TOOLS OF ANALYSIS FOR INTERNATIONAL TRADE MODELS
Topic 2.1
Questions
· Why does trade occur?
· What goods will a country export/import?
· What will be the volume of trade?
· What will be the prices at which trade occurs?
· What is the effect of trade on factors of production?
Methodology
· Models
· Abstraction from reality
· Positive and normative analysis
· General Equilibrium
· Abstract thinking
· Link real trade and international finance
The basic model
Agents are rational (maximizing)
Note:
Disagree with that text that ‘rationality’ is synonymous with ‘utility maximizing’
‘Predictably irrational ‘
‘Behavioral economics’
The human element matters
There are two countries in the world
This is standard, but a very restrictive assumption. Many elements of trade do not make sense except in a multi-country world.
Ideally, we will get to multi-country models.
In addition, there are only two goods in the world.
Some issues require more than two goods.
There is no money illusion
This is really an assumption about international finance models. In a ‘real trade’ model there isn’t any ‘money’
The essence of the assumption is that only relative prices matter.
The confusion between nominal and real prices is a non-issue in real trade models.
In each country endowments are fixed and the technologies available to each country are constant
This assumption generates a single production possibility frontier for each country
The PPF can have different shapes. A concave PPF represents increasing opportunity costs. A linear PPF represents constant opportunity costs.
Generally, concavity/convexity gives ‘nicer’ solutions to a model.
The concavity/convexity does not have to arise from the production side –it could arise from the consumption side of the model.
There is perfect competition and no externalities exist
These assumptions support an equilibrium solution where there is no divergence between private and social costs. Also there is no scope for strategy by firms in production or pricing.
Factors of production are perfectly mobile between industries within a country
This assumption allows returns to factors to be variable as they move between industries and their marginal product changes.
Reallocating factors of production allows a country to react to changes in demand for its two products.
Community preferences can be represented by a consistent set of community indifference curves
This basically says that we can represent preferences by one huge utility function (or one huge indifference curve) for the whole country. There is no heterogeneity in tastes. In effect, every individual is identical on the consumption.
Friday, August 22, 2008
topic 1.2
INTRODUCTION TO INTERNATIONAL ECONOMICS
Topic 1.2
Definitions of trade terms
· GNP (the World bank calls this GNI)
· GDP
· Exports/imports
· Index of openness
· Trade deficit/surplus
· PPP
· Exchange rate
· Terms of Trade
Stylized facts/empirical regularities
· Large economies tend to be more closed
· Most trade is between developed countries
· World trade has grown much faster than GDP since 1950
· Barriers to trade have fallen since 1950
· Asia’s share of world trade has increased
· Gravity models predict trade very well
· Fast growing countries tend to be open
· Most trade is in inputs and intermediate goods (like parts)
· Services are 20 per cent of trade
Topic 1.2
Definitions of trade terms
· GNP (the World bank calls this GNI)
· GDP
· Exports/imports
· Index of openness
· Trade deficit/surplus
· PPP
· Exchange rate
· Terms of Trade
Stylized facts/empirical regularities
· Large economies tend to be more closed
· Most trade is between developed countries
· World trade has grown much faster than GDP since 1950
· Barriers to trade have fallen since 1950
· Asia’s share of world trade has increased
· Gravity models predict trade very well
· Fast growing countries tend to be open
· Most trade is in inputs and intermediate goods (like parts)
· Services are 20 per cent of trade
Wednesday, August 20, 2008
topic 1.1
INTRODUCTION TO INTERNATIONAL ECONOMICS
Topic 1.1
International economics is divided into two areas:
· International trade
· International macroeconomics/finance
International trade (or ‘real’ trade) is the macroeconomics of trade. It studies topics such as:
· Why do countries trade?
· What determines the pattern of trade (who exports and who imports)
· Who produces what products
· How does technology affect trade?
· Who gains from trade?
· How does trade affect income?
· What determines the ‘terms of trade’ and why does it matter?
· What policies should a country adopt for trade?
· What is the relationship between trade and growth?
The classical theory of trade is based on general equilibrium microeconomic theory.
The advantage of general equilibrium theory is that it captures the essential characteristic of international trade—everything affecting everything else.
There are two limitations to general equilibrium theory:
· It is basically a static equilibrium approach.
· It does not handle ‘imperfect competition’ well.
Other theories of trade allow for some degree of market power.
Yet others incorporate geography, or technology, or use the firm as the unit of analysis.
Theories that are more recent incorporate culture, networks, and other ideas from other disciplines.
International macroeconomics/finance is characterized by the addition of money and financial assets to the classical model.
‘Money’ allows/facilitates exchange between different countries.
Assets (like bonds) allow trade over time. Borrowing/lending requires some form of contract and that is what bonds are. Another aspect of allowing assets is that countries can manage risk/uncertainty.
The difference between macroeconomics and finance is that of emphasis. International finance emphasizes assets and risk. International macroeconomics emphasizes currency and generic ‘bonds’ as a way to shift consumption/production over time.
For convenience, we will use the term ‘international finance’
International finance studies:
· Exchange rates
· ‘Capital flows’ and the balance of payments
· Interaction between global monetary policies and global growth and trade
· International finance and growth
International economics has a long intellectual history – going back to Adam Smith and Davis Ricardo.
It is a dynamic area –falling transportation costs, the internet, and technology have made the world ‘flat’.
International economics is difficult to test econometrically—everything affects everything else.
We will do some experiments in international economics. There is some new work that we’ll look at by Vernon Smith and Bart Wilson on the evolution of exchange and specialization.
Topic 1.1
International economics is divided into two areas:
· International trade
· International macroeconomics/finance
International trade (or ‘real’ trade) is the macroeconomics of trade. It studies topics such as:
· Why do countries trade?
· What determines the pattern of trade (who exports and who imports)
· Who produces what products
· How does technology affect trade?
· Who gains from trade?
· How does trade affect income?
· What determines the ‘terms of trade’ and why does it matter?
· What policies should a country adopt for trade?
· What is the relationship between trade and growth?
The classical theory of trade is based on general equilibrium microeconomic theory.
The advantage of general equilibrium theory is that it captures the essential characteristic of international trade—everything affecting everything else.
There are two limitations to general equilibrium theory:
· It is basically a static equilibrium approach.
· It does not handle ‘imperfect competition’ well.
Other theories of trade allow for some degree of market power.
Yet others incorporate geography, or technology, or use the firm as the unit of analysis.
Theories that are more recent incorporate culture, networks, and other ideas from other disciplines.
International macroeconomics/finance is characterized by the addition of money and financial assets to the classical model.
‘Money’ allows/facilitates exchange between different countries.
Assets (like bonds) allow trade over time. Borrowing/lending requires some form of contract and that is what bonds are. Another aspect of allowing assets is that countries can manage risk/uncertainty.
The difference between macroeconomics and finance is that of emphasis. International finance emphasizes assets and risk. International macroeconomics emphasizes currency and generic ‘bonds’ as a way to shift consumption/production over time.
For convenience, we will use the term ‘international finance’
International finance studies:
· Exchange rates
· ‘Capital flows’ and the balance of payments
· Interaction between global monetary policies and global growth and trade
· International finance and growth
International economics has a long intellectual history – going back to Adam Smith and Davis Ricardo.
It is a dynamic area –falling transportation costs, the internet, and technology have made the world ‘flat’.
International economics is difficult to test econometrically—everything affects everything else.
We will do some experiments in international economics. There is some new work that we’ll look at by Vernon Smith and Bart Wilson on the evolution of exchange and specialization.
syllabus
Econ 463
International Economics
Fall 2008
Dr. Paul Johnson
Rasmuson Hall 319A
(907) 786-4311
afprj@cbpp.uaa.alaska.edu (please use subject line: ECON 463)
Class information
Prerequisites: ECON 201 and ECON 202
Related classes:
International Finance BA 427
Course aims and outcomes
ECON 463 is an undergraduate course focusing on the study of international markets, institutions and policy.
The primary objective of this course is to help students obtain a better understanding of the international economic environment. This understanding will be aided by introducing students to theoretical tools that illuminate the workings of international markets, institutions and policies.
There will be a special emphasis on recent developments in the study of the simultaneous emergence of specialization and trade and the history of international economic theory.
Student learning outcomes
By the end of this course, you should be able to:
· Explain how international economics contributes to understanding of world events, world economic growth, and the international business environment.
· Apply comparative advantage models to solve analytical problems.
· Apply trade theories to solve analytical trade problems.
· Apply exchange rate theory to solve analytical problems in exchange-rate determination.
· Describe and explain the role of the major international trade organizations.
· Provide an in-depth overview of the major free trade agreements and common currency areas.
· Compare and discuss the major controversies in trade policy.
Approach to learning and teaching
Traditional lecturing will be used where necessary – to explain basic facts and concepts, to give current examples, and to make connections between the different course elements. However, much of the teaching will involve discussions or experiential activities.
Classroom experiments will be an important feature of this course. Current news articles and case studies will be assigned as class discussion readings in order for students to practice applying new knowledge to real world events.
Syllabus
Text Chapter and Topic
1. An Introduction to International Trade
2. Tools of Analysis for International Trade Models
3. The Classical Model of International Trade
4. The Heckscher-Ohlin Model
5. Tests of Trade Models: The Leontief Paradox and Its Aftermath
6. Tariffs
9. Preferential Trade Arrangements
10. International Trade and Economic Growth
Midterm exam (date TBA)
11. An Introduction to International Finance
12. The Balance of Payments
13. The Foreign-Exchange Market
14. Prices and Exchange Rates: Purchasing Power Parity
15. Exchange Rates, Interest Rates, and Interest Parity
17. Basic Theories of the Balance of Payments
18. Exchange Rate Theories
19. Alternative International Monetary Standards
Final Exam (Monday December 8th 1.00-3.45pm.)
Text and readings
The text is Husted and Melvin International Economics 7th Ed. Handouts and readings of current articles will be made available. Handout material is all examinable. (“Handout” may mean posted on the web, or handed out in hard copy).
Grading
Midterm exam 30
Final exam 40
Assignments (including lab report/s) 30
Total 100
Special consideration
Students with disabilities who need extra time/assistance with exams may apply to
Disability Support Services to arrange such assistance.
General conduct and behavior
You are expected to conduct yourself with consideration and respect for the needs of your fellow students and teaching staff. Conduct which disrupts or interferes with a class is not acceptable and students may be asked to leave the class.
Once students are in class they may not leave without specific prior approval. A student who just gets up and leaves a class which is still in session may receive an automatic one letter grade penalty.
Attendance
Your regular and punctual attendance at lectures and seminars is expected in this course.
Students who consistently miss scheduled classes may be subject to an “F” regardless of assignment and exam scores. You should take note of all announcements made in lectures. You will be deemed to have received this information regardless of your absence, except in the case of a written pre-approved absence.
Study commitment
Students will be expected to be current with all assigned readings, and to participate in all class discussion and activities. All assignments must be turned in on the assigned due dates, unless a written exemption has been obtained beforehand, which will be given only in exceptional circumstances.
International Economics
Fall 2008
Dr. Paul Johnson
Rasmuson Hall 319A
(907) 786-4311
afprj@cbpp.uaa.alaska.edu (please use subject line: ECON 463)
Class information
Prerequisites: ECON 201 and ECON 202
Related classes:
International Finance BA 427
Course aims and outcomes
ECON 463 is an undergraduate course focusing on the study of international markets, institutions and policy.
The primary objective of this course is to help students obtain a better understanding of the international economic environment. This understanding will be aided by introducing students to theoretical tools that illuminate the workings of international markets, institutions and policies.
There will be a special emphasis on recent developments in the study of the simultaneous emergence of specialization and trade and the history of international economic theory.
Student learning outcomes
By the end of this course, you should be able to:
· Explain how international economics contributes to understanding of world events, world economic growth, and the international business environment.
· Apply comparative advantage models to solve analytical problems.
· Apply trade theories to solve analytical trade problems.
· Apply exchange rate theory to solve analytical problems in exchange-rate determination.
· Describe and explain the role of the major international trade organizations.
· Provide an in-depth overview of the major free trade agreements and common currency areas.
· Compare and discuss the major controversies in trade policy.
Approach to learning and teaching
Traditional lecturing will be used where necessary – to explain basic facts and concepts, to give current examples, and to make connections between the different course elements. However, much of the teaching will involve discussions or experiential activities.
Classroom experiments will be an important feature of this course. Current news articles and case studies will be assigned as class discussion readings in order for students to practice applying new knowledge to real world events.
Syllabus
Text Chapter and Topic
1. An Introduction to International Trade
2. Tools of Analysis for International Trade Models
3. The Classical Model of International Trade
4. The Heckscher-Ohlin Model
5. Tests of Trade Models: The Leontief Paradox and Its Aftermath
6. Tariffs
9. Preferential Trade Arrangements
10. International Trade and Economic Growth
Midterm exam (date TBA)
11. An Introduction to International Finance
12. The Balance of Payments
13. The Foreign-Exchange Market
14. Prices and Exchange Rates: Purchasing Power Parity
15. Exchange Rates, Interest Rates, and Interest Parity
17. Basic Theories of the Balance of Payments
18. Exchange Rate Theories
19. Alternative International Monetary Standards
Final Exam (Monday December 8th 1.00-3.45pm.)
Text and readings
The text is Husted and Melvin International Economics 7th Ed. Handouts and readings of current articles will be made available. Handout material is all examinable. (“Handout” may mean posted on the web, or handed out in hard copy).
Grading
Midterm exam 30
Final exam 40
Assignments (including lab report/s) 30
Total 100
Special consideration
Students with disabilities who need extra time/assistance with exams may apply to
Disability Support Services to arrange such assistance.
General conduct and behavior
You are expected to conduct yourself with consideration and respect for the needs of your fellow students and teaching staff. Conduct which disrupts or interferes with a class is not acceptable and students may be asked to leave the class.
Once students are in class they may not leave without specific prior approval. A student who just gets up and leaves a class which is still in session may receive an automatic one letter grade penalty.
Attendance
Your regular and punctual attendance at lectures and seminars is expected in this course.
Students who consistently miss scheduled classes may be subject to an “F” regardless of assignment and exam scores. You should take note of all announcements made in lectures. You will be deemed to have received this information regardless of your absence, except in the case of a written pre-approved absence.
Study commitment
Students will be expected to be current with all assigned readings, and to participate in all class discussion and activities. All assignments must be turned in on the assigned due dates, unless a written exemption has been obtained beforehand, which will be given only in exceptional circumstances.
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