International Economics
University of Helsinki
September 22nd – October 17th, 2008
Practicalities
Lecturer:
Matti Sarvimäki
matti.sarvimaki@vatt.fi / (09) 703 2953
Lectures:
Mondays 14-16, Wednesdays 14-16
Fridays 10-12 at Economicum
Exam:
Retake:
27.10.2008 at 8 - 10 ECO, lecture room
24.11.2008 at 8 - 10 ECO, lecture room
Requirements
• Lectures
• Krugman (1993): What Do Undergrads Need to Know
About Trade? The American Economic Review 83(2): 23–
26 (available from JSTOR)
• There are two textbooks that are likely to be helpful
(one by Krugman & Obstfeld another by Appleyard
& Field). Both are called International Economics. The
course covers most of the first half of the books
(trade theory and policy) and the books cover most of
the material I will present during the lectures
Outline
The course
•
•
•
Basic Trade Models
Introduction to Trade Policy
Further Topics
This lecture: Introduction
• Stylised facts
• What models do
• Mercantilism and Adam Smith
• (introduction to comparative advantage)
World Trade 1820-1992
World Exports/GDP (in 1990 constant dollars, percent)
Source: Rodrik (2000), original data from Maddison (1995)
Real GDP per capita (population weighted
averages, 1950-2000)
Real GDP per capita (1996 international dollars)
Index: 1950=100
30.000
4.50
4.00
25.000
3.50
3.00
20.000
2.50
15.000
2.00
1.50
10.000
1.00
5.000
0.50
0.00
0.000
1950
1960
1970
1980
bottom 25%
1990
2000
25-50%
1950
1960
50-75%
1970
1980
top 25%
Source: Calculations from Penn World Table, data available at http://pwt.econ.upenn.edu/
1990
2000
World Inequality 1820-1992
(mean logarithmic deviation)
0.90
0.80
0.70
Inequality
within
countries
0.60
0.40
Inequality
between
countries
0.30
Total
Inequality
0.50
0.20
0.10
0.00
1820 1850 1870
1890 1910
1929 1950 1960
1970 1980 1992
Source: Bourguignon & Morrisson (2002). See also Human Developments Trends in
http://www.gapminder.org/, in particular slides 1/15 and 2/11.
Change in the U.S. Real Wages
Change in real wages 1970–2002
(per percentile between 1970 and 2002 )
Percentile
Source: Smith (2006)
0
100
200
300
Openness to Trade, GDP per capita and
population (2000)
0
10
20
Real GDP per capita ($'000)
30
Source: Calculations from Penn World Table, data available at http://pwt.econ.upenn.edu/
40
300
Openness to Trade, GDP per capita and
population (2000)
HKG
LUX
200
MYS
EST
SYC
ATG
SVK CZE
KNA
MUS
HUN
SVN
TTO
BRB
TJK
100
GNQ
NGA
IDN
RUS
GRC
BRA
ARG
NZL
ESP
MAC
NLD
AUT
SWE
FIN
GER
GBR
FRA
ITA
CHE
CAN
DNK
NOR
AUS
USA
JPN
0
CHN
PAK
BGD
IND
KOR
ISR
PRT
IRL
BEL
0
10
20
Real GDP per capita ($'000)
30
Source: Calculations from Penn World Table, data available at http://pwt.econ.upenn.edu/
40
Openness to Trade and GDP per capita
over time (Finland, 1950-2000)
80
Finland
70
2000
60
1980
50
1970
1990
40
1960
30
1950
5
10
15
Real GDP per capita ($'000), constant prices
20
Source: Calculations from Penn World Table, data available at http://pwt.econ.upenn.edu/
25
Openness to Trade and GDP per capita
over time (Selected countries, 1950-2000)
Mexico
10
1980
1960
2000
40
1990
1950
1980
1960
20
20
1990
(imports+exports)/GDP
30
40
2000
60
50
China
1970
0
0
1970
0
1
2
3
Real GDP per capita ($'000), constant prices
4
2
4
12
Argentina
40
(imports+exports)/GDP
40
60
50
India
6
8
10
Real GDP per capita ($'000), constant prices
1980
10
19501960
1990
2000
20
20
30
2000
1950
1960
1990
1970
1980
0
0
1970
0
1
2
3
Real GDP per capita ($'000), constant prices
4
2
4
6
8
10
Real GDP per capita ($'000), constant prices
12
0
2
4
6
Changes in Openness to Trade and
changes in GDP per capita (1950/60 - 1990/00)
0
2
6
4
Change in real GDP per capita between 50/60 and 90/00
8
Source: Calculations from Penn World Table, data available at http://pwt.econ.upenn.edu/
10
6
Changes in Openness to Trade and GDP
per capita (1950/60 - 1990/00)
CHN
TUR
4
KOR
ESP
ISR
TWN
0
2
PHL
AGO NGA NPL
BEN
MRT
LSO
NER ETH
USA
PRY
CHL
GUY
SYC
ROM
GRC MYS
IDN
ITA
IRL
AUT
PNG JOR
INDPRI
BEL
SEN
PRT
MDG
NIC
GINHND
CAN
JAM MEX
MUS
BGD
FRA
CRI
ECU
GNB
GTM
MLI
FIN
ARG
URYFJI SWE
TCD NAM
CYP
PAK
MOZRWA
GMB
DOM LUX
SYR
CHE
COL
ZAR
CIV
BDI
GBR
IRN
SLV
BOL
COG
NLD
ISL
MWI
GNQVEN
TGO
GAB BRA
MAR
EGY
TZA
DNK
GHANZL AUS
COM
BRB
ZWE
PAN NOR
BFA
KEN LKA
CPV
HTI
ZAF
CMR
CAF ZMB
TTO
PER
UGA
DZA
0
2
THA
BWA
HKG
JPN
6
4
Real GDP per capita ($'000)
SGP
8
Source: Calculations from Penn World Table, data available at http://pwt.econ.upenn.edu/
10
Leading Merchandise Traders
(2004, excluding intra-EU trade)
1
2
3
4
5
6
7
8
9
Exporters
EU (extra-25)
United States
China + HK
Japan
Canada
South Korea
Mexico
Russia
Taiwan
Value
1203.8
818.8
838.9
565.8
316.5
253.8
189.1
183.5
182.4
Share
18.1
12.3
12.6
8.5
4.8
3.8
2.8
2.8
2.7
68.5
Importers
United States
EU (extra-25)
China + HK
Japan
Canada
South Korea
Mexico
Taiwan
Singapore
Value Share
1525.5 21.8
1280.6 18.3
588.6 8.4
454.5 6.5
279.8 4.0
224.5 3.2
206.4 3.0
168.4 2.4
163.9 2.3
70.0
Billions of dollars, Source: WTO
http://www.wto.org/english/res_e/statis_e/its2005_e/section1_e/i06.xls
Structure of Trade (Finland, 2000)
Food etc.
Materials etc.
Manufacturing
Machinery and transport
Other
Exp.
0.8
7.9
17.3
20.3
0.8
47.1
Imp.
1.7
9.7
7.2
14.2
0.8
33.7
-1.0
-1.8
10.1
6.1
0.0
13.5
Billons of dollars, Source: Calculations from the NBER-United Nations Trade Data.
Data available at http://cid.econ.ucdavis.edu/. Stata code available by request (from
me). In 2000, Finland’s GDP was about 130 billion dollars.
Finland’s Top 6 Trading Partners, 2000
Exports
Germany
UK
USA
Sweden
France
China*
value
4.9
3.6
3.0
3.0
2.2
2.3
Surplus
UK
France
USA
Italy
Spain
Philippines
value
1.5
0.9
0.9
0.6
0.5
0.4
Imports
Germany
Sweden
Russian Fed
USA
UK
China*
value
4.8
3.5
3.2
2.4
2.2
2.1
Deficit
Russia
Japan
Sweden
Norway
Denmark
Korea Rep.
value
-2.4
-1.4
-0.5
-0.4
-0.3
-0.3
* China, Hong Kong, Macao, Areas NES
Billons of dollars, NBER-United Nations Trade Data
Structure of Bilateral Trade (Finland, 2000)
China
Food etc.
Materials etc.
Manufacturing
Machinery and transport
Other
Exp. Imp.
0.0 0.0 0.0
0.0 0.1 -0.1
0.1 0.5 -0.3
1.9 0.7 1.2
0.2 0.8 -0.6
2.3 2.1 0.2
Sweden
Food etc.
Materials etc.
Manufacturing
Machinery and transport
Other
Exp. Imp.
0.1 0.3 -0.2
0.7 0.8 -0.1
1.2 1.2 -0.1
1.0 1.2 -0.2
0.0 0.0 0.0
3.0 3.5 -0.5
Billons of dollars, NBER-United Nations Trade Data
Structure of Trade (Finland 1962, 1989, 2000)
Exp.
Food etc.
0.0
Materials etc.
0.5
Manufacturing 0.4
Machinery and
0.0
transport
Other
0.0
0.9
1962
1989
2000
Imp.
Exp. Imp.
Exp. Imp.
0.1 -0.1
0.5 1.2 -0.7
0.8 1.7 -1.0
0.1 0.3
5.3 6.1 -0.8
7.9 9.7 -1.8
0.3 0.1 12.3 6.9 5.5 17.3 7.2 10.1
0.4 -0.3
0.0
0.9
0.0
0.1
6.4
9.4 -3.1
0.2 0.2 -0.1
24.7 23.8 0.8
20.3 14.2
6.1
0.8 0.8 0.0
47.1 33.7 13.5
Economic Theory / Models
“. . . just talking plausibly about economics is not the same as having a real
understanding; for that you need crisp, tightly argued models.”
Paul Krugman (1996)
“[Models] reduce a complex problem to a few essentials and illustrate
the relationships between them. A good model is one which is wide in scope
and unexpected in implications.”
John Kay (2003)
“…The ideas of economists and political philosophers, both when they are
right and when they are wrong, are more powerful than is commonly
understood. Indeed, the world is ruled by little else.”
John Maynard Keynes (1936)
Economic Models as Simplifications
•
The point of economic models is to simplify the
complex reality in order to understand it. A good
model is such that
a.
it is easy to understand (simple)
b.
it increases the understanding of reality
•
Mathematics is the language of economics. The point is to be
consistent and to make assumptions transparent. In this
course we use geometry to make the math more intuitive
Gibbard & Varian (1978) describe models as “caricatures”,
“approximations”, “stories with a specific structure” etc.
Models typically ask “what would happen if this and this was
the case?” and exaggerate to make a point
•
Example: London
A model of London
Another model of London
Economic Models as Imitations
“[…] a "theory" is not a collection of assertions about the
behavior of the actual economy but rather an explicit set of
instructions for building a parallel or analogue system […] A
"good" model, from this point of view, will not be exactly more
"real" than a poor one, but will provide better imitations. Of
course, what one means by a "better imitation" will depend on
the particular questions to which one wishes answers.”
Lucas (1980)
• For an example of this kind of model in trade contest,
visit www.gtap.agecon.purdue.edu
• However, in this course we will concentrate on models
that are best described as caricatures.
International Economics
• What is different in comparison to “ordinary”
economics? The institutional setting (national policies,
currencies etc) nothing else, really.
• International economics typically divided:
o
o
international trade and international money.
In this course we will concentrate on the former. HSE
provides a similar course that concentrates on the latter.
• The study of international trade can be extended to
study international capital, labour flows and diffusion
of technology
Evolution of Trade Theory
• Mercantilism (1500–)
• Classical Political Economy
o
o
o
Price-Specie-Flow Mechanism (Hume, 1752)
Absolute Advantage (Smith, 1776)
Comparative Advantage (Ricardo, 1817)
• Neo-Classical Economics
o
Heckscher-Ohlin Model (1919, 1933) and extensions
• Modern Economics
o
Economies of scale, imperfect competition…
Mercantilism
• Diffuse collection of economic thought
• Mostly written by merchants and businessmen
• Appears in economics virtually always as a target of
critique. However, the mercantilist mindset has not
vanished among many non-economists
• The word mercantilist is still used for a person
opposing free trade based on “traditional arguments”
For short discussion, see Appleyard & Field (chapter 2). If
you’re more interested, see Landreth & Colander (2002)
Mercantilist View of the Economy
•
•
•
Nations wealth = holdings of precious metals
Zero-sum economy
“Favourable balance of trade”
o
•
i.e. exports good, imports bad
Implicit assumption that the economy was operating
at less than full employment
Conclusion: Economic activity should be regulated
Mercantilist Policy Recommendations
International
o
o
o
o
Tariffs & Quotas on imports
Subsidies on exports
Exclusive trading rights
Government control on exchange of precious metals
Domestic
o
o
Regulating production (exclusive product charters, tax
exemptions, subsidies, special privileges…)
Regulating labour (crafts guilds, low wages, subsidies for
children, financial incentives for marriage…)
Adam Smith
“... He generally, indeed, neither intends to promote the public interest, nor
knows how much he is promoting it [...] he intends only his own
gain, and he is in this, as in many other cases, led by an invisible hand to
promote an end which was no part of his intention.”
Smith (1776)
“Somehow all of the activities seem to get coordinated. There’s a taxi to get
you to the airport. There’s butter and cheese for lunch on the airplane.
There are refineries to make the airplane fuel and trucks to transport it,
cement for the runways, electricity for the escalators, and most important of
all, passengers who want to fly where the airplanes are going. […] if you
are in a mood to be amazed, it can amaze you that the system works at
all.”
Schelling (1978)
Smith’s View of the Economic
System
• Nations wealth = Production capacity
• Positive-sum economy
• Self-interest combined with competition serves public
interest
• Division of labour increases productivity
Conclusion: Policy of laissez faire promotes
economic growth
Labour theory of value
• The amount of labour required to produce a good
determines its’ value
o
Let’s assume that it takes two hours to produce A and
an hour to produce B → A is two times more valuable
than B
• The prevailing value theory until 1870s
o
o
Main problem: Does not consider utility
Other problems: measurement, differing skills, how to
deal with capital, land and profits
Smith on Trade:
Absolute Advantage
Cloth
Wine
England
1 hr. / yd.
4 hrs. / bbl.
Portugal
2 hr. / yd.
3 hrs. / bbl.
Absolute Advantage:
Relative Prices in Autarky
• Autarky price of wine in terms of cloth
o England: 1 bbl. wine = 4 yd. cloth
o Portugal: 1 bbl. wine = 1,5 yd. cloth
• Autarky price of cloth in terms of wine
o England: 1 yd. cloth = 0,25 bbl. wine
o Portugal: 1 yd. cloth = 0,67 bbl. wine
→
England has absolute advantage in cloth,
Portugal in wine
Absolute Advantage:
Rationale for Trade
• If international trade is allowed
o
o
→
England wants to buy wine if it costs less than 4
yard of cloth per barrel of wine
Portugal wants to sell wine if it gets more than
1,5 yard of cloth per barrel of wine
Both are willing to trade for any price
between 1,5 - 4 yard per barrel
References
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Gibbard & Varian (1978): Economic models. Journal of Philosophy 75:664–677
Bourguignon & Morrisson (2002): Inequality Among World Citizens: 1820-1992. American
Economic Review. Vol. 92, No. 4
Heckscher (1919): The Effect of Foreign Trade on the Distribution of Income, Ekonomisk
Tidskrift.
Hume (1752): Of the Balance of Trade. Availabe at www.utilitarian.net/hume/
Kay (2003): The Truth about Markets. Allan Lane. Published in the U.S. as “Culture and
Prosperity“ by HarperBusiness.
Keynes (1936): The General Theory of Employment, Interest, and Money.
Krugman (1993): What Do Undergrads Need to Know About Trade? The American
Economic Review. Vol. 83(2): 23–26
Krugman (1996): Pop Internationalism. MIT Press.
Landreth & Colander (2002): History of Economic Thought. Houghton Mifflin Company.
Lucas (1980): Methods and Problems in Business Cycle Theory. Journal of Money, Credit and
Banking 12: 696-715
Ohlin (1933): Interregional and International Trade.
Ricardo (1817): On the Priciples of Political Economy.
Schelling (1978): Micromotives and macrobehavior. W. W. Norton
Smith, A. (1776): An Inquiry into the Nature and Causes of the Wealth of Nations.
Smith, J. (2006): Immigrants and the Labor Market. Journal of Labor Economics 24(2)