Lecture #1 Introduction Mercantilsm Abs Ad

International Economics I

Tri Widodo, PhD.Faculty of Economics and Business Gadjah Mada University

Office: South Wing S-212Office Hours: Weekday, 07.00-17.00 (by appointment)

GMUJournal

The objective of this course

To give students an analytical framework that can be used to study international trade and trade policy.

When students have completed successfully this course, students should be able to: Understand trade concepts; Understand how trade creates wealth; Explain basic events and phenomena related international

trade; Critically evaluate the claims of politicians and other policy

makers regarding the welfare effects of their proposal of international trade.

Week Topic/Subjects Text and Assignment

1 Introduction KO Ch. 1; AF Ch. 1-2

2 The Classical Theory of Trade: Ricardian Model KO Ch. 2; AF Ch. 3

3 Extensions and Tests of the Classical Model of Trade KO Ch. 2; AF Ch. 4

4 Introduction to Neoclassical Trade Theory: Tools to Be Employed

KO Ch. 3; AF Ch. 5

5 Gains from Trade in Neoclassical Theory KO Ch. 3; AF Ch. 6

6 The Basis for Trade: Factor Endowments and the Heckscher-Ohlin Model

KO Ch. 4; AF Ch. 8

7 Empirical Test of the Factor Endowments Approach KO Ch. 4; AF Ch. 9

8 Offer Curve and the Terms of Trade KO Ch. 5; AF Ch.7

9 Post-Heckscher-Ohlin Theories of Trade and Intra-industry Trade KO Ch. 6; AF Ch. 10

10 Economic Growth and International Trade AF Ch. 11

11 International Factor Movements KO Ch. 7; AF Ch. 12

12 The Instruments and the impacts of Trade Policy KO Ch. 8; AF Ch. 13

13 The Arguments of Trade Policies KO Ch. 9; AF Ch. 14

14 Trade Policies in Developing and Advanced Countries KO Ch. 10-11; AF Ch. 15

Contents

Text Books

Dennis, R. Appleyard and Alfred J. Field, JR., International Economics. Fourth Edition. McGraw-Hill. International Edition, 2001. (AF)

Paul R. Krugman and Maurice Obstfeld. International Economics. Theory and Policy. Fifth Edition. Addison-Wesley Publishing Company, 2000. (KO)

Additional readings will be handed out in class. Data base: The United Nations Commodity Trade Statistics (UN-COMTRADE ), the Standard International Trade Classifications Revision 3 (SITC Rev. 3) (http://comtrade.un.org/db/)

Evaluation

Assignments/Presentation = 30% Midterm Exam = 30% Final Exam = 40% Every student will have opportunities to present

one of the case studies in the textbooks. The lecturer will give other case studies.

6#1. INTRODUCTION#1. INTRODUCTION(KO Ch. 1; AF Ch. 1(KO Ch. 1; AF Ch. 1--2)2)

7OutlineOutline

1.1. The world of international tradeThe world of international trade2.2. MercantilismMercantilism3.3. Absolute advantageAbsolute advantage4.4. Case study Case study

81. The world of international trade1. The world of international trade

The world is getting relatively smaller every day. Why?The world is getting relatively smaller every day. Why? Internationalization of economic life is also getting Internationalization of economic life is also getting

more complicated by foreignmore complicated by foreign--owned assets. How about owned assets. How about domestic interests?domestic interests?

International trade relates to countriesInternational trade relates to countries differences: differences: form of government, currencies, economic system, form of government, currencies, economic system, resource endowments, cultures, institutions, etc.resource endowments, cultures, institutions, etc.

International economics concerns decision making with International economics concerns decision making with respect to the use of resources to meet desired respect to the use of resources to meet desired economic objectives:economic objectives:

Maximize/Minimize Maximize/Minimize ObjectiveObjectiveSubject to Subject to Constraint (s)Constraint (s)

9 Get some evidences:Get some evidences: Growth in volume world production and tradeGrowth in volume world production and trade Exports and imports by region Exports and imports by region Leading exporters and importersLeading exporters and importers Regional structure of merchandise exportsRegional structure of merchandise exports Commodity composition of world exportsCommodity composition of world exports InterInter-- and Intraand Intra--regional traderegional trade Trade in commercial servicesTrade in commercial services How do we identify degree of economic How do we identify degree of economic

interdependence?interdependence?

10

Growth in the volume of world merchandise trade and GDP, 2000-2006

Source: International Trade Statistics (ITS), 2007.

World real merchandise trade grows faster than output

11

Growth in the volume of merchandise trade and GDP by region, 2000-2006


16.6

6.8

Asia and Europe recorded higher merchandise export growth than import growth

in 2006

12

Leading Exporters and Importers in world merchandise trade, 2006


13

Sectoral structure of merchandise exports by region, 2006

Note: CIS = Commonwealth of Independent States


Manufactures dominate the merchandise

exports structure of

Asia, Europe and North America

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Commodity composition of world exports, 1950Commodity composition of world exports, 1950--20062006


Manufactures remain the most dynamic product group in merchandise trade.

Raul Prebisch (Book: The Economic Development of Latin America (1950; orig. in Spanish 1949).

Hans Singer (Paper: Post-War Relations between Under-developed and Industrialized Countries (1949)

The Singer-Prebisch thesis is the observation that the term of trade (TOT) between primary products and manufactured goods tend to deteriorate over time. How? Income Elasticity of Demand.

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Selected IntraSelected Intra-- and Interand Inter--regional merchandise trade flows, 2006regional merchandise trade flows, 2006


World merchandise trade is still characterized by intra-regional flows(Drysdale and Garnout, 1982)Trade Intensity Index

tw

wk

j

jk

jk

Xx

Xx

TI

=

Ng and Yeats (2003):

What does it imply?

Trade in commercial servicesTrade in commercial services

In 2006, trade in merchandise was boosted by commodity prices, growing faster than trade in

commercial services.


International trade in services broadly consists of commercial services, investment income and government services.

Trade in services? The GATS Four Modes of Supply comprises:Mode 1 Cross border trade, which is defined as delivery of a service from the territory of one country into the territory of other country; Mode 2 Consumption abroad - this mode covers supply of a service of one country to the service consumer of any other country; Mode 3 Commercial presence - which covers services provided by a service supplier of one country in the territory of any other country, i.e. foreign direct investment undertaken by a service provider; Mode 4 Presence of natural persons - which covers services provided by a service supplier of one country through the presence of natural persons in the territory another economy.

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How do we identify degree of economic How do we identify degree of economic interdependence?interdependence?

Macroeconomics:Macroeconomics:Y = C + I + G + (X Y = C + I + G + (X -- M) M)

Ratio of exports and imports of goods and services to GDP = (X+M)/Y

2. Mercantilism2. Mercantilism Mercantilism is an economic theory which the prosperity of a Mercantilism is an economic theory which the prosperity of a

nation depends upon its nation depends upon its supply of capitalsupply of capital. Three components: . Three components: manufacturing sector, rural sector and manufacturing sector, rural sector and foreign coloniesforeign colonies. .

Economic assets, or capital, are represented by bullion (gold, Economic assets, or capital, are represented by bullion (gold, silver, and trade value) held by the state, which is best increasilver, and trade value) held by the state, which is best increased sed through a through a positive trade balancepositive trade balance with other nations (exports with other nations (exports minus imports). Zerominus imports). Zero--sum game.sum game.

Mercantilism suggests that the ruling government should Mercantilism suggests that the ruling government should advance these goals by playing a protectionist role in the advance these goals by playing a protectionist role in the economy, by encouraging exports and discouraging imports, economy, by encouraging exports and discouraging imports, especially through the use of tariffs. How?especially through the use of tariffs. How?

Country AImports (M)

Exports (X) Trade Balance (TB):TB = ( X M )

20

The challenge to mercantilismThe challenge to mercantilism

David Hume : the PriceDavid Hume : the Price--SpecieSpecie--Flow MechanismFlow MechanismSurplus TB Surplus TB ----> Money Supply increases > Money Supply increases ----> Prices and > Prices and

wages increase wages increase ----> M increases and X decreases> M increases and X decreasesAssumptions:Assumptions:

-- The quantity theory of money : The quantity theory of money : MMssVV = PY= PY-- Demand for traded goods is price elasticDemand for traded goods is price elastic-- Perfect competitionPerfect competition-- Gold standard existsGold standard exists

Adam Smith: Absolute AdvantageAdam Smith: Absolute Advantage

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3. Absolute Advantage 3. Absolute Advantage

A country has an A country has an absolute advantageabsolute advantage over another in producing over another in producing a good, if it can produce that good using a good, if it can produce that good using fewer resourcesfewer resources than than another country. another country.

For example if For example if one unit of laborone unit of labor in in JapanJapan can produce 80 units can produce 80 units of X or 20 units of Y; while in the of X or 20 units of Y; while in the USUS one unit of labor makes 50 one unit of labor makes 50 units of X or 75 units of Y, then Japan has an absolute advantagunits of X or 75 units of Y, then Japan has an absolute advantage e in producing X and the US has an absolute advantage in in producing X and the US has an absolute advantage in producing Y. producing Y.

JapanJapan USUSXX 8080 5050YY 2020 7575

Recall microeconomics:

TP = total product

MP = marginal product

AP = average product

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4. Case Study: 4. Case Study: Trend in International TradeTrend in International Trade

1985ASEAN5, 4.23%

EU, 33.30%

North-East Asia, 16.16%

Rest, 28.23%

NAFTA, 18.08%

2006ASEAN5, 6.14%

EU, 42.13%

North-East Asia, 18.53%

Rest, 17.09%

NAFTA, 16.11%

Source: UN-COMTRADE

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Philippin

Exports by Countries in East Asia

Source: UN-COMTRADE

Documents

Lecture #1 Introduction Mercantilsm Abs Ad