participants of exchange of goods, services, labour, capital, technology and information in the world
market.
International economics deals with the trade and financial interdependence among nations.
Main aspects:
-theory
-policy
-practice
Main areas:
-international trade
-international finance
International trade deals with:
-international trade theory (analysis of the basis for trade, trade patterns, and gains from trade)
-international trade policy
(examination of reasons for and effects of different trade instruments, economic integration,
international trade institutions and organizations, international trade strategy ...)
International finance deals with open-economy macroeconomics:
- theory of international finance (balance-of-payments, exchange rates regimes, adjustment...)
- international monetary policy (monetary integration, international capital movement, financial
markets, international financial institutions...)
Trade theory is the product of an evolution of ideas in economic thought.
Mercantilism the first complete view on international trade.
Stages of reproduction process:
Phase I: production
Phase II: allocation/distribution
Phase III: exchange (trade)
Phase IV: consumption
Magic triangle of economic goals:
-economic growth
-internal equilibrium
-external equilibrium
Theoretical directions in international trade (in chronological order):
-mercantilism (XVI, XVII, beginning of XVIII)
-liberalism (end of XVIII, XIX)
-protectionism (end of XIX)
-government interventionism (after 1930)
-neoliberalism (end of XX and beginning of XXI)
MERCHANTILISM:
-colonialization period
-gold standard
-wealth of nations was measured by the stock of precious metals
Basis for trade arises from differences in relative productivity (comparative costs differences)
between countries.
Comparative advantages are calculated by comparing relative unit costs of production (comparing
ratios of unit costs).
aLx/aLy : aLxf/aLyf
aLx time/labour costs for production of an unit of the product x in domestic country;
aLy time/labour costs for production of an unit of the product Y in domestic country;
aLxf time/labour costs for production of an unit of the product x in foreign country;
aLyf time/labour costs for production of an unit of the product Y in foreign country;
Theory of Reciprocal Demand (John Stuart Mill):
Export price will be determinated by reciprocal demand intensity. Reciprocal demand is demand of
each of two countries for export product of the other one.
Similarities between classical and neoclassical trade theories:
-several assumptions: full employment, perfect competition, free trade;
-thesis on reason for trade based on comparative advantages principle;
The main thesis of classical trade theories on reason for trade based on comparative advantages
principle strongly stands in neoclassical theories as well.
Neoclassical offer an explanation of the causes of comparative cost differences
Differences: What is different in neoclassical theories?
-two- or multi-factors models;
-abandonment of labour theory of value;
-costs expressed in money terms instead in physical product units;
-both constant and variable (changeable) costs;
-both complet and incomplet specialisation;
-transportation costs;
Opportunity cost theory - Haberler:
Basic assumptions:
-model 2x2x3 (two countries - two commodities -three production factors);
-perfect competition;
-free trade;
-full employment;
-increasing costs.
G. Haberler introduced a new element in his analysis the principle of marginal costs.
The main thesis:
A country has a comparative advantage in some product, if it can produce an additional unit of that
product at lower opportunity costs expressed in terms of other product, than another country can do
it.
Opportunity costs can be illustrated by production possibilities schedule (PPF); the slope of PPF is
equal to opportunity costs;
PPF indicates the maximum amount of any two products an economy can produce, assuming that all
resources are used in their most efficient manner (full employment).
RICARDOS MODEL
H-O MODEL
Similarities
- model two countries two commodities
- perfect competition both in commodity market and factor market
- free trade
- homogenous products
- identical tastes and preferences (identical demand conditions)
- constant average costs
- perfect mobility of labour within countries and perfect immobility
between countries
- given and fixed technology
- zero transportation costs
Differencies
one-factor model
two-factor model and different factor
(labour theory of value)
intensivity of products
different production functions for the same identical production functions for the same
product in different countries
product in different countries
different technology between countries
identical technology in different countries
Relative factor endowment can be defined in two ways:
-by physical units of factors the quantitative definition;
-by factor prices the price definition.
A country is considered to be relatively capital abundant not if its total amount of capital is bigger
than total amount of capital in the other country, than if its ratio of total amount of capital to total
amount of labour is higher than that ratio in another country.
TK1/TL1 > TK2/TL2
Price definition:
A country is relatively capital abundant if its ratio of interest rate (price of capital) to wage (price of
labour) is lower than that ratio in another country.
PK1/PL1 < PK2/PL2
r1/w1 < r2/w2
Relative factor intensity:
A product is capital-intensive, if the ratio of capital to labour in its production (K/L) is bigger than that
ratio in production of another product.
(K/L)x > (K/L)y
A capital-abundant country exports capital-intensive products and a labour-abundant country
exports labour-intensive products.
Conventional Theories
Assumptions
New
Theories
On technology
On tastes
Perfect competition
On market structure
Imperfect competition
Constant
On costs
Changeable (increasing)
Homogeneous
On products
Technological Theories:
-Theory on economic growth and international trade (Rybczynski theorem, Theory on technical progress);
-Technological gap theory;
-Product life cycle theory.
Assumptions on technology
In conventional theories:
-production possibilities of countries are given and fixed;
-Ricardos model no technological change, given but different technology between countries;
-H-O model no technological change, the same technology available to all countries.
Assumptions on technology
In new theories:
-continuous moving of PPF due to:
increase in factor supply, or
more efficient use of factors (because of technological change);
-different technology between countries;
-technological change as a new reason for trade;
New theories consider technology as very important for explanation of basis for trade
Economic growth is growth in potential output; PPF shifts outward.
Economic growth causes changes in production and consumption that have important implications
on international trade.
Balanced growth growth in supply of all factors at the same rate
Unbalanced growth growth in supply of only one factor or faster growth in supply of one factor
compared to growth of the other one
Rybczynski theorem:
At constant product prices, an increase in the endowment of one factor will increase the output of
the product intensive in that factor and will reduce the output of the other product intensive in the
other factor
Technical progress changes a way of use of factors in production enabling the same output to be
produced with less inputs.
Three types of technical progress neutral, labour-saving and capital-saving
Effect of economic growth on trade depends of neto-results of growth on production and
consumption
-neutral growth (trade and output grew at the same rate);
-protrade growth (faster growth of trade);
-antitrade growth (faster growth of output).
Technological Gap Theory (M. V. Posner)
Technological gap theory proposes that changes in international trade are dictated by the relative
technological sophistication of countries.
Basic assumption:
-International trade can be based on differences in technological changes over time among countries
because of a time lag in transfer of technology.
-Innovation creates a technological gap which provides for a temporary monopoly in the world
market.
Main thesis:
-Technological innovations create dynamic comparative advantages comparative advantages can
be changed or created due to technological change and diffusion of technology.
-A large portion of trade among industrialised countries is based on tehnological innovations.
Types of lags:
-imitation lag
-demand lag
-net-lag (export monopoly)
Product Life Cycle Theory (Vernon)
-Vernons theory is a modification of H-O theory rather than an alternative;
-This theory focuses on the role of technological innovation as a key determinant of trade patterns in
manufactured products.
Main characteristics:
- after 1945
- partial theories
- microeconomic
theories
(main actors companies; focus of
analysis on
characteristics of
industry/product;
developed by business
economists)
- dynamic theories
(dynamic assumptions)
- based on analysis of
both supply-side
elements (costs) and
demand-side elements
(income, tastes)
- explained both interand intra-industry
trade
- theories of dynamic
comparative advantages
Main characteristics:
- universal theory
- macro- and
microeconomic
theory
- dynamic theory
(dynamic assumptions)
- based on analysis both
of supply-side and
demand-side elements
- explained both interand intra-industry trade
- theory of competitive
advantages
Special:
-expressed in a fixed amount of money per physical unit of a product;
-method of determination: based on quantity or wheight;
-advantages: easy to apply and administer, particularly to standardised products, easy to determine;
-disadvantages: cannot be applied on all kinds of goods (arts), degree of protection varies inversely
with changes in import prices;
Tarrifs by country of origin:
-Unitary
-Differential (prefferensional,retorsive, etc.)
-Differential tariffs leads to a different treatment of goods originated from different countries; they
have political character.
-Tariff preference/Preferential tariff - a lower (or zero) tariff on a product from one country than is
applied to imports from most countries.
-Retorsive tariff a tariff imposed for a purpose to force other country to release.
Equalization tariffs:
-Anti-dumping tariff a tariff levied on dumped imports.
-Countervailing tariff a tariff levied against imports that are subsidized by the exporting country's
government, designed to countervail the effect of the subsidy
Dumping when export price is "unfairly low," defined as either below the home market price
(normal valute) or below cost
International economic integration represents a process, or an achieved level of institutional
connecting between countries, most often on a regional level through mediation of liberalization of
trade and/or liberalization of moment of factors of production
Elements of the definition:
- process or a level (dynamic category)
- institutional connecting
- regional level (dominant)
- liberalization of trade and other flows
Important concepts for IEI:
-RTA Regional Trading Arrangement
-multilateralism, regionalism, bilateralism
-regionalism / regionalization (the theory or practice of regional rather than central systems of
administration or economic, cultural, or political affiliation.)
IEI according to level of development of member countries:
-IEI between developed countries
-IEI between developing countries
-IEI between developed and developing countries
IEI according to symmetry of obligations member countries
-symmetric
-asymmetric