Although, international economics has traditionally been treated as a part of microeconomics, its subject matter belongs to both microeconomics and macroeconomics.
Pure theory of international trade (that is, explanation of the reasons for international trade and capital flows, their direction and composition, etc.) has been erected on the assumption that all decisions relating to international flows of goods, services and funds, etc., are decisions by individual economic units who are guided only by economic rationality, that is, only by their economic interest.
In this approach, even governments and other authorities are treated as individual economic units. It is assumed that they also take decisions on the basis of prices of individual commodities and promotion of economic interest.
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This approach leaves out international economic transactions undertaken by governments and other international institutions if they are taken on the basis of non-economic considerations.
It is noteworthy that non-economic considerations often play a critical role in international transactions such as those relating to defence products, food items, lifeline drugs, energy items and so on. This is so even in transactions involving charity, gifts and donations, etc.
A fuller and proper study of international economics reveals that it equally belongs to the field of macroeconomics. The authorities of a country cannot stand aside and remain indifferent to the impact of international economic transactions on the economy and society.
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They are expected to keep an eye on the impact of international economic transactions on income, employment, economic growth, stability, distributive justice and a host of other aspects of the home economy.
They are expected to make every effort within their capacity to protect and promote economic interests of the country. And for this purpose, they are also expected to formulate and implement appropriate monetary and fiscal policies.
It is expected that, if necessary, they would devise and implement measures for the regulation of exports, imports, technology transfers, rate of exchange, balance of payments, capital flows and so on.
In recent decades, the practice of having official gold reserves has been replaced by having reserves of a few selected, leading foreign currencies, and this has led to the creation of some additional problems relating to adequacy of foreign exchange reserves, sustainable balance of payments behaviour, and measures to rectify any unwanted developments.
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The issues relating to international flows of capital funds (both short term and long term) as also international indebtedness of some countries have also gained prominence.
All these developments have heightened the interdependence of open economies. It has also necessitated that study of international economics should incorporate a comprehensive understanding of the multi-dimensional phenomenon of this interdependence.
Thus, the subject matter of international economics is a simultaneous application of the principles of both microeconomics and macroeconomics.