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KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 1
International EconomicsPart 2
Dr. Stefan KoothsBiTS Berlin
(winter term 2013/2014)www.kooths.de/bits-ie
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 2
Outline
1. Introduction and Overview2. Systemizing and Recording Cross-border
Economic Activity3. The Pure Theory of International Trade
General analysis of cross-border trade Reasons for inter-industry trade:
Absolute and comparative advantage Causes and consequences of cost differences:
The role of factor endowments and factor proportions “Imperfect” competition and intra-industry trade
4. Trade Policy: Free Trade vs. Protectionism5. Foreign Exchange Markets and the Open
Macroeconomy6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 3
Four basic questions about trade:Trigger, impact, national and international gains
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 4
Categories of trade
Non-availability (trade in commodities) Inter-industry trade (specialization) Intra-industry trade
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 5
Product markets: General assumptions, demand and supply, consumer and producer surplus, elasticities
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 6
Opening of trade: National and international markets
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 7
Arbitrage and free-trade equilibrium
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 9
Four basic answers to trade
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 10
Outline
1. Introduction and Overview2. Systemizing and Recording Cross-border
Economic Activity3. The Pure Theory of International Trade
General analysis of cross-border trade Reasons for inter-industry trade:
Absolute and comparative advantage Causes and consequences of cost differences:
The role of factor endowments and factor proportions “Imperfect” competition and intra-industry trade
4. Trade Policy: Free Trade vs. Protectionism5. Foreign Exchange Markets and the Open
Macroeconomy6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 11
Adam Smith: Theory of absolute advantage
» Maximum number of working hours: 10 (millions, billions, …)» Production and consumption possibilities without trade
(self-sufficiency)?» Consumption possibilities with trade and specialization
(division of labor)?
Working hoursper ton of wheat
Working hoursper barrel of wine
Country A 2 5
Country B 2,5 4
Adam Smith (1723—1790)An Inquiry into the Nature and Causes
of the Wealth of Nations, 1776
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 12
David Ricardo:Opportunity cost and theorem of comparative advantage
» Maximum number of working hours: 10 (millions, billions, …)» Production and consumption possibilities without trade
(self-sufficiency)?» Any chance for mutually beneficial trade (division of labor)?
David Ricardo (1772—1823)On the Principles of Political Economy and Taxation, 1817
Working hoursper ton of wheat
Working hoursper barrel of wine
Country A 2 5
Country B 1 4
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 13
Production-possibility curve
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 14
Exchange rate and terms of trade
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 15
Mercantilism and unbalanced trade
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 16
Complete vs. incomplete specialization: Constant vs. increasing marginal cost
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 17
Production conditions, preferences and trade patterns
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 18
Trade effects and gains from trade