International Trade Theory and Finance Syllabus for M.A. Economics

International Trade Theory and Finance (Paper-1) M.A. Economics Part-II

This course is designed to familiarize students with international economics. It is divided into two parts. The first part covers the trade theory, and the other international finance. Emphasis in this course is on the rigorous treatment of traditional and current trade and exchange rate theories and models. Models of gains from trade, pattern of trade, international flow of factors of production, trade related competitive theories, liberalization reforms, balance of payments problems, determinants of exchange rate, and future markets are some of the topics covered in this course. Furthermore, implications of international flow of funds and debt crises are covered in depth. By providing training- built analytical ability, which is particular for policy formulation, this course would prepare students for jobs in both public and private sector organizations.

Prerequisite for this course is intermediate-level knowledge of economic theory and mathematics.

A) International Trade Theory

 Topic1. Importance and Bases of Trade

• Why Study International Economics?
• The Changing World and Interdependence: Basis of Trade, Gains from Trade.
• Absolute Advantage, Comparative Advantage, Overview of Comparative Advantage and Pattern of Trade.
• Offer Curves and  Free Trade Equilibrium.
• Disagreements on Free Trade: Overview of Emergency of International Trade Issues.
• The Elasticity of Exports Demand and Balance of Payment.
• Substitution and Income Effects, Impacts of Rise in Exports Demand.

Topic 2. Growth and Trade

• International Trade and Shift in Production Function
• Immzerizing Growth
• Output Growth and Terms of Trade (T.O.T)
• Deterioration: Uniform Growth at given T.O.T.
• The Transfer Problem: Marshall Plan and Transfers
• Transfer of Resources:  Neutral Case.

Topic 3. Technology and Factor Endowment

• Ricardian Trade Model, World Production and Gains.
• Comparative Cost and Trade Pattern. National and World Gains from Trade.
• International Wage differentials and Productivity.
• Technical Progress and International Gains.
• WTO and Gains from Technical Progress: Impacts on Prices.
• Equilibrium Production and Consumption: Non-traded and Tradeables, Costs, Marginal Physical Product and Production Possibilities.
• Production Possibilities with Diminishing Returns, Increasing Opportunity Cost.
• Free Trade and Income Distribution, Relative Demand, Supply and Pattern of Trade.
• Dutch Disease and its application.

Topic 4. Factor Endowment and Heckscher – Ohlin Theory

• Output and Factors Rewards in 2*2 Model. Factor Intensity Comparison.
• Heckscher- Ohlin (H.O) Model, The Role of Demand, Factor’s Prices and Commodity Prices, Factor Price Equalization, and Factor Intensity Reversal.
• Newly Industrializing Countries (NIC’s) and Footloose Production Process.
• NIC’s and H.O Theorem. The Product Cycle, Critical Analysis of Traditional Trade Theories.
•   Rypecksy Theorem and its critical review.

Topic 5. Markets, Cartels and International Trade

• Monopoly and Import Competition, Export Opportunities.
• Product Differentiation and Monopolistic Competition.
• Dumping / Discrimination and WTO, Competitiveness and Market Share, Gains from Migration.
• WTO and Factor’s Movements and the Commodity Movement.
• Multinationals Firms and Foreign Direct Investment, Transfer of Capital, Technology, Skill and other Gains, Transfer of Resources and Transfer Problem.

Topic 6. Tariff, Quota and Trade Policies

• Tariff and Small Country: Effects of Tariff, Price and Demand for Imports, Welfare impacts.
• Impacts of Tariff on Government Revenue, T.O.T Production and Welfare.
• Impact of Tariff on Domestic and World Welfare.
• The Optimal Tariff.
• Tariff and Distribution of Income.
• Brief Introduction of Tariff and WTO Laws, Tariff and Second Best Choice, Subsidies and Quota, Voluntary Quota, Growth with Protection vs. Free Trade Gains and WTO.
• Managed Trade, Quantitative Restrictions, Voluntary Export Restrictions and Their Impacts.
• Trade Diversion and Preferential Arrangements.
• WTO: Injury, Anti-dumping Duties, Tariff and B.O.P Support.
• Success and Failure of WTO Agenda.

B) International Monetary Economics and Finance

 Topic 7. Foreign Exchange Market and Exchange Rate Determination

• Foreign Exchange Rates (F.E.R): What it represents? Real, Nominal and Effective Rates.
• Determinants of Foreign Exchange Rate.
• Efficient F.E.R  Market.
• Dynamic Theory of Interest and Exchange Rate.
• The Theory of Spot Exchange Rate Determination.
• Capital Flow and Speculations.
• Forward Exchange Market, Interest Arbitrage, Interest Parity Theory,
• Speculators,  Hedgers and Traders, Forward Exchange Rate Policy.

Topic 8. Purchasing Power Parity, Exchange Rates and Balance of Payments (B.O.P)

• Purchasing  Power Parity (PPP): Non-Trade Goods, Balance of Payment Effect.
• Test of Exchange Rate Instability.
• Impacts of F.E.R. Rate Instability.
• B.O.P: Income Absorption  Approach to B.O.P.
• Elasticities of Exports and Imports and Impact on  B.O.P.
• The  Marshall- Larner Conditions.
• Monetary Approach to B.O.P.
• Monetarist  Critique to the  Keynesian Closed Economy Model.
• B.O.P. Effects of Stabilization Policies.
• Empirical Tests of Monetary Approach to the B.O.P. WTO and B.O.P Support.
• Adjustment with Short-run capital Flow.
• Methods dealing with undesired Short-run Capital Flow.

Topic 9. Open Economy:  Monetary and Fiscal Policy

• Monetary and Fiscal Policies: Internal and External Balance.
• Monetary and  Fiscal Policy with Fixed Exchange Rates.
• Problems of Small Country: Fixed Exchange Rate, Free Floating Exchange Rate, Managed Exchange Rate and Critical Review of The Fiscal – Monetary Mix Models.
• Fiscal Policy and Temporary Payment Imbalances.
• Monetary Policy and Permanent Payments Imbalances, A Random Walk Model of Payment Imbalances.
• Critical Review of the Modern Theory and Adjustment Mechanism.

Topic 10. International Institution:  Trade, Capital and B.O.P.

• Introduction of International Institutions, Role and Major Activities of IMF.
• IMF Credit Facilities.
• Loan Mechanism, Value of SDRs.
• The Optimum Quantity of Reserves, Optimum Interest Rate.
• Euro-Dollar, Dollar Exchange and Impacts.
• Role of IMF in B.O.P Support and Stabilization.

Topic 11. International Movements of Factors and Welfare:  Impacts / Issues

• Facts on International Capital Flow: ASEAN Crisis and Role of International Institution and Criticism.
• Motive for Capital Movement: Return and Risk Diversification.
• Why disagreement on International Movement of Labour? Welfare Impacts of Labour Movements.
• Factors of Production and Price Equalization Issues.
• Losses of National Sovereignty.
• Can Developing Countries Compete and Gain from Trade: Terms of Trade due to Demand Pattern and its Impacts.
• What Counts for wage Differential Between Primary Goods Producer and Value Added Goods Producer, Competitiveness Issue.
• WTO: GATT and Emergency of WTO.
• Why necessary to Join WTO?
• WTO: Expected Impacts on Trade, Liberalization and B.O.P; Special Status of Developing Countries and Net Food Importing Countries.
• Protections under WTO Rules.
• Are Free Trade Gains more than Restricted Trade? Gains for whom; how much and how long? Centre-Periphery Theory.
• WTO Rules: Sanitary, Phytosanitary, Dumping, Anti-Dumping etc Rules and Emerging New Issues and Their Impacts.

Topic 12. Major Contemporary International Economic Issues:

• WTO: GATT and Emergency of WTO.
• Why necessary to Join WTO?
• WTO: Major Trade Rules and Their Expected Impacts on Trade, B.O.P Deficit.
• WTO and Fair Trade / Free Trade.
• Free Trade will it be?
• Issue of “Are Free Trade Gains more than Restricted Trade”?
• Emerging Regional Trading,  Blocks,  Special Preference and their Impacts.
• Issues relating to the Contributions of International Financial Institutions and Their Evaluations.
• Is there need to  Reform International Institutions?
• Monetary Integration and Their Impacts.
• Terms of Trade Issue. International Debt Problem, Growth and Competitiveness.
• Issues of Developing Countries: Level of Development, Competitiveness and Trade Stability: World Income Distribution and Free Trade.

Basic Readings: 

1. Caves Richard, E., and Jones Ronald W., World Trade and Payments: An Introduction, Latest Editions. Little, Brown and Company, Boston,
2. Chacholiades, Miltiades,   International   Trade   Theory   and   Policy   (Latest Edition). McGraw Hill Book Company, New York, London.
3. Donomick Sal Vatore B., International Economics (Latest Edition), Prentice
4. Grubel Herbert C., International Economics, (Latest Edition) Richard D. Irwin Inc., Honewood,
5. Peter Holinder & Thomas A., Pugel., International Economics. 9th Edition
6. Sodersten B. and Geoffry Read., (1994). International Economics, MacMillan Press
7. The Global Competitiveness, Report 1999, World Economic Forum, Oxford University Press, Oxford, New
8. World Bank. World Development Report, 1986.  Oxford University

 Additional Readings: 

1. Baldwin Robert L. and Richardson David J., (1986). International Trade and Finance, Little Brown and Company, Boston,
2. Moran Theodore H., (1985). Multinational Corporations: The Political Economy of Foreign Direct Investment. Lexington Books.  Toronto,
3. Krugman and Obstfeld, International Economics: Theory and Policy, Addison Willey (1998).