International Economics

Assoc. Prof. Dr. Ngo Thi Tuyet Mai

Senior Lecturer, Department of International Economics
Email: ngothituyetmaineu@gmail.com
ngothituyetmai@neu.edu.vn
 Week 1- Introduction

 Introduction to the Syllabus

 Chapter 1: International
Economics & the world economy
CHAPTER ONE

1 Introduction to
international economics
and the world economy

Dominick Salvatore (2016), International Economics, 12th edition, John Wiley & Sons, Inc.
Course content
 Chapter 1: Introduction to international
economics and the world economy

 Chapter 2: Theory of international trade

 Chapter 3: International trade policy

 Chapter 4: International economic integration

 Textbook & Reference Books
 Textbook: Đỗ Đức Bình & Ngô Thị Tuyết Mai
(đồng chủ biên) (2019), Giáo trình Kinh tế quốc
tế, NXB Đại học Kinh tế Quốc dân
 Reference books
 Dominick Salvatore (2016), International Economics, 12th
edition, John Wiley & Sons, Inc.
 Paul R.Krugman, Maurice Obsfeld, Marc Melitz (2018),
International Economics: Theory and Policy (11th edition). Prentice
Hall.
 Thomas Pugel (2016). International Economics. 16th edition.
McGraw-Hill
Assessment & grading policy
 Students will attend the final exam if they
meet :
• Class attendance at least 60% of the whole period
• Attend the mid-term exam
 Grading:
• Lecture’s assessment: 10%
• Mid-term exam: 20%
• Final exam : 70%
 Bonus Points: may be given to students actively
participating in class discussions
Introduction to international
economics
 What is International Economics?
 is the study of economic interactions between
countries.
 Sovereign States
 Recognized Stages
How many countries in the World ?

 United Nations (UN): 195 states

 193UN member states (Sovereign

States)
 02 UN observer states (Holy See;
Palestine)
The importance of international
economics
 Approximately 30% of all world production
of goods and services is exported to other
countries?
 The value of international trade services is
increasing; it has expanded faster than trade
in goods between 2005-2017, at 5.4 % on
average
Trends in global export value of
trade in goods (1950-2020)
(in billion USD)

Source: https://www.statista.com/statistics/264682/worldwide-export-volume-in-the-trade-since-1950/
The importance of international
economics
 Generates interdependence
 Gains from trade
 Gains from trade is probably the most
important insight in international economics
 i.e. Exports and imports as a percentage of U.S
national income
 Economic growth in the US spurs increased
demand for imports
 Increased import demand by the US generates
economic growth in other countries
The importance of international
economics
 Sources of potential gain
 Access to items not available domestically
 Access to lower cost products
 Access to greater product variety
 …
 Is it always a gain?
Current International Problems
 Globalization & Inequality, Unemployment,
Environment, Immigration, Human Rights
 Trade Protectionism &Trade Liberalization
 Excessive Fluctuations and Large
Disequilibria in Exchange Rates
 Financial Crises/ Global Crises/ EU Public
debt
 Industry 4.0
 Climate Change
 ????
What is globalization? (i)
 Globalization refers to the shift toward a
more integrated and interdependent world
economy
 There is an increasing integration of
economies around the world, particularly
through:
 International Trade (goods, services flows)
 International Investment/FDI
 Financial flows
 Movement of ideas, jobs,…
What is globalization? (ii)
 Increasing the role of international organizations
(WB, WTO, ADB, IMF,…)
 in constraining domestic policies
 help manage, regulate, and police the global market
place
 Promote the establishment of multinational treaties to
govern the global business system
 Increasing cultural homogeneity
 Increasing domestic economic growth caused by
expanded international connections
What is globalization?
 Increasing international economic
connections:
 International trade (it is expanding)
 International asset ownership (i.e. foreign stock
ownership; government debt; automobile
assembly debt,…)
 Increasing role of international organizations
in constraining domestic policies
 Increasing cultural homogeneity
 Increased domestic economic growth caused
by expanded international connections
The globalization of production: The example
of the Boeing 787 Dreamliner
Drivers of globalization
 The decline in trade & investment barriers
(GATT/WTO)
 Regional trade agreements: AFTA, EU,
ACFTA,…
 Technological change/innovation
 UN: 90% of 2,600 changes made worldwide
between 1992 and 2008 in the laws governing
FDI created more favorable for FDI
Is globalization a good thing?
 Good thing?
 Stimulating economic growth
 Creating jobs
 Raise income level
 Bad thing?
 Loss of jobs
 Increase in gap between the rich and the poor
 Environmental damage
 Erosion of national sovereignty
CHAPTER TWO

2 International
Economics
Twelve Edition

Theory of International
Trade
Dominick Salvatore (2016), International Economics, 12th edition, John Wiley & Sons, Inc.
International Trade Theory

 Learning Goals:
After studying this chapter, you should be able to:
 Describe the basic concepts and policies associated
with Mercantilism
 Understand the law of comparative advantage
 Understand the relationship between opportunity
costs and relative commodity prices
 Explain the basis for trade and show the gains from
trade under constant costs conditions
International Trade Theory

 The classical theory of international trade

 The extend of standard theory of
international trade
 The modern theory of international
economics
 New trade theory of international trade
International Trade Theory

 Basic questions:
 What is the basis for trade?
 What are the gains from trade?
 What is the pattern of trade?
The classical theory of
international trade
 Mercantilists
 Theory of absolute advantage
 Theory of comparative advantage
 The assessment of the classical theories
 The theory of comparative advantage: in case
of constant opportunity cost
 Trade Theory Timeline

1500 1600 1700 1800 1900 2000

Absolute Advantage
Mercantilism
Comparative Advantage

Heckscher-Ohlin Theory

International Product Life Cycle

New Trade Theory

National Competive Advantage

The Classical Theory of International Trade

 The Mercantilists’ Views on Trade

 Adam Smith and Absolute Advantage
 David Ricardo and Comparative Advantage
 The Mercantilists’ Views on Trade

 Mercantilism
 During 16th and 18th centuries, a group of
men - Mercantilists (merchants, bankers,
government officials, and philosophers)
 In Great Britain, Spain, France, Portugal
and the Netherlands
 Gold and silver were the currency of
trade between countries
 The Mercantilists’ Views on Trade

 Mercantilism
 Belief that nation could become rich and
powerful only by exporting more than it
imported
 Export surpluses brought inflow of gold and
silver
 The Mercantilists’ Views on Trade

 Mercantilism
 Trade policy was to stimulate exports and
restrict imports by:
 Maximize exports through subsidies
 Minimize imports through tariffs and quotas
 One nation gained only at the expense of another
“a zero-sum game”
The Mercantilists’ Views on Trade

 Mercantilists measured wealth of a nation by

stock of precious metals it possessed.

 Today, we measure wealth of a nation by its

stock of human, man-made and natural
resources available for producing goods and
services.
 The Mercantilists’ Views on Trade

 Mercantilism- Questions for reviews

 What are the main ideas of mercantilism?
 What are the advantages and disadvantages of
mercantilism?
 Today neo-mercantilists = protectionists ?

Reading Case study: Mercantilism Is Alive and

Well in the Twenty -first Century
Adam Smith and Absolute Advantage

 The Wealth of Nations, 1776

 A. Smith challenged the mercantilist

views on wealth and trade by arguing
that trade was not a zero-sum game,
but rather as a positive-sum game.

 A. Smith’s concept of absolute

advantage was crucial in altering
views on the nature of and potential
gains from trade
 Adam Smith and Absolute Advantage

 A nation has an absolute advantage in the

production of a product when it is more
efficient than any other country producing it
 When one nation has absolute advantage in
production of a commodity, but an absolute
disadvantage with respect to the other nation
in a second commodity, both nations can
gain by specializing in their absolute
advantage good and exchanging part of the
output for the commodity of its absolute
disadvantage.
Illustration on Absolute
Advantage
 Assumptions
 There are two countries A and B
 They produce two commodities X&Y
 Free trade exists between the countries
 The only element of cost of production is
labour
Adam Smith and Absolute Advantage
Units of labour

U.S. U.K.
Wheat (bushels/hour) 6 1
Cloth (yards/hour) 4 5
 U.S. has absolute advantage over U.K. in W or
C, and explain Why?
 U.K. has absolute advantage over U.S. in W
or C, and explain Why?
 Both nations can gain from specialization in
production and trade.
 Adam Smith and Absolute Advantage

No Trade Specialization Trade Trade Gain

U.S. U.K. U.S. U.K. U.S. U.K. U.S. U.K.

Wheat 6 1 12 0 6 5 - 5-1=4
Cloth 4 5 0 10 6 5 6-4=2 -

 Assuming each country has 2 unit labor hours and

specialize on the product that has Absolute Advantage
 Adam Smith and Absolute Advantage

Then answer the following questions:

 Is gain from trade equally devided between the two
nations and why?
 What is the range for mutually beneficial trade?
 Adam Smith and Absolute Advantage
 Example:
Because of climatic conditions:
 Canada is efficient in growing wheat but
inefficient in growing coffee.
 Vietnam is efficient in growing coffee but
inefficient in growing wheat.
 Canada has an absolute advantage in wheat,
Vietnam has an absolute advantage in coffee.
=> Under this circumstances, mutually beneficial trade
can take place if both countries specialize in their
absolute advantage.
Adam Smith and Absolute Advantage

 Adam Smith and other classical economists

advocated policy of laissez-faire, or minimal
government interference with economic
activity.
 Free trade would cause world resources to be
utilized most efficiently, maximizing world
welfare.
Adam Smith and Absolute Advantage

 Absolute advantage can explain a very small

portion of world trade

 By nature, absolute advantage is a special

case of the more general theory of comparative
advantage developed by David Ricardo
Trade Based on Comparative Advantage:
David Ricardo
 1817: Principles of Political Economy and
Taxation
 Law of Comparative Advantage
 Even if one nation is less efficient than (has
absolute disadvantage with respect to) the
other nation in production of both
commodities, there is still a basis for mutually
beneficial trade.
 Not possible for one country to have a
comparative advantage in everything
Trade Based on Comparative Advantage:
David Ricardo
U.S. U.K.
Wheat (bushels/labor hour) 6 1
Cloth (yards/labor hour) 4 2
U.S. U.K.
Wheat UK has higher opportunity cost than US
in Wheat production
Cloth US has higher opportunity cost than UK
in Cloth production
 U.K. has absolute disadvantage in both goods.
 Since U.K. labor is half as productive in cloth but
six times less productive in wheat compared to
U.S., the U.K. has a comparative advantage in cloth.
 U.S. has comparative advantage in wheat.
Comparative Advantage and
Opportunity Costs
 The original idea of comparative advantage
was based on the labor theory of value:
 The value or price of a commodity depends
exclusively on the amount of labor used to
produce it.
 Can use the opportunity cost theory to
explain comparative advantage:
 The cost of a commodity is the amount of a second
commodity that must be given up to release just
enough resources to produce one additional unit
of the first commodity.
Comparative Advantage and
Opportunity Costs

 Production Possibilities Frontier

 A curve that shows various combinations of the
two commodities that a nation can produce by
fully using all resources with best available
technology.
 Constant opportunity costs arise when:
1. Resources are either perfect substitutes for each
other or used in fixed proportion in production
of both commodities, and
2. All units of the same factor are homogeneous.
The Production Possibility Frontiers of the
United States and the United Kingdom.
The Basis for and the Gains from Trade under
Constant Costs

 In the absence of trade, a nation’s production

possibilities frontier also represents its
consumption frontier. US produces and
consumes at A; UK produces and consumes
at A’

 Increased output resulting from

specialization and trade represents nations’
gains from trade, allowing nations to
consume outside production possibilities
frontier.
Terms of Trade = ? Trading Possibilities Lines ???
 Trade with Constant Opportunity
Costs

C’

 Both nations will specialize until ….?

 Line BE, B’E’ become terms of trade for both the US and UK
The Basis for and the Gains from Trade under
Constant Costs

 Under constant cost conditions, nations will

completely specialize in their comparative
advantage .

 With complete specialization in both nations,

the equilibrium-relative commodity price of
each commodity lies between the pre-trade
relative commodity price in each nation.
 BEC and B’E’C’ are called trade triangles and
they are identical, WHY?
Equilibrium in Isolation
The Gains from Trade with
Increasing Costs
FIGURE 2-3 Equilibrium-Relative Commodity Prices with
Demand and Supply.
Empirical Tests of the Ricardian Model

 McDougall (1951 and 1952)

 Argued that costs of production would be lower
in the U.S. in industries where U.S. labor was
more than twice as productive as U.K. labor.
 Found positive relationship between labor
productivity and exports; industries with
relatively productive labor in U.S. have higher
ratios of U.S. to U.K. exports, supporting
Ricardian theory of comparative advantage.
 Results supported by Balassa, Stern and Golub in
later studies.
Empirical Tests of the Ricardian Model

 Absolute advantage: refer to a nation’s ability

to produce a certain commodity more
efficiently than another nation

 Comparative advantage: refer to a nation’s

ability to produce a particular commodity
with a lower opportunity cost than another
nation
Absolute Advantage Theory &
Comparative Advantage Theory

What are the advantages and disadvantage of

Absolute Advantage theory?

What are the advantages and disadvantage of

Comparative Advantage Theory?