International Trade - Eco 471
aman jain
tebaldi_krugman_chapter1.pptxInternational Trade ECO 471
Professor Edinaldo Tebaldi
Keep this in mind!
“Achieving free trade is like getting to heaven. Everyone wants to get there, but not too soon.”
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Preview
What is international economics about?
International trade topics
Gains from trade, explaining patterns of trade, effects of government policies on trade
International finance topics
Balance of payments, exchange rate determination, international policy coordination and capital markets
International trade versus finance
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What Is International Economics About?
International economics is about how nations interact through:
trade of goods and services, flows of money, and investment.
International economics is an old subject, but continues to grow in importance as countries become tied more to the international economy.
Nations are now more closely linked than ever before.
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What Is International Economics About? (cont.)
International trade as a fraction of the national economy has tripled for the U.S. in the past 40 years.
Both imports and exports fell in 2009.
Compared to the U.S., other countries are even more tied to international trade.
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Fig. 1-1: Exports and Imports as a Percentage of U.S. National Income
Source: U.S. Bureau of Economic Analysis
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Fig. 1-2: Exports and Imports as Percentage of National Income in 2007
Source: Organization for Economic Cooperation and Development
High Tech exports
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CHN 1985 1990 1995 2000 2005 2010 1.1521200000000001E-2 2.09284E-2 7.3217900000000002E-2 0.1677284 0.24269979999999999 DEU 1985 1990 1995 2000 2005 2010 0.1156015 8.8918200000000003E-2 6.7561399999999994E-2 8.6691699999999997E-2 8.8748099999999996E-2 9.6123899999999998E-2 USA 1985 1990 1995 2000 2005 2010 0.2499402 0.19902259999999999 0.15791330000000001 0.1478236 0.1141619 8.17547E-2 JPN 1985 1990 1995 2000 2005 2010 0.20493220000000001 0.1551872 0.1048096 9.4488900000000001E-2 6.8371199999999993E-2 6.9876099999999997E-2 SGP 1985 1990 1995 2000 2005 2010 3.7910199999999998E-2 4.7330299999999999E-2 5.78421E-2 6.29112E-2 6.3495499999999996E-2 7.1251499999999995E-2 BRA 1985 1990 1995 2000 2005 2010 3.7946999999999998E-3 1.9252E-3 2.2039E-3 4.7009E-3 5.0854999999999997E-3 4.6495E-3
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What Is International Trade About? Empirical Questions:
Does international trade hurt or benefit the poor?
Do developing (developed) countries benefit from international trade?
Does globalization contribute to increased child labor, human trafficking, or income inequality?
Should the United States remove all barriers (tariff, quotes …) to international trade?
Should the United States stop buying goods from China?
Why are US companies outsourcing (offshoring) production?
Should the U.S. join the FTAA ( Free trade Area of the Americas)?
Why is the U.S. losing ground in the high tech global market?
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COURSE OBJECTIVES
Offer a broad overview of international economic theory and its application to analyze real world events.
Given the complex nature of the subject, we will utilize examples, abstract concepts and simplified models designed to accentuate those areas of study deemed most essential.
It will be discussed a wide range of issues, including comparative advantage, gains from trade, protectionism, and the effects of trade on income distribution.
It will also be examined political and economic aspects of trade policies and the links between international trade and economic development.
By the end of the course you should be able to:
Identify international trade concepts used in the mainstream media;
Analyze and interpret international trade models and data;
Apply concepts of international trade to analyze current events and policy topics;
Critically evaluate the impacts of international trade on society’s well-being.
Chapter 1
Introduction
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Gains from Trade
Several ideas underlie the gains from trade.
When a buyer and a seller engage in a voluntary transaction, both can be made better off.
Norwegian consumers import oranges that they would have a hard time producing.
The producer of the oranges receives income that it can use to buy other things that it desires.
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Gains from Trade (cont.)
How could a country that is the most (least) efficient producer of everything gain from trade?
Countries use finite 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 (cont.)
Trade benefits countries by allowing them to export goods made with relatively abundant resources and imports goods made with relatively scarce resources.
When countries specialize, they may be more efficient due to larger-scale production.
Countries may also gain by trading current resources for future resources (international borrowing and lending) and due to international migration.
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Gains from Trade (cont.)
Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country.
International trade can harm the owners of resources that are used relatively intensively in industries that compete with imports.
Trade may therefore affect the distribution of income within a country.
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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?
Why some countries export certain products can stem from differences in:
Labor productivity
Relative supplies of capital, labor and land and their use in the production of different goods and services
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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 (cont.)
If a government must restrict trade, which policy should it use and how much should it restrict trade?
If a government restricts trade, what are the costs if foreign governments respond likewise?
Trade policies are often chosen to cater to special interest groups, rather than to maximize national welfare.
Governments tend to adopt tariffs, then negotiate them down in exchange for reduction in trade barriers of other countries.
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International Finance Topics
Exchanging risky assets such as stocks and bonds can benefit all countries by diversification that reduces the variability of income – another source of gains from trade.
Most international trade involves monetary transactions.
Many monetary events have important consequences for international trade.
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Balance of Payments
Governments measure the value of exports and imports, as well as the value of financial assets that flow into and out of their countries.
Trade deficits, where countries import more than they export in value, may be offset by net inflows of financial assets.
The official settlements balance, or the balance of payments, measures 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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Exchange Rate Determination
Exchange rates are an important financial issue for most governments.
Exchange rates measure how much domestic currency can be exchanged for foreign currency and thus affect:
how much goods denominated in foreign currency (imports) cost in the domestic country.
how much goods denominated in domestic currency (exports) cost in foreign markets.
Some exchange rates change continually (float) while others are fixed for periods of time.
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International Policy Coordination
In an integrated economy, one country’s economic policies usually affect other countries as well, leading to the need for some degree of policy coordination.
Depends on type of exchange rate regime.
Capital markets, where money is exchanged for promises to pay in the future, have special concerns in an international setting:
Currency fluctuations can alter the value paid.
Countries, especially developing ones, might default on debt.
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International Trade Versus Finance
International trade focuses on transactions involving movement of goods and services across nations.
International trade theory (chapters 2–8) and policy (chapters 9–12)
International finance focuses on financial or monetary transactions across nations.
International monetary theory (chapters 13–18) and policy (chapters 19–22)
TENTATIVE COURSE OUTLINE AND READING LIST
| Topics | Reading |
| Introduction | Chapter 1 |
| World Trade: An overview | Chapter 2 |
| Labor Productivity and Comparative Advantage: The Ricardian Model | Chapter 3 |
| Resources and Trade: the Heckscher-Ohlin Model. | Chapter 5 (select sections) |
| The Standard Trade Model | Chapter 6 (select sections) |
| Economies of Scale and the International Location of Production | Chapter 7 |
| Firms in a Global Economy | Chapter 8 |
| The Instruments of Trade Policy | Chapter 9 |
| The Political Economy of Trade Policy | Chapter 10 |
| Controversies in Trade Policy (Students are entirely responsible this chapter) | Chapter 12 |
| An introduction to International Macroeconomic Policy | TBA |
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