What determines the structure, volume, and direction of a country's international exchange?
• What forces determine whether a country will import or export a specific type of product?
• How should each merchandise be exchanged?

Welfare Analysis

Investigates the effects that a change in real demand will have on a country's terms of trade, leading to questions such as:

• What are the advantages of international trade?
• How do international consumption rates increase or decrease consumption and economic development?

Comparative Costs and Advantages

This principle stems from the condition that given a product, the increment obtained from specialization—as opposed to economic isolation—is maximized if each country or region specializes in producing goods and services where it holds a primary comparative advantage, meaning the comparative production cost is at its minimum.