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Chapter 1: Major themes

International Economics discusses international flows of goods, production factors,

money, etcetera. And their impact.

Real (Edition 9: Chapters 1-12)

I What are the gains from trade and how are these distributed?

II What is the pattern of trade?

III Trade policy and protectionism

Monetary (Edition 9: Chapters 13 and further)

Questions like:
- What will the Dollar do?
- Should the value of currencies be left to the market?

I. Gains from trade

Key result: Trade is beneficial also for countries who are inefficient in all respects.

Why does world output ?

1. Owing to trade countries produce more of what they can produce relatively
cheaply: specialization in production.

A first grasp: Suppose:

countries A and B
two products: shoes (s) and bottles (b)
production cost in A: $5 and $10, respectively
production cost in B: $5 and $2.5, respectilvey

if after trade Ps / Pb = 1
and A produces 1 more s (instead of 0.5b) gets 1b in return
and B produces 1 more b (instead of 0.5 s) gets 1 s in return.
both are better off. See chapters 3, 4, 5.

2. ch 7,8 exports exploit economies of scale

3. ch 8: exports productivity

But Distributional Effects:

Owners of production factors facing competition from imports will

experience an income loss (Ch 4,5).
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II Trade patterns Who exports what?

What explains this trade pattern?

Laymans observation:
differences in natural resource availability (e.g., oil, sun hours, etcetera)
determine trade patterns.

Theories:
Ricardos model (19th century)
Differences in labour productivity (Ch3)

Heckscher-Ohlin (20th century)

Local relative supply of production factors compared to relative
of these factors in the production process (Ch 5). (mainly relating to prices)

Krugman and others (1980s)

exploitation of economies of scale (Ch 7,8).

Melitz (2003) and others:

Heterogeneous firms (Ch8)

III Trade policy and protectionism

Although free trade is in most cases the best for countries from
an aggregate welfare point of view, some sectors gain and
others lose
Governments may want to intervene in order to:
Protect import competing sectors (via import tariffs and quotas)

Promote exports (via export subsidies); and

Raise government revenue

See Chapters 10, 11, 12.
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