International Economics

Units

1. 1

   Classical and factor-based trade theory

   4 lessons

   1. The Ricardian modelBuild the one-factor Ricardian model with unit labor requirements aLC and aLW, draw each country's straight-line production possibility frontier, and find the relative price of cloth in terms of wine.
   2. Gains from tradeUse the world relative supply and demand diagram to find the terms of trade between the two autarky prices, and show that each country then consumes at a point outside its own frontier.
   3. The specific factors modelUse the labor market diagram of two value-of-marginal-product curves on a horizontal axis split between manufactures and food to find the wage and the allocation of labor, and show who gains and loses when a good's price rises.
   4. Heckscher-Ohlin and Stolper-SamuelsonDraw the Edgeworth box and the bowed-out frontier it generates, show that a country exports the good that uses its abundant factor intensively, and show with unit-cost lines that a rise in a good's price raises the return to the factor that good uses intensively.
2. 2

   Increasing returns and the gravity model

   4 lessons

   1. Monopolistic competition and tradeUse a firm's average cost and marginal revenue diagram and the zero-profit tangency to explain intra-industry trade, and show that a larger market gives more varieties at a lower price.
   2. Heterogeneous firms and exportingUse the Melitz model, with a productivity axis marked by a cutoff for survival and a higher cutoff for exporting, to show that only the most productive firms export and that opening to trade reallocates market share toward them.
   3. The gravity equationWrite trade between countries i and j as proportional to GDP_i times GDP_j over distance, take logs to get a straight line, and read the distance elasticity from a fitted line of log trade against log distance.
   4. Multinationals and offshoringExplain foreign direct investment, the horizontal and vertical motives for producing abroad, and global supply chains, using a cost break-even, a cost stack, a flow diagram of production stages across countries and a chart of FDI over time.
3. 3

   Tariffs, quotas and subsidies

   4 lessons

   1. Tariffs in a small countryAnalyzes a tariff on a supply and demand graph showing the world price, the domestic price rising by t, and shaded consumer loss, producer gain, revenue, and two deadweight triangles.
   2. The optimal tariff and terms of tradeShows that a large country's tariff lowers the foreign export price, with two-panel import demand and export supply curves, the terms of trade gain rectangle and the optimal tariff.
   3. Quotas, export subsidies and VERsCompares an import quota with an equivalent tariff using a supply and demand graph where the quota rent is shaded, then export subsidies and voluntary export restraints and who gets the rent.
   4. Why protection persistsExplains the political economy of trade policy with concentrated gains and diffuse losses, infant industry and strategic trade policy, drawn as a Brander-Spencer payoff matrix for subsidies.
4. 4

   Trade agreements and blocs

   4 lessons

   1. The GATT, the WTO and negotiationsReviews most favored nation, national treatment and tariff bindings, and why countries need agreements as a Prisoner's Dilemma tariff matrix, with a timeline of GATT rounds and the WTO.
   2. Customs unions and free trade areasDistinguishes free trade area, customs union and common market, with a diagram of trade creation and trade diversion on a supply and demand graph with shaded areas for each effect.
   3. NAFTA, the EU and regional integrationStudies regional agreements such as NAFTA and the EU and their effects on trade flows, with a map of the blocs and a chart of intra-bloc trade shares before and after.
   4. Trade, wages and adjustmentExamines the effects of trade on wage inequality and job loss, with the China shock evidence, and a chart of manufacturing employment and regional unemployment with adjustment assistance as response.
5. 5

   Open-economy accounting

   4 lessons

   1. The balance of paymentsLays out the current account, capital account and financial account with the identity CA + KA + FA = 0, as a T-account table of credits and debits, with worked examples of recorded transactions.
   2. National income and the current accountDerives CA = S - I = Y - (C + I + G) for an open economy, with a stacked bar of GDP into spending components and the saving-investment gap equal to the current account balance.
   3. Intertemporal trade and net foreign assetsTreats the current account as borrowing and lending across time, with a two-period budget line and endowment point, and a chart of net international investment positions of major countries.
   4. Exchange rates and the foreign exchange marketDefines nominal and real exchange rates, appreciation and depreciation, and the structure of FX trading, with a price quote table and a timeline plot of the dollar against the euro.
6. 6

   Exchange rate determination

   4 lessons

   1. Interest rate parityDerives covered parity F / E = (1 + i) / (1 + i*) and uncovered parity i = i* + expected depreciation, with the FX market diagram of expected returns on deposits against the exchange rate.
   2. Asset market model of the exchange rateShows how a rise in the home interest rate appreciates the currency by shifting a returns curve, with a step-by-step diagram for money supply changes and Dornbusch overshooting on a time path.
   3. Purchasing power parityStates absolute PPP, E = P / P*, and relative PPP, and the law of one price, with a Big Mac chart of misalignments and a plot showing PPP holding better in the long run.
   4. Long-run exchange rates and the Balassa-Samuelson effectCombines PPP with productivity differences to explain why rich countries have higher price levels, with a scatter of price level against income and the real exchange rate path to long-run equilibrium.
7. 7

   Macroeconomic policy under exchange rate regimes

   4 lessons

   1. The Mundell-Fleming modelExtends IS-LM to an open economy with the IS, LM and FX curves and capital mobility, drawing the equilibrium and the effect of fiscal and monetary expansion with floating rates.
   2. Fixed versus floating exchange ratesCompares policy effectiveness under fixed rates, where the central bank must hold the rate and reserves move, with two IS-LM panels and the shift of the LM curve when money is lost.
   3. The policy trilemmaShows a country can have only two of fixed exchange rates, free capital flows and independent monetary policy, drawn as a triangle with corners labeled and regimes like the euro placed on each side.
   4. Optimum currency areas and the euroApplies Mundell's criteria of labor mobility, trade integration and fiscal transfers, with a benefits and costs graph against openness (GG and LL curves) and the euro crisis as case study.
8. 8

   Currency crises, capital flows and sovereign debt

   4 lessons

   1. Speculative attacks and currency crisesExplains first and second generation crisis models, with a graph of falling reserves reaching a critical level and a speculative attack, and the Asian crisis timeline of 1997.
   2. Capital flows and sudden stopsStudies gains and risks of international capital mobility with sudden stops and original sin, using a chart of capital flows to emerging markets and boom-bust cycles, and currency mismatch on balance sheets.
   3. Sovereign debt sustainabilityDerives the debt dynamics d' = d (1 + r) / (1 + g) - primary surplus, drawing the debt to GDP path under different values of r and g, with the threshold for stability.
   4. Default, restructuring and the IMFReviews sovereign default, haircuts and restructuring, the IMF's role and conditionality, with a timeline of Latin American, Greek and Argentine episodes and a bar chart of haircuts.