Rich Stern
Winter, 1992
Department of Economics

Course Description

This course is an introduction into international economics. The first half of the course focuses on the microeconomic aspects of international economics, trade. In particular we will study theories of why countries trade, under what circumstances will a country gain from trade, how trade policies will affect trade patterns and welfare, and how market environments will affect trade patterns and welfare. Finally we will apply the theories we have studied to current issues in international trade: Europe 1992 (the full integration of the European Economic Community) and Eastern Europe.

The second half of the course will concentrate on the macroeconomic aspects of international economics, international finance. We will study open economy applications of macro theory, including Mundell-Flemming, the Monetarist Approach, and the effects of international capital flows. Then we will look at theories of exchange rate determination and regime choice. With a good theoretical background, we will study ways in which we can apply these theories to the current state of affairs in post-Socialist countries.

There will be two types of basic texts for the course. The main textbook is: Richard E. Caves, Jeffrey A. Frankel, Ronald W. Jones, World Trade and Payments: An Introduction, fifth Edition, 1990 [hereafter to be referred to as CFJ]. There will be additional readings which will be handed out. In this class, readings will be essential because we will go through each topic very quickly and the readings will fill in the gaps from the lectures.

Course Requirements

In addition to the readings, the requirements for the course will be as follows:

1. Periodic problem sets (approx. 15% of your grade)
2. A mid-term exam (approx. 25% of your grade)
3. A short 3-5 page paper (approx. 25% of your grade)
4. A final exam (approx. 35% of your grade)

Though class participation will not be overtly graded, it is highly recommended.

The exams and problem sets are fairly self-explanatory.

The paper requirement is designed to allow you to apply the theoretical tools that you have learned in class. In particular, the paper is a policy memo in which you will take a current issue in international trade or finance and analyze the problem (using a theoretical framework learned in class) and make any recommendations or policy prescriptions you see fit. THIS IS NOT A RESEARCH PAPER, RATHER IT IS A THOUGHT EXERCISE. Since you are limited to 3 to 5 typewritten pages (no handwritten papers accepted), you must distill the important aspects of the problem and eliminate unnecessary details. A good source for finding topics is the Economist magazine. Topics are due Monday, January 15 in class and THE PAPER IS DUE MONDAY, March 17 IN CLASS (no exceptions or extensions).

Course Outline and Readings



a. The Standard Trade Model
Readings: CFJ chapters 3,4
A. Why do countries trade?
1. Classical Theories
a. Ricardian Trade Model
Readings: CFJ chapter 5
b. Heckscher-Ohlin Model (2 X 2 X 2)
Readings: CFJ chapter 7
c. Sector Specific Model and Income Distribution
Readings: CFJ chapter 6
2. Modern Trade Theory
a. Market Structure and Imperfect Competition
Readings: CFJ chapter 14, and Krugman and Obstfeld (reader), chapter 6
B. Commercial Policy
l. The Instruments of Trade Policy
Readings: Krugman and Obstfeld (reader), chapter 8, and CFJ chapter 11
2. The Political Economy of Protection
Readings: CFJ chapter 12, and Krugman and Obstfeld (reader), chapter 9
C. Applications of Theory (if time permits)
1. Developing countries
Readings: Bhagwati and Srinivasan (reader), chapter 25, and Krugman and Obstfeld (reader), chapter 10, and Raul Prebisch (reader)
2. Case Study, European Integration and 1992
a. Customs Union Theory


A. Introduction, concepts, vocabulary
a. Traditional Balance-of-Payments Models
1. Keynesian Approaches
Readings: CFJ Chapters 16,17
2. Monetary Approaches
Readings: CFJ Chapter 18
B. Open Economy Extensions of Basic Macro Models
Readings: CFJ Chapters 21 and 22
C. Exchange Rate Determination Models
1. Traditional Approaches
Readings: CFJ Chapter 23 and Dornbusch, "Expectations and Exchange Rate Dynamics", Journal of Political Economy, December, 1976.
2. Forecasting and Risk
Readings: CFJ Chapter 23.

IV. Microfoundations of International Trade and Finance Models
(if time permits)

A. The Basic Model
1. Infinite Horizon Model vs.
2. Overlapping Generations Models
3. Ricardian Equivalence and "Does Money Matter?"
Readings: Selected Readings from Frenkel and Razin, Fiscal Policy and the World Economy

CRC-Curriculum Resource Center
CEU Budapest, Hungary
Modified: May, 1996


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