Introduction and Overview

EC 380 - International Economic Issues

Jose Rojas-Fallas

2025

Course Goals

In this class we will:

• Learn baseline models that help explain why countries trade

• Analyze policy-relevant trade tools

  • Tariffs

  • Quotas

  • Subsidies

• Explore global finance through exchange rates and BoP

Syllabus

Class Information

• Schedule: Monday & Wednesday in Straub 245

• Office Hours: Wednesdays from 09:00 am to 11:00 am

Lectures

• Slides are meant to complement the lectures, not substitute them

• I will lecture, go through example problems, ask you to solve things, etc

• By being in lecture, the goal is for you to understand things beyond the textbook

Course Logistics

• Our textbook is International Economics by James Gerber (8th Ed)

  • Any other reading/material I will be responsible for providing to you

Course Schedule

• W1 - W3: Theory of Trade
• W4 - W7: Trade Policy
• W8 - W10: Global Finance

Course Grades

• 5% \(\rightarrow\) In-Class Activity Participation
• 25% \(\rightarrow\) 5 Problem Sets
• 10% \(\rightarrow\) 4 Quizzes
• 30% \(\rightarrow\) Midterm Exam
• 30% \(\rightarrow\) Final Exam

In-Class Activity

Every so often we will be creating our own world market

• The class will be split into countries (groups of 8)

• Each time the economy will have different rules and circumstances

• The goal is to give you an interactive component rather than just lectures, homeworks and exams

Assignments

Problem Sets

• Will be assigned a week before they are due
• Due at 2:00pm (before lecture) but can submit until 11:59pm of due day
• A late submission (anything past 2:00pm) will incur a propoortional late penalty

Submissions

• Only PDF files are accepted
• If you write your answers on paper and take pictures/scan them, compile them onto one pdf file
  • To do this use any website that merges pdf files (be sure to put them in order!)
  • I personally use Adobe

Assignments

Quizzes

• These are intended to test your critical thinking and develop your ability to form coherent and succint arguments
• Have a 45min time limit
• Submissions should be no more than a paragraph or two in length

Exams

• Midterm exam is scheduled for Wednesday of Week 5 (Feb 5th)
• Final exam is scheduled for Wednesday March 19th at 2:45pm

Make-Up Assignments

Absolutely no make-up assignments will be given. Please do not ask. If a situation ever comes up that gets in the way of your being able to submit something, let me know beforehand and we will see

In extreme circumstances that lead you to miss the midterm exam I will consider re-weighting your grade toward the final exam. To qualify for re-weighting, you must notify me no later than two days after exam. Consideration for this form of accomodation is entirely subjective.

Canvas & Course Set-up

Canvas will serve as a place to submit assignments and as a gradebook

Everything else will be on our class website

International Trade Overview

International Integration (Good & Bad)

Generally, we think of integration of nations to bring many benefits

• Innovation in products/services

• More affordable goods

• Flow of investments toward scarce resource nations

But this process can also make nations vulnerable to foreign economic problems

• The Great Recession was a US Housing and Banking crisis

• The 1970s oil price shocks

• The Covid Pandemic

• that leaked to the world
• led to many Latin American countries having account deficits due to foreign debt accumulation
• meant that exporting nations were not able to produce at the same pace which slowed down all economies through trade flow linkages

Trade Integration

Let’s define it

Trade Integration can be roughly measured through 4 criteria:

• Trade Flows
• Capital Flows
• People/Labor Flows
• Similarity of prices in different markets

World Trade Movement

Trade Growth Has Outpaced GDP Growth

Trade to GDP Ratio

\[\begin{align*} \dfrac{(\text{Exports} + \text{Imports})}{GDP} \end{align*}\]

Trade & Country Size

In Trade Size Can Matter

Importance of Trade Varies by Country

Trade Overview

• Trade is important to nations and increasingly so
• Flows of Trade (Imports/Exports) represent a large proportion of nations GDP
• Trade openness varies by country size

Questions come to mind:

• Why do countries trade so much?
• What do they gain from trading?
• How does trade impact other aspects of the economy (labor market, geopolitics, etc)?

What Goods do Countries Trade?

Costa Rica

United States

How Did They End Up There?

Countries specialize and export core products

• Trading goods that they are “best” at producing results in gains from trade

• Specialization comes from where each country has a Comparative Advantage

What factors, other than the fundamentals, influence specialization?

• Foreign Direct Investment (FDI)

• Knowledge Sharing/Diffusion

• Cross-border Migration Shocks

• And much more

Why Does Trade Continue to Grow?

Trade is not frictionless. There are costs to trading with other nations

Trade growth can be largely attributed to reduced trade barriers over time

This is called trade liberalization

Some examples are:

• Costs of shipping/transport are lower

• Tariff rate reductions

• Preferential Trade Agreements

• Relaxing non-tariff measures (quotas)

Reduced Tariff Rates

Lower Transport Costs

Economics Can Be Very Complex

• Explicit trade barriers have fallen over time, coinciding with the growth of trade relative to economic activity

• Hidden barriers are the next hurdle. Much of the current literature suggests is far more impactful than existing tariff rates

  • Current trade theory and literature focuss on heterogenous agent models, which was orignally created to explain why not every firm functions as an exporter

• We will not be diving that deep into international trade. Our primary goal is to get a good understanding of how/why it works and understanding basic dynamics.

• Hidden barriers can be subsidies, labor clauses in FTAs, quality requirements, etc.

Overview of Trade Theory

Why does trade occur? This is our main question.

There are two strands within the field of international trade:

I. Neoclassical Models of Trade (‘Old Theories’):

• Ricardian Model \(\Rightarrow\) Technology differences spur trade
• Hecksher-Ohlin Model \(\Rightarrow\) Resource differences spur trade

II. ‘New’ Trade Theory:

• Krugman Model \(\Rightarrow\) Demand/Want of variety spurs trade
• Melits Model \(\Rightarrow\) Heterogenous firms drive trade

Next Steps

We will begin to look at the theory, starting with the Ricardo Model. It involves:

• Single factor of production (labor)
• Two countries (home,foreign)
• Technology differences across countries

It will be key to note the models attributes as they will all have some key differences. Each model will also have predictable outcomes.

For Wednesday

• Read through Ch.1: Introduction to the World Economy (p. 24 - 37)
• Read through Ch.3: Comparative Advantage and the Gains from Trade (p. 64 - 85)

Optional

• Skim through Krugman (1993) “What do Undergrads Need to Know About Trade”