1. International Economics
Professor Ivar Bredesen
Room PI-540

2. International Economics
Specific subjects
International trade theory. The basis for trade and the gains from trade
International trade policy. The reasons for and the effects of trade restrictions
Balance of payments. A nations total receipts and total payments to the rest of the world
Foreign exchange markets. Exchange of one national currency for another
Open economy macroeconomics. Stabilisation policies in the open economy

3. International Economics
Basically, the course is divided into two parts
International trade and trade policy
Economic Integration in Europe
It will be assumed that students master basic microeconomics and macroeconomics
We will mostly explore theory using graphical analysis with little use of mathematics
4-hour closed book exam in December

4. International Economics

5. International Economics
Required reading
Feenstra and Taylor
Chapter 1 – 6,
Baldwin and Wyplosz
Chapter 4 – 5, 9 – 11,16 – 18
Textbook web: Feenstra:
Baldwin:

6. Recommended reading
Excellent non technical book written by one of the leading trade economists in the world, Elhanan Helpmand
Recommended as a supplement, but cannot replace textbook

7. International Economics
International Economics - economic interdependence among nations
Globalisation
Flow of goods and services across borders
Movement of people and firms
Spread of culture and ideas between countries
Tight integration of financial markets
Kofi Annan, former secretary general of the United Nations (2000)
The main losers in today`s very unequal world are not those who are too much exposed to globalization. They are the ones who have been left out.

8. Trade in a Global Economy
Why do countries trade?
They can get products from abroad cheaper or of higher-quality than those obtained domestically.
The fact that Germany was the largest exporter of goods in 2005 shows its technology for producing high-quality manufactured goods.
China produces goods more cheaply than most industrialized countries.
In the first part of the course, we will examine several models explaining international trade
How do we measure the volume of trade?
Bilateral trade flows can be hard to interpret
Another way to measure trade is by looking at its ratio to GDP.

9. Trade Compared to GDP Table 1.2 Trade/GDP Ratio in 2005
Table 1.2: Trade/GDP Ratio in 2005 This table shows the ratio of total trade to GDP for each country, where trade is calculated as (Imports + Exports)/2, including both merchandise goods and services. Countries with the highest ratios of trade to GDP tend to be small in economic size and are often important centers for shipping goods, like Hong Kong (China) and Malaysia. Countries with the lowest ratios of trade to GDP tend to be very large in economic size, like Japan and the United States, or are not very open to trade because of trade barriers or distance from other countries.
Source: World Development Indicators, The World Bank.

10. Trade Compared to GDP
Figure 1.3 Trade in Goods and Services Relative to GDP
Figure 1.3: Trade in Goods and Services Relative to GDP This diagram shows total trade in merchandise goods and services for each country (i.e., the average of imports and exports) divided by gross domestic product (GDP). There was a considerable increase in the ratio of trade to GDP between 1890 and This trend ended by World War I and the Great Depression, and it took many years to regain the same level of trade. Most of the industrial countries shown did not reach the level of trade prevailing in 1913 until the 1970s. Some countries—such as Australia and the United Kingdom—did not reach their earlier levels until the end of the century.
Source: Revised from Robert C. Feenstra, “Integration of Trade and Disintegration of Production in the Global Economy,” Journal of Economic Perspectives, Fall 1998, 31–50.

11. International Trade
The First “Golden Age” of Trade was from , and the second one in the period after WW2
Trade had a setback in the interwar period, partly due to trade barriers. This decline in the world economy lead the Allied countries to meet after WWII to develop policies to keep tariffs low. General Agreement on Tariffs and Trade (GATT) which became the World Trade Organization (WTO)
Trade barriers refer to all factors that influence the amount of goods and services shipped across international borders.

12. Barriers to Trade Figure 1.4 Average Worldwide Tariffs, 1860–2000
Figure 1.4: Average Worldwide Tariffs, 1860–2000 This diagram shows the world average tariff for 35 countries from 1860 to The average tariff fluctuated around 15% from 1860 to After World War I, however, the average tariff rose sharply because of the Smoot-Hawley Tariff Act in the United States and the reaction by other countries, reaching 25% by Since the end of World War II, tariffs have fallen.
Source: Michael A. Clemens and Jeffrey G. Williamson, 2004, “Why did the Tariff-Growth
Correlation Change after 1950?” Journal of Economic Growth, 9(1), 5–46.

13. Map of Foreign Direct Investment
Foreign Direct Investment (FDI) occurs when a firm in one country owns a company in another country.
In 2000 there were FDI flows of $1.3 trillion into or out of OEDC countries. This value is more than 90% of total world FDI.
Two ways FDI can occur
Horizontal FDI occurs when a firm from one country owns a company in another industrial country.
Vertical FDI occurs when a firm from an industrial country owns a plant in a developing country