1. KOOTHS | BiTS: International Economics (winter term 2015/2016) 1 International Economics Prof. Dr. Stefan Kooths BiTS Berlin (winter term 2015/2016) www.kooths.de/bits-ie

2. KOOTHS | BiTS: International Economics (winter term 2015/2016) 2 Contact data Prof. Dr. Stefan Kooths Head of the Forecasting Center Kiel Institute for the World Economy Office Berlin In den Ministergärten 8 10117 Berlin 030/2067-9664 stefan.kooths@bits-hochschule.de www.kooths.de

3. KOOTHS | BiTS: International Economics (winter term 2015/2016) 3 The Kiel Institute for the World Economy

4. KOOTHS | BiTS: International Economics (winter term 2015/2016) 4 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

5. KOOTHS | BiTS: International Economics (winter term 2015/2016) 5 Outline 1.Introduction and Overview  Motivation, key questions, and methodology  Course scheme 2.Systemizing and Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

6. KOOTHS | BiTS: International Economics (winter term 2015/2016) 6 Global production and international trade Average growth: GDP: 3.4 percent Trade: 5.6 percent

7. KOOTHS | BiTS: International Economics (winter term 2015/2016) 7 Drivers of Globalization (overview)  Liberalization of world trade  Liberalization of cross-border capital flows  Collapse of centrally-planned economies  Increased political/social stability  Improved transportation infrastructure  Progress in telecommunication systems/internet technologies  Creation of economic blocs (e.g. EEC/EU, NAFTA, MERCOSUR)  Spread of technological know-how via FDI  Better education for more people

8. KOOTHS | BiTS: International Economics (winter term 2015/2016) 8 Effects of Globalization (overview)  Generally: More choices (deeper markets)  More competition on world markets  Increased number of tradable goods and services  More alternatives for production sites (globally integrated value-added chains)  Accelerated structural change/more innovations (pressure on domestic labor markets)  Regulatory arbitrage, pressure on tax and transfer systems (less latitude for national policies)  Intensified international dependencies  Net gains, but domestic winners and losers (preview)

9. KOOTHS | BiTS: International Economics (winter term 2015/2016) 9 Why „International Economics“ is different (and why it is not)  Key economic questions (not specific to IE) »(International) division of labor »(International) allocation of production factors »Uniform microeconomic foundations and macroeconomic analysis  Country borders and the nation state »Factor mobility (labor, capital) »Legal frameworks, fiscal policy »National money and exchange rate systems

10. KOOTHS | BiTS: International Economics (winter term 2015/2016) 10 Economics: Analysis of economic activity (= coping with scarcities)

11. KOOTHS | BiTS: International Economics (winter term 2015/2016) 11 International Economics: Analysis of cross-border economic activity

12. KOOTHS | BiTS: International Economics (winter term 2015/2016) 12 BUT: Do country borders always matter?

13. KOOTHS | BiTS: International Economics (winter term 2015/2016) 13 Methodological individualism  General method »Individuals as point of departure for economic analysis »Explaining social processes via actions of involved persons  Individuals … »… are diverse »… have exogenous preferences »… are capable of acting on their own »… follow their vested interest  Subjectivism »Individual preferences »No scientific inter-subjective comparisons of utility

14. KOOTHS | BiTS: International Economics (winter term 2015/2016) 14 Key first insights from methodological individualism  Trade = exchange of goods or services »Two-sided human interaction (social cooperation) »Based on voluntary contracts (implies mutual benefits)  Net gains from trade for both parties (no zero-sum game)  Pitfalls from aggregation/collectivist perspectives »Countries do not trade with each other, only individuals/firms do »Countries do not compete with each other, only individuals/firms do  Competitiveness is a relative concept  Countries (economic areas) consist of multiple markets  Each market comprises both the supply side and the demand side  „Competitiveness“ not applicable to country level

15. KOOTHS | BiTS: International Economics (winter term 2015/2016) 15 Outline 1.Introduction and Overview  Motivation, key questions, and methodology  Course scheme 2.Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

16. KOOTHS | BiTS: International Economics (winter term 2015/2016) 16 Reading  Literature »Dieckheuer, G. (2001): “Internationale Wirtschaftsbeziehungen”, 5. Aufl., München/Wien. »Eibner, W. (2006): “Understanding International Trade: Theory & Policy/Anwendungsorientierte Außenwirtschaft: Theorie & Politik”, Oldenbourg Verlag: München/Wien. »Hazlitt, H. (2008): “Economics in One Lesson”, Ludwig von Mises Institute: Auburn/Alabama. [https://mises.org/books/economics_in_one_lesson_hazlitt.pdf] »Kooths, S. and B. van Roye (2012): “Euro Area: Single Currency – National Money Creation”, Kiel Working Papers, No. 1787, Kiel. »Pugel, T, A. (2012): “International Economics”, 15 th Edition, McGraw-Hill: New York. »Snower, D., J. Boysen-Hogrefe, K.-J. Gern, H. Klodt, S. Kooths, C.-F. Laaser, C. Reicher, B. van Roye, J. Scheide and K. Schrader (2013): “The Kiel Policy Package to Address the Crisis in the Euro Area”, Kiel Policy Brief, No. 58a, Kiel.  Course website: www.kooths-de/bits-iewww.kooths-de/bits-ie

17. KOOTHS | BiTS: International Economics (winter term 2015/2016) 17 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity  The Balance of Payments (BoP)  The International Investment Position (IIP) 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

18. KOOTHS | BiTS: International Economics (winter term 2015/2016) 18 CAPITAL AND FINANCIAL ACCOUNT CURRENT ACCOUNT Types of cross-border transactions  Trade flows »Goods (merchandise) »Services  Cross-border incomes (compensation for use of production factors) »Labor: Compensation of employees »Capital: Investment income  Transfers »Current transfers (regularly) »Capital transfers (one-off)  Financial transactions »Nonofficial: Direct/Portfolio/Other investment »Central bank: Changes in official international reserves

19. KOOTHS | BiTS: International Economics (winter term 2015/2016) 19 Accounting principles: Credit and debit items (double-entry bookkeeping)  Credit item (measured with a positive sign/entry on the left side) … »… results from a transaction for which the country must be paid. It sets up the basis for a payment by a foreigner into the country – that is, it creates a monetary claim on a foreigner.  Debit item (measures with a negative sign/entry on the right side) … »… results from a transaction for which the country must pay. It sets up the basis for a payment by the country to a foreigner – that is, it creates a monetary liability against a foreigner.  Double-entry system (sum of all credit entries = sum of all debit entries) »BUT: Statistical discrepancies („errors and omissions“)

20. KOOTHS | BiTS: International Economics (winter term 2015/2016) 20 Valuation: cif vs. fob

21. KOOTHS | BiTS: International Economics (winter term 2015/2016) 21 Key “Balance of Payments” concepts  Flow-oriented framework for cross-border transactions »Specific time period (year, quarter, month) »NOT: Stocks (“balance sheet”)  Time of recording »Accrual principle »NOT: Actual Payment  People »Residents vs. Non-Residents »NOT: Nationals vs. foreigners (nationality does not matter)  Focus: Reporting country vs. RoW (= rest of the world)

22. KOOTHS | BiTS: International Economics (winter term 2015/2016) 22 The consolidated BoP account

23. KOOTHS | BiTS: International Economics (winter term 2015/2016) 23 Current account vs. Capital and financial account

24. KOOTHS | BiTS: International Economics (winter term 2015/2016) 24 More detailed BoP subaccounts

25. KOOTHS | BiTS: International Economics (winter term 2015/2016) 25 The detailed BoP structure (IMF BoP Manual)  IMF Balance of Payments Manual http://www.imf.org/external/pubs/ft/bopman/bopman.pdf http://www.imf.org/external/pubs/ft/bopman/bopman.pdf

26. KOOTHS | BiTS: International Economics (winter term 2015/2016) 26 Official reserve assets and the role of the central bank

27. KOOTHS | BiTS: International Economics (winter term 2015/2016) 27 Real-life BoPs Statistical Discrepancies = Net Errors and Omissions = Balance on Unclassified Transactions

28. KOOTHS | BiTS: International Economics (winter term 2015/2016) 28 Example: US Balance of Payments (2010, $ billions)

29. KOOTHS | BiTS: International Economics (winter term 2015/2016) 29 Interpreting BoP balances (BoP and National Accounts)  Goods and services balance / trade balance (NX) »Net exports of both goods and services  Current account balance (CA) »Net credits on the flows of goods, services, income, current transfers  Financial account balance, exl. official reserves (FA) »Net credits involving changes in nonofficial foreign financial assets and liabilities  Overall balance / official settlements balance (B) »Current account balance + (nonofficial) financial account balance [+ statistical discrepancy] = Increase of official reserve assets  Link to National Accounts »NX  GDP »CA  GNI »CA + net capital transfers  Net external lending

30. KOOTHS | BiTS: International Economics (winter term 2015/2016) 30 Does a trade deficit reduce GDP?

31. KOOTHS | BiTS: International Economics (winter term 2015/2016) 31 Accounting exercise (Reporting country: USA) (1)At the end of the year, Northern Illinois (a U.S. utility company) buys $34 million in natural gas from a Canadian firm. It does not pay in cash immediately, but instead issues a promissory note saying it will pay the bill (plus interest that will accrue over time) one year later. (2)Brazilian soccer fans spend $6 million as tourists in the U. S. during a soccer tournament, and they pay for their hotels, meals, and transportation by using the deposits that they have at a New York bank. (3)The U.S. Treasury pays $25 million in interest on its past borrowing from Swiss investors, paying with checks on a New York bank. (4)The U.S. monetary authority (Fed) in its official role becomes concerned that the exchange rate value of the dollar may appreciate against the Japanese yen. It decides to purchase yen- denominated bank deposits from a major Tokyo bank and pay by transferring $15 million of its New York bank deposits to this Tokyo bank. (5)The U.S. government gives $8 million in foreign aid to the government of Egypt in the form of wheat from U.S. government stockpiles. (6)Mexican immigrant workers in the U.S. send $2 million from their bank accounts at a Phoenix-based bank as remittances to their families in Mexico.

32. KOOTHS | BiTS: International Economics (winter term 2015/2016) 32 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity  The Balance of Payments (BoP)  The International Investment Position (IIP) 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

33. KOOTHS | BiTS: International Economics (winter term 2015/2016) 33 Linking BoP and IIP  Stocks (IIP) vs. flows (BoP  Transaction-based flows vs. revaluations of stocks

34. KOOTHS | BiTS: International Economics (winter term 2015/2016) 34 Germany: Current account, capital transfers, and IIP

35. KOOTHS | BiTS: International Economics (winter term 2015/2016) 35 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.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. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

36. KOOTHS | BiTS: International Economics (winter term 2015/2016) 36 Four basic questions about cross-border trade  Causes: What determines which products are exported and imported?  Impact: How does trade affect production and consumption in each country?  National gains: How does trade affect the economic well-being of each country?  Intra-national winners and losers : How does trade affect the distribution of economic well-being among various groups within a country?

37. KOOTHS | BiTS: International Economics (winter term 2015/2016) 37 Categories of trade  Non-availability (trade in commodities)  Inter-industry trade (specialization)  Intra-industry trade

38. KOOTHS | BiTS: International Economics (winter term 2015/2016) 38 Product markets: General assumptions, demand and supply, consumer and producer surplus, elasticities

39. KOOTHS | BiTS: International Economics (winter term 2015/2016) 39 Opening of trade: National and international markets

40. KOOTHS | BiTS: International Economics (winter term 2015/2016) 40 Arbitrage and free-trade equilibrium

41. KOOTHS | BiTS: International Economics (winter term 2015/2016) 41 Terms of trade

42. KOOTHS | BiTS: International Economics (winter term 2015/2016) 42 Four basic answers to trade

43. KOOTHS | BiTS: International Economics (winter term 2015/2016) 43 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.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. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

44. KOOTHS | BiTS: International Economics (winter term 2015/2016) 44 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 hours per ton of wheat Working hours per barrel of wine Country A 25 Country B 2,54 Adam Smith (1723—1790) An Inquiry into the Nature and Causes of the Wealth of Nations, 1776

45. KOOTHS | BiTS: International Economics (winter term 2015/2016) 45 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 hours per ton of wheat Working hours per barrel of wine Country A 25 Country B 14

46. KOOTHS | BiTS: International Economics (winter term 2015/2016) 46 Production-possibility curve

47. KOOTHS | BiTS: International Economics (winter term 2015/2016) 47 Exchange rate and terms of trade

48. KOOTHS | BiTS: International Economics (winter term 2015/2016) 48 Mercantilism and unbalanced trade

49. KOOTHS | BiTS: International Economics (winter term 2015/2016) 49 Complete vs. incomplete specialization: Constant vs. increasing marginal cost

50. KOOTHS | BiTS: International Economics (winter term 2015/2016) 50 Production conditions, preferences and trade patterns

51. KOOTHS | BiTS: International Economics (winter term 2015/2016) 51 Trade effects and gains from trade

52. KOOTHS | BiTS: International Economics (winter term 2015/2016) 52 Country size and relative international winners

53. KOOTHS | BiTS: International Economics (winter term 2015/2016) 53 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.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. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

54. KOOTHS | BiTS: International Economics (winter term 2015/2016) 54 Factor proportions and factor endowments  Factor proportions »Factor intensity used in production of goods »Labor-intensive good: Ratio of labor to other factors is high relative to other goods (share of labor costs is high relative to other goods)  Factor endowments »Available factor resources within a country »Labor-abundant country: Ratio of labor to other factors is high relative to the rest of the world

55. KOOTHS | BiTS: International Economics (winter term 2015/2016) 55 Shares of the world‘s factor endowments (2007/2010)

56. KOOTHS | BiTS: International Economics (winter term 2015/2016) 56 The Heckscher-Ohlin theory and income distribution  Two countries, two factors, two goods (2-2-2 model)  Fixed and fully employed factor supplies »Mobile between sectors within each country »Immobile between countries  Same consumption patters in both countries  Same (constant-return-to-scale) production technologies in both countries Trade explanation by H-O »Differences across countries in the relative availability of factors »Differences across products in the use of these factors  A country exports products that use its relatively abundant factor(s) intensively and imports products that use its relatively scarce factors intensively

57. KOOTHS | BiTS: International Economics (winter term 2015/2016) 57 Short-run and long-run effects: National losers and winners (1/2)

58. KOOTHS | BiTS: International Economics (winter term 2015/2016) 58 Short-run and long-run effects: National losers and winners (2/2)

59. KOOTHS | BiTS: International Economics (winter term 2015/2016) 59 The Stolper-Samuelson theorem and factor price equalization

60. KOOTHS | BiTS: International Economics (winter term 2015/2016) 60 The Rybczynski-theorem

61. KOOTHS | BiTS: International Economics (winter term 2015/2016) 61 The Leontief-paradox and empirical evidence

62. KOOTHS | BiTS: International Economics (winter term 2015/2016) 62 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.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. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

63. KOOTHS | BiTS: International Economics (winter term 2015/2016) 63 Intra-industry trade (overview)  Intra-industry trade »Exports and imports in the same product category  Main drivers and explanations »Product differentiation (monopolistic competition) »Substantial internal scale economies (global oligopolies) »External scale economies (regional spill-overs, industry clusters)

64. KOOTHS | BiTS: International Economics (winter term 2015/2016) 64 Measuring intra-industry trade  United States, selected products (2009)  Average percentage IIT-shares in non-food manufactured products

65. KOOTHS | BiTS: International Economics (winter term 2015/2016) 65 Internal and external scale economies and complete specialization

66. KOOTHS | BiTS: International Economics (winter term 2015/2016) 66 Monopolistic competition  Preferences for variety and product differentiation  Some internal scale economies (decreasing average cost)  Easy market entry and exit in the long run  Mild form of “imperfect” competition

67. KOOTHS | BiTS: International Economics (winter term 2015/2016) 67 Global oligopolies  Substantial internal scale economies (few large firms)  Path-dependency for firm locations  Oligopoly pricing (interdependence, game theory)  Stronger form of “imperfect” competition

68. KOOTHS | BiTS: International Economics (winter term 2015/2016) 68 External scale economies: Industry clusters  Spill-overs and regional clusters: Size of the entire industry in one location matters »Home market »Path-dependency, luck »Government interventions

69. KOOTHS | BiTS: International Economics (winter term 2015/2016) 69 Summary: Gains and losses from international trade

70. KOOTHS | BiTS: International Economics (winter term 2015/2016) 70 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism  Protectionism: Goals and instruments  Tariffs  Nontariff-barriers to trade  Export subsidies (dumping)  Economic integration and multilateral trade policy  Free trade: Pros and cons 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

71. KOOTHS | BiTS: International Economics (winter term 2015/2016) 71 Goals of protectionism

72. KOOTHS | BiTS: International Economics (winter term 2015/2016) 72 Mercantilism

73. KOOTHS | BiTS: International Economics (winter term 2015/2016) 73 Tariffs vs. nontariff barriers to trade

74. KOOTHS | BiTS: International Economics (winter term 2015/2016) 74 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism  Protectionism: Goals and instruments  Tariffs  Nontariff-barriers to trade  Export subsidies (dumping)  Economic integration and multilateral trade policy  Free trade: Pros and cons 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

75. KOOTHS | BiTS: International Economics (winter term 2015/2016) 75 Tariff as a tax on imports

76. KOOTHS | BiTS: International Economics (winter term 2015/2016) 76 Types of custom duties  Specific tariff  Ad valorem tariff

77. KOOTHS | BiTS: International Economics (winter term 2015/2016) 77 Effect on domestic producers

78. KOOTHS | BiTS: International Economics (winter term 2015/2016) 78 Effect on domestic consumers

79. KOOTHS | BiTS: International Economics (winter term 2015/2016) 79 Government revenues

80. KOOTHS | BiTS: International Economics (winter term 2015/2016) 80 Net national effect

81. KOOTHS | BiTS: International Economics (winter term 2015/2016) 81 Terms-of-trade effect: Small vs. large countries

82. KOOTHS | BiTS: International Economics (winter term 2015/2016) 82 Nationally „optimal“ tariffs

83. KOOTHS | BiTS: International Economics (winter term 2015/2016) 83 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism  Protectionism: Goals and instruments  Tariffs  Nontariff-barriers to trade  Export subsidies (dumping)  Economic integration and multilateral trade policy  Free trade: Pros and cons 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

84. KOOTHS | BiTS: International Economics (winter term 2015/2016) 84 Types of nontariff barriers

85. KOOTHS | BiTS: International Economics (winter term 2015/2016) 85 Import quotas: Small country analysis

86. KOOTHS | BiTS: International Economics (winter term 2015/2016) 86 Allocating import licenses  Fixed favoritism  Auction  Resource-using procedures

87. KOOTHS | BiTS: International Economics (winter term 2015/2016) 87 Import quotas: Large country analysis

88. KOOTHS | BiTS: International Economics (winter term 2015/2016) 88 „Voluntary“ export restraints

89. KOOTHS | BiTS: International Economics (winter term 2015/2016) 89 Other nontariff barriers  Product standards  Domestic content requirements  Government procurement

90. KOOTHS | BiTS: International Economics (winter term 2015/2016) 90 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism  Protectionism: Goals and instruments  Tariffs  Nontariff-barriers to trade  Export subsidies (dumping)  Economic integration and multilateral trade policy  Free trade: Pros and cons 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

91. KOOTHS | BiTS: International Economics (winter term 2015/2016) 91 Dumping vs. fair market value  „Normal“ value »Comparative (prices charged in domestic market) »Cost-based (selling below average cost)

92. KOOTHS | BiTS: International Economics (winter term 2015/2016) 92 Types of dumping  Predatory  Cyclical  Seasonal  Persistent (price discrimination)

93. KOOTHS | BiTS: International Economics (winter term 2015/2016) 93 Small exporting country analysis

94. KOOTHS | BiTS: International Economics (winter term 2015/2016) 94 Large exporting country analysis

95. KOOTHS | BiTS: International Economics (winter term 2015/2016) 95 Retaliation

96. KOOTHS | BiTS: International Economics (winter term 2015/2016) 96 Strategic trade policy: Boing vs. Airbus (1/2)

97. KOOTHS | BiTS: International Economics (winter term 2015/2016) 97 Strategic trade policy: Boeing vs. Airbus (2/2)

98. KOOTHS | BiTS: International Economics (winter term 2015/2016) 98 Outline 1.Introduction and Overview 2.Systemizing and Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism  Protectionism: Goals and instruments  Tariffs  Nontariff-barriers to trade  Export subsidies (dumping)  Economic integration and multilateral trade policy  Free trade: Pros and cons 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

99. KOOTHS | BiTS: International Economics (winter term 2015/2016) 99 Stages of economic integration

100. KOOTHS | BiTS: International Economics (winter term 2015/2016) 100 Regional economic integration Source: http://en.wikipedia.org/wiki/File:Economic_integration_stages_(World).png

101. KOOTHS | BiTS: International Economics (winter term 2015/2016) 101 Trade creation and trade diversion

102. KOOTHS | BiTS: International Economics (winter term 2015/2016) 102 Other effects of economic integration  Increase in competition (reducing monopoly power) »Lower prices (static efficiency) »Higher productivity/lower cost of production (dynamic efficiency)  Lower cost by expanding scales of production  More opportunities for business investments (FDI)

103. KOOTHS | BiTS: International Economics (winter term 2015/2016) 103 Case study: The European Union

104. KOOTHS | BiTS: International Economics (winter term 2015/2016) 104 Trade embargoes

105. KOOTHS | BiTS: International Economics (winter term 2015/2016) 105 International trade disputes

106. KOOTHS | BiTS: International Economics (winter term 2015/2016) 106 GATT and WTO  GATT (1947) »General Agreement on Tariffs and Trade  WTO (1994) »World Trade Organization »www.wto.org

107. KOOTHS | BiTS: International Economics (winter term 2015/2016) 107 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism  Protectionism: Goals and instruments  Tariffs  Nontariff-barriers to trade  Export subsidies (dumping)  Economic integration and multilateral trade policy  Free trade: Pros and cons 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

108. KOOTHS | BiTS: International Economics (winter term 2015/2016) 108 First best vs. second best

109. KOOTHS | BiTS: International Economics (winter term 2015/2016) 109 Costs of protection  Loss of welfare (deadweight losses)  Foreign retaliation  Enforcement costs  Rent-seeking costs  Rents to foreign producers (VERs)  Dynamic inefficiencies (loss of dynamic efficiency)

110. KOOTHS | BiTS: International Economics (winter term 2015/2016) 110 Externalities

111. KOOTHS | BiTS: International Economics (winter term 2015/2016) 111 Promoting domestic production or employment

112. KOOTHS | BiTS: International Economics (winter term 2015/2016) 112 The infant industry/dying industry arguments

113. KOOTHS | BiTS: International Economics (winter term 2015/2016) 113 Public revenues

114. KOOTHS | BiTS: International Economics (winter term 2015/2016) 114 Noneconomic objectives  „National pride“  National defense  Domestic income redistribution

115. KOOTHS | BiTS: International Economics (winter term 2015/2016) 115 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy  Foreign exchange markets and currency systems  International financial investment  Determination of exchange rate movements  Open-economy macroeconomics 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

116. KOOTHS | BiTS: International Economics (winter term 2015/2016) 116 Exchange rates (spot vs. forward rate)  Exchange rate »Price of one nation‘s money (e.g. USD) … »… in terms of another nation‘s money (e.g. EUR)  Euro area view: 0,73 [€/$]  United States view: 1,37 [$/€]  Time dimension »Spot rate: price for immediate exchange »Forward rate: price set now for an exchange in the future

117. KOOTHS | BiTS: International Economics (winter term 2015/2016) 117 Currency systems: Floating vs. fixed exchange-rate systems

118. KOOTHS | BiTS: International Economics (winter term 2015/2016) 118 Appreciation/revaluation and depreciation/devaluation  Floating exchange rate »Appreciation »Depreciation  Fixed exchange rate »Revaluation »Devaluation

119. KOOTHS | BiTS: International Economics (winter term 2015/2016) 119 Demand for and supply of foreign exchange  Demand-side »Imports of goods and services »Capital outflows  Supply-side »Exports of goods and services »Capital inflows

120. KOOTHS | BiTS: International Economics (winter term 2015/2016) 120 Arbitrage  Exploiting price differentials »Between trading centers (NY, London, Frankfurt, Tokyo, …) »Between multiple currencies 1,6 [USD/GBP] 0,9 [USD/CHF] 0,5625 [GBP/CHF] 1,6 [USD/GBP]  1,0227 GBP 0,9 [USD/CHF]  1,6363 USD 0,55 [GBP/CHF]  1 GBP = 1,8181 CHF

121. KOOTHS | BiTS: International Economics (winter term 2015/2016) 121 Pegged exchange rates

122. KOOTHS | BiTS: International Economics (winter term 2015/2016) 122 Defending the peg: Official interventions

123. KOOTHS | BiTS: International Economics (winter term 2015/2016) 123 Exchange control

124. KOOTHS | BiTS: International Economics (winter term 2015/2016) 124 International experience: From the Gold Standard until today

125. KOOTHS | BiTS: International Economics (winter term 2015/2016) 125 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy  Foreign exchange markets and currency systems  International financial investment  Determination of exchange rate movements  Open-economy macroeconomics 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

126. KOOTHS | BiTS: International Economics (winter term 2015/2016) 126 Exchange rate risk and speculation

127. KOOTHS | BiTS: International Economics (winter term 2015/2016) 127 Hedging and forward exchange contracts

128. KOOTHS | BiTS: International Economics (winter term 2015/2016) 128 Futures, Options, Swaps

129. KOOTHS | BiTS: International Economics (winter term 2015/2016) 129 The “Lake” model

130. KOOTHS | BiTS: International Economics (winter term 2015/2016) 130 Covered and uncovered transactions

131. KOOTHS | BiTS: International Economics (winter term 2015/2016) 131 Interest parity  Covered interest parity  Uncovered interest parity

132. KOOTHS | BiTS: International Economics (winter term 2015/2016) 132 Outline 1.Introduction and Overview 2.Recording Cross-border Economic Activity 3.The Pure Theory of International Trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy  Foreign exchange markets and currency systems  International financial investment  Determination of exchange rate movements  Open-economy macroeconomics 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

133. KOOTHS | BiTS: International Economics (winter term 2015/2016) 133 Short run vs. long run analysis  Short-run »Asset market approach to exchange rates (capital flows)  Long-run »Low of one price  Purchasing power parity (trade in goods and services)

134. KOOTHS | BiTS: International Economics (winter term 2015/2016) 134 Asset market approach and interest rate parity

135. KOOTHS | BiTS: International Economics (winter term 2015/2016) 135 Purchasing Power Parity (PPP)

136. KOOTHS | BiTS: International Economics (winter term 2015/2016) 136 Absolute vs. relative PPP

137. KOOTHS | BiTS: International Economics (winter term 2015/2016) 137 Monetary approach

138. KOOTHS | BiTS: International Economics (winter term 2015/2016) 138 Exchange rate overshooting