Jan J. Michalek
International Economics
for: International Business Program
Jan J. Michalek Introduction
Jan J. Michalek
The Gains from Trade
Many people are skeptical about importing goods that a country could produce for itself.
When countries sell goods to one another, all countries benefit.
Trade and income distribution
International trade might hurt some groups within nations.
Trade, technology, and wages of high and low-skilled workers.
What is
International Economics About?
Jan J. Michalek
The Pattern of Trade (who sells what to whom?)
Climate and resources determine the trade pattern of several goods.
In manufacturing and services the pattern of trade is more subtle.
There are two types of trade:
Interindustry trade depends on differences across countries.
Intraindustry trade depends on market size and occurs among similar countries.
What is
International Economics About?
The Balance of Payments
Some countries run large trade surpluses.
For example, in 1998 both China and South Korea ran trade surpluses of about $40 billion each.
Is it good to run a trade surplus and bad to run a trade deficit?
Exchange Rate Determination
The role of changing exchange rates is at the center of international economics.
What is
International Economics About?
Jan J. Michalek
What is
International Economics About?
International Policy Coordination
A fundamental problem in international economics is 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.
The International Capital Market
There are risks associated with international capital markets:
Currency depreciation
National default
Jan J. Michalek
International Economics:
Trade and Money
International trade analysis focuses primarily on the real transactions in the international
economy.
• These transactions involve a physical movement of goods or a tangible commitment of economic resources.
– Example: The conflict between the United States
and Europe over Europe’s subsidized exports of
agricultural products
Jan J. Michalek
International monetary analysis focuses on the monetary side of the international
economy.
That is, financial transactions such as foreign purchases of U.S. dollars.
–
Example: The dispute over whether the foreign
exchange value of the dollar should be allowed to float freely or be stabilized by government action
International Economics:
Trade and Money
International trade issues
Part I: International Trade Theory
Part II: International Trade Policy
International monetary issues
Part III: Exchange Rates and Open-Economy Macroeconomics
Part IV: International Macroeconomic Policy
International Economics:
Trade and Money
Jan J. Michalek
P. Krugman, M.Obstfeld, International Economics.
Theory and Policy, seventh Edition (Addison-Wesley, 2006). [Krugman & Obstfeld below). The second, third and fourth editions are not very different. There is also 9-th edition written by P. Krugman, M. Obstfeld and M.
Melitz from 2012 (slightly different)
There is a Polish translation of this textbook, entitled
“Ekonomia Miedzynarodowa”, published by PWN in 2007.
reasonable alternatives especially for the second (macroeconomic) part of the course include:
Suggested textbooks:
The most suitable are:
Jan J. Michalek
R. Caves, A. Frankel and R. Jones, International Trade and Finance, An introduction, Sixth edition, Harper and Collins College Publishers, 1993. It is very good, standard but quite traditional textbook..
The suitable, but more advanced textbook, for the first (trade) part of the course is:
Ch. Van Marrewijk, International Economics, Oxford University Press 2012 (Mar below)
S. Schueller & D. Ottens, Study Guide for International Trade and the World Economy, Oxford University Press 2002
Student resources to complete the Marrewijk textbook (power point presentations, web links, simulations, figures from the text, answers to selected questions) available at:
http://www.oup.co.uk/best.textbooks/economics/marrewijk/
Suggested textbooks:
The most suitable are:
Jan J. Michalek
1. Introduction: World economy;
World economy, “traditional” inter-sectoral and inter-industry division of labor, description of trade flows and monetary equilibria after 1945; measuring openness of the economy;
Mar ch 1&2
2. The Ricardian model;
Production possibility frontier, relative prices, gains from trade, Ricardian model and comparative advantage, relative wages in the multigood model, empirical evidence:
MacDougall and others.
K&O: ch. 2,
PART I: INTERNATIONAL TRADE AND POLICY
3. The Hecksher-Ohlin model;
Assumptions of a 2x2x2 model, resource abundance and relative factor prices, pattern of production and specialization, relative prices, factor specific model, Stolper-Samuelson theorem,
K&O: ch. 4 & 5
4. The Heckscher-Ohlin model continued;
Stolper-Samuelson theorem, Rybczynski theorem, Factor Price equalization theorem, gains from trade empirical evidence of H-O model: Leontief paradox and empirical work of E. Leamer. The phenomenon of the role of intra-industry trade, empirical evidence (G-L index)
5. Modern theories of trade;
“Overlaping demand” (Linder) and “product cycle ” (Vernon) approach.
Imperfect competition, product differentiation, scale economies: simple Krugman model (from the K&O textbook),.
K&O: ch. 6
PART I: INTERNATIONAL
TRADE AND POLICY
Jan J. Michalek
6. International Factor movements:
International capital mobility (a simple neoclassical model), International labor mobility, the impact of taxation on labor mobility, “brain drain”, labor mobility in the European Union.
K&O: ch. 7
7. The instruments of trade policy:
Basic tariff analysis: partial equilibrium approach: small and large country, general equilibrium effects, optimal tariff, post-war changes in the tariff level. Non-tariff measures: Comparison: of tariffs with: quantitative restrictions (QR’s), K&O: ch. 8
8. The NTB’s and political economy of trade policy
VER’s. Dumping and A-D procedures, subsidies and countervailing duties.
Trade policy under imperfect competition: comparison of tariffs and NTB’s.
infant protection, externalities, The arguments for free trade, strategic trade policy (idea of Brander-Spencer model), advantage of international negotiations: the role of GATT/WTO system.
K&O: ch. 9-11.
PART I: INTERNATIONAL TRADE AND POLICY
Jan J. Michalek
9. National income and balance of payments:
National income accounting for a closed economy. An open economy: current account (CA) and foreign indebtedness, CA and private and government savings. The balance of
payments: Current and capital account, statistical discrepancy.
K&O: ch. 12
10. Markets for currencies and exchange rate in the short run
Spot market for foreign currencies (clearing, hedging, speculation), forward markets, interest parity: uncovered and covered interest arbitrage, supply & demand for foreign exchange: exchange rate determination under flexible rate regime & under fixed regime,
K&O: ch. 13-14
PART II: INTERNATIONAL
MONEY AND FINANCE
Jan J. Michalek
11. Exchange rate in the long run
Purchasing Power Parity (PPP) and the law of one price, effective exchange rate. General model of long-run exchange rates.
K&O: ch. 14-15
12 Money and foreign exchange: IS-LM-BP model
Money in an open economy: demand for money: LM curve, foreign exchange: BOP curve, IS-LM-BOP model, automatic adjustment under a flexible exchange rate regime automatic adjustment under stable exchange rate regime: money creation process.
Yarbrough: ch. 15
PART II: INTERNATIONAL MONEY AND FINANCE
13. Macroeconomic policy under fixed and flexible exchange rates:
Macroeconomic policy with capital immobility, policy with perfect (and imperfect) capital mobility, efficiency of monetary, fiscal and exchange rate policy under different exchange rate systems
Yarbrough: ch. 16-17.
14. International Monetary regimes:
The gold standard and macroeconomic adjustment (price-specie flow mechanism and rules of the game), the interwar period: search for a new system, Fixed exchange rates in the Bretton Woods system, Post-Bretton Woods system: flexible exchange rates and managed float: theory and macroeconomic performance.
K&O: ch. 18-19
15. European Monetary Union (if there is enough time)
Optimum currency area, increased economic interdependence, economic cost and benefits of the monetary union, experience of the European Monetary System, EMU: Maastrich criteria, first experience of EMU, Poland
PART II: INTERNATIONAL
MONEY AND FINANCE
Jan J. Michalek
