International Economics

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Prof. Dr. Dierk Herzer

Dipl. Betriebswirt Julian

Donaubauer

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donaubauer@wiwi.uni-wuppertal.de

Lecture: M.16.11, Tue, 12-16 Tutorial: M.15.13, Thu, 12-14

12 April 2011

19 April 2011 21 April 2011

26 April 2011 28 April 2011

3 May 2011 5 May 2011

10 May 2011 12 May 2011

17 May 2011 19 May 2011

24 May 2011 26 May 2011

31 May 2011

7 June 2011 9 June 2011

21 June 2011

28 June 2011 30 June 2011

5 July 2011 7 July 2011

12 July (M.16.11; Tue, 12-16)

14 July

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Literature • Krugman, P.R., Obstfeld, M.: International Economics:

Theory and Policy, 8th Edition, Pearson Addison-Wesley

• Appleyard, D.R., Field, A.J., Cobb, S.L.: International Economics, 7th Edition, McGraw-Hill Irwin

• Markusen, J.R., Melvin, J.R., Kaempfer. W.H., Maskus, K.E.: International Trade: Theory and Evidence, http://spot.colorado.edu/~markusen/textbook.html

• Slides are available at:

http://herzer.wiwi.uni-wuppertal.de

• Downloads

Benutzername (user name): schumpeter

Passwort (pass word): schumpeter

Slides

Questions and Problems

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Chapter 1: Introduction

• Krugman, P.R., Obstfeld, M.: International

Economics: Theory and Policy, 8th Edition,

Pearson Addison-Wesley, 1-9

• Appleyard, D.R., Field, A.J., Cobb, S.L.:

International Economics, 7th Edition,

McGraw-Hill Irwin, 1-12

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Preview

• What is international economics about?

• Gains from trade

• Explaining patterns of trade

• The effects of government policies on

trade

• International finance topics

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What Is International Economics About?

• International economics is about how nations interact

through trade of goods and services, through flows of

money and through investment.

• International economics is an old subject, but it

continues to grow in importance as countries become

tied to the international economy.

• Nations are more closely linked through trade in

goods and services, through flows of money, and

through investment than ever before.

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What Is International Economics

About?

• International trade as a fraction of the national

economy has tripled for the U.S. in the past

40 years.

• In Germany, international trade has more than

doubled in importance compared with the

economy as a whole.

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Figure 1a: Exports and Imports as a

Percentage of U.S. National Income

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Figure 1b: Exports and Imports (percent of

German GDP), 1971-2006

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10

15

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40

45

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1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

── Imports (% of GDP); ── Exports (% of GDP)

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Gains from Trade

• Several ideas underlie the gains from trade

1. When a buyer and a seller engage in a voluntary

transaction, both receive something that they

want and both can be made better off.

• Norwegian consumers could buy oranges through

international trade that they otherwise would have a

difficult time producing.

• The producer of the oranges receives income that it can

use to buy the things that it desires.

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Gains from Trade

2. How could a country that is the most (least) efficient

producer of everything gain from trade?

With a finite amount of resources, countries can use those

resources to produce what they are most productive at

(compared to their other production choices), then trade

those products for goods and services that they want to

consume.

Countries can specialize in production, while consuming

many goods and services through trade.

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Gains from Trade

3. Trade is predicted to benefit a country by making it

more efficient when it exports goods which use

abundant resources and imports goods which use

scarce resources.

4. When countries specialize, they may also be more

efficient due to large scale production.

5. Countries may also gain by trading current

resources for future resources (lending

and borrowing).

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Gains from Trade

• Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country.

International trade can adversely affect the owners of resources that are used intensively in industries that compete with imports.

Trade may therefore have effects on the distribution of income within a country.

Conflicts about trade should occur between groups within countries rather than between countries.

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Patterns of Trade

• Differences in climate and resources can explain why Brazil exports coffee and Australia exports iron ore.

• But why does Japan export automobiles, while the U.S. exports aircraft?

• Differences in labor productivity may explain why some countries export certain products.

• How relative supplies of capital, labor and land are used in the production of different goods and services may also explain why some countries export certain products.

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The Effects of Government Policies

on Trade

• Policy makers affect the amount of trade through

tariffs: a tax on imports or exports,

quotas: a quantity restriction on imports or exports,

export subsidies: a payment to producers that export,

or through other regulations (ex., product specifications) that exclude foreign products from the market, but still allow domestic products.

• What are the costs and benefits of these policies?

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The Effects of Government Policies

on Trade

• Economists design models that try to measure the effects of different trade policies.

• If a government must restrict trade, which policy should it use?

• If a government must restrict trade, how much should it restrict trade?

• If a government restricts trade, what are the costs if foreign governments respond likewise?

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International Finance Topics

• Governments measure the value of exports and imports, as well

as the value of financial assets that flow into and out of their

countries.

• Related to these two measures is the measure of official

settlements balance, or the balance of payments: the balance of

funds that central banks use for official international payments.

• All three values are measured in the government’s national

income accounts.

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International Finance Topics

• Besides financial asset flows and the official

settlements balance, exchange rates are also an

important financial issue for most governments.

Exchange rates measure how much domestic currency can

be exchanged for foreign currency.

They also affect how much goods that are denominated in

foreign currency (imports) cost.

And they affect how much goods denominated in domestic

currency (exports) cost in foreign markets.

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International Policy Coordination

• The international economy compromises sovereign nations, each free to choose its own economic policies. In an integrated world economy one country’s economic policies usually affect other countries as well.

How to produce an acceptable degree of harmony among the international trade and monetary policies of different countries without a world government that tells countries what to do?

GATT / WTO

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International Trade

Versus International Finance

• International trade focuses on transactions

of goods and services across nations.

These transactions usually involve a physical movement

of goods or a commitment of tangible resources like

labor services.

• International finance focuses on financial or monetary

transactions across nations.

For example, purchases of U.S. dollars or financial assets

by Europeans.

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The Nature of Merchandise Trade

• The value world merchandise exports was $10.2 trillion in 2005, a figure that is dramatic when one realizes that the value of goods exported worldwide was less than $2 trillion in 1985.

• Throughout the past four decades, international trade volume has, on average, outgrown production.

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Table 1: Growth in Volume of World

Goods Production and Trade

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Figure 2: Openness of the World

Economy, 1960-2005

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90

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Table 2: Exports and Imports by

Region, 2005

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Table 3: Regional Structure of World

Merchandise Exports, 2005

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Table 5: Commodity Composition of

World Exports, 2005 and 1980

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Figure 3: Germany’s Main Trading

Partners, 2007

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Figure 4: Germany’s Main Export

Products, 2007

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World Trade in Services

• One sixth of total trade in goods and services.

• The service category now accounts for the largest share of income and employment in many industrial countries.

• Services account for 77 percent of GDP in France, 69 percent in Germany, 77 percent in the US, 73 percent in the UK, and 68 percent in Japan.

• Services generally include the following categories in the International Industrial Classification (ISIC) system: wholesale and retail trade, restaurants and hotels, transport, storage, communications, financial services, insurance, real estate, business services, personal services, community services, social services, and government services.

• International trade in services broadly consist of commercial services, investment income, and government services.

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The Changing Degree of Economic

Interdependence

• Increases in the export/GDP ratio

indicate a greater international

interdependence.

• While increased interdependence has

many inherent benefits, it also brings

with it greater adjustment requirements

and greater needs for policy

coordination among trading partners.

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Course Outline

• Chapter 2: Basic Determinants of Bilateral Trade

• Chapter 3: Labor Productivity and Comparative Advantage: The Ricardian Model

• Chapter 4: Resources, Comparative Advantage, and Income Distribution

• Chapter 5: The Standard Trade Model

• Chapter 6: Economies of Scale, Imperfect Competition, and International Trade

• Chapter 7: International Factor Movements

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Course Outline

• Chapter 8: The Instruments of Trade Policy

• Chapter 9: The Political Economy of Trade Policy

• Chapter 10: International Trade and the Developing Countries

• Chapter 11: Controversies in Trade Policy

• Chapter 12: Economic Integration

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Course Outline

• Chapter 13: National Income Accounting and the Balance of Payments

• Chapter 14: Exchange Rates and the Foreign

Exchange Market: An Asset Approach

• Chapter 15: Money, Interest Rates, and Exchange Rates

• Chapter 16: Price Levels and the Exchange Rate in the Long Run

• Chapter 17: Output and the Exchange Rate in the Short Run

• Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention

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