SAINT MARY'S COLLEGE

Department of Business Administration

and Economics

ECON 452 PROFESSOR JERRY McELROY

International Trade and Finance 106 Madeleva (#4488)

Home Phone: 234-2827

Spring 2001 Hours: WF 9-12, appt.

CONTENT: This course develops the theoretical tools for analyzing the open economy. It covers (I) the theory of trade (Ch.2-7),(II) protectionism (Ch.8-11),(III) resource movements (Ch. 12),(IV) the BOP (13) and foreign exchange market (14-15), and (V) the price, income, exchange rate and policy adjustments to balance of payments (BOP) disequilibrium (Ch.16-21). Special topics include: growth, LDC trade and finance problems, the Marshall-Lerner condition, multinational behavior, migration, the world debt problem, and macroeconomic policy analysis to achieve internal and external balance. Unique course feature is daily focus on current events.

GOALS: 1) Thorough theoretical grounding in the micro aspects of trade, protectionism, and the foreign exchange market, as well as the IS/LM/FE, macro framework to handle BOP, exchange rate, and policy adjustments.

2) Repeated application of these concepts to illustrate contemporary international behavior, issues, and problems.

MEANS: 1) Pre-reading the chapter selection in the text and coming to class prepared to answer the questions listed chapter-by-chapter in the reading assignments sections below.

2) Completing a number of indispensable homework problems designed to fortify empirical grasp of the tools.

3) Taking three class-period tests and the final exam on the dates required.

4) Completing a short 8 page term paper on a specific topic from those included at the end of this syllabus.

5) Active verbal repartee in class.

452 Syllabus--page 2

PROCEDURES: Each class will begin with a current news item applying theory to today's events. There will also be some review of previous material, as well as an outline of topics to be covered. Students will be expected to summarize material from the text and present it briefly in class.

The final grade will be based on a total of 220 points. This will be composed of three class-period tests worth 40 points each, the research paper worth 40 points, and the final exam worth 60 points. Grades will be based on the following scale: 92-100 (A), 90-92 (A-), 88-90 (B+), 82-87 (B), 80-82 (B-), and so on.

RESEARCH PAPER: It will be a simple but rigorous hypothesis testing undertaking. It will be narrowly focused on a specific contemporary issue/controversy of the student's own choosing from the list attached to the syllabus. Successful completion of the paper will depend on the following three requirements:

1) Topic and methodology outline (one page) must be submitted (without extension) for approval by March 22. The outline should include (1) a clear statement of the hypothesis,(2) specific mention of the kinds of data to be used in the test, and the library sources where the data can be found,(3)and a listing of any other library materials you plan to use. For international data sources, see page 20-21 of the text.

2) Short five-minute CLASS PRESENTATION of research results are due May 1 during class time.

3) The FINAL PAPER (8 or so pages typewritten) is due by 5 PM on Thursday, May 3.

Successful papers must follow this format closely:

a) statement of a clear hypothesis with some theoretical support from authorities in the field (check the text).

b) discussion of methodology & identification of variables and data and data sources to measure those variables.

c) presentation of evidence in graphs and tables (and/or regressions.)

d) discussion of exogenous explanatory factors not in your hypothesis i.e. violations of the ceteris paribus assumption of your simple hypothesis that all other things remain constant (when in reality they never do).

e) summary of your research results and at least one policy recommendation and one follow-up research task.

452 Syllabus--page 3

Those students wishing to use the paper for their Advanced W Portfolios should revise the paper after it has been graded and handed back at the end of the semester. The revisions should follow the instructor's specific corrections/guidelines contained in the graded paper. The revision should be returned to me for approval sometime early in the Fall 1999 semester, say by the end of September.

REQUIRED TEXT: Dominick Salvatore, International Economics, 6th edition, (Prentice-Hall, 1998). Chapters and exact page numbers are given in parentheses in section immediately below. Questions are given to guide your reading for the answers. Students are also encouraged but not required to purchase a three-month subscription to the Wall Street Journal since we will be discussing WSJ articles in every class.

(page numbers in parenthesis)

1/16 (1) Introduction (1-13). The importance of trade and the organization of the course; the syllabus.

1/18 (2) Absolute and Comparative advantage (26-45). Show the graphic/numeric differences between abs. and comp. adv. with the PPF using constant costs. How does the small-country case work? and differ for the general theory in two aspects? What does the slope of the PPF mean? Was Ricardo right?

1/23-25 (3) Standard Trade Theory (53-69). What does increasing costs do to the PPF? Define the MRT. What are CICs? Show the pattern of trade in two graphs, as well as both nations on the same graph. Can there be trade if both countries have the same PPF? How? Show it.

1/30 (4) Offer Curves, Trade and TOT (83-96). Know the excess D and S model. Know how to derive offer curves from the PPF. Show equilibrium in a two-nation case. How do taste changes affect the offer curve, the TOT and the volume of trade?What is peculiar about the small-country case? What is the precise definition of the TOT in this chapter?

2/1 (5) Factor endowments and The Heckscher-Ohlin Theory (109-137). Define factor intensity. State the H-O Law. Using identical tastes, show trade for 2 countries with diff. PPFs. How does trade equalize factor prices? How does trade affect the income distribution?

452 Syllabus--page 4

2/6 (6) Economies of Scale and Other Theories (155-163, 168- 177). How can trade patterns be explained by economies of scale? differentiated products? technogaps/product cycles? If transport costs rise, what happens to imports?

2/8 TEST ONE: Chapters 1-6

2/13-15 (7) Growth and Trade (185-209). Graphically how does factor growth affect the small-nation trade triangle? What are the 3 kinds of technical progress and their likely impacts on trade--neutral, antitrade, and protrade? How does growth affect large-country trade? What is

immizerizing growth? at uneven rates? or if tastes change in both countries (in the same good, in different goods)?

2/20 (8) Tariffs (221-241). Using offer curves, what are effects of a tariff on TOT and trade in the small nation? in the large nation? what graphically are the 6 effects of a tariff in one country? What is the difference between the nominal and effective rate of protection? How is the second calculated? What does a tariff do to consumer and producer surplus?

2/22 (9) How do quotas (257-278) as opposed to tariffs affect production of the protected industry in the face of domestic demand and supply changes? How are cartels a source of "taxation"? What is dumping? Do you buy the infant industry argument? Impact of subsidies.

2/27 (11) Trade and Development (330-356). What is the Third World criticism of comparative advantage? Why has the TOT fallen? What is the diff. between commodity and income TOT? What is the source(s) of export revenue instability? How does a buffer stock arrangement work? Define import substitution versus export industrialization. What is the relation bet. the LDC debt problem and export pessimism? What is the NIEO?

3/1 Review for Test Two

3/6 TEST TWO: Chapters 7 to 9, and 11

3/8-20 (12) Capital mobility and labor migration (356-388). Know well the "box model" for analyzing the effects on both countries of a capital outflow on factor prices, incomes, employment, and GNP. Apply the same graph to labor migration. RESEARCH PAPER TOPICS AND OUTLINES ARE DUE ON OR BEFORE MARCH 22.

452 Syllabus–page 5

3/22 (13-14) The BOP (skim 397-414) and the Foreign Exchange

Market (423-450). For. Exch. Graphics plus arbitrage, spot

and forward rates, hedging, covered interest arbitrage etc.

3/27 Finish (14) plus (15) Exch. Rate Determinants. Know the PPP, Monetary and asset approaches.

3/29- (16) How price (exchange rate) changes adjust the BOP 4/3 (509-531). What does price elasticity of demand have to do with the success of depreciation in correcting a BOP deficit? What is the Marshall-Lerner condition? J-curve? How does a fixed gold standard work?

4/5-10 (17) Income, Repercussion, and the BOP (543-565). Be able to construct the "two-gap model" whereby the intersection of (X-M) and (S-I) determines Y and the BOP. How does foreign repercussion work numerically and graphically? Distinguish between the impacts of K* (X-M) and K** (S-I). What are the absorption affects of depreciation?

4/12- (18) Open Economy Macro: MP and FP to adjust the BOP and

17 the level of Y (573-597). Be sure to brush up on derivation of IS, LM, and FE cures in appendix. Know how to use the IS/LM/FE graphics to overcome a recession or inflation using MP or FP. How do elastic capital flows affect the effectiveness of MP/FP in recession or inflation? What happens to policy effectiveness when a flexible exchange rate is introduced? How is policy affected by price flexibility?

4/19 Review for Test #3.

4/24 TEST THREE: Chapters 12 to 18 (not 13).

4/26 Discuss research papers: Structure & Data Interpretation

5/1 Short ten-minute class presentations of results of research papers during class.

5/3 Review for Final Exam. Final drafts of Research Papers

are due in my office by 5 pm.

RESEARCH PAPER TOPICS: Remember these are only suggestions and other topics are possible with my approval. Also remember it is first-come/first-serve, so get you topics/outlines in early to

452 Syllabus--page 6

insure your choice. Remember also some good stat sources: SURVEY OF CURRENT BUSINESS, WORLD DEVELOPMENT REPORTS, WORLD TABLES, INTERNATIONAL FINANCIAL STATISTICS, FEDERAL RESERVE BULLETIN, STATISTICAL ABSTRACT OF THE U.S.

1) Are high interest rates (nominal or real) associated with high exchange rates (the U.S. case), and also the cases of Germany, France, or Japan?

2) Does inflation cause the exchange rate to fall as PPP suggests? Sample 3-4 or more industrial countries and provide evidence.

3) Do high interest rates cause BOP deficits? Sample 6-7 U.S. and European countries over the past 15 years to find a relation.

4) Is the money supply negatively related to the balance of trade? Is excess M.S. associated with deficits (i.e. a capital outflow)? Use the U.S. and 2 European countries to test it over the past 15 years. (How will you measure excess M.S?).

5) Sample 3 LDCs like Argentina, Brazil and Mexico to determine if there is a relation between LDC debt and their budget deficits.

6) Is world trade more stable or unstable since flexible rates began in 1971-73? Either gather information on world trade over the period, or sample 5-6 countries since 1960.

7) Is Heckscher-Ohlin right? Do capital-abundant nations export capital-insensitive goods and labor-abundant nations export labor-insensitive goods? Try it out on industrial countries.

8) Is the stock market related to the behavior of the exchange rate? How and why? Use the U.S. of Japan as examples.

9) What is the relation between the stock market and the interest rate differential between U.S. and European rates over the past 15 years?

10) Does GNP in LDCs fluctuate more widely than in industrial countries? Why or why not? Sample 5 of each from 1960.

452 Syllabus--page 7

11) Sample 15 industrial and 15 LDC countries. Determine if trade (X+M/Y) is more important to LDCs, if the percent change in the trade ratio yearly is greater for LDCs, and whether this is associated with greater annual Y changes.

12) Since 1973 are BOP deficits associated with falling or rising exchange rates? Sample 4-5 countries. What would the theory argue?

13) Since 1960 or 1970 have the TOT in fact moved against the LDCs and in favor of industrial countries, industrial products? Sample 5 of each type of country.

14) Are countries which import large amounts of labor also exporters of labor-intensive goods? Give three examples.

15) Is political instability associated with a weak or strong exchange rate? Why or why not? Give four examples.

16) Is the cheap foreign labor argument for protection valid? Are foreign goods cheaper because foreign labor is cheaper? or is it more a question that foreign labor is more productive relative to its low-wage status? Compare wage and productivity differentials for two industries and two countries.

17) Are budget deficits positively related to trade deficits? Examine the U.S. and 1 or 2 European countries for 1970.

18) Is the more open economy (higher the X/Y ratio) the higher or lower the inflation rate? Sample 20-25 countries and plot the relationship.

20) Is the BOP more sensitive to the exchange rate or the interest rate differential? Look at the U.S. experience vis-a-vis the UK, or perhaps Germany or Japan since 1970.

21) What is the relation between the BOP and the rate of inflation? Examine 3 industrial countries and 3 LDCs since 1970.

22) What is the relation between LDC debt and world interest rates? Sample 6 LDCs from 1970 or 1975 and compare the debt-to-GNP ratio with annual U.S. nominal and real interest rates.

23) Test the J-curve hypothesis, namely that exchange rate 452 Syllabus–page 8

changes affect the BOP only after a 1 or 2 year lag. Using the U.S. and 1 or 2 European countries from 1970, determine the relation between percent changes in the exchange rate in year 1 with the percent changes in exports (or imports) in year 2 or 3.

24) Do high exchange rates cause increased importation of foreign cars (or other goods)? Why or why not?From 1970 for the U.S.

25) Is the U.S. economy really the world leader? Compare fluctuation in the U.S. GNP with fluctuations in European countries (3 or 4) since 1960. Or compare the U.S. with the more developed LDCs (3 or 4). How does U.S. GNP correlate with export of these countries?

26) Does the exchange rate have any influence on the unemployment rate? Sample 5 countries to determine the relation since 1973. What is the theory supporting such a relation?

27) Does a rising exchange rate cause rising investment? Sample 5-10 industrial countries and relate the exchange rate to the ratio of investment to GNP since 1973. What is the theory supporting such a hypothesis?

1) In the mechanics, be sure spelling and grammar are correct, use proper page numbers, and remember the word data is a plural noun and takes a plural verb. Also remember NOT to use the first person "I" or "We".

2) If at all possible, put data tables in text so reader (graphs too) can readily examine them. Interpret the data in your text--don't just place data in appendix and forget about your empirical contribution.

3) At bottom of tables put sources (references) of your data. This is imperative.

4) If you use graphics, put them inside text if they are important to your analysis, and not in the appendix.

5) Although you should take the 8 page limit seriously, if you have a lot of tables and graphs, the paper can be longer by a page or two.

452 Syllabus–page 9

6) If you use statistical regression analysis, report in text the R-Squared and t-values since this is part of your original contribution. Discuss whether the relation is statistically significant at the .05 level of confidence or better.Also use the sub-command for the Durbin-Watson statistic (DW). That sub-command is: DW.

7) When you use library references, you must footnote to give credit, and you must footnote clearly giving page numbers. Footnotes can all appear together on a separate page before the bibliography. But you must footnote when you borrow ideas, either (1) when you see a direct quote, or (2) when you use the author's material loosely (passim). If you don't

properly credit references, you risk plagiarism and then the paper fails the criterion of originality.

8) You must have a bibliography of your references and each entry should include: (for a book) author(s), title, city, publisher, date; for a journal article: author(s), title, journal name, volume, date, page numbers. Don't forget to also list your data sources.

9) Content-wise, papers in the past have lost points because (a) the hypothesis was not clearly stated and/or no theoretical justification was given to argue the plausibility of the hypothesis, (b) wrong variables were used to measure the relationships, (c) data were not incorporated into the analysis, despite the fact that this term paper is fundamentally an empirical exercise.

10) Please check your papers for the two most common writing errors: (1) dangling participles ("Having finished the paper, the semester was over"); and (2) improper agreement ("When they saw their losses, COMPAQ agrees to fold").