KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 1 International Economics Part 2 Dr. Stefan Kooths BiTS Berlin (winter term 2013/2014)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 2 Outline 1.Introduction and Overview 2.Systemizing and Recording Cross-border Economic Activity 3.The Pure Theory of International Trade  General analysis of cross-border trade  Reasons for inter-industry trade: Absolute and comparative advantage  Causes and consequences of cost differences: The role of factor endowments and factor proportions  “Imperfect” competition and intra-industry trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 3 Four basic questions about trade: Trigger, impact, national and international gains

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 4 Categories of trade  Non-availability (trade in commodities)  Inter-industry trade (specialization)  Intra-industry trade

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 5 Product markets: General assumptions, demand and supply, consumer and producer surplus, elasticities

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 6 Opening of trade: National and international markets

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 7 Arbitrage and free-trade equilibrium

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 8 Terms of trade

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 9 Four basic answers to trade

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 10 Outline 1.Introduction and Overview 2.Systemizing and Recording Cross-border Economic Activity 3.The Pure Theory of International Trade  General analysis of cross-border trade  Reasons for inter-industry trade: Absolute and comparative advantage  Causes and consequences of cost differences: The role of factor endowments and factor proportions  “Imperfect” competition and intra-industry trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 11 Adam Smith: Theory of absolute advantage »Maximum number of working hours: 10 (millions, billions, …) »Production and consumption possibilities without trade (self-sufficiency)? »Consumption possibilities with trade and specialization (division of labor)? Working hours per ton of wheat Working hours per barrel of wine Country A 25 Country B 2,54 Adam Smith (1723—1790) An Inquiry into the Nature and Causes of the Wealth of Nations, 1776

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 12 David Ricardo: Opportunity cost and theorem of comparative advantage »Maximum number of working hours: 10 (millions, billions, …) »Production and consumption possibilities without trade (self-sufficiency)? »Any chance for mutually beneficial trade (division of labor)? David Ricardo (1772—1823) On the Principles of Political Economy and Taxation, 1817 Working hours per ton of wheat Working hours per barrel of wine Country A 25 Country B 14

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 13 Production-possibility curve

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 14 Exchange rate and terms of trade

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 15 Mercantilism and unbalanced trade

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 16 Complete vs. incomplete specialization: Constant vs. increasing marginal cost

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 17 Production conditions, preferences and trade patterns

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 18 Trade effects and gains from trade

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 2 19 Country size and relative international winners