Week 1: Introduction
Preview:
Trade are economic movements that happen across borders
•2 main branches in international economics:
•International trade: Gains from trade, explaining patterns and volume of trade, effects of
government policies on trade
•International finance: Balance of payments, exchange rate determination, international policy
coordination, capital markets we’re not focusing on this in this course, only the other branche!
What is international Economics about? (1 of 3)
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
Nations are now more closely linked than ever before
What is international economics about (2 of 3)
The US exports and imports shares of gross domestic product have been on an upward trend
- International trade has roughly tripled in importance compared to the economy as a whole in
the past 50 years
Both imports and exports fell substantially in 2009 due to the recession
Normally, imports and exports
have an upward sloping trend.
Only in the gray areas you see
the crisis periods and you see
how the contraction of
external sector is a major
driver of economic down
terms
What is international economics about (3 of 3)
•Compared to the United States, other countries are even more tied to international trade.
–Their imports and exports as a share of GDP are substantially higher.
–The United States, due to its size and diversity of resources, relies less on international trade than
almost any other country.
, So also for the US trade is important,
but how smaller the economy gets
the more important trade becomes
(example: Belgium)
Gains from trade (1 of 4):
•That there are gains from trade is probably the most important insight in international economics.
•Countries selling goods and services to each other almost always generates mutual benefits.
1.When a buyer and a seller engage in a voluntary transaction, both can be made better off.
Example: Norwegian consumers import oranges that they would have a hard time producing
(oranges cannot be produced in Norway, so via international trade they import oranges).
Very intuitive: if you open up to international trade, more transactions are allowed to happen
voluntarily (if you do not open the borders you miss out on these transactions!)
Gains from trade (2 of 4):
2. How could a country that is the most (or least) efficient producer of everything gain from trade?
Countries can specialize in production, while consuming many goods and services through trade.
–use finite resources to produce what most productive at (compared to their other production
choices), and trade for what they want to consume.
So through specialization trade can occur!
Gains from trade (3 of 4):
3.Trade benefits countries by allowing them to export goods made with relatively abundant
resources and import goods made with relatively scarce resources.
4.When countries specialize, they may be more efficient due to larger-scale production. (= a further
reason why specialization can create gains)
5.Countries may also gain by trading current resources for future resources (international borrowing
and lending) and due to international migration. (will not be focused on too much this course!)
Gains from trade (4 of 4):
•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. (for example: farmers)
–Trade may therefore affect the distribution of income within a country.
,Think about trade war between China and USA -> after this course we will understand why China
raised tariffs etc etc etc and why this harmed both parties
Patterns of trade:
•A pattern of trade describes who sells what to whom.
•Differences in climate and resources explain why Brazil exports coffee and Saudi Arabia exports oil.
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
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: for instance cars must have some functions
to enter the country knowing that your domestic producers include this into the products and foreign
producers do not) that exclude foreign products from the market, but still allow domestic products.
•What are the costs and benefits of these policies?
Sometimes trade tariffs can backfire, which we will see in this course
Structure of the course:
•We will cover the main theories explaining:
–Trade patterns.
–Distributional change patterns: winners and losers of trade policies.
–What are governments considering when taking trade policies.
Week 2: Chapter 2: World Trade, an overview
Learning objectives:
2.1 Describe how the value of trade between any two countries depends on the size of these
countries’ economies and explain the reasons for that relationship.
2.2 Discuss how distance and borders reduce trade.
2.3 Describe how the share of international production that is traded has fluctuated over time and
why there have been two ages of globalization.
2.4 Explain how the mix of goods and services that are traded internationally has changed over time.
Preview:
•Largest trading partners of the US and the EU.
•Gravity model: Influence of an economy’s size on trade; Distance, barriers, borders and other trade
impediments
•Globalization: then and now
•Changing composition of trade
•Service outsourcing
, Who trades with whom:
•More than 30% of world output is sold across national borders.
–World trade in goods and services exceeded $21 trillion in 2015.
•The largest trading partners with the U.S. in 2015 were China, Canada, Mexico, Japan, and
Germany.
•The largest 15 trading partners with the U.S. accounted for 75%of the value of U.S. trade in 2015.
•The 6 largest trading partners with the E.U. in 2019 were the US, China, Switzerland, Russia, Turkey
and Japan.
–With the US, trade balance was positive.
–With China, trade balance was negative (and comparable in magnitude).
good question: why does the EU not trade more with for example African countries classical
theory suggests that you trade with countries that are different from you because you can
complement each other in practice this is often not the case for EU and US, they trade more with
countries which are not that different
List of busiest container ports:
Many in Asia, but also
Rotterdam and Antwerp are
present
GDP of 2.5 trillion USD for
India compared to 0.8
trillion GDP for the
Netherlands (so only three
times more)
So US trades almost as
much with India as with
Netherlands, despite the
difference in population!
