GLOBE

International Trade and Finance
Theory and Policy Analysis

Course Syllabus

by Steven Suranovic ©2000

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This syllabus is for a one semester intermediate level overview of international trade and international finance theory and policy. It is most suited for undergraduates who have taken introductory micro and macroeconomics courses. Students should have a working knowledge of basic algebra and graphical techniques.

  Course Outline
Session 1 Introduction to Course, Trade Policy Tools
In the first session students are presented with an overview of the entire course, both finance and trade. They learn some of the important results and the methods of analysis used. Attention then turns to international trade theory and policy which is covered in the first half of the semester. The trade policy tools section provides a way to begin discussion of some of ways in which governments regulate the flow of goods and services between countries. It is useful as a way to provide background information so students, who may not know too much about the issues of the course, can better relate the theory to the real world.

Readings:

Introduction to International Finance
Chapter 5 - Introductory Issues
Sections 5-1 to 5-5e
Chapter 10 - Trade Policy Tools
Sections 10-0 to 10-7

Supplementary Readings:

Problems:

1.1  Jeopardy Answers 5-1
1.2  Jeopardy Answers 10-1

Session 2 US Trade History, Trade Law, and the WTO
This session continues with more background information about the world of international trade. It covers bits and pieces of US trade history, a discussion of some international trade laws and an introduction to the World Trade Organization. It is not intended to be a comprehensive overview, but rather a way for students to learn some of the important real world issues to which the theory will later relate.

Readings:

Chapter 20 - Trade History and Trade Law
Sections 20-0 to 20-4

Supplementary Readings:

  • The WTO Agreements
    A description of some of the details behind WTO rules on antidumping measures, subsidies and countervailing measures and safeguards.

Problems:

2.1  Jeopardy Answers 20-1
2.2  Internet Questions 20-1
2.3  Internet Questions 20-4

Session 3 The Ricardian Theory of Comparative Advantage
This session presents the first formal model of international trade. The chapter emphasizes the importance of the assumptions in generating the model results. Students learn some of the surprising outcomes of the Ricardian model, such as, that less productive nations may nonetheless benefit from free trade with its more productive neighbors.

Readings:

Chapter 40 - The Ricardian Model of Comparative Advantage
Read sections 40-0 to 40-8

Supplementary Readings:

Problems:

3.1  Jeopardy Answers 40-1
3.2  Problem Set 40-2

Session 4 The Heckscher-Ohlin Model and Economies of Scale Overview
Differences in factor endowmwnts and the presence of economies of scale in production are shown to be important reasons for international trade. A few of the interesting results from these models are presented, but a formal development of the models is not done because time is limited.

Readings:

Chapter 60 - The Heckscher-Ohlin (Factor-Proportions) Model
Read sections 60-0

Chapter 80 - Economies of Scale and International Trade
Read sections 80-0 to 80-4

Supplementary Readings:

Problems:

4.1  Jeopardy Answers 60-1

Session 5 The Effects of Trade Policies: Tariffs and Quotas
This session first shows a represention of a free trade equilibrium in a partial equilibrium model. This model is then used to demonstrate the price effects of a tariff in large and small country cases. After explaining the concepts of consumer and producer surplus, the welfare effects of a tariff are presented. Finally a tariff setting game between governments is used to identify the motivation for trade wars.

Readings:

Chapter 90 - Trade Policy Effects with Perfectly Competitive Markets
Read sections 90-0 to 90-14

Section 110-1 - Retaliation and Trade Wars

Supplementary Readings:

Problems:

5.1  Jeopardy Answers 90-1
5.2  Problem Set 90-2
5.3  Problem Set 90-3

Session 6 Trade Policy Choice Under Domestic Distortions:
The Theory of the 2nd-Best
This is perhaps the most important session in a trade course. It will first identify a series of market imperfections and distortions and point out how these are likely to be prevalent in the real world. Next it shows that in the presence of a market imprefection, carefully selected trade policies can often be used to raise the natioanl welfare of a country. Third it is shown that carefully selected domestic policies are often superior to trade policies as a way of promoting the national welfare of a country.

Readings:

Chapter 100 - Trade Policies with Market Imperfections and Distortions
Read sections 100-0 to 100-4

Supplementary Readings:

Problems:

6.1  Jeopardy Answers 100-1
6.2  Problem Set 100-2

Session 7 Evaluating the Controversy Between Free Trade and Protectionism
The final session is used to review the material of the course by explaining how every model and every result has a role to play in the ongoing argument between free trade and protectionism. The chapter offers the present argument for free trade , as understood by most economists. It is an argument that is quite a bit more complex than is commonly understood, for it shows why economists may still support free trade even while recognizing that some individuals may be harmed as a result.

Readings:

Chapter 120 - Evaluating the Controversy Between Free trade and Protectionism
Read sections 120-1 to 120-6

Problems:

7.1  Jeopardy Answers 120-1

Session 8 National Income Accounts
This session introduces students to national income accounts. I find it useful to present the numbers from these accounts for the US to give students knowledge about the country and to provide a frame of reference for future observations of similar data. Ideally the national income accounts for students' home country should be used.

Readings:

Chapter 5 - National Income and the Balance of Payments Accounts
Sections 5-1 to 5-4

Supplementary Readings:

Session 9 The Balance of Payments
This session introduces students to the balance of payments accounts for a country. Students are shown how specific international transactions are recorded and shown the interrelationship between the current and capital account balances.

Readings:

Chapter 5 - National Income and the Balance of Payments Accounts
Sections 5-5 to 5-8

Supplementary Readings:

  • US International Accounts Data
    the most recent US data from the US balance of payments accounts including the US international investment position available here from the US Bureau of Economic Analysis.

Problems:

9.1  Jeopardy Answers 5-1
9.2  Problem Set 5-1

Session 10 Evaluation of Trade Imbalances
This session tries to dispel the popular notion that trade deficits are "bad" and trade surpluses are "good". The material highlights the intertemporal borrowing and lending associated with trade imbalances and notes situations in which each of these could be appropriate (or inappropriate) for both individuals and for nations. Key factors needed to determine the seriousness of a trade imbalance are discussed and a case study for the US is presented.

Readings:

Chapter 6 - The Whole Truth about Trade Imbalances
Sections 6-0 to 6-3

Supplementary Readings:

Problems:

10.1  Problem Set 6-1

Session 11 The Foreign Exchange Market
This session introduces students to the foreign exchange market. It includes an overview of market participants, and exchange market terminology. Histories of some curriencies fluctuiations are presented.

Readings:

Chapter 10 - Foreign Exchange Markets
Sections 10-1 to 10-5

Supplementary Readings:

Problems:

11.1  Problem Set 10-1
11.2  Problem Set 10-2

Session 12 Exchange Rates, Interest Rates and Interest Parity
This session highlights the linkage between the exchange rate, and interest rates through the interest rate parity condition. It is shown how changes in economic variables can affect differential rates of returns which in turn can affect the value of the exchange rate.

Readings:

Chapter 20 - Exchange Rates, Interest Rates and Interest Parity
Sections 20-1 to 20-6

Supplementary Readings:

  • Analysis of Canadian $ Exchange Rate
    this page, by Prof. Antweiler of UBC, provides provides an analysis of the forward premium or forward discount of the US Dollar (USD) from the perspective of the Canadian Dollar (CAD). It is updated weekly.

Problems:

12.1  Problem Set 20-1

Session 13 Purchasing Power Parity
This session presents the theory of purchasing power parity. The logic of the theory as an explanation for exchange rate movements is provided. More importantly, the supplemental readings help teach the way PPP exchange rates are used to make international comparisons of economic data.

Readings:

Chapter 30 - Purchasing Power Parity
Sections 30-1 to 30-4

Supplementary Readings:

Problems:

13.1  Problem Set 30-1
13.2  Problem Set 30-2

Session 14 An Overview of Exchange Rate Systems
The course ends with a discussion of the differences between fixed and floating exchange rate regimes. The two articles below provide a good overview of some of the pros and cons of each system. In addition, an instructor should provide some insights about how a central bank must intervene to maintain a fixed exchange rate. Material on this subject will be added at the Study Center in the future.

Readings:

Alternative Exchange Rate Systems and Reform of the International Financial Architecture
testimony to the US House of representatives given by C. Fred Bergsten of the Intstitute of International Economics

A Case for Fixing Exchange Rates
a report by Arthur J. Rolnick and Warren E. Weber from the Federal Reserve Bank of Minneapolis


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©1997-2004-2000 Steven M. Suranovic, ALL RIGHTS RESERVED
Last Updated on 8/13/00