International Economics

2020/2021

Academic Year

ENG

Instruction in English

10

ECTS credits

Delivered at:

International College of Economics and Finance

Course type:

Elective course

When:

4 year, 1-4 module

Course Syllabus

Abstract

The main goal of the first part course is to introduce students to both classical and modern theories of international trade in goods and services, as well as empirical research on trade. A substantial fraction of the course is dedicated to examination of efficient trade policies. The main goal of the second part of the course is to introduce students to introductory level of theories of international finance flows, determination of interest and exchange rates in interconnected economies, macroeconomic policies available to the government, and the nature of financial crises. Prerequisites: Microeconomics 1-2, macroeconomics 1-2, calculus.

Learning Objectives

• Upon successful completion of the course, the students should be able to discuss and explain economic forces that drive international trade and international finance, as well as welfare effects of various policies.

Expected Learning Outcomes

• Understand the general international trade concepts such as: Why do countries trade? What are the gains from trade? What is the pattern of international trade? Analyze recent Russian and International trade statistics.
• Explain the concept of comparative advantage (CA) (in comparison to absolute advantage), how it determines the pattern of specialization and trade, the gains from trade and relative productivities -relative wages relationship. Discuss CA in the real world.
• Explain how differences in factor endowments can provide the basis for international trade, explain general effects of trade on income distribution, analyze the economic growth.
• Define the effects of trade liberalization and protection on factor allocations, outputs, and income distribution. Explain the effects of international migration.
• Explain the common features of the Ricardian, HO and Specific factors models of trade. Use relevant diagrams to do comparative statics analysis after trade liberalization, protection, or economic growth.
• Discuss limitations of the HO model and empirical studies of trade theory (Leontief paradox, the Case of the missing trade etc.)
• Discuss the concept of intra-industry trade and why it is not explained by traditional trade models, analyze the internal and external economies of scale and different models of trade based on this concept.
• : Explain how factor prices converge due to international factor movements, explain FDI and its effects for both home and host countries.
• Analyze price, quantity and welfare effects of a tariff, quota, export tax and export subsidy in partial and general equilibrium diagrammatic settings. Compare tariff and quota under perfect and imperfect competition
• Analyze similar effects of the import tariff and export tax, welfare gains for a large country from an import tariff.
• : Explain the strategic trade policies under Cournot and Bertrand competition model settings.
• Compare import substitution and export-oriented strategies, explain infant industry argument, discuss real life examples.
• Analyze the political economy models of protection, how protectionist policies exist in the democratic societies.
• Acknowledge with the History of WTO and various PTA. Analyze Viner’s static effects of the Customs Union (CU), Cooper-Massell argument and Kemp-Wan theorem. Discuss other effects of the regional integration such as Terms of Trade (TOT) argument, interests of exporters, economies of scale effects.
• : Learn historical aspects of Russian accession to WTO and international trade policy.
• Understand the relevance of international macroeconomics in the modern global economy and Russia in particular.
• Identify the main parts of national accounts and their connection with the external sector dynamics. Understand the key factors behind the balance of payments formation.
• Understand the factors driving the equilibrium on the foreign exchange market, the role of interest rates and the expectations about the future exchange rate
• Explain the role of money and banking in an economy. Construct the model of money and foreign exchange markets in the short run. Explain and analyze the effects of monetary policy on the interest rates, exchange rates and expectations.
• : Understand the factors behind price indices behavior and their connection with the external sector. Analyze the long-run dynamics of the real exchange rate behavior using a range of models.
• Construct the expenditure side Keynesian model of the real sector and connect it with the model of money and currency markets. Analyze the effects of monetary and fiscal policies on the real economy and monetary variables under flexible exchange rate regime. Decide on the appropriate macro policy options in response to the state of the economy.
• Understand the role of the central bank as a price-setting actor on the foreign exchange market. Analyze the effects of monetary and fiscal policies on the real economy and monetary variables under fixed exchange rate regime. Understand the factors behind the emergence of currency crises phenomena.
• Understand the pros and cons of global monetary systems used in the XX century. Analyze the restrictions each system places on the monetary and fiscal policies.
• Understand the structural problems behind unified currency and how those manifest in Europe.
• Understand how international capital markets provide gains from trade in financial assets. Understand the rough structure of global financial markets, the leading countries, currencies and types of transactions. Analyze the problems that international finance (mainly banking) is facing in recent years. Decide on the direction of international cooperation needed to solve those problems.
• : Understand the theoretical underpinnings of the most prominent currency crises of the last decades. Decide on the driving factors of the observed currency crises.

Course Contents

• 1.1 Introduction to International Trade
  - Important issues in international trade. - History and present state of world trade flows - Russian trade balance - History of the development of trade theory
• 1.2. Essentials: Ricardo and Comparative Advantage
  - The Ricardian model of trade - Empirical evidence and policy results
• 1.3. Factor Price Equalization and Trade
  - Hecksher-Ohlin model of trade - Stolper-Samuelson effects - Rybczynski effects
• 1.4. Who Wins and Who Loses from Trade?
  - The “Specific Factors” model of trade - Redistribution aspect of trade policy - International experience
• 1.5. Standard Trade Models and Country Welfare
  - Welfare comparisons across countries - Welfare comparisons within countries
• 1.6. An Empirical Evaluation of Trade Patterns
  - Problems with the Hecksher - Ohlin model - Empirical evidence of trade theory
• 1.7. Market Imperfections and Trade
  - Imperfect Competition and trade - Externalities and protectionism - Empirical evaluation of importance
• 1.8. International Factor Movements
  - International Labor Mobility - International Capital Flows - Multinational Firms and Direct Foreign Investment
• 1.9. Tariffs and Non-Tariff Barriers to Trade
  - Economics of Tariffs - Economics of Quotas - Protection and Imperfect Competition
• 1.10. Government Intervention in Trade
  - Welfare arguments - Income Distribution - Optimum Tariff
• 1.11. Strategic Trade Policies
  - Technology and Externalities - Imperfect Competition and Protection
• 1.12. Development through Trade Policies
  - Import Substitution and Infant Industry argument - Export-oriented development strategies - The East Asian Miracle?
• 1.13. Political Economy of Trade
  - Pros and Cons of government intervention - Strategic trade policy - Median voter theorem - Theory of collective action - Politicians for sale (partial eqm analysis)
• 1.14. World Trade Organization, Preferential Trading Arrangements, Custom Unions and Economic Integration
  - Free trade agreements, customs unions - Trade creation vs trade diversion - Trade policy in developing countries: import substitutions, export promotion - International negotiations: GATT, WTO, Doha round.
• 1.15. Russia in Global Trade
  - History of socialist trade agreements - Accession of Russia to the WTO - The Eurasian customs union - Current issues in Russian international trade.
• 2.1. Introduction to International Finance
  Distinction between International Trade and International Macroeconomics - Why International Finance became relevant in the last decade: capital flows in open economy, Washington consensus rethink, global crisis 2008-09, eurozone problems, global banking. Importance for Russia
• 2.2. National Income accounting revisited and the Balance of Payments
  - National income accounts, main macroeconomic identity reminder. - National income accounting for open economy, BoP and transaction accounting - Importance of BoP as a measure of foreign currency flow balance
• 2.3. Asset Approach to Exchange Rate Determination
  Demand for foreign currency assets - Equilibrium in the foreign exchange market. - Interest rates, expectations, and uncovered exchange rate parity
• 2.4. Money, Interest Rates, and Exchange Rates
  Aggregate money demand - Equilibrium interest rate - Money and exchange rate in the short run. Dornbusch overshooting model - Money, price level and exchange rate in the long run
• 2.5. Price Levels and the Exchange Rate in the Long Run
  - Empirical evidence on PPP and the law of one price. Problems with PPP approach - Models of long-run exchange rates determination - Real exchange rate and real interest parity
• 2.6. Output and the Exchange Rate in the Short Run
  Output market equilibrium in the short run: The DD schedule - Asset market equilibrium in the short run: The AA schedule - Short-Run Equilibrium for an open economy - Temporary vs. permanent changes in monetary and fiscal policies - Macroeconomic policies and the current account - Mundell-Fleming (IS-LM-BP) model and comparison with AA-DD model
• 2.7. Fixed exchange rate regime
  - Central bank intervention in the foreign exchange market - Stabilization policies and exchange rate regimes comparison - Three models of currency (balance of payments) crises
• 2.8. The International Monetary Systems
  The Gold Standard and the Bretton Woods agreements. IMF. - Policy coordination with floating exchange rates.
• 2.9. The Monetary Integration
  - Optimum currency area theory. - Single currency and economic integration. - European Monetary Union, its functioning, advantages and problems
• 2.10. International capital markets and emerging markets
  The efficiency of international capital markets: theory and evidence - Problems in international banking - Problems of international finance for developing countries.
• 2.11. Financial and economic crisis of 2008-09
  - Recent currency crises: Mexico 1994, Asia 1997-98, Russia 1998. - What was the same, and what was different in the Global Financial Crisis of 2008-09. - European crisis in 2010-15, Russian crisis in 2014-15

Assessment Elements

• home assignments
• activity in seminars and lectures
• mid-semester evaluation
• end-of-semester exam

Interim Assessment

• Interim assessment (2 module)
  0.06 * activity in seminars and lectures + 0.5 * end-of-semester exam + 0.16 * home assignments + 0.28 * mid-semester evaluation
• Interim assessment (4 module)
  0.03 * activity in seminars and lectures + 0.25 * end-of-semester exam + 0.08 * home assignments + 0.5 * Interim assessment (2 module) + 0.14 * mid-semester evaluation

Bibliography

Recommended Core Bibliography

• International economics : theory and policy, Krugman, P. R., 2015

Recommended Additional Bibliography

• Advanced international trade : theory and evidence, Feenstra, R. C., 2016
• Exchange rates and international finance, Copeland, L. S., 2008
• International economics, Appleyard, D. R., 2017