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TU-91.2043 INTERNATIONAL ECONOMICS

TU-91.2043 INTERNATIONAL ECONOMICS. Spring 2014 by Hannele Wallenius Aalto University School of Science Department of Industrial Engineering and Management. Course Organization. 20 contact hours (slides in Noppa -> Lectures) + a poster session + final exam

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TU-91.2043 INTERNATIONAL ECONOMICS

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  1. TU-91.2043 INTERNATIONAL ECONOMICS Spring 2014 by Hannele Wallenius Aalto University School of Science Department of Industrial Engineering and Management

  2. Course Organization • 20 contact hours (slides in Noppa -> Lectures) + a poster session + final exam • Students will choose a certain current/topical economic event/issue to write a short report (ca. 15 - 20p.) and repair a poster for the poster session held at the end of the course • form a group of max 4 students • some examples of such events/issues are listed on the next slide 1. Introduction - 1.1. relevance and scope of international economics

  3. What's Going on in the World? Examples of topics: • Development of US Financial Crises • Impact of US Financial Crises and the After Match on the Economies (for instance, on exports, stock prices, GDP, balance of payments) • Recent Actions Taken by Central Banks: ECB, FED, etc. • Events in the WTO (new developments in agreements, disputes, etc.) • Changes in Exchange Rate Markets • Development of Euro Depth Crises • The Future of EU • Political Events Affecting the Economies • Signs of IncreasingProtectionism • Possible New Free Trade Agreements • Is China Loosing Its Competitiveness? • Currency Wars • Topic of your own choice 1. Introduction - 1.1. relevance and scope of international economics

  4. Grading Policy Grades will be based on the final exam (60%) Economic Event/Issue Assignment written report 25% poster 5% In class group exercises 10% Textbook Husted, S. and Melvin, M.: International Economics, 8th ed., Addison Wesley, Ch 1 -15, 19 & 21 1. Introduction - 1.1. relevance and scope of international economics

  5. OK, before we continue, a reality check • What do you hope to learn during this course? OR • What topics you think will be covered in this course? 1. Introduction - 1.1. relevance and scope of international economics

  6. 1. INTRODUCTION • 1.1 Relevance and Scope of International Economics • 1.2 Patterns and Trends in International Trade 1. Introduction - 1.1. relevance and scope of international economics

  7. What is International Economics? • International Economics studies how a number of distinct economies interact with one another in the process of allocating scarce resources to satisfy human wants • International Economics studies the special issues raised by economic transactions between sovereign nations 1. Introduction - 1.1. relevance and scope of international economics

  8. Two Major Branches • International Economics can be divided into two major branches: • International Trade • International Finance 1. Introduction - 1.1. relevance and scope of international economics

  9. Two Major Branches continued • International Trade Why and What is traded? Trade flows… Trade policy Immigration (movement of labor) • International Finance Financial flows between countries Foreign direct investments Exchange rates Balance of payments problems Microeconomic approach, long-run focus Macroeconomic approach, short-run focus 1. Introduction - 1.1. relevance and scope of international economics

  10. What is International Economics? continued • During this course we will develop analytical models to explain the patterns of international trade • Including who benefits and who loses from trade • We will apply trade theory to the analysis of government trade policies • Including who benefits and who loses from these policies 1. Introduction - 1.1. relevance and scope of international economics

  11. Why Study International Economics? • International economics has become more important with increasing globalization and its backlash • Both international trade and international direct investments & capital flows have increased dramatically during the past few decades 1. Introduction - 1.1. relevance and scope of international economics

  12. The study of international economics has never been as important as it is now • At the beginning of the 21st century, nations are more closely linked through trade in goods and services, through flows of money, and through investment in each others’ economies than ever before 1. Introduction - 1.1. relevance and scope of international economics

  13. Give me an example of the interdependency of todays world economies. 1. Introduction - 1.1. relevance and scope of international economics

  14. Some Popular Sayings The World Has Become Very Inter-Connected: • "When America sneezed, Japan and Europe used to catch a cold” • "No nation is immune to economic events that occur in far away places” • "Surely there is no closed economy in the real-world, except the world economy!” 1. Introduction - 1.1. relevance and scope of international economics

  15. Example 1: "When East and West Germany were united, the cost was high for West Germany. It had to borrow money extensively from international sources, raising interest rates. This caused high interest rates all over the Europe." 1. Introduction - 1.1. relevance and scope of international economics

  16. Examples 2: "As Toyotas flooded the US market, producers in the US faced a hard choice: to either trim their budgets or close their doors. Many workers lost their jobs, and louder and louder calls for 'protection from ruinous foreign competition' were heard. As a result, the country that championed free trade in the world economy had second thoughts about the benefits of free trade.“ And how about the impact of China and India in many industries today! 1. Introduction - 1.1. relevance and scope of international economics

  17. AND the most recent example 3: The US financial crisis that started 2007-2008 has shown how interdependent the world really has become! Financial crises escalated to a full-blown recession all over the world! EU debt crises (Greece, Ireland, Portugal, Spain, Italy!?)

  18. After finishing this course, you will be able to: • Describe some of the patterns and trends in international trade • Explain comparative advantage • Explain how economies of scale and diversity of taste lead to gains from international trade • Explain why trade restrictions lower the volume of imports and exports and lower our consumption possibilities • Explain why we have trade restrictions even though they lower our consumption possibilities • Explain how international trade is financed • Describe a country's balance of payments account 1. Introduction - 1.1. relevance and scope of international economics

  19. After finishing this course, you will be able to continued: • Explain how the foreign exchange rates are determined • Explain the effects of changes in international exchange rates • Describe global and regional integration trends in international trade • Describe international financial markets • Discuss importance of European Union • Debate pros and cons of single currency in European Union • Understand some reasons for financial crises 1. Introduction - 1.1. relevance and scope of international economics

  20. 1 INTRODUCTION • 1.1. Relevance and Scope of International Economics • 1.2. Patterns and Trends in International Trade 1. Introduction - 1.1. relevance and scope of international economics

  21. Characteristics of World Trade • Value and growth of world merchandise and services trade • Largest exporters and importers • Geographic patterns • Commodity composition 1. Introduction - 1.1. relevance and scope of international economics

  22. Why is the trade between Finland and China different from the trade between Helsinki and Oulu? • TWO reasons: 1) Since international trade crosses national borders, governments can monitor this trade • CAN impose taxes or quotas on goods imported from China, for example - Have to decide whether to do so or not! 2) International trade involves the use of different national currencies! • Finns will pay in Euros for Chinese products but Chinese want to be paid in Yuan - we have created international payments 1. Introduction - 1.1. relevance and scope of international economics

  23. World Exports and Output in Real Terms: 1950–2011 Source: WTO, international trade statistics 2011 1. Introduction - 1.1. relevance and scope of international economics

  24. BUT the US financial crises brought a rather severe slump in all economies GDP: 1. Introduction - 1.1. relevance and scope of international economics

  25. AND brought along lots of uncertainty about the trade: 1. Introduction - 1.1. relevance and scope of international economics

  26. WTO: World trade hit by 12% drop in 2009 24 Feb 2010 Head of the World Trade Organization (WTO) Pascal Lamy says 2009 was the worst year for global business in the past 65 years. Lamy told a think tank in Brussels that world trade dropped by 12 percent last year due to the global economic meltdown. "World trade was reduced by 12 percent in 2009" to experience its "sharpest decline" since 1945, he added. "World trade has also been a casualty of this crisis," the WTO director general said. This is while the WTO had forecasted a 10 percent drop for 2009. "Until now our forecast was around 10 percent," he said. See the dramatic changes in Finland’s exports.

  27. Development of Exports in Selected EU Countries, 2009(1-10) Ireland France Spain Germany Netherlands Italy UK Estonia Sweden Finland Source: Finnish Customs, Statistics Unit

  28. Development of Exports in Selected EU Countries, 2010(1-10) Source: Finnish Customs, Statistics Unit

  29. Development of Exports in Selected EU Countries, 2011(1-11) Source: Finnish Customs, Statistics Unit

  30. Let’s return to the long period of growth in world trade: What caused the explosion of world trade? • Reduction in trade barriers • Advances in transportation and communication technology • Proliferation of trade agreements 1. Introduction - 1.1. relevance and scope of international economics

  31. Leading Exporters in World Merchandise Trade, 2012 Source: WTO, International Trade Statistics 2013 1. Introduction - 1.1. relevance and scope of international economics

  32. 1. Introduction - 1.1. relevance and scope of international economics

  33. Leading Importers in World Merchandise Trade, 2012 Source: WTO, International Trade Statistics 2013 1. Introduction - 1.1. relevance and scope of international economics

  34. World Trade in Services • Value of $4,3 trillion in 2012 (about 20% of the international trade) • U.S. and EU are largest exporters and importers of services • Most traded services: transportation, travel, other services (banking, medicine, consulting, insurance & education) 1. Introduction - 1.1. relevance and scope of international economics

  35. Trade in Services 1. Introduction - 1.1. relevance and scope of international economics

  36. EU Exports to…, 2012 CIS =Commonwealth of Independent States (former Soviet Union countries, formed 1991) Source: WTO, International Trade Statistics 2013 1. Introduction - 1.1. relevance and scope of international economics

  37. US Exports to…, 2012 CIS =Commonwealth of Independent States Source: WTO, International Trade Statistics 2013 1. Introduction - 1.1. relevance and scope of international economics

  38. Key Issues/Challenges in World Trade have often been a) Raw materials’ prices • industrial countries buy them, refine them and sell back to LDCs! • LDCs would like to behave as OPEC does! b) Manufactured exports from LDCs • some countries already do have some major manufacturing industries 1. Introduction - 1.1. relevance and scope of international economics

  39. A shift is taking place… Developing economies accounted for 41% of world exports in 2011 (January-September) and 38% of world imports. 1. Introduction - 1.1. relevance and scope of international economics

  40. Key issues in world tradecontinued • Trade disputes The concern used to be: should, for instance, Japanese exports be restricted to prevent massive job losses in Western Europe and North America or...? And now we are worried about job losses to China and India! And next possibly to Africa.. • Banana dispute between USA and EU!! • U.S. steel tariffs • Unfair value of Yuan… And next the Finnish case… 1. Introduction - 1.1. relevance and scope of international economics

  41. Volume of Finland’s Merchandise Imports and Exports, 1860 – 1999 index 1926 = 100 Imports Fast growth starts after WWII Exports Imports Exports 1. Introduction - 1.1. relevance and scope of international economics

  42. Finland’s Monthly Importsand Exports ofMerchandise 2002-2013 Financial crises hits Finnish economy! 1. Introduction - 1.1. relevance and scope of international economics

  43. Finland’s Exports by industry, 2012 Source: The Finnish Customs http://www.tulli.fi/fi/suomen_tulli/ulkomaankauppatilastot/grafiikkaa/index.jsp 1. Introduction - 1.1. relevance and scope of international economics

  44. What does Finland import? Source: The Finnish Customs http://www.tulli.fi/fi/suomen_tulli/ulkomaankauppatilastot/grafiikkaa/index.jsp 1. Introduction - 1.1. relevance and scope of international economics

  45. With whom does Finland trade with? Exports by Country Groups, 2012 Source: The Finnish Customs http://www.tulli.fi/fi/suomen_tulli/ulkomaankauppatilastot/grafiikkaa/index.jsp 1. Introduction - 1.1. relevance and scope of international economics

  46. With whom does Finland trade with Importsby Country Groups, 2011 Source: The Finnish Customs http://www.tulli.fi/fi/suomen_tulli/ulkomaankauppatilastot/grafiikkaa/index.jsp 1. Introduction - 1.1. relevance and scope of international economics

  47. Finland’s Foreign Trade continuedThe most important trade partners, 2012 Sourse: Statisitcs Finland http://www.tilastokeskus.fi/tup/suoluk/suoluk_kotimaankauppa.html 1. Introduction - 1.1. relevance and scope of international economics

  48. Use Web/Lecture Notes to Draw Some Conclusions of World Trade: • Why do we export/import goods and services? • Who are the largest exporters/importers in the world? • What are the typical products/services country x exports/imports?Do you detect any pattern? 1. Introduction - 1.1. relevance and scope of international economics

  49. Basic Facts About World Trade 1. Trade has been growing more quickly than world income, and is increasingly important. 2. World trade centers on the industrialized countries for a long time, but China and few other countries now making a change to this. 3. About a quarter of world trade is in primary products, the remaining three-quarters in manufactures. 1. Introduction - 1.1. relevance and scope of international economics

  50. On next lecture: 2. WHY DO WE TRADE? Trade Thories 1. Introduction - 1.1. relevance and scope of international economics

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