KTEE308 International Economics

Introduction

Assoc. Prof. Tu Thuy Anh

Faculty of International Economics
 Popular Sayings
 "When America sneezed, Japan and
Europe used to catch a cold”

 "No nation is immune to economic

events that occur in far away places“

 "Surely there is no closed economy in

the real-world, except the world
economy!"
 Examples:
"As Toyotas flooded the US market, producers
in the US faced a hard choice: to either trim
their budgets or close their doors. Many
workers lost their jobs, and louder and louder
calls for 'protection from ruinous foreign
competition' were heard. As a result, the
country that championed free trade in the
world economy had second thoughts about
the benefits of free trade.“

And how about the impact of China and India

in many industries today!
 Recent Examples:
- EVFTA
- Oil Price
- CPTPP
- Automobiles
• The study of international economics
has never been as important as it is
now
 At the beginning of the 21st century,
nations are more closely linked through
trade in goods and services, through
flows of money, and through
investment in each others’ economies
than ever before
 What Is International Economics About?
• International economics is about how nations interact
through trade of goods and services, through flows of money
and through investment.
• Whereas economic theory deals with the problems of a
single closed economy, International Economics
focuses on the problems of two or more economies
• International economics is an old subject, but it continues to
grow in importance as countries become tied to the
international economy. (CPTPP, EVFTA, RCEP)
• Nations are more closely linked through trade in goods and
services, through flows of money, and through investment
than ever before. 1-6
What Is International Economics About? (cont.)

1-7
What Is International Economics About?

1-8
 Index of Openness*
1980 2004
Low-income
country average 20.6 25.1 Some trade extensively,
others very little.
China 6 35.4 How can this activity be
Turkey 5 23.3 understood and
explained?
Middle-income
country average 25.1 33.7

USA 10 6.7
Japan 14 11.9
Germany - 36.8
Ireland 48 75.9 * Ratio of exports to GDP
Sweden 29 37.6 multiplied by 100
Finland 33 35.9
Singapore 215 172.4
High-income
country average 39.1 43.8
 Openness in Vietnam
50 80
45 70
40
60
35
30 50
Ave Exp (mil USD)
25 40
EXP / GDP (%)
20 30
15
20
10
5 10

0 0
1986 - 1991 – 1996 - 2001 - 2006 -
1990 1995 2000 2005 2007
 Why do we trade?
Countries (or firms in different countries) trade with
each other because they benefit from it! Specifically,
we trade
• to get goods and services that cannot be produced at
home
• to get cheaper goods and services than those
produced at home
• to achieve economies of scale: static gains
• to grow faster: dynamic gains
 Gains from Trade
• Several ideas underlie the gains from trade
1. When a buyer and a seller engage in a voluntary
transaction, both receive something that they want and
both can be made better off.
• Norwegian consumers could buy oranges through
international trade that they otherwise would have a difficult
time producing.
• The producer of the oranges receives income that it can use
to buy the things that it desires.

1-12
 Gains from Trade (cont.)
2. How could a country that is the most (least) efficient
producer of everything gain from trade?
– With a finite amount of resources, countries can use those
resources to produce what they are most productive at (compared
to their other production choices), then trade those products for
goods and services that they want to consume.
– Countries can specialize in production, while consuming many
goods and services through trade.

1-13
 Gains from Trade (cont.)
3. Trade is predicted to benefit a country by making it more
efficient when it exports goods which use abundant
resources and imports goods which use scarce resources.
4. When countries specialize, they may also be more
efficient due to large scale production.
5. Countries may also gain by trading current resources for
future resources (lending and borrowing).

1-14
 Gains from Trade (cont.)
• Trade is predicted to benefit countries as a whole
in several ways, but trade may harm particular
groups within a country.
– International trade can adversely affect the owners of
resources that are used intensively in industries that
compete with imports.
– Trade may therefore have effects on the distribution of
income within a country.
– Conflicts about trade should occur between groups
within countries rather than between countries.
1-15
 Patterns of Trade
• Differences in climate and resources can explain why
Brazil exports coffee and Australia exports iron ore.
• But why does Japan export automobiles, while the US
exports aircraft?
• Differences in labor productivity may explain why some
countries export certain products.
• How relative supplies of capital, labor and land are used
in the production of different goods may also explain why
some countries export certain products.

1-16
 The 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 (e.g., product specifications)
that exclude foreign products from the market, but still allow
domestic products.
• What are the costs and benefits of these policies?

1-17
 The Effects of Government Policies
on Trade (cont.)
• Economists design models that try to measure the effects
of different trade policies.
• If a government must restrict trade, which policy should it
use?
• If a government must restrict trade, how much should it
restrict trade?
• If a government restricts trade, what are the costs if foreign
governments respond likewise?

1-18
 Why Do We Trade?
The classical theory of IT is concerned with three questions:
1. What are the gains from trade?
Where do the gains come from, and how are they divided
among the trading countries?
2. What is the structure/pattern of trade?
Which goods/services are exported, and which are
imported?
3. What are the terms of trade?
At what prices are the exported and imported goods
exchanged?
 International Finance Topics
• Governments measure the value of exports and imports, as well as the
value of international financial capital that flows into and out of their
countries.
• Related to these two measures is the measure of official settlements
balance, or the balance of payments: the balance of funds that central
banks use for official international payments.
• All three values are measured in the government’s national income
accounts.

1-20
 International Finance Topics
(cont.)
• Besides international financial capital flows and the
official settlements balance, exchange rates are also an
important financial issue for most governments.
– Exchange rates measure how much domestic currency can be
exchanged for foreign currency.
– They also affect how much goods that are denominated in foreign
currency (imports) cost.
– And they affect how much goods denominated in domestic
currency (exports) cost in foreign markets.

1-21
 International Trade
Versus International Finance
• International trade focuses on transactions
of real goods and services across nations. (micro based
theory)
– These transactions usually involve a physical movement
of goods or a commitment of tangible resources like
labor services.
• International finance focuses on financial or monetary
transactions across nations. (macro based)
– For example, purchases of US dollars or financial assets
by Europeans.

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 COURSE MATERIALS
1. Required text
Salvatore. D., Introduction to International Economics
2. Recommended books:
· Krugman P. and M. Obstfeld, International Economics, Theory
and Policy, 6th edition, Addison-Wesley, 2003.
· International Economics, by Thomas A. Pugel and Peter H.
Lindert, 2000, McGraw - Higher Education.
· International Economics (Tu Thuy Anh, 2013, textbook in
Vietnamese)
 Additional readings
• The Economist magazine
• World Trade Organization
• United Nations Conference on Trade and
Development
• The World Bank’s Trade and Development Center
• International Trade Center
 COURSE GRADING
Grades will be based on the final exam, a course
(group) paper and class participation.
• Final Exam will count for a total of 60% of your
grade.
• Midterm is worth 30% of your grade.
 Class participation: 10%. This includes
exercises to do in class, among other things.