Gippsland, Berwick, DE, Singapore

1
ECW3121 Economics of International Trade and
Finance

• Gippsland, Berwick, DE, Singapore

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Subject Adviser
Dr Gennadi KAZAKEVITCH Berwick
- Room 129 Consultation time
Thursday 2-4 PM
Phone [phone] E-mail
Gennadi.Kazakevitch_at_buseco.monash.edu.au Interne
t http//www-personal.buseco.monash.edu.au/genn
adik/gkazwww.htm
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Tutor
Ms Azra Bajric-Kolar Berwick -
Room 123 Tutorials Tuesday 9, 10 and 11
AM Start next week Consultation time
Tuesday 12-1 PM Start in 3 weeks
Phone 03 9904
7232 E-mail Azra.Bajric-Kolar_at_BusEco.monash.edu
.au
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Objectives

• To understand the reasons for international
  trade
• To be able to critically evaluate policy debates
• To be able to predict the impact of global
  economic development upon Australia or other
  small open economies (such as international
  students home countries)
• To understand welfare effects of international
  trade.

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AimsOn the completion of the subject you will
have

• Introduction to the discipline of International
  economics
• awareness of the Australian economy as a small
  open economy and open economies role in a world
  of increasing international integration
• understanding of the exchange rates determination
  and the operation of foreign exchange markets
• the ability to critically evaluate contemporary
  policy debates in the area of international trade
  and finance.

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Text Book
Salvatore, Dominick International Economics 8th
Ed John Wiley 2003 Unit book The Reader
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Assessment

• Assignment
• Due 5 PM 22 September 2004 30
• Examination
• 3 Hours 70

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Tutorials

• Give same priority as lectures
• Material covered will be for the assignment or
  exam
• Will assume that work has been done
• YOUR time to ask questions and help each other

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Bring to All Lectures and Tutorials

• Ruler
• Pencils (coloured)
• Graph Paper
• Text Book

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Approach to Study

• Follow the Subject Book
• Work towards the assignments
• Struggle with the theory
• Tackle the original articles in the Reader
• Use your micro and macro skills
• Read the newspaper for relevant articles

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Semester Research Topic

• Australias recent free trade agreements
• Section of the exam paper
• Start collecting information now
• Plenty of information on Internet
• Link current affairs with the theory

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Taking Notes

• Very little writing
• Print out lecture notes before the lecture
• Fit your comments/notes around PPT slides.
• LISTEN before you look
• LOOK before you write
• NO, you cannot have a hard copy of my slides .

13
Revise the following concepts and methods in
Microeconomics (ECW1101 and ECW2120)

• Demand and supply curves
• Isoquants
• Edgewoth box
• Pareto optimum
• Production frontiers
• Indifference curves
• Marginal product of labour and capital
• Consumer and producer surplus.

14
Revise the following concepts and methods in
Macroeconomics (ECW1102 and ECW2120)

• Money demand and supply
• IS, LM, BP curves
• Balance of payments
• Expenditure switching and changing
• Velocity of money
• Money multiplier.

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WWW

• Two options
• http//www-personal.buseco.monash.edu.au/gennadik
  /ecw3121/ecw3121.htm
• Or
• WebCT
• On-line subject materials.
• Lecture notes will be normally available on-line
  not later than durirng the weekend prior to the
  lecture
• Tutorial questions for the next week will be
  available not later than on Wednesday of the
  current week

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Subject Outline
Trade Theory Study Guide 1 Weeks 1-5
International Trade and Finance
Finance Study Guide 3 Weeks 9-12
Trade Policy Study Guide 2 Weeks 6-8
17
Heckscher-Ohlin
Stolper-Samuelson
Factor Price Equalisation
Comparative Advantage
Trade Theory Study Guide 1 Weeks 1-5
Trade Theory Study Guide 1
Rybzcynski
Absolute Advantage
Immiserising Growth
Mercantilism
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Trade Theory

• Theory used to explain and predict.
• What is International Trade?
• Why do nations trade?
• What are the gains from trade?
• Who gains from trade?

19
Other Trade Policies
Regional Trade Agreements
Trade Policy Study Guide 2 Weeks 6-8
Tariffs
International Resource Movements
Tools of the Trade Policy Analysis
20
Exchange Rates
Current Account Deficit
Finance Study Guide 3 Weeks 9-12
Exchange rate theorems
Interest Arbitrage
21
Heckscher-Ohlin
Stolper-Samuelson
Factor Price Equalisation
Comparative Advantage
Trade Theory Study Guide 1
Rybzcynski
Absolute Advantage
Immiserising Growth
Mercantilism
International Trade and Finance
Balance Of Payments
Foreign Exchange Markets
Non Tariff Barriers
Interest Arbitrage
TradeBlocs
Tariffs
Finance Study Guide 3
Trade Policy Study Guide 2
International Resource Movements
Tools of the Trade Policy Analysis
Exchange rate theorems
22
Heckscher-Ohlin
Stolper-Samuelson
Factor Price Equalisation
Comparative Advantage
Trade Theory Study Guide 1 Weeks 1-5
Trade Theory Study Guide 1
Rybzcynski
Absolute Advantage
Week 1
Immiserising Growth
Mercantilism
23
Trade Theory
Why do Nations Trade?

• Mercantilism - zero sum game - one nation gains
  at the expense of the other.
• Adam Smith - both nations can gain from trade.
• Absolute Advantage - each nation should
  specialise in production of the good which it is
  most efficient at producing.

24
Assumptions
Trade Theory
Why do Nations Trade?

• Perfect Competition in Product and Factor Markets
  (PMC)
• Each Country has a fixed endowment of resources
  that are fully used and are homogeneous
• Technology is Unchanging
• No Transportation Costs or barriers to trade
• Factors of Production are perfectly mobile
  between industries but are immobile between
  countries
• 2x2x1

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Trade Theory
Why do Nations Trade?
Mercantilism
Thomas Munn (1571-1641)
The way for a nation to become rich and powerful
is to export more than to import
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Trade Theory
Why do Nations Trade?
Mercantilism
ENGLAND
FRANCE
Imports
Imports
Exports
Exports
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Trade Theory
Why do Nations Trade?
Absolute Advantage

• Adam Smith.
• Trade is necessary for most efficient use of
  world resources.
• Each nation should specialise in production of
  the good in which it enjoys an absolute
  advantage.
• Each nations self interest would allow free
  trade to maximise world welfare.
• Free trade is mutually beneficial for
  participating nations.

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Trade Theory
Why do Nations Trade?
Revision constant cost production possibility
frontier (PPF)
Product A
4
Represents different combinations pf products A
and B that can be produced at a fixed
endowment of resources. Moving along PPF
represents giving up the production of one of
the products for producing more of the other
one.
3
2
1
0
Product B
1
2
3
4
5
29
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
4
3
2
1
0
Cars 100000s per year
1
2
3
4
5
30
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
4
3
2
1
Cars 100000s per year
0
1
2
3
4
5
31
Why do Nations Trade?
Absolute Advantage
32
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
4
Australia
3
2
1
Japan
0
Cars 100000s per year
1
2
3
4
5
33
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
Production Points in Autarky (closed not
trading economy)
4
Australia
3
(2 sugar, 1 car)
2
1
Japan
0
Cars 100000s per year
1
2
3
4
5
34
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
Production Points in Autarky
4
Australia
3
(2 sugar, 1 car)
2
1
(0.6 Sugar, 2 Cars)
Japan
0
Cars 100000s per year
1
2
3
4
5
35
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
Diagrammatic determination of the world output
4
Australia
3
(2 sugar, 1 car)
2
1
(0.6 Sugar, 2 Cars)
Japan
0
Cars 100000s per year
1
2
3
4
5
36
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
Diagrammatic determination of the world output
4
Australia
3
(2 sugar, 1 car)
2
1
(0.6 Sugar, 2 Cars)
Japan
0
Cars 100000s per year
1
2
3
4
5
37
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
Diagrammatic determination of the world output
4
Australia
3
(2 sugar, 1 car)
2
1
(0.6 Sugar, 2 Cars)
Japan
0
Cars 100000s per year
1
2
3
4
5
38
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
Diagrammatic determination of the world output
4
Australia
3
(2 sugar, 1 car)
2
1
(0.6 Sugar, 2 Cars)
Japan
0
Cars 100000s per year
1
2
3
4
5
39
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
Diagrammatic determination of the world output
4
Australia
3
(2 sugar, 1 car)
2
1
(0.6 Sugar, 2 Cars)
Japan
0
Cars 100000s per year
1
2
3
4
5
40
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
Diagrammatic determination of the world output
4
Australia
3
(2 sugar, 1 car)
2
1
(0.6 Sugar, 2 Cars)
Japan
0
Cars 100000s per year
1
2
3
4
5
41
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
Diagrammatic determination of the world output
4
Australia
3
(2.6 Sugar, 3 Cars)
2
1
Japan
0
Cars 100000s per year
1
2
3
4
5
42
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
World Output Autarky
4
Australia
3
(2.6 Sugar, 3 Cars)
2
1
Japan
0
Cars 100000s per year
1
2
3
4
5
43
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
4
Australia
Output with specialisation in production
(3 sugar, 0.5 Cars)
3
2
1
(0.4 Sugar, 3 Cars)
Japan
0
Cars 100000s per year
1
2
3
4
5
44
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
4
Australia
Output with specialisation in production
(3 sugar, 0.5 Cars)
3
2
1
(0.4 Sugar, 3 Cars)
Japan
0
Cars 100000s per year
1
2
3
4
5
45
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
4
Australia
(3.4 Sugar, 3.5 Cars)
(3 sugar, 0.5 Cars)
3
World Output with specialisation in production
2
1
(0.4 Sugar, 3 Cars)
Japan
0
Cars 100000s per year
1
2
3
4
5
46
Trade Theory
Why do Nations Trade?
Absolute Advantage
Sugar 000000s tonnes per year
4
Australia
(3.4 Sugar, 3.5 Cars)
3
(2.6 Sugar, 3 Cars)
World Output with specialisation in production
2
1
Japan
0
Cars 100000s per year
1
2
3
4
5
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DONT FORGET

• Reading Salvatore Chapters 1,2,3 before next
  lecture.
• Tutorial task

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Tutorial task

• Revision of Microeconomics
• The model of absolute advantage