1 lecture 1: Setup of the course and balance of payments 5

Internationaleconomics June 19, 2025

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International economics Contents

1 lecture 1: Setup of the course and balance of payments 5

1.1 National income accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1.1 A nation’s net foreign assets . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1.2 Savings and the current account . . . . . . . . . . . . . . . . . . . . . . . .

1.1.3 Balance of payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 Lecture 2: Exchange rates, parities, simple models of short and long run 11

2.1 Exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.1.1 effects of depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.2 Purchasing power parity (PPP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.3 Interest parities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.3.1 uncovered interest parity . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.3.2 Covered interest parity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.4 A long run model of the exchange rate based on PPP . . . . . . . . . . . . . . . .

2.4.1 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.4.2 Fisher effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.5 A short run model of the exchange rate based on UIP . . . . . . . . . . . . . . . .

• lecture 3: More comprehensive approach to money, prices, interest rates and ex-

change rates21 3.1 money demand and money supply: a summary . . . . . . . . . . . . . . . . . . .

3.2 Prices and exchange rates in the short and long run . . . . . . . . . . . . . . . . .

3.2.1 Money and exchange rates in the long run . . . . . . . . . . . . . . . . . .

3.3 linking forex and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.4 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• lecture 4: Exchange rate regimes and developments in international monetary eco-

nomics26 4.1 Macroeconomic policy goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.2 The Bretton Woods system of fixed exchange rates . . . . . . . . . . . . . . . . .

4.3 policies for internal and external balance . . . . . . . . . . . . . . . . . . . . . . .

4.3.1 Tinbergen’s rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.3.2 collapse of bretton Woods . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.4 alternative exchange rate regimes . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.4.1 the two extremes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.4.2 fixed vs flexible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.5 what have we learnt until now . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 Lecture 5: World trade and the income distribution 33

5.1 gravity model as basic way to understand the extent of trade between countries 5.2 comparative advantage and opportunity costs . . . . . . . . . . . . . . . . . . . .

5.3 Ricardian model of comparative advantage . . . . . . . . . . . . . . . . . . . . . .

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International economics 5.4 Wages and productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.5 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6 Lecture 6: Trade and the income distribution 38

6.1 Trade and welfare gains wth increasing opportunity costs . . . . . . . . . . . . .

6.2 Factor endowments as a reason for trade (Heckscher-Ohlin model) . . . . . . .

6.2.1 Factor prices and input choice . . . . . . . . . . . . . . . . . . . . . . . . .

6.2.2 Factor abundance and comparative advantage . . . . . . . . . . . . . . .

6.3 income distribution effects of trade . . . . . . . . . . . . . . . . . . . . . . . . . .

6.4 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7 Lecture 7: Firms, trade and the international location of production 48

7.1 External economies of scale and the international location of production . . . .

7.2 Internal economies of scale as a reason for trade between identical countries .

7.2.1 The monopolistic competition model of IIT . . . . . . . . . . . . . . . . .

7.3 The gains from inter-industry trade and intra-industry trade . . . . . . . . . . .

7.3.1 performance differences across firms . . . . . . . . . . . . . . . . . . . . .

7.3.2 winners and losers from econ. integration . . . . . . . . . . . . . . . . . .

7.4 Causes and effects of FDI and MNEs . . . . . . . . . . . . . . . . . . . . . . . . . .

7.4.1 terminology regarding FDI and MNEs . . . . . . . . . . . . . . . . . . . . .

7.4.2 Stylized facts of FDI and MNEs . . . . . . . . . . . . . . . . . . . . . . . . .

7.4.3 theory of MNEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.4.4 summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• Lecture 8: Trade policy: instruments, effects, motives 57

8.1 (policy) shocks in trading economies . . . . . . . . . . . . . . . . . . . . . . . . .

8.1.1 world relative demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.2 Trade policy instruments and their effects on prices and trade . . . . . . . . . .

8.3 Welfare and income distribution effects of trade policy . . . . . . . . . . . . . . .

8.3.1 welfare effects in partial equilibrium . . . . . . . . . . . . . . . . . . . . .

8.3.2 Export subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.3.3 differences between quota and tariffs . . . . . . . . . . . . . . . . . . . . .

8.4 the political economy of trade policy (free trade and the WTO) . . . . . . . . . .

8.4.1 WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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9.1 Lecture 1: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.2 Lecture 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.3 Lecture 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.4 Lecture 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.5 Lecture 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.6 Lecture 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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International economics 9.7 lecture 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.8 Lecture 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.9 Shocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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