Lectures International Economics
Lecture 1 02-09-2019
What is international economics?
• International economics studies
o The economic interactions among the different nations that make up the global economy;
o How inhabitants of different nations interact through the flow of trade in goods and services
and the flow of money and investment.
• Empirically:
o Nations are more closely linked through trade and financial transactions than ever before;
o Smaller countries are likely to be more open (share of international transactions) than, for
instance, the US.
▪ Small countries do not necessary have an effect on other countries if they change for
example their trade strategy.
• Analysis:
o Often in terms of domestic versus foreign sector.
Two fields in international economics
International Finance / Open Economy Macroeconomics / International Monetary Economics:
• Exchange rates, capital flows, current account imbalances
• Currencies (money, foreign exchange) are very important
• International policy coordination
• First three weeks of the course plus 1 lecture (Bohn)
International Trade (Microeconomics)
• Physical movement of goods and services
• Where to locate production? (export or FDI)
• The role of trade policy by governments
• 1 lecture plus last three weeks of the course (de Vaal, Hartman, Lange)
Issues in open economy macroeconomics
• Monetary developments:
o Widely fluctuating exchange rates since 1973
o Exponential increase in international financial markets and capital flows (especially after
1990)
• Financial crises in the past:
o Currency crises: e.g. European Monetary System 1992; Asia 1997; Argentina 2002
o US subprime mortgage crisis 2007-2008 (Lehman Brothers collapse 2008; Icelandic banking
crisis 2008)
o Sovereign debt crises: Greece 2009-2018; Europe 2010
▪ If the country cannot repay its own debts.
• Current account imbalances:
You do not have as many imports as exports.
o US versus China and Germany
o Germany versus Southern European countries (recent convergence)
,→ US has a huge deficit, compared to China.
Issues in open economy macroeconomics
• Monetary developments:
o Widely fluctuating exchange rates since 1973
o Exponential increase in international financial markets and capital flows
• Financial crises in the past:
o Currency crises
o US subprime mortgage crisis
o Sovereign debt crises
• Current account imbalances:
o US versus China and Germany
o Germany versus Southern European countries (recent convergence)
• Brexit:
o Exchange rate and financial market implications
,What to study in open economy macroeconomics?
Lots of interesting questions:
• What are the determinants of capital flows?
• Does financial liberalization help or harm economic development?
• Are global current account imbalances the ultimate cause of the recent financial crises?
• Is it wise to have the euro?
• Should governments intervene?
o Foreign exchange market interventions
o Financial transaction tax (Tobin tax)
o International supervision/regulation – guest lecture by Tijmen Daniëls (DNB)
We can only scratch the surface in the monetary part in this course:
• Understand basics of balance of payments, international financial system, key relationships between
prices, interest and exchange rates.
• What determines exchange rates? Why do they fluctuate?
Is openness a threat?
• (nearly) Anything you buy these days involves foreign production
• (large) Firms increasingly have production facilities all over the world, constantly (re)considering
where to locate production
• There is the rise of the BRIC-countries in world trade and investment
o Brazil, Russia, India and China.
• Are these issues that should worry governments in (particularly) Western countries?
• Or should we be (more) worried by the reactions of world leaders to these issues?
Trade part of this course:
• Analyses the economic pros and cons of free trade and factor movements, using microeconomic
foundations
• Will show analytically that there are gains from trade, but also that openness is not beneficial to
everyone:
o Countries as a whole gain due to international specialization
o But within countries there are income distribution effects of openness
• Does this mean that governments should protect local production and employment by raising import
barriers?
o What are the costs and benefits of trade policy?
o Is trade policy the best way to overcome the income distribution effects?
Leading to insight on …
• ....why is shopping at Primark, H&M, et cetera such a bargain?
• ....what will Brexit mean for the Dutch economy?
• ....is the rise of China as a world (economic) power a threat or an opportunity?
• ....which industries can we expect to suffer from international competition?
• ....does it make economic sense to use trade policy to keep jobs in your country?
• ......and much more!
National income accounts: GNP
• Gross national product (GNP) is the value of all final goods and services produced by a nation’s factors
of production in a given time period. (als je een product meerdere malen verhuurt, vergroot je GNP)
o What are factors of production?
Factors that are used to produce goods and services:
▪ workers (labor services),
▪ physical capital (like buildings and equipment),
▪ land (estate, farmland), natural resources (rare earths, minerals) and others.
o The value of final goods and services produced by home-owned factors of production are
counted as home country’s GNP.
, National income accounts: GDP
Another approximate measure of national income:
• Gross domestic product (GDP) measures the
final value of all goods and services that are produced within a country in a given time period.
• GDP = GNP [produced by a country’s factors of prod.]
– payments (from foreign countries) for home factors of
production, but produced abroad
(e.g. domestic capital invested abroad)
+ payments (to foreign countries) for foreign factors of
production, but produced at home
(e.g. foreign capital invested in the NL
Where produced
• At home
• Abroad
Who own factor of production
• Home owned
• Foreign owned
Where produced
At home Abroad
Who own factor Home owned Big -
Of production Foreign owned + Big
National income accounts: GNP (cont.)
• GNP is calculated by adding the value of expenditure on final goods and services produced.
• There are 4 types of expenditure:
1. Consumption: expenditure by domestic consumers
2. Investment: expenditure by firms on buildings & equipment
3. Government purchases: expenditure by governments on goods and services (usually also referred
to as government consumption, but it also includes government investment, e.g. infrastructural
investment)
4. Current account balance (“exports” minus “imports”): net expenditure by foreigners on domestic
goods and services including factor payments (incl. interest payments)
Beyond the textbook: national income: two interpretation
Ex post national income identity:
• National income = Y = C + I + G + CA = expenditure on
domestic production
• Final products not purchased by households or gov. are counted as inventory investment by firms.
→ Leftovers of a firm
Equilibrium condition in a demand driven model: (not mentioned in book)
• Keynesian Cross
• Supply = dom. production
= Y = AD (aggregate demand) → equilibrium condition also
= C + I + G + CA
(meaning Cdem + Idem + Gdem + EXdem - IMdem)
Lecture 1 02-09-2019
What is international economics?
• International economics studies
o The economic interactions among the different nations that make up the global economy;
o How inhabitants of different nations interact through the flow of trade in goods and services
and the flow of money and investment.
• Empirically:
o Nations are more closely linked through trade and financial transactions than ever before;
o Smaller countries are likely to be more open (share of international transactions) than, for
instance, the US.
▪ Small countries do not necessary have an effect on other countries if they change for
example their trade strategy.
• Analysis:
o Often in terms of domestic versus foreign sector.
Two fields in international economics
International Finance / Open Economy Macroeconomics / International Monetary Economics:
• Exchange rates, capital flows, current account imbalances
• Currencies (money, foreign exchange) are very important
• International policy coordination
• First three weeks of the course plus 1 lecture (Bohn)
International Trade (Microeconomics)
• Physical movement of goods and services
• Where to locate production? (export or FDI)
• The role of trade policy by governments
• 1 lecture plus last three weeks of the course (de Vaal, Hartman, Lange)
Issues in open economy macroeconomics
• Monetary developments:
o Widely fluctuating exchange rates since 1973
o Exponential increase in international financial markets and capital flows (especially after
1990)
• Financial crises in the past:
o Currency crises: e.g. European Monetary System 1992; Asia 1997; Argentina 2002
o US subprime mortgage crisis 2007-2008 (Lehman Brothers collapse 2008; Icelandic banking
crisis 2008)
o Sovereign debt crises: Greece 2009-2018; Europe 2010
▪ If the country cannot repay its own debts.
• Current account imbalances:
You do not have as many imports as exports.
o US versus China and Germany
o Germany versus Southern European countries (recent convergence)
,→ US has a huge deficit, compared to China.
Issues in open economy macroeconomics
• Monetary developments:
o Widely fluctuating exchange rates since 1973
o Exponential increase in international financial markets and capital flows
• Financial crises in the past:
o Currency crises
o US subprime mortgage crisis
o Sovereign debt crises
• Current account imbalances:
o US versus China and Germany
o Germany versus Southern European countries (recent convergence)
• Brexit:
o Exchange rate and financial market implications
,What to study in open economy macroeconomics?
Lots of interesting questions:
• What are the determinants of capital flows?
• Does financial liberalization help or harm economic development?
• Are global current account imbalances the ultimate cause of the recent financial crises?
• Is it wise to have the euro?
• Should governments intervene?
o Foreign exchange market interventions
o Financial transaction tax (Tobin tax)
o International supervision/regulation – guest lecture by Tijmen Daniëls (DNB)
We can only scratch the surface in the monetary part in this course:
• Understand basics of balance of payments, international financial system, key relationships between
prices, interest and exchange rates.
• What determines exchange rates? Why do they fluctuate?
Is openness a threat?
• (nearly) Anything you buy these days involves foreign production
• (large) Firms increasingly have production facilities all over the world, constantly (re)considering
where to locate production
• There is the rise of the BRIC-countries in world trade and investment
o Brazil, Russia, India and China.
• Are these issues that should worry governments in (particularly) Western countries?
• Or should we be (more) worried by the reactions of world leaders to these issues?
Trade part of this course:
• Analyses the economic pros and cons of free trade and factor movements, using microeconomic
foundations
• Will show analytically that there are gains from trade, but also that openness is not beneficial to
everyone:
o Countries as a whole gain due to international specialization
o But within countries there are income distribution effects of openness
• Does this mean that governments should protect local production and employment by raising import
barriers?
o What are the costs and benefits of trade policy?
o Is trade policy the best way to overcome the income distribution effects?
Leading to insight on …
• ....why is shopping at Primark, H&M, et cetera such a bargain?
• ....what will Brexit mean for the Dutch economy?
• ....is the rise of China as a world (economic) power a threat or an opportunity?
• ....which industries can we expect to suffer from international competition?
• ....does it make economic sense to use trade policy to keep jobs in your country?
• ......and much more!
National income accounts: GNP
• Gross national product (GNP) is the value of all final goods and services produced by a nation’s factors
of production in a given time period. (als je een product meerdere malen verhuurt, vergroot je GNP)
o What are factors of production?
Factors that are used to produce goods and services:
▪ workers (labor services),
▪ physical capital (like buildings and equipment),
▪ land (estate, farmland), natural resources (rare earths, minerals) and others.
o The value of final goods and services produced by home-owned factors of production are
counted as home country’s GNP.
, National income accounts: GDP
Another approximate measure of national income:
• Gross domestic product (GDP) measures the
final value of all goods and services that are produced within a country in a given time period.
• GDP = GNP [produced by a country’s factors of prod.]
– payments (from foreign countries) for home factors of
production, but produced abroad
(e.g. domestic capital invested abroad)
+ payments (to foreign countries) for foreign factors of
production, but produced at home
(e.g. foreign capital invested in the NL
Where produced
• At home
• Abroad
Who own factor of production
• Home owned
• Foreign owned
Where produced
At home Abroad
Who own factor Home owned Big -
Of production Foreign owned + Big
National income accounts: GNP (cont.)
• GNP is calculated by adding the value of expenditure on final goods and services produced.
• There are 4 types of expenditure:
1. Consumption: expenditure by domestic consumers
2. Investment: expenditure by firms on buildings & equipment
3. Government purchases: expenditure by governments on goods and services (usually also referred
to as government consumption, but it also includes government investment, e.g. infrastructural
investment)
4. Current account balance (“exports” minus “imports”): net expenditure by foreigners on domestic
goods and services including factor payments (incl. interest payments)
Beyond the textbook: national income: two interpretation
Ex post national income identity:
• National income = Y = C + I + G + CA = expenditure on
domestic production
• Final products not purchased by households or gov. are counted as inventory investment by firms.
→ Leftovers of a firm
Equilibrium condition in a demand driven model: (not mentioned in book)
• Keynesian Cross
• Supply = dom. production
= Y = AD (aggregate demand) → equilibrium condition also
= C + I + G + CA
(meaning Cdem + Idem + Gdem + EXdem - IMdem)
