Download World economy and introductory international economics

World economy and introductory international economics
Сourse description
Course name: World economy and introductory international economics.
ECTS: 3.
Quarter/semester: 3rd quarter, 2nd semester.
Contact hours: Thursdays, 15:20-16:40.
Author of the course: Iakov Kuga, senior teacher of Departments of Economics.
Outline
This introductory course familiarise students with major concepts of international trade and
finance as well as provides basic facts on spatial distribution of economic activity in the modern
world and its driving forces. The classes are focused on analysis and discussion of recent
economic events and use actively newspapers, magazines and economic blogs like voxeu.org.
This activity helps to learn how to make economic knowledge useful in daily life and make
judgements on particular economic issues. Another type of activity in the classes is a work with
data. Students will be acquainted with major data sources on world economy like COMTRADE
database. Writing assignment provides an opportunity to practice with the data solving individual
business-related problems. This assignment is complemented with presentation and discussion of
the solutions in the class. Preparing this task trains students to back their opinion with relevant
data and to collate theory, data and common sense.
Structure and content
1. The first wave of globalisation
2. Resources and their spatial distribution. Spatial
distribution of production.
3. Trends in consumption
4. Transportation and communications
5. Theories of international trade
6. International trade patterns
7. Firms in Global Economy: Multinationals, FDI,
and Outsourcing.
8. Foreign exchange market and interest rate parity.
9. Price levels and exchange rates in the long-run
Total
Lectures (h)
Classes (h)
2
4
2
2
Home
activity (h)
4
16
1
1
4
2
2
2
2
4
2
2
6
4
10
20
6
2
2
20
2
2
20
4
4
74
Lecture 1. The first wave of globalisation.
The world around 1815. Spatial distribution of economic activity. Transportation and
communications of those times. Business practices in international trade and finance. Take-off of
Europe. Technical progress in transportation and communications; railroads, steam ships and
telegraph, Suez channel. Transportation costs and international trade. Labour migrations.
Development and internationalisation of capital markets. Global economic and financial
institutions of XIX and early XX centuries. The world around 1913.
Literature
Stutz and Warf (2012) cited as SW below, ch. 2,91
Cambridge Economic History (2010), vol.1, ch. 4,8 and vol. 2, ch.1, 3.
1
Required reading marked bold.
1
Krugman, Obstfeld and Melitz (2012) cited as KOM below, ch. 19.
Bordo (2005), Bordo (2006), Clemens and Williamson (2004), Redding and Turner (2014),
Rodrik (2010), ch. 2., Williamson (1995), Williamson (1998).
Lecture 2. Resources and their spatial distribution. Spatial distribution of production.
Part 1. Labour.
Global population distribution. Population density. Factors influencing population distribution.
Population growth over time and space. Overpopulation. Malthusian trap. Green revolution and
other innovations in food production. Demography. Birth and death rates. Migration.
Demographic transition. Age structure of population. Total fertility rate. Life expectancy at birth.
Population growth: history and perspectives. Human capital and Labour resources. Resources on
demographic data.
Agricultural production. Geography of major food production. Geography of major mineral
resources. Sources of energy. Manufacturing. Manufacturing regions. Industrial restructuring.
Agglomeration economies in manufacturing. Learning-by-doing and productivity growth in
manufacturing.
Part 2. Resources and their spatial distribution.
Renewable and non-renewable resources. Food resources. Green revolution. Hunger.
Dependence on agricultural export. Mineral and energy resources. Efficiency of mineral
resources and energy use. Peak-oil?
Literature
SW, ch. 3, 4, 6, 7, 8.
Lecture 3. Trends in consumption.
Final consumption and consumption of intermediate goods. GDP composition (expenditure
approach). Consumption and household budgets: love for variety, heterogeneous tastes,
sensitivity to income, intertemporal smoothing of consumption, life cycle. Value chains.
Importing to export.
Literature
SW, ch. 11.
Xing (2016).
Lecture 4. Transportation and Communications.
Transportation modes. Transportation infrastructure. Transport costs. Transport costs vs bordercrossing costs. Incoterms. Baltic Dry Index. Harper Shipping Index. Communication costs and
business practices.
Literature
SW, ch. 9.
Baier and Bergstrand (2001), Redding and Turner (2014), Rua (2014).
Lecture 5. Theories of international trade.
Part 1. Comparative advantages.
Comparative advantages. Ricardian theory (2x2 setting). Relative demand and relative supply.
Misconceptions about comparative advantages. Comparative advantages with many goods.
Relative wages in the Ricardian economy. Nontradable goods. Empirical evidence on the
Ricardian model.
Part 2. Hekscher-Ohlin model.
2x2x2 setting. Factor-intensity. Abundance of factors. Hekscher-Ohlin theory. Leontief paradox.
Possible solutions to the paradox. Stolper-Samuelson effect and income distribution. Empirical
evidence on the Hekscher-Ohlin model.
Part 3. International trade and the economy of scale.
2
Economy of scale vs love to variety. Monopolistic competition. Effect of increased market size.
Intraindustry trade. Grubel-Lloyd index.
Part 4. Firms heterogeneity.
Firm responses to trade. Introduction to the Melitz model Trade costs and decision to export.
Selection effect.
Literature
SW, ch. 5, 12.
KOM, ch. 3, 5, 7, 8.
Lecture 6. International trade patterns.
Growth of international trade. Structure of international trade. Geography of international trade.
The global triad. Intraregional trade. Eurozone compared to EAEU.
Literature
SW, ch. 13.
International Trade Statistics –2015 (2015).
Lecture 7. Firms in Global Economy: Multinationals, FDI, and Outsourcing.
Multinational enterprises. Forms of foreign investments: debt vs equity. Foreign direct
investments. Greenfield and brownfield FDI. Investments and divestments. Sources and
destinations of FDI. Horizontal and vertical FDI. Reasons for FDI. FDI vs outsourcing. Barriers
to international trade and investments.
Literature
SW, ch. 12.
KOM, ch. 8.
Handbook of International Economics, vol. 4 (2014).
World Investment Report (2015).
Lecture 8. Foreign exchange market and interest rate parity.
Exchange rates and international transactions. Direct and indirect quotations. Appreciation and
depreciation. Exchange rate and relative prices. Foreign exchange market. Foreign exchange
market turnover by currency, currency pair, and counterparty. Spot and forward exchange rates,
foreign exchange swaps and options. Foreign exchange market turnover by instrument. Return
for an asset denominated in foreign currency. Interest rate parities. Uncovered interest parity.
Covered interest parity. Current exchange rate and expected return. Changing expectations and
current exchange rate.
Literature
KOM, ch. 14, 16.
Triennial… (2013).
Lecture 9. Price levels and exchange rates in the long-run.
Law of one price. Absolute purchasing power parity. Relative purchasing power parity.
Evidence on purchasing power parity. Explaining the problems with PPP: trade barriers,
nontradables, market power and pricing to market. Real exchange rate. Big Mac index.
Literature
KOM, ch. 16.
Taylor and Taylor (2004).
Class materials and instructions
Class 1. Introduction.
Problems for discussion: What is globalisation? How to measure globalisation?
3
Class 2. The first wave of globalisation and its consequences.
Problems for discussion:
1) How did the World War I affect trade policy, capital flows, and migration policy? What are
the reasons for these effects?
2) What are the growth consequences of the World War I?
3) Why did the economic consequences of the World War I are so long-living?
4) Do the economic turmoil and social changes in the modern World treaten freer trade, capital
movements, and migration? Should we counterreact to that? If yes, how?
Required literature:
1) Carl Strikwerda, On War And Peace : A Lesson Learned From A Past War, Intelligencer
Journal, 12 October 2014.
2) Terence Corcoran, World War One: The war that ended growth, Postmedia Breaking News,
26 July 2014.
3) Drew Keeling, August 1914 and the end of unrestricted mass migration, VOX, 23 June 2014.
Class 3. The first wave of globalisation and its consequences.
Problems for discussion:
Questions for discussion:
1) Which factors affect oil prices?
2) Were the James Hamilton's forecasts on oil prices correct or not?
3) How do oil prices affect overall economic growth, development in particular industries, and
consumer's welfare?
Required literature:
1) James Stafford, The Real Reasons Behind Oil Prices Rises - An Interview with James
Hamilton, OilPrice.com, 28 August 2012.
2) James Hamilton, Could Low Oil Prices Cause A Global Recession? OilPrice.com, 25 January
2016.
3) Jimmy Vallee, Low oil prices produce calamity: Opposing view, USA Today, 28 January,
2016.
4) Abdul Q Memon, Falling oil prices - opportunity or threat? The Express Trubune, 1 February
2016.
Class 4. Working with COMTRADE database and FAO Stat.
Activity:
Arguing with use of production, trade and prices data in FAO Stat.
Queries to COMTRADE database.
Visualisation tools for COMTRADE database.
Required links:
Statistical division of the Food and Agricultural Division of the United Nations.
http://faostat3.fao.org/home/E
United Nations International Trade Statistics Database COMTRADE http://comtrade.un.org/
Class 5. Comparative advantages.
Problem 1
Country A is endowed with 200 units of labour while 100 units of labour are available in country
B. It takes two units of labour to produce a piece of cheese in A and only one unit of labour is
required to produce a bottle of wine there. As for country B, it takes only one unit of labour to
produce a piece of cheese or a bottle of wine. The countries trade with no costs. The relative
demand for cheese in the world is: QC / QW  2 PW / PC .
a. Derive the relative supply curve.
b. Draw RD and RS curves.
c. Find the equilibrium relative price for cheese.
4
d. Determine the equilibrium wages in both countries.
2 PW
. Find the
3PC
new equilibrium relative price for cheese and equilibrium wages in both countries.
Problem 2.
Three countries can produce apples and oranges. Country A has comparative advantage over
country B in production of oranges, while country B has comparative advantage in production of
oranges over country C. Does country A have comparative advantage over country C in
production of oranges?
Problem 3.
Three countries can produce apples and oranges. Country A has comparative advantage over
country B in production of oranges, while country B has comparative advantage in production of
apples over country C. It is known, that countries A and C trade with each other. Can we
determine which of these to countries exports oranges?
Problem 4.
Five countries can produce T-shirts and
wheat. Their labour costs are given in the
Country
Labour costs to
Labour
table.
produce a unit of
endowa. Derive and draw the relative supply
ment
wheat T-shirts
curve.
Germany
5
2
60
b. Relative demand is expressed by
China
20
5
800
QW
PT
Netherlands
2
1
20
equation:
the

. Find
Russia
6
3
90
QT
PW
USA
3
1
240
equilibrium relative price and
outputs in each economy.
e. Let assume, the relative demand for cheese have decreased to QC / QW 
Class 6. Hekscher-Ohlin model.
Problem 1. It takes one unit of labour and one unit of capital to produce a one unit of cloth, while
it takes one unit of labour and six unit of capital to produce one gadget. The relative demand
Q g Pc
 . Country A is endowed with 100 units of labour and 200 units of
curve for gadgets is
Q c Pg
capital.
a. Draw RD and RS curves. Find the equilibrium relative price for gadgets.
b. Find equilibrium wage to rental ratio.
Assume, we have country B with the same technologies and preferences, which is endowed with
100 units of labour and 300 units of capital.
c. Draw RD and RS curves. Find the equilibrium relative price for gadgets.
d. Rybczynski theorem says that relative increase in abundance with particular resource
more than proportionally increases the production of good where this factor is used
intensively. Comparing economies A and B, check if this is true for this case.
e. Stolper-Samuelson theorem says that wage-rental ratio reacts more than proportionally
on relative price change. Comparing economies A and B, check if this is true for this
case.
Assume, countries A and B decide to trade.
f. Draw RD and RS curves. Find the equilibrium relative price for gadgets.
g. Find equilibrium wage to rental ratio.
h. Discuss the consequences of the free trade.
Class 7. International trade and economy of scale.
Problem 3 from KOM, ch. 8, pp. 188-189.
5
Class 8. Decision to export or outsource.
Problem 1. A monopolist sells goods at home facing the demand curve Q H  100  P .
Its marginal costs are equal to 20, while FC = 1000.
a. Calculate optimal price and profit of the monopolist
Assume, demand for the good in a foreign market is Q F  100  PF . Costs of transporting goods
to the foreign market are equal to 20 for every unit of the good.
b. Assume, that the firm can produce in the foreign country with the same marginal costs (MC =
20). Determine, how does the choice of monopolist to export to the foreign country or to produce
there depend on fixed costs of the plant abroad.
Classes 9-10. Students presentations based on their individual assignments.
Individual take home assignments
There are five types of assignments. Each of the types has several variants related to various
goods (#good# in task) or countries (#country#, #country1#, #country2#).
Problem
Variants
Assume that you are an economist in a Russian company importing 1 – grapes
#good#. Using COMTRADE database determine, which countries 2 – oranges
were the major exporters of #good# to Russia in 2013? Calculate their 3 – lemons
shares in total import of #good# to Russia. Import of #good# from 4 – pears
particular countries was banned in August 2014 (see Government 5 – tomatoes
decree: http://government.ru/media/files/41d4f8cdfeeb731522d2.pdf 6 – cucumbers
). Recommend alternative sources of #good# for your company. 7 – butter
Justify your proposal. Which countries became the major exporters of 8 – cheese
#good# to Russia after the ban? Visit your local shop and check 9 – apricots
countries of origin of #good# for sale there. Do statistical data and 10 - strawberries
your observations agree with your advises?
Assume that you are an economist in a Russian company importing 11 – tomatoes
#good# from Turkey. As you know, import of #good# from this 12 – cucumbers
country is banned since 1 December 2015 (see Government decree 13 – oranges
http://publication.pravo.gov.ru/Document/View/0001201512010026
14 – grapes
?index=6&rangeSize=1 ). Moreover, import of #good# from EU, 15 – apricots
USA, Australia, Canada, and Norway was banned earlier (see 16 – strawberries
Government
decree
http://government.ru/media/files/41d4f8cdfeeb731522d2.pdf ). Use
COMTRADE and/or FAO Stat databases to recommend alternative
sources of #good# for your company. Justify your proposal. Pay
attention to average prices and volumes of supplied #good#.
Determine, which other importers buy the #good# from that source.
Visit your local shop and check countries of origin of #good# for sale
there. Do your observations agree with your advises?
Use FAO Stat database to determine major producers and consumers 17 – tobacco
of #good# in the World. Choose a dozen or two of countries which 18 – vanilla
don't produce #good#. Calculate consumption of #good# per capita in 19 – tea
these countries using COMTRADE database. Note that a particular 20 – coffee
country may both import and export the #good#. Draw a scatter 21 – apricots
diagram and look, how per capita #good# consumption is associated 22 – olives
with income per capita. Discuss the results.
23 – oranges
24 – pepper
Using COMTRADE database determine, what are major goods 25 – Italy
Russia imports from #country#? Draw a pie diagram showing shares 26 – France
6
of particular product groups. Choose a narrow product category you 27 – Germany
are interested in and describe briefly producers from the #country# 28 – USA
supplying Russia with their goods.
29
–
United
Kingdom
Using COMTRADE database determine in which industries 30
–
USA,
intraindustry trade arises between #country1# and #country2#? Canada
Choose a narrow product category you are interested in. Calculate 31 – France,
Grubel-Lloyd index to demonstrate that intraindustry trade is high Germany
enough in this category. The index is calculated as 32
–
USA,
GL = 1 – |X-M|/(X+M), where X is a value of export and M is a value United Kingdom
of import. Choose a narrow product category you are interested in. 33 – USA, Japan
Discuss reasons for this kind of trade. Which brands and products in 34
–
United
this category #country1# imports from #country2# and exports to Kingdom, France
#country2#?
35
–
United
Kingdom,
Germany
Final take home exam questions
1. In early XIX century the food was much cheaper in New World compared to Europe,
while the wages where significantly higher. Economies of North and South America
grew quickly during the second half of XIX century. Nonetheless, the gaps between
American and European wages and food prices narrowed significantly. Explain.
2. An average Chinese woman has 1.6 children. However, statistics shows that population
of China is still growing. In particular, it increased from 1341 million people in 2010 to
1368 million people in 2014. Do these facts contradict to each other? Provide
explanations.
3. Discuss future trends of population growth in China.
4. How does demographic transition affect population and economy? Explain and provide
real-life examples.
5. Discuss economic consequences of migration in the modern World.
6. Should we expect “end-of-oil”? Explain.
7. King Hubbert proposed an idea of “peak-oil”. World economy continues to grow. IMF
considers the periods of real World GDP growth of 3 per cent per annum or less as global
recessions. Is it possible to keep the rapid economic growth if the “peak-oil” concept is
true? Provide arguments.
8. Baby-boomers are the most numerous cohort of U.S. population. Describe and explain
the effect of baby-boomers retirement on American savings and output growth.
9. Mr. Trump proposes to reduce American import of manufacturing from China and other
countries to improve the chronically deficit trade balance of United States. However,
manufacturers fear that it may hurt their export possibilities as they use imported parts in
production. Explain “importing to export” concept.
10. Compare opportunities to deliver a cargo of mobile phones from China to St. Petersburg
by sea and by rail-roads.
11. Compare opportunities to deliver a cargo of dish-washing machines from Germany to St.
Petersburg by rail-roads and by trucks.
12. How does containerization affect transport costs? Explain.
13. Is Baltic Dry Index decline a good or bad news for South Korean ship-builders? Explain.
14. Russia exports wheat, produces sugar beet, and imports sugar. How does the wheat price
decline in the world market affect wages of beet producers?
15. Why do Asian countries specialise on textile production, while this industry is in deep
decline in Russia?
7
16. Krugman model assumes that firms have increasing return to scale. Why don’t these
firms merge into larger companies?
17. Krugman model predicts prices drop as a result of a markets integration. Explain this
result.
18. Higher demand declines the price level in Krugman model. Explain this result.
19. Small local firms often oppose free trade fiercely, while larger firms greet lower trade
barriers. Explain.
20. Statistics shows, that exporter firms are typically more productive than those operating
only on the home market. Why do the less productive firms serve the home market, but
not the foreign one? Explain.
21. What are the reasons of building car-assembling plants by foreign car-producers in
Russia?
22. What are the reasons to build a plant in China instead of ordering particular product parts
from China?
23. Recent drop of demand for imported food is often attributed to effect of the ‘countersanctions”. Provide alternative explanations.
24. Spot and forward exchange rates moves together typically. What are the reasons for this
behaviour?
25. Taking into account forward exchange rates (from the Central Bank of Russia site)
determine the rate of return on ruble-denominated and dollar-denominated deposits with
the same terms in your bank. Which one is more profitable? Provide your calculations
and explanations.
Literature
Main textbook
Stutz F.P. and Warf B. The World Economy: Geography, business, development. 6th ed. Prentice
Hall, 2012.
Supplementary textbook
Krugman P., Obstfeld M., Melitz M. International Economics: Theory and Policy. 9th ed.
Addison-Wesley. 2012.
Additional Literature
Bordo M.D. Historical Perspectives on Global Imbalances. NBER Working Paper #11383, 2005.
Bordo M.D. Sudden Stops, financial Crises and Original Sin in Emerging Countries: Dèjá-vu?
NBER Working Paper #12393, 2006.
Baier S.L., Bergstrand J.H. The growth of world trade: tariffs, transport costs, and income
similarity. Journal of International Economics, 2001, vol. 53, Issue 1, pp. 1–27
*The Cambridge Economic History of Modern Europe / ed. S.Broadberry, K. O’Rourke. Vols 12. Cambridge University Press, 20102.
Clemens M.A., Williamson J.G. Wealth Bias in the First Global Capital Market Boom, 18701913. Economic Journal, 2004, vol. 114, pp. 304-337.
Handbook of International Economics, vol. 4 / ed. G. Gopinath, E. Helpman, and K.Rogoff.
Elsevier, 2014.
International Trade Statistics –2015. WTO, 2015.
Lane Ph., Milesi-Ferretti G.M. International Financial Integration. IMF Working Paper #03/86.
2003.
Redding S.J. and Turner M.A. Transportation costs and Spatial organization of Economic
Activity. NBER Working Paper #20235, 2014.
*Rodrik D. The Globalization Paradox: Democracy and the Future. W.W.Norton & Co, 2010.
Rua G. Diffusion of Containerization. Finance and Economics Discussion Series. Federal
Reserve Board, 2014, #2014-88.
2
Books and articles translated to Russian marked by *.
8
Taylor A.M. and Taylor M.P. The Purchasing Power Parity Debate. Journal of Economic
Perspectives, vol. 18 (Fall 2004), pp. 135–158.
Triennial Central Bank Survey Foreign exchange turnover in April 2013: preliminary global
results. BIS, 2013.
Williamson J.G. The Evolution of Global Labour Markets since 1830: Background Evidence and
Hypotheses. Explorations in Economic History, 1995, vol. 32, pp. 141-196.
Williamson J.G. Globalization, Labour markets and Policy Backlash in the Past. Journal of
Economic Perspectives, 1998, vol. 12, no 4, pp. 51-72.
World Investment Report, UNCTAD, Geneva, 2015
Xing Y.(ed.) Uncovering value added in trade new approaches to analyzing global value
chains.World Scientific, 2016.
Prerequisites: Principles of Economics
Assesment: written examination; coursework
class participation 30%: discussion, presentations
individual assignment 50%:
written examination 20%: individual take home essay (approx. 150 words)
9