International economics
June 19, 2025
1
,International economics
Contents
1 lecture 1: Setup of the course and balance of payments 5
1.1 National income accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.1.1 A nation’s net foreign assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.1.2 Savings and the current account . . . . . . . . . . . . . . . . . . . . . . . . 7
1.1.3 Balance of payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2 Lecture 2: Exchange rates, parities, simple models of short and long run 11
2.1 Exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1.1 effects of depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2 Purchasing power parity (PPP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3 Interest parities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.3.1 uncovered interest parity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.3.2 Covered interest parity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.4 A long run model of the exchange rate based on PPP . . . . . . . . . . . . . . . . 16
2.4.1 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.4.2 Fisher effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.5 A short run model of the exchange rate based on UIP . . . . . . . . . . . . . . . . 19
3 lecture 3: More comprehensive approach to money, prices, interest rates and ex-
change rates 21
3.1 money demand and money supply: a summary . . . . . . . . . . . . . . . . . . . 21
3.2 Prices and exchange rates in the short and long run . . . . . . . . . . . . . . . . . 22
3.2.1 Money and exchange rates in the long run . . . . . . . . . . . . . . . . . . 23
3.3 linking forex and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.4 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4 lecture 4: Exchange rate regimes and developments in international monetary eco-
nomics 26
4.1 Macroeconomic policy goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.2 The Bretton Woods system of fixed exchange rates . . . . . . . . . . . . . . . . . 27
4.3 policies for internal and external balance . . . . . . . . . . . . . . . . . . . . . . . 28
4.3.1 Tinbergen’s rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.3.2 collapse of bretton Woods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.4 alternative exchange rate regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.4.1 the two extremes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.4.2 fixed vs flexible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.5 what have we learnt until now . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5 Lecture 5: World trade and the income distribution 33
5.1 gravity model as basic way to understand the extent of trade between countries 33
5.2 comparative advantage and opportunity costs . . . . . . . . . . . . . . . . . . . . 34
5.3 Ricardian model of comparative advantage . . . . . . . . . . . . . . . . . . . . . . 34
2
,International economics
5.4 Wages and productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.5 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6 Lecture 6: Trade and the income distribution 38
6.1 Trade and welfare gains wth increasing opportunity costs . . . . . . . . . . . . . 38
6.2 Factor endowments as a reason for trade (Heckscher-Ohlin model) . . . . . . . 41
6.2.1 Factor prices and input choice . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.2.2 Factor abundance and comparative advantage . . . . . . . . . . . . . . . 43
6.3 income distribution effects of trade . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.4 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7 Lecture 7: Firms, trade and the international location of production 48
7.1 External economies of scale and the international location of production . . . . 48
7.2 Internal economies of scale as a reason for trade between identical countries . 49
7.2.1 The monopolistic competition model of IIT . . . . . . . . . . . . . . . . . 50
7.3 The gains from inter-industry trade and intra-industry trade . . . . . . . . . . . 50
7.3.1 performance differences across firms . . . . . . . . . . . . . . . . . . . . . 51
7.3.2 winners and losers from econ. integration . . . . . . . . . . . . . . . . . . 52
7.4 Causes and effects of FDI and MNEs . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7.4.1 terminology regarding FDI and MNEs . . . . . . . . . . . . . . . . . . . . . 53
7.4.2 Stylized facts of FDI and MNEs . . . . . . . . . . . . . . . . . . . . . . . . . 54
7.4.3 theory of MNEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
7.4.4 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8 Lecture 8: Trade policy: instruments, effects, motives 57
8.1 (policy) shocks in trading economies . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.1.1 world relative demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.2 Trade policy instruments and their effects on prices and trade . . . . . . . . . . 59
8.3 Welfare and income distribution effects of trade policy . . . . . . . . . . . . . . . 60
8.3.1 welfare effects in partial equilibrium . . . . . . . . . . . . . . . . . . . . . 61
8.3.2 Export subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
8.3.3 differences between quota and tariffs . . . . . . . . . . . . . . . . . . . . . 64
8.4 the political economy of trade policy (free trade and the WTO) . . . . . . . . . . 65
8.4.1 WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
8.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
9 Super short summary 70
9.1 Lecture 1: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
9.2 Lecture 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
9.3 Lecture 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
9.4 Lecture 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
9.5 Lecture 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
9.6 Lecture 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
3
, International economics
9.7 lecture 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
9.8 Lecture 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
9.9 Shocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
4
June 19, 2025
1
,International economics
Contents
1 lecture 1: Setup of the course and balance of payments 5
1.1 National income accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.1.1 A nation’s net foreign assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.1.2 Savings and the current account . . . . . . . . . . . . . . . . . . . . . . . . 7
1.1.3 Balance of payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2 Lecture 2: Exchange rates, parities, simple models of short and long run 11
2.1 Exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1.1 effects of depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2 Purchasing power parity (PPP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3 Interest parities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.3.1 uncovered interest parity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.3.2 Covered interest parity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.4 A long run model of the exchange rate based on PPP . . . . . . . . . . . . . . . . 16
2.4.1 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.4.2 Fisher effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.5 A short run model of the exchange rate based on UIP . . . . . . . . . . . . . . . . 19
3 lecture 3: More comprehensive approach to money, prices, interest rates and ex-
change rates 21
3.1 money demand and money supply: a summary . . . . . . . . . . . . . . . . . . . 21
3.2 Prices and exchange rates in the short and long run . . . . . . . . . . . . . . . . . 22
3.2.1 Money and exchange rates in the long run . . . . . . . . . . . . . . . . . . 23
3.3 linking forex and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.4 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4 lecture 4: Exchange rate regimes and developments in international monetary eco-
nomics 26
4.1 Macroeconomic policy goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.2 The Bretton Woods system of fixed exchange rates . . . . . . . . . . . . . . . . . 27
4.3 policies for internal and external balance . . . . . . . . . . . . . . . . . . . . . . . 28
4.3.1 Tinbergen’s rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.3.2 collapse of bretton Woods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.4 alternative exchange rate regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.4.1 the two extremes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
4.4.2 fixed vs flexible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.5 what have we learnt until now . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5 Lecture 5: World trade and the income distribution 33
5.1 gravity model as basic way to understand the extent of trade between countries 33
5.2 comparative advantage and opportunity costs . . . . . . . . . . . . . . . . . . . . 34
5.3 Ricardian model of comparative advantage . . . . . . . . . . . . . . . . . . . . . . 34
2
,International economics
5.4 Wages and productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.5 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6 Lecture 6: Trade and the income distribution 38
6.1 Trade and welfare gains wth increasing opportunity costs . . . . . . . . . . . . . 38
6.2 Factor endowments as a reason for trade (Heckscher-Ohlin model) . . . . . . . 41
6.2.1 Factor prices and input choice . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.2.2 Factor abundance and comparative advantage . . . . . . . . . . . . . . . 43
6.3 income distribution effects of trade . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.4 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7 Lecture 7: Firms, trade and the international location of production 48
7.1 External economies of scale and the international location of production . . . . 48
7.2 Internal economies of scale as a reason for trade between identical countries . 49
7.2.1 The monopolistic competition model of IIT . . . . . . . . . . . . . . . . . 50
7.3 The gains from inter-industry trade and intra-industry trade . . . . . . . . . . . 50
7.3.1 performance differences across firms . . . . . . . . . . . . . . . . . . . . . 51
7.3.2 winners and losers from econ. integration . . . . . . . . . . . . . . . . . . 52
7.4 Causes and effects of FDI and MNEs . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7.4.1 terminology regarding FDI and MNEs . . . . . . . . . . . . . . . . . . . . . 53
7.4.2 Stylized facts of FDI and MNEs . . . . . . . . . . . . . . . . . . . . . . . . . 54
7.4.3 theory of MNEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
7.4.4 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8 Lecture 8: Trade policy: instruments, effects, motives 57
8.1 (policy) shocks in trading economies . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.1.1 world relative demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.2 Trade policy instruments and their effects on prices and trade . . . . . . . . . . 59
8.3 Welfare and income distribution effects of trade policy . . . . . . . . . . . . . . . 60
8.3.1 welfare effects in partial equilibrium . . . . . . . . . . . . . . . . . . . . . 61
8.3.2 Export subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
8.3.3 differences between quota and tariffs . . . . . . . . . . . . . . . . . . . . . 64
8.4 the political economy of trade policy (free trade and the WTO) . . . . . . . . . . 65
8.4.1 WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
8.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
9 Super short summary 70
9.1 Lecture 1: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
9.2 Lecture 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
9.3 Lecture 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
9.4 Lecture 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
9.5 Lecture 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
9.6 Lecture 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
3
, International economics
9.7 lecture 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
9.8 Lecture 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
9.9 Shocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
4
