1. World Economy: 1830 – WWII

2. „father” of international economics: Charles Kindleberg

3. International Economics:

• Pure theory (trade theory – attention to gains, terms, patterns of trade)

• Monetary theory (attention to money: exchange rate, adjustment mechanisms)

1. Pre-theoretical: Ancient times, Mercantilism

2. Classical models of international trade:

• ONE COUNTRY PRODUCES TWO COMMODITIES in close economy, ONE COMMODITY in open economy

• 2 countries, 2 goods

• The only one factor: labour

• Differences in labour requirements in producing the same commodity

• No returns of scale

• Constant opportunity cost

• Fixed level of technology

• No difference in quality of goods between countries

• Transportation costs = 0

• Export = Import

• Labour force completely mobile within a country, but immobile outside

• [International division of labour]

• Adam Smith

-“The wealth of nations” 1776
- Country’s Absolute advantage in cost of production of one good needed in order to produce sth

• David Ricardo

-“The principles of political economy and taxation” 1817

- Country’s at least Comparative advantage in cost of production of one good needed in order to produce sth

• Stanisław Ulam
  - Comparative advantage (also, like P. Samuelson?)

• Gotfried Haberler
  - “The theory of international trade” 1936
  - “rescued” the Ricardo’s theory of only comparative advantage needed
  - single production factor (of previous classical economies) replaced by given factors of production
  - production possibilities frontier (we do not focus on factors of production, wybieramy na wyresie 1 dobro, które produkujemy efektywniej I to produkujemy ) [PPF model]

• Models extended by: wages – numerous goods – exchange rates

• Still one factor of production (labour)

• Differences in labour requirements

• Dornbusch – Fischer – Samuelson model
  - Poland exports when $\frac{\text{Lp}}{\text{Ln}} < \ \frac{\text{Wn}}{\text{Wp}}*E$
  - Evaluation of Ricardo’s model: If wages in one country are 2 times lower, the second country has to be more than 2 times more effective in order to have comparative advantage

• 2 factors of production (labour, capital)

• Differences in labour and capital requirements to produce the same good

• Different factors endowment between countries

• Consumers tastes are the same in both countries

• ONE COUNTRY PRODUCES TWO COMMODITIES (but more of one type, less of the other) in closed and in open economy

• Heckscher – Ohlin Theorem [The theory of factor endowment]
  - Factor endowment: Country is more abundant in one factor of production and produces more of “that factor-intensive” commodity.
  - Factor-prices equalization: Demand for that abundant factor increases – its price increases, price of the second factor decreases
  - Stolper – Samuelson theory: income of the owner of abundant factor increases
  - Wassily Leontief: first test of Heckscher – Ohlin Theorem (1953)

1. Neoclassical approach

• Tools from XIX and XX century

• Francis Edgeworth added consumer indifference curve to the chart

• Increasing opportunity cost (instead of constant opportunity cost as previous)

• 2 countries, 2 goods: ONE COUNTRY PRODUCES TWO COMMODITIES both in closed and open economy

1. New trade theories

• Dynamic technological differences (one country developed, another still developing)

• Technological gap (Posner 1961) (we export to the country, where consumers want to buy, but no domestic producer has technology to produce)

• Product cycle model (Vermon 1966) (developing countries learn how to produce and they become exporters)

• Economies of scale (internal [one firm]/external [industry in a country])

• Intra-industry trade (we produce and import the same good at once, because they’re differentiated

• Overlapping demand hypothesis (Linder 1961) (trade between countries of equal GDP and equal demand)

• Gravity equation of trade (trade intensity depends on GDP and distance between countries)

1. Services

• 75% of GDP in developed countries

• 75% of employment in developed countries

• Only 20% of world export value

• But 1300% of world services trade in 1980

• 90% of USA import in 1925: row materials; 65% of USA import now: consumer goods

1. Economic growth

1. In a small country – doesn’t affect prices

   • Balanced: more production of both goods (because of growth of technology or production factor)

   • Biased towards production of the good A (in which production we are more effective): EXPORT EXPANDING GROWTH

   • Biased towards production of the good B (in which production we are less effective): IMPORT REPLACING GROWTH

   • Deindustrialization “Dutch disease” (Rybczyński 1977) – growth of only one factor of production leads to investing only in “that-factor-intensive” production and restricts development of all other branches (production of the second good decreases)

2. In a big country – affects prices

   • IMPORT REPLACING GROWTH reduces relative world prices of imported goods (we gain twice – we export more of expensive good, import more of the cheaper and cheaper good)

   • Immiserizing growth concept (Bhagwati 1958) – a big poor country can be worse off (at a worse consumer indifference curve) after growth than before (extracting more natural resources affects prices too much)

1. International factor movement

1. Capital movement:

• Foreign Portfolio Investment (FPI)

• Foreign Direct investment (FDI)

• Investments abroad: 12% of world GDP in 1997 [inv. In industry – 6% of all, inv. In services – 48% of all]

• 33% of international trade is constituted by trade among one comp. subsidiaries

• 95% of global (capital?) export and 80% import – by developed countries

1. Labour force movement

• 1820-1914: 50 mln people migrated from Europe (2,2 mln from Poland)

• After WWII: 16 mln (0,5 mln)

• Poles emigrate to: UK (642 tys), Germany (560 tys), Ireland (116 tys)

1. Trade policy

1. TARIFFS

• Single-column / multi – column

• Import duties / export duties / transit duties

• In order to protect / for gov. revenue

• Ad valorem (%)/ specific (PLN) / compound duties (mix)

• Average Tariff index / Average Weighted Tariff index

1. PARATARIFF BARRIERS

• Custom fees and reductions (obniżki)

• Suspension on tariffs (zawieszenie)

• Tariff-quota (limity ceł?)

• Two-tiers tariff-quota

• Advanced deposit requirements

• Procedures for clearing

• Valuation of production (wartość produkcji)

• Collection of taxes

• Taxes

• The Common Agriculture Policy (CAP) supporting mechanism

1. NON-TARIFF BARRIERS

• Quotas: export quota / import quota

• Voluntary Export Restraint: developed in 1970, forbidden since 1995

• Government Procurement Policy: Poland during communism, the USA (imported goods have to be ~10% cheaper than domestic to start import; 50% in case of military goods)

• Domestic Content Requirement: mixing requirement / domestic requirement

• Subsidies:
  - domestic production subsidy / export subsidy
  - forms: money paid directly / tools reducing costs of production indirectly
  - now FORBIDDEN (mostly: agriculture, research (75% ) & development (50%), developing regions assistance (85% of GDP), environment standards adjustment (20% costs) allowed

• Standards (technology)

• Economic sanctions:
  - first Pericles 432 b.Ch.
  - forms: trade sanctions / financial sanctions

• Dumping:
  - seasonal / predatory dumping
  - WTO allows anti-dumping duties when: the margin of dumping is >2% or the market contribution of the dumped good is >3%
  - 1979-1990: only developed countries used anti-d. duties; 1995-2007: 1166 imposed by developed, 2054 by developing

1. Environment

• Ecological footprint: USA 10,3 ha/cap.; New Zealand 7,6 ha/cap.; India 0,8 ha/cap.; China 0,5 ha/cap.

• 1950-1990: fish were mainly captured, >1990: mainly aquaculture (Norway, Croatia)

• National ecological policies: production and consumption standards

• 1990 – American protest against tuna from Mexico (GATT supports Mex.); 1997 – American ban of shrimps import form India, Pakistan, Malaysia, Thailand… (WTO sup. them)

• International treaties:

• 1972 Stockholm (human environment, marine pollution)

• 1979 Geneva (air pollution)

• 1985 Vienna, 1987 Montreal (ozone layer)

• 1989 Basel (control of hazardous waste movement)

1. Organizations

• GATT (1948 Havana) – General Agreement on Tariffs and Trade

• Reciprocity rule (but since 1971 Generalised System of Preferences GSP: some countries can demand lower tariffs) (wzajemności)

• No discrimination (Most Favoured Nation clause [MFN]) (apart from economic integration aso)

• National clause (foreign goods treated as good as domestic)

• Negotiations rounds: VI 1964-1967 Kennedy Round (tariffs abolished) , VII 1974-1979 Tokyo Round (paratariff barriers abolished), VIII 1987-1994 Uruguay Round (agriculture, intellectual property, trade with services)

• WTO (1995 – transformed from GATT) – World Trade Organisation

  • VER banned

  • GATS – General Agreement on Trade in Services

  • TRIPS – Agreement on Trade Related Aspects of Intellectual Property Rights

  • Tariffs instead of subsidies

  • Agreement on agriculture, sustainable development idea

  • Doha Round 2001 (no agreement)

• EFTA 1960 – European Free Trade Association: against EU;
  [firstly:  Austria, Dania, Norwegia, Portugalia, Szwajcaria, Szwecja i Wielka Brytania ]
  [now: Island, Norway, Switzerland, Lichtenstein]

• CEFTA 1993 - Central European Free Trade Agreement [Środkowoeuropejskie Porozumienie o Wolnym Handlu]. Założyły Czechy, Polska, Słowacja i Węgry  – to prepare us for EU membership

• OPEC 1960 Bagdad- Organization of the Petroleum Exporting Countries:
  Algieria ,Angola,Arabia Saudyjska, Ekwador, Irak,Iran, Katar, Kuwejt, Libia, Nigeria, Wenezuela, Zjednoczone Emiraty Arabskie.

• Unia Europejska, UE 1993 – gospodarczo-polityczny związek demokratycznych państw europejskich. Powstała 1 listopada 1993 na mocy podpisanego 7 lutego 1992, traktatu z Maastricht. Wcześniej EWG (European Community, EC) (od 1958).

• OECD 1960 – Organisation for Economic Cooperation and Development  Organizacja Współpracy Gospodarczej i Rozwoju – zrzesza wysoko rozwinięte kraje Europy Zachodniej, Ameryki Północnej oraz Japonię, Koreę Południową, Turcję, Australię i Nową Zelandię

• ONZ 1945 – Organizacja Narodów Zjednoczonych (United Nations – UN)

• G-8 – Grupa Ośmiu Najbogatszych Państw Świata (Group of Eight)
  Utworzona w 1975 roku przez Stany Zjednoczone, Japonię, Wielką Brytanię, Francję, Niemcy i Włochy (Grupa Sześciu); w 1976 roku dołączyła do nich Kanada, a w 1998 Rosja.

• NATO 1949 – Organizacja Paktu Północnoatlantyckiego (North Atlantic Treaty Organization)
  Powstała w 1949 roku jako sojusz polityczno-wojskowy państw Europy Zachodniej, Stanów Zjednoczonych i Kanady.

• OPA – (Organization of American States) Organizacja Państw Amerykańskich 

• WNP – Wspólnota Niepodległych Państw (Sodrużestwo Niezawisimych Gosudarstw)

• ASEAN –(Association of South East Asian Nations) Stowarzyszenie Narodów Azji Południowo-Wschodniej 

• LPA – Liga Państw Arabskich (Dżami’at Al-duwal al Arabijja)

• AU – Unia Afrykańska (African Union)

• OIPC – Interpol (Organisation Internationale de Police Criminelle)

• Handlu Obu Ameryk (Free Trade Area of the Americas)

• APEC – Współpraca Gospodarcza Azji i Pacyfiku (Asia-Pacific Economic Cooperation)

• ECOWAS 1975 – (Economic Community of West African States) Wspólnota Gospodarcza Państw Afryki Zachodniej 

• SADC – (Southern African Development Community) Wspólnota Rozwoju Południowej Afryki 

• CEMAC – Środkowoarfykańska Wspólnota Gospodarcza i Walutowa

• MERCOSUR – Wspólny Rynek Południa zrzeszający Argentynę, Brazylię, Paragwaj i Urugwaj.

• NAFTA 1992 -  North American Free Trade Agreement Północnoamerykańska Strefa Wolnego Handlu

• CARICOM (ang. The Caribbean Community and Common Market), Karaibska Wspólnota i Wspólny Rynek

1. International Financial Relations

• Full / limited convertibility of currencies (“foreign – exchange monopoly” of the state in Poland before 1989)

• Rigid / fixed / floating exchange rate (rigid – złoty dewizowy, fixed – after Bretton Woods, managed floating – now

• Gold Standard (1880-1914): ER stable, supply of money provided, adjustment mechanism, but LITTLE independence of countries

• Gold Exchange Standard (1944-1971): ER stable, supply of money provided, NO adjustment mechanism (but incentive to adjust), LITTLE independence of countries. It ended in 1971 (Jamaica Accord)

1. Others

• James Meade – The theory of international economic policy 1951

• Czas miedzy uznaniem euro a wprowadzeniem – 3 lata

• Deficyt rozmów telefonicznych w bilansie – kraj importujący siłę nabywczą

• ?? – teoria ilości pieniądza

• Kraj bez euro – Lichtenstein

• Ilość unii walutowych w Afryce – więcej nic w Europie

• Ceny transferowe - mogą być niższe i wyższe

• Gold standard in Poland – między wojnami

• Kiedy powołano ITO – nie doszło do skutku

• Procesy dostosowawcze – np. kraje wprowadzające euro

• Currency reserves function – krótkookresowe zmienianie deficytu

• Fixed exchange rate: Syria, Nigeria

• Eclectic theory of international production: OLI (Ownership, Localization, Internationalization)

• Koncepcja popytu wzajemnego – J.S. Mill

• największa fundacja: Bill and Melinda Gates Foundation (28,8 bln $)

• Nigeria: 96% of export is Oil

• Between WWI and WWII – 72 international cartels, after 1985 – only 5

• Highest piracy – Vietnam, Zimbabwe

• Potential gains from full removal of tariffs : the biggest in developing countries

• The biggest anti-dumping activity: in terms of steel, metals and chemicals

• Tariffs on polish steel and meat before access to EU

• Major ivory exporters: Sudan, Central African Republic

• Now most currency reserves: in USD

• W gold exchange standard, BC miały interweniować, gdy waluta narodowa deprecjonowała lub aprecjonowała o >1% w stosunku do $

• Udział USA w funduszach International Monetary Fund (IMF): 17,4%

1. Adjustment measures: there is no obligation

2. Multiplier effect (gains from export) is bigger, when tendency to consumption is higher ?????

3. The most advanced form of integration: economic union

4. Foreign investment: worse situation of country’s balance of payments in the short run, better in the long

5. Strong currency – the stable one

6. EFTA – free trade association

7. Most Favoured Nation – trade terms with all the countries should be the same

8. Conditionalities – conditions for taking out a loan from International Monetary Fund IMF

9. Bilans płatniczy kraju:

- bilans obrotów bieżących ( current account balance )

• Dobra

• Usługi

• Dochody (wynagrodzenia siły roboczej, dochody inwestycyjne z FDI i FPI)

• Transfery bieżące

- bilans obrotów kapitałowych (pomoc bezzwrotna na finansowanie środków trwałych, umorzenie długów, kupno/sprzedaż aktywów: patentów, licencji)

- bilans obrotów finansowych

• Inwestycje bezpośrednie: min. 10% akcji jakiejś firmy

• Inwestycje portfelowe: zakup innych akcji, obligacji

• Pozostałe inwestycje

- saldo błędów i opuszczeni

- oficjalne aktywa rezerwowe: operacje BC i sektora rządowego

1. Western Europe: 50% of global trade

2. London Club and Paris Club: organization restructuring state debts in private banks

3. Paying interests for foreign countries: deterioration of balance of payments

4. Optimal rate of tariff: maximization: marginal gain from terms of trade = marginal loss of consumers

5. Equador, Camerun, Nigeria – only exporters of oil

6. Industrialized countries: can contribute to maintaining ecological balance by aiding developing countries attempts to save the environment

7. Foreign capital flowed out of Latin America: because of overvalued currencies and low interest rate

8. Appropriate theory (zawłaszczalności) – Magee – companies want to have an access to foreign technology

9. IMF and World Bank headquarters – Washington

10. Mariginal tendency to import ~ marginal rate of import ~ income elasticity of import ?

11. Adjustment mechanism in Rigid Exchange rate: by adjusting interest rates

12. Taxes on imported goods are similar to tariffs (e.g. coffee in Poland)

13. WTO doesn’t pay attention to exchange rates and doesn’t grant loans

14. Import tariff: loss of consumers and foreign producers, gain of domestic producers

15. If we use dumping: lower prices when high elasticity of demand, higher when low elasticity of d.

16. When Japan exports much do the USA and USA exports little to Japan: yen appreciates, $ depreciates

17. Terms of Trade Index: TOT= $\frac{\text{export}}{\text{import}}*100\%$. When <100 (in comparison to the previous year) – we have to export more goods to buy previous amount of imported commodities (import more expensive)

18. American embargo on selling crops to ZSRR: protest of American farmers

19. LIBOR – London Interbank Offer Rate

20. Maastricht treaty – about creating monetary union (€ zone)

21. Technological development & international trade: increase Gross National Product

22. The biggest exporter: China, the biggest importer: USA/China?

23. Adam Smith: every country taking part in international trade can gain

24. If one country has comparative advantage in production of one good, it does not have to have absolute advantage

25. Adjustment charge (dopłata wyrównawcza) – in Poland: to protect farmers

26. If country A has absolute advantage in production of most goods, it should export those in which production it has comperative advantage and import the other

27. Deterioration of developed countries economy: lower prices of resources used in their industry (e.g. cooper)

28. Polish state debt: most creditors are foreign states

29. Main aim of IMF: supporting monetary cooperation of states

30. Most foreign investments of developed countries: to other developed countries

31. Deterioration of indebted countries: mainly because of worse TOT

32. Limitation of exchange rates fluctuation: European Monetary System (?)

33. Country importing labour force gains more than country exporting

34. Rate of protecting agriculture: low in Australia, higher in the USA, EU

35. Debt for nature swap: country conducts some programs saving the environment in exchange for debt reduction

36. Mutual clearing: limited to the amount of less developed country export

37. Urugruay Round (GATT): conflict between Europe and developing countries in terms of agriculture trade

38. Interest charge paid to foreign investors (e.g. for shares): debit on current account balance

39. Long term effect of monetary union: economies of scale ???

40. Total loss:

• Tariffs: b+d (small country, where prices rise [consumers loose] but producers and government gains)

• Quotas: b+d (consumers loose)

• VAR: b+c+d (foreign exporter gains “c” because of higher prices of his limited good)

• Subsidy:
  + domestic production subsidy: b (consumers do not loose, producers gain, only gov. looses)
  + export subsidy: b+d (producers gain, but gov. looses [pays] and consumers loose [higher prices])