KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 1 International Economics Part 2 Dr. Stefan Kooths BiTS Berlin (winter term 2013/2014)

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


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


Four basic questions about trade:Trigger, impact, national and international gains


Categories of trade

Non-availability (trade in commodities) Inter-industry trade (specialization) Intra-industry trade


Product markets: General assumptions, demand and supply, consumer and producer surplus, elasticities


Opening of trade: National and international markets


Arbitrage and free-trade equilibrium


Terms of trade


Four basic answers to trade


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


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


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


Production-possibility curve


Exchange rate and terms of trade


Mercantilism and unbalanced trade


Complete vs. incomplete specialization: Constant vs. increasing marginal cost


Production conditions, preferences and trade patterns


Trade effects and gains from trade


Country size and relative international winners

Documents

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 1 International Economics Part 2 Dr. Stefan Kooths BiTS Berlin (winter term 2013/2014)