Transcript Lecture 1 File

TU-E1160
INTERNATIONAL
ECONOMICS
Spring 2016
by
Hannele Wallenius
Aalto University School of Science
Department of Industrial Engineering and Management
International Economics
Hannele Wallenius
Course Organization
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

20 contact hours including a Poster Session +
the final exam
Slides in MyCourses > Lectures
Students will choose a certain current/topical
economic event/issue to write a report of ca. 20p.
and repair a poster for the poster session held
at the end of the course
 form a group of 3 - 4 students
 some examples of such events/issues are listed
on the next slide
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What's Going on in the World?
Examples of Topics
1. Recent Actions Taken by Central Banks: ECB, FED, JoB, PBOC
2. Events in the WTO (new developments in agreements, disputes, etc.)
3. Changes in Exchange Rate Markets
4. Development of Euro Depth Crises
5. EU’s Banking Union
6. Is China Loosing Its Competitiveness?
7. Currency Wars
8. European Central Bank's Bond-Buying Program
9. EU’s Capital Market Union
10. European Deflation Problem?
11. Oil Price War
12. Transatlantic Trade and Investment Partnership (TTIP)
13. Brexit – Reasons and Impact on EU
14. Brasilia’s Economy Today
15.BRIC Countries Today
16.Venezuela – oil and hyperinflation
17. How QE has influenced the monetary and investment markets
18. Lifting of economic sanctions on Iran – Impact on World Économy
19.Two Economic Unions under Consideration: and Euro- Asian union
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Grading Policy
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Grades will be based on
– the final exam (60%)
– Economic Event/Issue Assignment
 poster
+ written report 5 + 25 = 30%
– In-class group exercises 10%
Textbook
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Husted, S. and Melvin, M.: International Economics, 9th
international edition, Addison Wesley, Ch. 1 – 9, 11 - 16 & 18
Robert Mundell and Milton Friedman: ONE WORLD, ONE
MONEY?
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OK, before we continue, a reality check
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
What do you hope to learn during this
course?
OR
What topics you think will be covered
in this course?
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After finishing this course, you will be able to:
 Describe some of the patterns and trends in
international trade
 Explain the concept of comparative advantage
 Explain how economies of scale and diversity of
taste lead to gains from international trade
 Explain why trade restrictions lower the volume of
imports and exports and lower our consumption
possibilities
 Explain why we have trade restrictions even though
they lower our consumption possibilities
 Explain how international trade is financed
 Describe a country's balance of payments account
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After finishing this course, you will be able to
continued:
Explain how the foreign exchange rates are
determined
Explain the effects of changes in international
exchange rates
Describe global and regional integration trends in
international trade
Discuss importance of European Union
Debate pros and cons of single currency in
European Union
Describe international financial markets
Understand some reasons for financial crises
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1. INTRODUCTION
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1.1 Relevance and Scope of
International Economics
1.2 Patterns and Trends in
International Trade
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What is International Economics about?
 International Economics studies how a
number of distinct economies interact with
one another in the process of allocating
scarce resources to satisfy human wants
 The study of international trade and
finance is where the discipline of
economics as we know it began
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Two Major Branches
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International Economics can be divided
into two major branches:
 International Trade
 International Finance
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Two Major Branches continued
 International Trade
Microeconomic
approach, longrun focus
Why and What is traded?
Trade flows…
Trade policy
Economic integration
International factor movements
Immigration (movement of labor)
 International Finance
Financial flows between countries Macroeconomic
Foreign direct investments
approach,
short-run focus
Exchange rates
Balance of payments problems
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What is International Economics? continued

During this course we will develop
analytical models to explain the patterns
of international trade
– Including who benefits and who loses from
trade

We will apply trade theory to the analysis
of government trade policies
– Including who benefits and who loses from
these policies
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Why Study International Economics?
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International economics has become
more important with increasing
globalization and its backlash
Both international trade and international
direct investments & capital flows have
increased dramatically during the past few
decades
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
The study of international economics has
never been as important as it is now
 At the beginning of the 21st century,
nations are more closely linked through
trade in goods and services, through flows
of money, and through investment in each
others’ economies than ever before
 Globalization has made citizens of all
countries much more aware than ever
before of the the worldwide economic
forces that influence their fortunes, and
globalization is here to stay!
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Give me an example of the
interdependency of todays world
economies.
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The World Has Become Very Inter-Connected:
Some Popular Sayings
 "When America sneezed, Japan and
Europe used to catch a cold”
 "No nation is immune to economic events
that occur in far away places”
 "Surely there is no closed economy in the
real-world, except the world economy!”
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Example 1:
"When East and West Germany were united,
the cost was high for West Germany. It had
to borrow money extensively from
international sources, raising interest rates.
This caused high interest rates all over the
Europe."
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Examples 2:
"As Toyotas flooded the US market, producers
in the US faced a hard choice: to either trim
their budgets or close their doors. Many
workers lost their jobs, and louder and louder
calls for 'protection from ruinous foreign
competition' were heard. As a result, the
country that championed free trade in the
world economy had second thoughts about
the benefits of free trade.“
And how about the impact of China and
India in many industries today!
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AND the most recent example 3:
The US financial crisis
that started 2007-2008
has shown how
interdependent the world
really has become!
Financial crises escalated
to a full-blown recession
all over the world!
EU debt crises (Greece,
Ireland, Portugal, Spain,
Cyprus, Italy!?)
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1 INTRODUCTION
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1.1. Relevance and Scope of
International Economics
1.2. Patterns and Trends in
International Trade
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Characteristics of World Trade
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Value and growth of world
merchandise and services trade
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Largest exporters and importers
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Geographic patterns
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Commodity composition
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Why is the trade between Finland and China
different from the trade between Helsinki and
Oulu?
TWO reasons:
1) Since international trade crosses national
borders, governments can monitor this trade
• CAN impose taxes or quotas on goods
imported from China, for example
- Have to decide whether to do so or not!
2) International trade involves the use of
different national currencies!
• Finns will pay in Euros for Chinese products
but Chinese want to be paid in Yuans
- we have created international payments
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World Exports Compared to World GDP
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BUT the US financial crises brought a rather severe
slump in the GDP of all economies:
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AND brought along lots of uncertainty about the trade:
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WTO: World trade hit by 12%
drop in 2009
24 Feb 2010
Pascal Lamy
Head of the World Trade Organization (WTO) Pascal Lamy
says 2009 was the worst year for global business in the past
65 years.
Lamy told a think tank in Brussels that world trade dropped by
12 percent last year due to the global economic meltdown.
"World trade was reduced by 12 percent in 2009" to
experience its "sharpest decline" since 1945, he added.
"World trade has also been a casualty of this crisis," the WTO
director general said.
This is while the WTO had forecasted a 10 percent drop for
2009. "Until now our forecast was around 10 percent," he said.
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See the dramatic changes in Finland’s
and some other countries’ exports.
Development of Exports
in Selected EU Countries, 2009(1-10)
Ireland
France
Spain
Germany
Netherlands
Italy
UK
Estonia
Sweden
Finland
Source: Finnish Customs, Statistics Unit
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Development of Exports
in Selected EU Countries, 2010(1-10)
But already
next year
exports started
growing…
Source: Finnish Customs, Statistics Unit
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Development of Exports
in Selected EU Countries, 2011(1-11)
Source: Finnish Customs, Statistics Unit
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Let’s return to the long period of growth
in world trade: What caused the
explosion of world trade?
 Reduction in trade barriers
 Advances in transportation and
communication technology
 Proliferation of trade agreements
 Widespread outsourcing of production
activities
 Greater awareness of foreign cultures
and products
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Leading Exporters in World Merchandise
Trade, 2014
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China’s Major Trading Partners (2013)
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Leading Importers in World Merchandise
Trade, 2014
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World Trade in Services
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Value of $4.6 trillion in 2013 (about
20% of the international trade)
U.S. and EU are largest exporters
and importers of services
Most traded services: transportation,
travel, other services (banking,
medicine, consulting, insurance &
education)
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Trade in
services
of EUcountries
(excluding
intra-EU
trade) in
2014
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EU Exports to…, 2014
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Source: Eurostat
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US Exports to…, 2014
Source: U.S. Department of Commerce, Census Bureau, Economic Indicators Division.
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Key Issues/Challenges in World Trade
have often been
a) Raw materials’ prices
• industrial countries buy them, refine them
and sell back to LDCs!
• LDCs would like to behave as OPEC does!
b) Manufactured exports from LDCs
• some countries already do have some
major manufacturing industries
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A shift is taking place…
Low and middle income economies accounted for
29.7 % of world exports and 30.8% of world
imports in 2013.
Source: World Development Indicators
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Key issues in world trade continued
c) Trade disputes
The concern used to be: should, for instance,
Japanese exports be restricted to prevent
massive job losses in Western Europe and
North America or...? And now we are worried
about job losses to China and India! And next
possibly to Africa…
• Banana dispute between USA and EU!!
• U.S. steel tariffs
• Unfair value of Yuan…
And next the Finnish case…
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Volume of Finland’s Merchandise
Imports and Exports, 1860 – 1999
index 1926 = 100
Imports
Fast growth
starts after
WWII.
Imports
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Exports
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Finland’s Monthly Imports and Exports
of Merchandise 2002-2015
Financial
crisis hits
Finnish
economy!
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Finland’s Exports by industry,
2015 (1-9)
Source: The Finnish Customs
http://www.tulli.fi/fi/suomen_tulli/ulkomaankauppatilastot/grafiikkaa/index.jsp
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What does Finland import?
Source: The Finnish Customs
http://www.tulli.fi/fi/suomen_tulli/ulkomaankauppatilastot/grafiikkaa/index.jsp
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Finland’s Foreign Trade in High
Technology 1995 - 2014
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With whom does Finland trade with?
Exports by Country Groups, 2015 (1-9)
Source: The Finnish Customs
http://www.tulli.fi/fi/suomen_tulli/ulkomaankauppatilastot/grafiikkaa/index.jsp
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With whom does Finland trade with?
Imports by Country Groups, 2015 (1-9)
Source: The Finnish Customs
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Finland’s Foreign Trade in 2014 continued…
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Fenno-Russian trade, Exports/Imports
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In-Class Exercise 1: Use Web/Lecture Notes
to Draw Some Conclusions of World Trade:
1.
2.
3.
Why do we export/import goods and
services?
Who are the largest
exporters/importers in the world?
What are the typical
products/services country x
exports/imports? Do you detect any
pattern?
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On next lecture:
2. WHY DO WE TRADE?
Trade Theories
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