INTERNATIONAL ECONOMICS
Ghent University | Joyce Lefevere
Academic year 2017-2018 |1st semester
,INTERNATIONAL ECONOMICS 2
,Overview
INTRODUCTION 5
1. GLOBALIZATION: THE STATICS OF GLOBALIZATION (AN OVERVIEW) 5
1.1. GLOBALIZATION 5
PRODUCTION PROCES 5
CAUSES OF GLOBALIZATION 6
1.2. TRADE 6
1.2.1. SIZE OF TRADE 6
1.2.2. OPENNESS = GLOBALIZATION 7
1.2.3. TRADE IN GOODS 11
1.2.4. TRADE IN SERVICES 13
1.3. FACTORS OF PRODUCTION 14
1.3.1. LABOUR MIGRATION 14
1.3.2. CAPITAL 16
1.4. CURRENCIES 17
2. TRADE FLOW EXPLAINED: DIFFERENT MODELS 20
2.1. MERCANTILISM & ADAM SMITH 20
ABSOLUTE COST DIFFERENCES (ADAM SMITH) 20
2.2. RICARDIAN MODEL (DAVID RICARDO) 22
2.3. HECKSCHER-OHLIN MODEL 23
ASSUMPTIONS: 23
HECKSCHER-OHLIN MODEL THEOREM 24
EMPIRICAL EVIDENCE OF THE HECKSCHER-OHLIN MODEL 25
STOLPER-SAMUELSON THEOREM 25
2.4. ECONOMIES OF SCALE 25
2.4.1. GENERAL 25
2.4.2. EXTERNAL ECONOMIES OF SCALE 26
2.4.3. INTERNAL ECONOMIES OF SCALE 28
3. THE INSTRUMENT OF TRADE POLICY 30
3.1. THE INSTRUMENTS OF PROTECTION 30
3.2. MEASURING PROTECTION 33
3.3. EFFECTS OF PROTECTION ON TRADE, PRICES AND WELFARE 34
4. POLITICAL ECONOMY OF PROTECTION 42
4.1. ARGUMENTS FOR PROTECTION 42
4.2. POLITICAL ECONOMY OF PROTECTION 47
5. INTERNATIONAL FACTOR MOVEMENTS AND MULTINATIONALS 50
5.1. THEORY OF FACTOR FLOWS 50
5.2. 1) CAPITAL MIGRATION: FDI & MNE 51
5.3. 2) LABOUR MIGRATION 54
6. WTO & EU TRADE POLICY 56
6.1. WTO 56
FUNCTION 1: PRINCIPLES 57
FUNCTION TWO: ROUNDS OF MULTILATERAL TRADE NEGOTIATIONS 58
FUNCTION THREE: DISPUTE SETTLEMENT 60
6.2. EU TRADE POLICY 62
INTERNATIONAL ECONOMICS 3
,7. NATIONAL INCOME ACCOUNTING AND BALANCE OF PAYMENTS 68
7.1. NATIONAL INCOME ACCOUNTS 68
1- MEASURES OF NATIONAL INCOME 68
2- MEASURES OF VALUE OF PRODUCTION 68
3- MEASURES OF VALUE OF EXPENDITURE 68
7.2. NATIONAL SAVING, INVESTMENT, AND THE CURRENT ACCOUNT` 69
7.3. BALANCE OF PAYMENTS (BOP) ACCOUNTS 73
8. EXCHANGE RATES IN THE SHORT AND THE LONG TERM 77
8.1. DEFINITION 77
8.2. FOREX MARKETS 81
8.3. SHORT TERM: ARBITRAGE AND INTEREST PARITY 83
8.4. LONG TERM 86
8.4.1. PURCHASING POWER PARITY (PPP) 86
8.4.2. REAL EXCHANGE RATES 92
9. EXCHANGE RATE SYSTEMS AND MACROECONOMICS 94
9.1. TYPES OF EXCHANGE RATE SYSTEMS 94
9.1.1. TWO PURE SYSTEMS 94
9.1.2. IN BETWEEN FIXED AND FLOATING 96
9.1.3. ON THE SIDE 97
9.2. THE EXCHANGE RATE AND MACROECONOMIC POLICY 98
THE OPEN ECONOMY TRILEMMA 99
ELASTICITY APPROACH 104
SHORTER TERM: THE J-CURVE 105
LONGER TERM 105
10. HISTORICAL OVERVIEW OF EXCHANGE RATE SYSTEMS & IMF 106
10.1. HISTORICAL OVERVIEW OF EXCHANGE RATE SYSTEMS 106
10.2. INTERNATIONAL MONETARY COOPERATION 112
10.2.1. INTERNATIONAL COOPERATION IN GENERAL 112
10.2.2. IMF 114
10.2.3. WORLD BANK GROUP AND AIIIB 121
INTERNATIONAL ECONOMICS 4
,Introduction
2 parts of economics
- ‘real’ (2 6)
- ‘monetary’ (710)
1. Globalization: the statics of globalization (an overview)
1.1. Globalization
What is it?
= increased trade & factor migration
Economical point of view
What do you have in an economy?
Production process
INPUT = factors of PRODUCTION OUTPUT
production PROCES
• Labour • Labour • goods
• Capital (people) • services
• Nature working with
capital
(machines)
International economics POV:
- Different inputs and outputs start crossing borders
• International trade (exchanging outputs)
• International factor migration (trading input)
have increased in size = globalization
more and more economic transaction
TABLE: aspects of different periods in the recent history ( GLOBALIZATION IN
HISTORICAL PERSPECTIVE)
Remarks:
- Before the first world war: already globalization
- Population grow: population grow very fast (faster than before) after WW2
o GDP grows => we become richer
o Per capita? If growth of population > GDP growth not getting richer
people got richer during the 2 stages of globalization
- Trade growth: (output)
o Higher than capita growth of income => world economy has become more open
= globalization
o Golden 60’ies – 70’ies: trade growth is the highest
INTERNATIONAL ECONOMICS 5
, - Migration
Input: labor
o Net immigration into typical immigration economies
Globalization: borders are open
Input: capital
FDI = Foreign Direct Investment
= a foreign company buys/builds a company in Belgium = DIRECT investment
Wants to control management of the company
≠ foreign investor buying shares in a Belgian company = PORTFOLIO investment
Wants money back, don’t want direct connection with the management
Causes of globalization
- Less barriers (tariffs, regulation, …)
= matter of government policy
o Decreased tariffs: tax on import
Regional: EU
Worldwide basis:
GATT (General AgreementCOMMUNICATION
on Tariffs and Trade & TRANSPORT
WTO (World Trade COSTS IN 1990 US$
Sea freight (per Air transport Phone call (3 Information
Organization (1955)) ton) (per 100
passenger mile)
min. New York –
London)
processing
(processing cost;
countries get together to lower 1980 = 100)
the barriers of international trade
1920 95
1930 60 68 245
- Less transportation and transaction 1940 63 46 189
costs
1950 34 30 53
1960 27 24 46
= technological advancement 1970 27 16 32
1980 24 10 5 100
1990 15 11 3 3
2000 12 7 3 0,5
1.2. Trade
2005 13 7 3 0,3
1.2.1. Size of trade
WORLD TRADE IN GOODS & SERVICES Crisis 2009: drop
(EXPORTS VALUE, bn $) 2014: up
2016: drop
2008 2009 2014 2016
changes in value can be result of
Goods 16160 12555 19005 15955
- Change in volume
Services 3948 3520 5078 4807 Or/and
- Change in price
value = volume x price
Evolution of the goods export in volume
(number of cars, shoes etc. that are
exported)
LONG TERM TENDANCY
Upwards
REAL EVOLUTION (black)
Upwards, but shows drop
versus value
INTERNATIONAL ECONOMICS 6
, Change in volume
Two causes of discrepancy Commodity (oil, petrol, metal, food and
beverages etc.)
1. Declines in commodity prices - Value- drop (prices fall)
Appreciation US dollar:
Exchange rate = nominal effective
exchange rate
= US <-> UK <-> EU <-> Switzerland
<-> …
2. Appreciation of US dollar weighted (by using trade volume)
average of the movements in the
exchange rate of the currencies of the
countries you are dealing with
Effective exchange rate:
- Black: US -> increasing
(strong $)
Others have been decreasing
1.2.2. Openness = globalization
The more open you are, the more globalized you are
(𝑒𝑥𝑝𝑜𝑟𝑡𝑠 + 𝑖𝑚𝑝𝑜𝑟𝑡𝑠)
=
(𝑔𝑑𝑝 𝑥 2)
Compare countries: ex: one country is more open than another
Evolution in time:
Long term: openness increases
- Short term: trade more volatile than gdp
Openness 2016
450,00
(GDP = 100) 400,00
= Gross Domestic Product 350,00
300,00
250,00
200,00
Bigger countries: very 150,00
limited openness ratio 100,00
50,00
0,00
Remarks:
- Ratio > 100%
o How do you export more than you have produced?
▪ You can export goods that you have imported first
INTERNATIONAL ECONOMICS 7
, Evolution of openness
Graph op globalization
Trade is growing faster than GDP
RED: world GDP growth
Blue: trade volume changes => more
erratic
Trade moves up and down faster than
GDP
When international trade increases faster than international production
more openness
= aspect of globalization
Right measure for openness
- Numerator: trade is counted as total value (average of exports & imports)
- Denominator: GDP = added value
- Cf. global supply chains: fragmentation of production = aspect of globalization
o Each time an intermediate good crosses the border it counts in the numerator
Ex:
1. battery for iPhone is exported to a country to be assembled
2. parts of the iPhone (incl. battery) are exported again
3. the iPhone ready is exported again to another country
o Thus: the more fragmentation = the more double counting
Now: more ‘global value chains’
INTERNATIONAL ECONOMICS 8
Ghent University | Joyce Lefevere
Academic year 2017-2018 |1st semester
,INTERNATIONAL ECONOMICS 2
,Overview
INTRODUCTION 5
1. GLOBALIZATION: THE STATICS OF GLOBALIZATION (AN OVERVIEW) 5
1.1. GLOBALIZATION 5
PRODUCTION PROCES 5
CAUSES OF GLOBALIZATION 6
1.2. TRADE 6
1.2.1. SIZE OF TRADE 6
1.2.2. OPENNESS = GLOBALIZATION 7
1.2.3. TRADE IN GOODS 11
1.2.4. TRADE IN SERVICES 13
1.3. FACTORS OF PRODUCTION 14
1.3.1. LABOUR MIGRATION 14
1.3.2. CAPITAL 16
1.4. CURRENCIES 17
2. TRADE FLOW EXPLAINED: DIFFERENT MODELS 20
2.1. MERCANTILISM & ADAM SMITH 20
ABSOLUTE COST DIFFERENCES (ADAM SMITH) 20
2.2. RICARDIAN MODEL (DAVID RICARDO) 22
2.3. HECKSCHER-OHLIN MODEL 23
ASSUMPTIONS: 23
HECKSCHER-OHLIN MODEL THEOREM 24
EMPIRICAL EVIDENCE OF THE HECKSCHER-OHLIN MODEL 25
STOLPER-SAMUELSON THEOREM 25
2.4. ECONOMIES OF SCALE 25
2.4.1. GENERAL 25
2.4.2. EXTERNAL ECONOMIES OF SCALE 26
2.4.3. INTERNAL ECONOMIES OF SCALE 28
3. THE INSTRUMENT OF TRADE POLICY 30
3.1. THE INSTRUMENTS OF PROTECTION 30
3.2. MEASURING PROTECTION 33
3.3. EFFECTS OF PROTECTION ON TRADE, PRICES AND WELFARE 34
4. POLITICAL ECONOMY OF PROTECTION 42
4.1. ARGUMENTS FOR PROTECTION 42
4.2. POLITICAL ECONOMY OF PROTECTION 47
5. INTERNATIONAL FACTOR MOVEMENTS AND MULTINATIONALS 50
5.1. THEORY OF FACTOR FLOWS 50
5.2. 1) CAPITAL MIGRATION: FDI & MNE 51
5.3. 2) LABOUR MIGRATION 54
6. WTO & EU TRADE POLICY 56
6.1. WTO 56
FUNCTION 1: PRINCIPLES 57
FUNCTION TWO: ROUNDS OF MULTILATERAL TRADE NEGOTIATIONS 58
FUNCTION THREE: DISPUTE SETTLEMENT 60
6.2. EU TRADE POLICY 62
INTERNATIONAL ECONOMICS 3
,7. NATIONAL INCOME ACCOUNTING AND BALANCE OF PAYMENTS 68
7.1. NATIONAL INCOME ACCOUNTS 68
1- MEASURES OF NATIONAL INCOME 68
2- MEASURES OF VALUE OF PRODUCTION 68
3- MEASURES OF VALUE OF EXPENDITURE 68
7.2. NATIONAL SAVING, INVESTMENT, AND THE CURRENT ACCOUNT` 69
7.3. BALANCE OF PAYMENTS (BOP) ACCOUNTS 73
8. EXCHANGE RATES IN THE SHORT AND THE LONG TERM 77
8.1. DEFINITION 77
8.2. FOREX MARKETS 81
8.3. SHORT TERM: ARBITRAGE AND INTEREST PARITY 83
8.4. LONG TERM 86
8.4.1. PURCHASING POWER PARITY (PPP) 86
8.4.2. REAL EXCHANGE RATES 92
9. EXCHANGE RATE SYSTEMS AND MACROECONOMICS 94
9.1. TYPES OF EXCHANGE RATE SYSTEMS 94
9.1.1. TWO PURE SYSTEMS 94
9.1.2. IN BETWEEN FIXED AND FLOATING 96
9.1.3. ON THE SIDE 97
9.2. THE EXCHANGE RATE AND MACROECONOMIC POLICY 98
THE OPEN ECONOMY TRILEMMA 99
ELASTICITY APPROACH 104
SHORTER TERM: THE J-CURVE 105
LONGER TERM 105
10. HISTORICAL OVERVIEW OF EXCHANGE RATE SYSTEMS & IMF 106
10.1. HISTORICAL OVERVIEW OF EXCHANGE RATE SYSTEMS 106
10.2. INTERNATIONAL MONETARY COOPERATION 112
10.2.1. INTERNATIONAL COOPERATION IN GENERAL 112
10.2.2. IMF 114
10.2.3. WORLD BANK GROUP AND AIIIB 121
INTERNATIONAL ECONOMICS 4
,Introduction
2 parts of economics
- ‘real’ (2 6)
- ‘monetary’ (710)
1. Globalization: the statics of globalization (an overview)
1.1. Globalization
What is it?
= increased trade & factor migration
Economical point of view
What do you have in an economy?
Production process
INPUT = factors of PRODUCTION OUTPUT
production PROCES
• Labour • Labour • goods
• Capital (people) • services
• Nature working with
capital
(machines)
International economics POV:
- Different inputs and outputs start crossing borders
• International trade (exchanging outputs)
• International factor migration (trading input)
have increased in size = globalization
more and more economic transaction
TABLE: aspects of different periods in the recent history ( GLOBALIZATION IN
HISTORICAL PERSPECTIVE)
Remarks:
- Before the first world war: already globalization
- Population grow: population grow very fast (faster than before) after WW2
o GDP grows => we become richer
o Per capita? If growth of population > GDP growth not getting richer
people got richer during the 2 stages of globalization
- Trade growth: (output)
o Higher than capita growth of income => world economy has become more open
= globalization
o Golden 60’ies – 70’ies: trade growth is the highest
INTERNATIONAL ECONOMICS 5
, - Migration
Input: labor
o Net immigration into typical immigration economies
Globalization: borders are open
Input: capital
FDI = Foreign Direct Investment
= a foreign company buys/builds a company in Belgium = DIRECT investment
Wants to control management of the company
≠ foreign investor buying shares in a Belgian company = PORTFOLIO investment
Wants money back, don’t want direct connection with the management
Causes of globalization
- Less barriers (tariffs, regulation, …)
= matter of government policy
o Decreased tariffs: tax on import
Regional: EU
Worldwide basis:
GATT (General AgreementCOMMUNICATION
on Tariffs and Trade & TRANSPORT
WTO (World Trade COSTS IN 1990 US$
Sea freight (per Air transport Phone call (3 Information
Organization (1955)) ton) (per 100
passenger mile)
min. New York –
London)
processing
(processing cost;
countries get together to lower 1980 = 100)
the barriers of international trade
1920 95
1930 60 68 245
- Less transportation and transaction 1940 63 46 189
costs
1950 34 30 53
1960 27 24 46
= technological advancement 1970 27 16 32
1980 24 10 5 100
1990 15 11 3 3
2000 12 7 3 0,5
1.2. Trade
2005 13 7 3 0,3
1.2.1. Size of trade
WORLD TRADE IN GOODS & SERVICES Crisis 2009: drop
(EXPORTS VALUE, bn $) 2014: up
2016: drop
2008 2009 2014 2016
changes in value can be result of
Goods 16160 12555 19005 15955
- Change in volume
Services 3948 3520 5078 4807 Or/and
- Change in price
value = volume x price
Evolution of the goods export in volume
(number of cars, shoes etc. that are
exported)
LONG TERM TENDANCY
Upwards
REAL EVOLUTION (black)
Upwards, but shows drop
versus value
INTERNATIONAL ECONOMICS 6
, Change in volume
Two causes of discrepancy Commodity (oil, petrol, metal, food and
beverages etc.)
1. Declines in commodity prices - Value- drop (prices fall)
Appreciation US dollar:
Exchange rate = nominal effective
exchange rate
= US <-> UK <-> EU <-> Switzerland
<-> …
2. Appreciation of US dollar weighted (by using trade volume)
average of the movements in the
exchange rate of the currencies of the
countries you are dealing with
Effective exchange rate:
- Black: US -> increasing
(strong $)
Others have been decreasing
1.2.2. Openness = globalization
The more open you are, the more globalized you are
(𝑒𝑥𝑝𝑜𝑟𝑡𝑠 + 𝑖𝑚𝑝𝑜𝑟𝑡𝑠)
=
(𝑔𝑑𝑝 𝑥 2)
Compare countries: ex: one country is more open than another
Evolution in time:
Long term: openness increases
- Short term: trade more volatile than gdp
Openness 2016
450,00
(GDP = 100) 400,00
= Gross Domestic Product 350,00
300,00
250,00
200,00
Bigger countries: very 150,00
limited openness ratio 100,00
50,00
0,00
Remarks:
- Ratio > 100%
o How do you export more than you have produced?
▪ You can export goods that you have imported first
INTERNATIONAL ECONOMICS 7
, Evolution of openness
Graph op globalization
Trade is growing faster than GDP
RED: world GDP growth
Blue: trade volume changes => more
erratic
Trade moves up and down faster than
GDP
When international trade increases faster than international production
more openness
= aspect of globalization
Right measure for openness
- Numerator: trade is counted as total value (average of exports & imports)
- Denominator: GDP = added value
- Cf. global supply chains: fragmentation of production = aspect of globalization
o Each time an intermediate good crosses the border it counts in the numerator
Ex:
1. battery for iPhone is exported to a country to be assembled
2. parts of the iPhone (incl. battery) are exported again
3. the iPhone ready is exported again to another country
o Thus: the more fragmentation = the more double counting
Now: more ‘global value chains’
INTERNATIONAL ECONOMICS 8
