A proper understanding of many of the problems facing economic policy makers today requires an analysis of open economies that trade with one another. This course is designed to introduce students to the economic tool kit most widely employed to analyse policy issues in the field of international economics.

The course is split into two parts:

To give students a strong theoretical base from which to analyse international trade and finance.

To introduce students to relevant empirical evidence on the theories discussed.

To enable students to interpret current policy concerns in both the trade and open economy macroeconomics sphere.

1   To understand the difference between comparative and absolute advantage.

2  To understand the difference between the gains from exchange and the gains from specialisation.

4  To understand other gains from exchange such as economics of scale, competition effects, efficiency          effects, product variety, technology and knowledge transfer etc.

5 To understand the Heckscher-Ohlin model of trade, its limitations and empirical relevance, especially in relation to the Leontief paradox

6 To understand how trade can lead to the narrowing of factor prices between countries and discuss the      empirical evidence in relation to the factor price equalization theorem. In particular, students need to understand why equalization of factor prices is not the same as equalization of per capita GDPs.

8 To understand what is meant by an "optimum tariff" by a large country and why it may not prove to be so optimal in the long run (ie the threat of retaliation.)

9 To understand what is meant by a "tariff distorted equilibrium" and the theoretical basis for tariff reduction negotiations and why a unilateral tariff reduction may be sub- optimal for a large country.

10 To understand what is meant by the term economic integration and to distinguish between different types of economic integration.

11 To distinguish between "trade creation" and "trade diversion" and evaluate the net effect of customs union formation.

12 To explain and discuss the Cooper and Massell (1965) critique of customs union formation and explain some of the "dynamic" benefits of Customs Union formation

13 To explain the principles of the GATT /WTO framework of international trade. In particular to be able to discuss the economic pros and cons of (a) the principle on non discrimination (most favoured nation clause) (b) reciprocity (c) transparency (tariffs preferred to quotas).

14  To have an understanding of post second world war trade trends and some basic knowledge of the history of tariff negotiations within the GATT/WTO framework.

2 To understand the importance of the balance of payments figures and what are the factors need to be considered when determining if the figures are "good" are "bad."

3 To understand the difference between a closed economy fiscal multiplier and the open economy fiscal multiplier.

4 To understand the differing impacts on the current account of an export led export led economic recovery and a government expenditure led economic recovery.

5 To understand how the current account balance is equal to the sum of savings less investment and taxes less government expenditure and possible policy implications.

7 To describe the Swan diagram and understand how it can be used to illustrate Tinbergen’s instruments-targets rule.

8 To describe the IS/LM/BP model of an open economy and discuss the differing impacts of fiscal and monetary policy on real output under fixed and floating exchange rates.

9 To discuss the impact of international capital mobility on the conduct of economic policy under both fixed and floating exchange rates.

10 To discuss the Principle of Effective Market Classification and how it complements Tinbergen’s instruments- targets rule.

11. To understand the limitations of the IS/LM/BP framework.

12 To discuss the effects of monetary expansion under both fixed and floating exchange rates according to the monetary model.

13 To describe the policy implications of the monetary model and how they differ from the Keynesian IS/LM/BP framework.

14 To describe the difference between absolute and relative Purchasing Power Parity and the importance of distinguishing between traded and non traded goods in a generalised form of PPP.

15 To discuss the empirical evidence on PPP including the results of basic econometric tests of PPP.

17 To discuss the difference between the "flexible price" monetary model, the "sticky price" monetary model (Dornbusch) and the Frankel "real interest rate differential" model.

18 To discuss the empirical results of exchange rate models and the results of exchange rate forecasting tests.

a) The Classical Model

• absolute and comparative advantage

b) The Tool Kit of the Neoclassical Model

• assumptions of neoclassical trade theory
• the Edgeworth box diagram
• derivation of the production possibility frontier
• community indifference curves

c) The Gains from Trade

• the gains from specialization and exchange
• the income redistribution issue

d) The Heckscher-Ohlin Model

• factor abundance defined in quantity and price terms
• the Leontief paradox

e) The Factor Price Equalization Theorem

f) The Theory of Protection

• the small country model
• the large country model
• optimum tariffs, tariff wars, tariff bargaining and international cooperation
• tariffs and domestic prices, the Metzler paradox
• the Stopler-Samuelson theorem

g) The Theory of Economic Integration

• free trade areas and the problem of trade deflection
• customs unions - trade creation and trade diversion
• the Cooper and Massell critique
• measuring the effects of economic integration

h) The GATT Principles and Current International Trading Order

• Reciprocity
• Non discrimination (most favoured nation clause)
• tariffs preferred to quotas

i) Dumping by a Price Discriminating Monopolist

• trade account, capital account, balance for official financing
• disequilibrium concepts

• the Marshall-Lerner condition and J-curve effect
• the Absorption approach
• the Keynesian approach
• the Monetary approach

• the Swan diagram
• the Mundell-Fleming model
• the effectiveness of monetary and fiscal policy in open economies
• expenditure switching and expenditure changing policies
• Tinbergen’s "instruments-targets" rule
• the principle of effective market classification

• the current account model
• Purchasing Power Parity theory
• The Modern Asset Market approach
• the "flexible price" monetary model
• the "sticky price" monetary model
• the portfolio balance model
• exchange rate forecasting
• the relationship between the spot and forward exchange rate

• advantages/disadvantages approach
• price-output stability properties approach
• the case for exchange rate management

• Bretton Woods
• Floating Exchange Rates
• The International Monetary System
• the European Monetary System and European Monetary Union

There is no single textbook that covers all the material of this course:

Most of the material is well covered in Salvatore and also Soderston and Reed which is a bit more theoretical and harder to follow. I strongly advise you to use more than one of these.

Dominick Salvatore: International Economics, Maxwell Macmillan, London, 7^th Edition, 2000. (Recently out the 6^th edition 1997 is fine!!!!!)

Bo Soderston and Geoffrey Reed International Economics, Macmillan, London, Third Edition 1994

Mia Mikic, International Trade, Macmillan, 1998.

Paul Krugman and Maurice Obstfeld: International Economics, Theory and Policy, Addison Wesley, New York, 6^th edition, 2003.

Peter Kenen: The International Economy, Cambridge University Press, Cambridge, 4^th Edition, 2000.

Herbert Grubel: International Economics, Richard D Irwin Inc, 1977.

Wilfred J Ethier: Modern International Economics, W W Norton & Co, New York, 2^nd edition, 1984.

Richard Caves. Ronald Jones. and Jeffrey Frankel World Trade and Payments, Addison Wesley, New York, 8th edition, 1999.

Peter Kenen: The International Economy, Cambridge University Press, Cambridge, 4th Edition, 2000

Militiades Chacholiades: International Economics, McGraw-Hill, New York, 1990.

Steven Husted and Michael Melvin: International Economics, Harper and Row, 1990.

John Williamson and Chris Milner: The Open Economy and the World Economy, Harvester Wheatsheaf, 2^nd edition 1991.

The main text for use on this part of the course is:

Keith Pilbeam: International Finance, Macmillan Texts in Economics, Macmillan 1998

If you don't like the above (!) then two other useful texts are:

Exchange Rates and International Finance

Addison Wesley Publishing Co 2000

International Money and Finance

Theory, Evidence and Institutions

Basil Blackwell 2000

International Financial Markets

McGraw Hill 1997

Other books which are relevant to the course include:

International Money and Foreign Exchange Markets

John Wiley 1996

Richard Caves. Ronald Jones. and Jeffrey Frankel World Trade and Payments, Addison Wesley, New York, 8th edition, 1999.

Peter Kenen: The International Economy, Cambridge University Press, Cambridge, 4th Edition, 2000

Keith Pilbeam Exchange Rate Management: Theory and Evidence, Macmillan, London 1991.

Ronald MacDonald, Floating Exchange Rates Theory and Evidence. Hyman, London 1988.

Francisco L.Rivera-Batiz and Luis Rivera-Batiz International Finance and Open Economy Macroeconomics, Macmillan, 2nd edition 1994.

Much of the discussion for the early parts of the course is contained in standard international economics books such as:

Steven Husted and Michael Melvin, International Economics, Harper and Row, 1990.

John Williamson and Chris Milner, The Open Economy and the World Economy, Harper and Row, 2nd Edition 1991.

Paul Krugman and Maurice Obstfeld: International Economics, Theory and Policy, Harper Collins, New York, 5th edition, 2000.

Dominick Salvatore: International Economics, John Wiley, London, 7th Edition, 2000.