International Trade &
International Finance
ECN3013HK
Introduction to Module &
Recent Trends in International Trade
Lecture 1
Email: kamjanetkam@yahoo.com.hk
1
ASSESSED LEARNING OUTCOMES
• By the end of the module, you should be able to:
• Explain and evaluate alternative theories of
international trade in relation to modern trade patterns.
• Apply economic analysis to current trends and issues
in world trade.
• Explain and illustrate the fundamentals and the
interdependence of international financial markets.
• Explain and analyse macroeconomic policy in the
open economy under different exchange rate regimes.
• Appraise the development and performance of the
international monetary system.
2
Learning Outcomes
By the end of this session you should be
able to:
• Understand what is this module about?
• Discuss recent trends in international trade
• Use some basic tools for the economic
analysis of trade
– Demand & supply
– Consumer & producer surplus
– Welfare effects of trade
Why study international trade?
• International trade deals with the economic
relations & interdependence among
nations.
• We study international trade to analyse:
– the effect of the international flow of goods,
services & factors on domestic welfare;
– the effect of national policies re these
international flows on domestic welfare.
Is international trade a separate
branch of knowledge?
• International economic relations differ
from those within a nation because of:
– different currencies;
– less mobility of factors of production;
– different customs & laws.
• International economics uses the tools of
both macroeconomic & microeconomic
analysis, but adapts, extends & integrates
them.
In international trade there are four
basic questions to be answered:
1) Why do countries trade?
2) How does trade affect production and
consumption in each country?
3) How does trade affect the economic wellbeing of each country?
4) Who (within each country) are the gainers
and losers from opening trade?
Textboook
Essential reading:
Pugel, T.A., International Economics,
17th edition, London: McGraw Hill.
Resources and Data
http://www.wto.org/
http://www.worldbank.org/
http://www.imf.org/
http://unctad.org/
Recent Trends in
International Trade
• Since the middle of the 20th century,
world trade has generally grown faster
than world production
Annual growth in volume of
world merchandise exports and GDP
14
The picture can't be display ed.
12
10
8
Annual % change
6
4
2
0
-2
-4
-6
-8
Growth in exports
Average export growth
-10
-12
1955
1960
1965
1970
1975
Growth in GDP
Average GDP growth
1980
1985
1990
1995
Source: Based on data in Statistics Database (WTO) and World Economic Outlook (IMF )
2000
2005
2010
2015
World Exports as a Percentage of World GDP
Structure & Trends of World Trade
See WTO:
World Trade Statistical Review 2020/2021
https://www.wto.org/english/res_e/statis_e/wts2020_
e/wts2020_e.pdf
https://www.wto.org/english/res_e/statis_e/wts2021_
e/wts2021_e.pdf
Recent Trends in
International Trade
• The international economy is still
dominated by the advanced industrialised
nations
– 60% of world exports & 65% of world imports
are accounted for by developed economies
– Top ten nations account for 50% of world trade
• China has achieved the most spectacular
growth in exports followed by other BRIC
countries
Recent Trends in
International Trade
• Most world trade consists primarily of
manufactures, but ...
• Export structure does vary among
countries
Recent Trends in
International Trade
• Much trade is now intra-regional
– e.g. countries within the EU sell nearly 68%
of their exports to other EU countries
• Much trade is now intra-industry trade
– e.g. Germany exports cars to France &
France exports cars to Germany
• Increasingly intra-company
• Political controversies and social upheaval
• Small countries tend to be more reliant on
trade than large countries
Recent Trends in
International Trade
• Has growth in international trade peaked?
• Increasing interdependence
-intra-regional
-intra-industry
-intra-company
• Increased complexity
-FDI
-service trade (commercial services)
-MNEs and GVC
• Anti-globalisation, political intervention and social
upheaval
Exports, Imports and GDP in selected industrialised countries
Shares of GDP
Exports
Imports
1960s 2000s
1960s 2000s
Annual growth rates
Total trade flows
(Openness)
1960s
2000s
GDP Exports Imports
Australia
12.7
19.6
13.7
19.6
26.4
39.1
3.6
9.5
9.9
Canada
19.1
38.0
18.9
38.0
38.0
76.0
3.4
7.7
9.1
France
13.4
26.4
12.8
26.4
26.2
52.8
3.0
7.9
10.0
Germany
19.3
40.0
17.1
35.4
36.4
75.4
2.5
8.1
7.8
Ireland
32.4
87.5
39.0
74.3
71.4
161.8
4.5
14.0
13.3
Japan
9.8
13.6
9.4
12.5
19.2
26.1
4.3
8.7
9.1
154.3
288.8
3.9
10.1
10.1
Luxembourg
83.3 157.4
71.0 131.4
Netherlands
43.6
69.3
43.5
62.2
87.0
131.5
3.0
8.2
8.1
UK
19.4
27.0
20.0
29.6
39.4
56.6
2.3
9.5
9.7
5.2
10.7
4.6
15.3
9.9
26.0
3.2
9.1
10.1
19.1
36.3
18.9
35.3
38.0
71.6
2.8
9.3
9.3
USA
EU-15
Source: Based on data from AMECO database, European Commission, DGECFIN
Merchandise trade by destination and origin (2009)
(i) Exports
UK
$352.9 billion
Destination
%
EU 27
57.9
USA
14.9
China
2.3
Switzerland
1.7
Canada
1.6
Germany
$1.12 trillion
Destination
%
EU 27
62.9
USA
6.7
China
4.5
Switzerland
4.4
Russia
2.5
Japan
$580.8 billion
Destination
%
China
18.9
USA
16.4
EU 27
12.5
S Korea
8.1
Taiwan
6.3
USA
$1.06 trillion
Destination
%
EU 27
20.9
Canada
19.4
Mexico
12.2
China
6.6
Japan
4.8
(ii) Imports
UK
$482.9 billion
Origin
%
1 EU 27
53.0
2 USA
9.6
3 China
9.0
4 Norway
4.8
5 Japan
2.0
Germany
$926.3 billion
Origin
%
EU 27
58.3
China
8.3
USA
5.9
Switzerland
4.2
Russia
3.7
Japan
$552.0 billion
Origin
%
China
22.2
USA
11.0
EU 27
10.7
Australia
6.3
Saudi Arabia
5.3
USA
$1.61 trillion
Origin
%
China
19.3
EU 27
17.9
Canada
14.2
Mexico
11.1
Japan
6.1
1
2
3
4
5
Source: WTO Statistics Database
Basic Economic Theory and
International Trade
• Supply and demand analysis
– Modified to include trade
• Consumer surplus and producer surplus
• Trade between two national markets
– Gains and losses from international trade
• Welfare effects of trade
21
Demand & Supply Analysis
• Demand - shows the quantity and price
of a good, which consumers are willing
to buy
– Law of Demand: as market price
increases, quantity demanded decreases.
• Supply - shows the quantity and price
of a good that firms are willing to
produce/sell.
22
Demand & Supply Analysis
Demand & Supply Analysis
Consumer Surplus
• Consumer surplus measures the welfare that consumers
derive from their consumption of goods and services.
• Consumer surplus is the difference between what
consumers are willing to pay for a good or service
(indicated by the position of the demand curve) and what
they actually pay (the market price).
• The amount of consumer surplus is shown by the area
under the demand curve and above the ruling market
price
MU, P
P1
Consumer surplus
Total
consumer
surplus
Total
consumer
expenditure
O
MU=D
Q1
Q
Producer Surplus
• Producer surplus is a measure of producer welfare
• It is the difference between what producers are willing
and able to supply a good for and the price they actually
receive
• The level of producer surplus is shown by the area
above the supply curve and below the market price
£
Producer Surplus
MC
(= S under perfect competition)
a
Ppc
Total
Income
= Total Consumer
surplus
O
Qpc
Q
£
Producer Surplus
MC
(= S under perfect competition)
Ppc
a
Total producer
surplus
Total Producer
Costs
O
£
Ppc
Qpc
Q
In the perfectly competitive model, exchanges will be made all the
way over to the interception of demand and supply (equilibrium).
MC= S
a
Total producer
surplus
MU=D
Total Producer
Costs
O
Qpc
Q
Consumer Surplus &
Producer Surplus
Without trade
Consumer Surplus
Producer Surplus
Total Surplus
How to derive an international market
• Above market price, Excess Demand(ED) = 0
• Below market price, ED
= Quantity demanded – quantity supplied = 0T’
0
32
How to derive an international market
• Above market price, Excess Supply(ES)
= Quantity supplied – quantity demanded = 0T’
• Below market price, ES = 0
0
33
Welfare Effects of Trade
34
Two National Markets and the
Opening of Trade
Welfare Effects of Trade
Welfare Effects of Trade
Welfare Effects of Trade
Welfare Effects of Trade
Welfare Effects of Trade
Welfare Effects of Trade
Welfare Effects of Trade
We can start to answer the 4 questions
1. Why do countries trade?
• Simple availability of commodities/goods demanded.
• Differing demand and supply conditions lead to price differences
which can be arbitraged with trade.
2. How does trade affect production and consumption in each country?
• In the importing country trade lowers the price of the traded good:
• raises the quantity consumed; and
• lowers the quantity produced of that product.
• In the exporting country trade raises the prices of the traded good:
• raises the quantity produced; and
• lowers the quantity consumed of the product.
3. Which country gains from trade?
• Using the “one-dollar, one vote” metric, both do.
• The country whose prices are disrupted most by trade gains more.
4. Who (within each country) are the gainers and losers from opening trade?
• Consumers of imported products gain; and
• Producers of exportable products gain.
• Producers of import-competing products lose.
43
• Consumers of exportable products lose.
Pugel Ch.2 Problem11
Belgian writing paper
Domestic demand and supply functions:
Qd = 350 - 0.5 P or P = 700 - 2 Qd
Qs = -200 + 5 P or P = 40 + 0.2 Qs
a)What are the equilibrium price and quantity if there is no
international trade?
b)What are the equilibrium quantity for Belgium if the nation
can trade freely with the ROW at a price of 120?
c)What is the effect of the shift from no trade to free trade
on Belgium consumer surplus? On Belgium producer
surplus? What is the net national gain or loss for Belgium?
Pugel Ch.2 Problem11
a) Find the equilibrium values:
b) At an international price of 120, Belgium would
EXPORT paper.
c) To calculate consumer and producer surplus
changes, first draw the graph:
Calculate consumer and producer surplus
Label the areas between price lines 100 and 120 from left
to right, as A, B, C, D.
•Area A is
•Area B is
The ____ of consumer surplus due to exporting is
____________________________
•Area C is
•Area D is
•The ____ in producer surplus is ____________________
Net gain is represented by the triangles C and D, or
1100.
Belgian producers of writing paper gain more than
consumers lose.
Next session
• Early trade theories
– Mercantilists
– Absolute advantage – Adam Smith
– Comparative advantage – David Ricardo
• Reading: Pugel chapter 3