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INTERNATIONAL ECONOMICS SIS-616 A01

Stephen J. Silvia Office: SIS 320 School of International Service Tel: W 202.885.2462 American University e-mail: [email protected] Summer 2016 Office hours: Monday 8-9 pm, Wednesday 3:30-5:30, or by appointment

Economics is the science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. –

COURSE DESCRIPTION How do countries exchange wealth in a world with hundreds of currencies? How do we know whether one country is richer or poorer than another? Why do countries trade? What are the effects of trade? International Economics provides you with the tools and insights that economists have developed over the years to answer these and many other questions about trade and monetary relations among open economies. It also explores the range of policy choices and the impact of those choices on people, countries and the global economy.

COURSE PREREQUISITE Introductory macro and micro economics is the prerequisite.

LEARNING OBJECTIVES The objective of this course is for you to acquire a sound grasp of the essential vocabulary and analytical tools that economists use to explain how the international economy works.

LEARNING OUTCOMES By the end of the course, students should be able: (1) to apply the core concepts, models and theories of international economics accurately to explain real-world outcomes, and (2) to analyze correctly the domestic and international economic implications of policy choices. This is not an econometrics course. It does not cover inferential statistical techniques. You will need some math, but the most that you will need is elementary-school level arithmetic and basic algebra (i.e., no more math than you need to balance a checkbook). A few articles on the syllabus do include inferential statistics, so you will need to draw on what you have learned in your methods courses to read them discernibly.

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COURSE REQUIREMENTS Course requirements consist of: (1) six problem sets (Each is worth five points for a total of 30 percent); (2) a take home midterm examination, which amounts to 30 percent of the total grade; (3) a take home final examination, which accounts for 30 percent of the total grade, and (4) class participation, which is worth 10 percent.

PROBLEM SETS: You are to submit your problem sets on the BlackBoard site for the course. Since I distribute the answers to the problem sets shortly after they are graded, I have to be strict regarding the deadline for submitting them. The deadline for submitting a problem set is 5 pm am on the day the problem set is due. Assignments submitted after the deadline will have a one-point penalty deducted for each day that they are late, starting at 5:01 p.m. on the due date. I will not accept assignments after I post the answer key. Students failing to submit a problem set before I post the answer key will receive a zero for that problem set. I encourage you to work with your classmates on the problem sets, because that’s a good way to learn the material, but you must submit your completed problem sets individually. Remember, it’s vital that you understand the material yourself if you are to do well in this course because in-class examinations account for seventy percent of your grade.

EXAMINATIONS: The midterm and final are both take home exams. They will have short-answer questions. The final exam is not cumulative. It only covers the second half of the course. Calculators are NOT allowed in the exams. Any mathematics is kept simple enough for you to work it out without a calculator.

CLASS PARTICIPATION: Class participation has three components: (1) Attendance; which is mandatory. (2) Participation; asking and answering questions will be a part of your participation grade. (3) Posting two articles from news sources on BlackBoard. Each student is required to post at least one article from a news source that discusses international trade and one article that discusses exchange rates. Good sources for articles include The Economist magazine, The New York Times, and The Washington Post.

SUPPORT SERVICES The Academic Support and Access Center (ASAC) supports the academic development and educational goals of American University students and is committed to providing access for individuals with disabilities within the university’s diverse community. Topics of interest include time management, effective writing, textbook reading, note taking, critical thinking, memory skills and test taking. Do not hesitate to use these services. You are already paying for them, and they can really make a difference in how you do in all of your courses. You can find more information about the ASAC at: http://www.american.edu/ocl/asac/

ACADEMIC INTEGRITY CODE Standards of academic conduct are set forth in the University's Academic Integrity Code - International Economics • SIS-616-A01-2016X • Summer 2016, p. 3 -

(http://www.american.edu/academics/integrity/code.cfm). By registering, you have acknowledged your awareness of the Academic Integrity Code, and you are obliged to become familiar with your rights and responsibilities as defined by the Code. Violations of the Academic Integrity Code will not be treated lightly, and disciplinary actions will be taken should such violations occur. Please see me if you have any questions about the academic violations described in the Code in general or as they relate to particular requirements for this course.

EMERGENCY PREPAREDNESS IN CASE OF DISRUPTION OF CLASSES In the event of an emergency, American University will implement a plan for meeting the needs of all members of the university community. Should the university be required to close for a period of time, we are committed to ensuring that all aspects of our educational programs will be delivered to our students. These may include altering and extending the duration of the traditional term schedule to complete essential instruction in the traditional format and/or use of distance instructional methods. Specific strategies will vary from class to class, depending on the format of the course and the timing of the emergency. Faculty will communicate class-specific information to students via AU e-mail and Blackboard, while students must inform their faculty immediately of any absence. Students are responsible for checking their AU e-mail regularly and keeping themselves informed of emergencies. In the event of an emergency, students should refer to the AU Student Portal, the AU Web site (www.prepared.american.edu) and the AU information line at (202) 885-1100 for general university-wide information, as well as contact their faculty and/or respective dean’s office for course and school/ college-specific information.

READINGS Required Readings: - There is a textbook for this course. It is: Robert C. Feenstra and Alan M. Taylor, Essentials of International Economics, 3rd edition (New York: Worth, 2014). - All other required readings are posted on BlackBoard except for the week one reading by . The URL for it is on this syllabus. The videos have URLs listed on the syllabus.

Recommended Readings: You do NOT have to do the recommended readings. Most are examples of how economists use the concept that we’re discussing for that week. So, they are typically a bit more difficult than the required readings. They are there in case you would like to explore the topic further.

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COURSE READINGS AND OUTLINE:

ALL the readings listed below are REQUIRED, unless otherwise indicated. The RECOMMENDED readings are there for your information. There is NO obligation to read them.

May 9. Trade and Technology: The Ricardian Model of Comparative Advantage. - Feenstra and Taylor, chapter 2. - Paul R. Krugman, “Ricardo’s Difficult Idea,” http://web.mit.edu/krugman/www/ricardo.htm (1996). - “Wookienomics: Like the Force, economics binds the galaxy together,” Economist, 19 December 2015. - S.J. Silvia video, “Demonstrating Comparative Advantage,” https://vimeo.com/104645094 (Password: SIS1957)

Recommended: - Daniel M. Bernhofen and John C. Brown, “An Empirical Assessment of the Comparative Advantage Gains from Trade: Evidence from Japan,” 95, no. 1 (March 2005): 208-25. - Rüdiger Dornbusch, and , “Comparative Advantage, Trade and Payments in a Ricardian Model with a Continuum of Goods,” American Economic Review 67, no. 5 (1977), PP. 823-39. - Organization for Economic Cooperation and Development, Globalisation, Comparative Advantage and the Changing Dynamics of Trade (Paris: OECD, 2011). - Paul A. Samuelson, “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization,” Journal of Economic Perspectives 18, no. 3 (Summer 2004), pp. 135-146.

May 11. Gains and Losses from Trade in the Specific-factors Model. - Feenstra and Taylor, chapter 3. - Kevin O’Rourke, “The European Grain Invasion, 1870-1913,” Journal of Economic History 57, no. 4 (December 1997): 775-801.

Recommended: - Richard E. Caves, “‘Vent for Surplus’ Models of Trade and Growth,” in R. E. Baldwin, et al., eds., Trade, Growth, and the Balance of Payments: Essays in Honor of Gottfried Haberler (Chicago: Rand McNally, 1965), pp. 95-115. - Carl Davidson and Steven J. Matus, “Trade Liberalization and Compensation,” International Economic Review 47, no. 3 (August 2006), pp. 723-47.

*** PROBLEM SET #1 POSTED AFTER MAY 11 SESSION; DUE ON MAY 16 BEFORE CLASS.

May 16. Trade and Resources: The Heckscher-Ohlin Model. - Feenstra and Taylor, chapter 4. - Paul R. Krugman, “What do Undergrads need to know about Trade?” American Economic Review 83, no. 2 (May, 1993), pp. 23-26, http://www.jstor.org/stable/2117633 - “Trade in the balance: Globalisation can make everyone better off. That does not mean it will,” Economist, 6 February 2016. - S.J. Silvia video, “Stolper-Samuelson Theorem Illustrated: China and the USA” - International Economics • SIS-616-A01-2016X • Summer 2016, p. 5 -

https://vimeo.com/106029558 (Password: week 4).

Recommended: Katherine Baicker and Rehavi, M. Marit, “Trade Adjustment Assistance,” Journal of Economic Perspectives 18, no. 2 (Spring 2004), pp. 239-55. - Jagdish Bhagwati, Richard Brecher and Talsuo Hatta, “The Generalized Theory of Transfers and Welfare,” American Economic Review 73 (June 1995), pp. 606-18. - Alessandro Cigno, “Trade, Foreign Investment, and Wage Inequality in Developing Countries,” IZA World of Labor, November 2015. - Paul R. Krugman, “A Theory of Interstellar Trade,” Economic Inquiry 48, no. 4 (Oct. 2010): 1119-23. - Robert Z. Lawrence and Lawrence Edwards, “US Employment Deindustrialization: Insights from History and the International Experience,” Peterson Institute for International Economics Policy Brief PB13-27, October 2013. - Kevin O'Rourke; Jeffrey G. Williamson, “Late Nineteenth-Century Anglo-American Factor-Price Convergence: Were Heckscher and Ohlin Right?” Journal of Economic History 54, no. 4. (Dec. 1994), pp. 892-916. - Kenneth F. Scheve and Matthew J. Slaughter, “What determines individual trade-policy preferences?” Journal of International Economics 54 (2001): 267-92. - W. Stolper and P. A. Samuelson, “Protection and Real Wages,” Review of Economic Studies 9 (1941), pp. 58-73. - Stephen Tokarick, “Quantifying the Impact of Trade on Wages: The Role of Nontraded Goods,” Review of International Economics 13, no. 5 (September 2005), pp. 841-60.

May 18. Movement of Labor and Capital between Countries. - Feenstra and Taylor, chapter 5. - Richard B. Freeman, “People Flows in Globalization,” Journal of Economic Perspectives 20, no. 2 (Spring 2006), pp. 145-170. - “Border follies: Liberalising migration could deliver a huge boost to global output,” Economist, 17 November 2012. - S.J. Silvia video, “Migration Program and Discussion” https://vimeo.com/106765820 (Password: week 5).

Recommended: - George J. Borjas, “The Economic Benefits from Immigration,” Journal of Economic Perspectives 9, no. 2 (Spring 1995), pp. 3-22. - Robert E. Kohn, “A Heckscher–Ohlin–Samuelson Model of Immigration and Capital Transfers,” Open Economies Review 12, no. 4 (September 2001), pp. 379-87. Impact Factor: 0.44 · DOI: 10.1023/A:1017930900126 - Michael Michaely, “Goods versus Factors: When Borders Open, Who Moves?” World Economy 26, no. 4 (April 2003), pp. 533-53.

*** PROBLEM SET #2 POSTED AFTER MAY 18 SESSION; DUE ON MAY 23 BEFORE CLASS.

May 23. Non-arbitrage Trade Models: Monopolistic Competition and the Gravity Equation. - Feenstra and Taylor, chapter 6. - Andrew Rose, “Which International Institutions Promote International Trade?” Review of International Economics 13, no. 4 (Sept. 2005), pp. 682-98. - “Game of zones: Regional trade deals aren’t as good as global ones but they are still - International Economics • SIS-616-A01-2016X • Summer 2016, p. 6 -

beneficial.” Economist, 21 March 2015. - S.J. Silvia, “NAFTA, part 1,” https://vimeo.com/116033596 (password: nafta1), and “NAFTA, part 2,” https://vimeo.com/116035464 (password: nafta2). - S.J. Silvia video, “Overview of chapters 2 through 6,” https://vimeo.com/107394346 (password: week 6 overview).

Recommended: - Scott L. Baier and Jeffrey H. Bergstrand, “Bonus vetus OLS: A Simple Method for Approximating International Trade-cost Effects Using the Gravity Equation,” Journal of International Economics 77 (2009), pp. 77-85. - Andrew B. Bernard, J. Bradford Jensen, Stephen J. Redding, and Peter K. Schott, “Firms in International Trade,” Journal of Economic Perspectives 21, no. 3 (2007): 105-130. - Peter Debaere, “Monopolistic Competition and Trade, Revisited: Testing the Model without Testing for Gravity,” Journal of International Economics 66 (2005), pp. 249-66. - Paul R. Krugman, “The Increasing Returns Revolution n Trade and Geography,” American Economic Review 99, no. 3 (June 2009), pp. 561-71. - Roy J. Ruffin, “The Nature and Significance of Intra-industry Trade,” Economic and Financial Review, Federal Reserve Bank of Dallas, Fourth Quarter (1999), pp. 2-9. - John McCallum, “National Borders Matter: Canada-U.S. Regional Trade Patterns,” American Economic Review 85, no. 3 (June 1995), pp. 615-23.

May 25. Import Tariffs and Quotas under Perfect Competition. - Feenstra and Taylor, chapter 7.

Recommended: - James A. Brander and Barbara J. Spencer, “Tariff Protection and Imperfect Competition,” in Henryk Kierzkowski ed., Monopolistic Competition and International Trade (Oxford: Oxford University Press, 1984), pp. 194-206. - Christian Broda, Nuno Limão, and David E. Weinstein, “Optimal Tariffs and Market Power: The Evidence,” American Economic Review 98, no. 5 (2008): 2032-65. - Christopher S. Magee and Stephen Magee, “The United States is a Small Country in World Trade,” Review of International Economics 16, no. 5 (November 2008), pp. 990-1004.

*** PROBLEM SET #3 POSTED AFTER MAY 25 SESSION; DUE ON JUNE 1 BEFORE CLASS.

June 1. Import Tariffs and Quotas under Imperfect Competition. - Feenstra and Taylor, part of chapter 8: SECTIONS 3-5 ONLY. - “Dumping and tub-thumping: Throwing up tariffs is a counterproductive response to economic weakness,” Economist, 9 April 2016.

Recommended: - Bruce A. Blonigen and Thomas J. Prusa, “Antidumping,” in E. Kwan Choi and James Harrigen, eds., Handbook of International Trade (Oxford: Blackwell Publishing, 2008). - Douglas Irwin, “Did Late Nineteenth-Century U.S. Tariffs Promote Infant Industries?” Journal of Economic History 60, no. 2 (June 2000), p.335-60. - Brink Lindsey and Daniel J. Ikenson, “Antidumping 101: The Devilish Details of ‘Unfair Trade’ Law,” Cato Institute Trade Policy Analysis, no. 20 (2002). - Steven B. Webb, “Tariffs, Cartels, Technology, and Growth in the German Steel Industry, 1879 to 1914,” Journal of Economic History 40, no. 2 (June 1980), pp 309-330. - International Economics • SIS-616-A01-2016X • Summer 2016, p. 7 -

TAKE-HOME MIDTERM: POSTED JUNE 1 AFTER CLASS; DUE ON JUNE 6 BEFORE CLASS.

June 6. National and International Accounts: Income, Wealth, and the Balance of Payments. - Feenstra and Taylor, chapter 13. - Martin Feldstein, “Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate.” Journal of Economic Perspectives 22, no. 3 (2008):113-125.

Recommended: - Michael Kumhof and Douglas Laxton, “Fiscal deficits and current account deficits,” Journal of Economic Dynamics and Control 37 (2013), pp. 2062-82 - , “The Purchasing Power Parity Puzzle,” Journal of Economic Literature 34, no. 2 (June 1996), pp. 647-68.

*** PROBLEM SET #4 POSTED AFTER JUNE 6 SESSION; DUE ON JUNE 8 BEFORE CLASS.

June 8. Exchange Rates Preliminaries: Foreign Exchange Markets and Interest Parity. - Feenstra and Taylor, chapter 10. - “Taking a pounding: What America can learn from sterling’s decline as a reserve currency,” Economist, 3 October 2015.

Recommended: - Jeffrey A. Frankel and Kenneth A. Froot, “Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations,” American Economic Review 77, no. 1 (March 1987), pp. 133-153. - Kenneth A. Froot and Richard H. Thaler, “Foreign Exchange,” Journal of Economic Perspectives 4, no. 3 (Summer 1990): 179-192. - Richard A. Meese and Kenneth S. Rogoff, “Was It Real? The Exchange Rate–Interest Differential Relation over the Modern Floating-Rate Period,” Journal of Finance 43, no. 4 (1988): 93-48.

June 13. Exchange Rate Model, part 1: The Monetary Approach in the Long Run. - Feenstra and Taylor, chapter 11. - Alan M. Taylor and Mark P. Taylor, “The Purchasing Power Parity Debate” Journal of Economic Perspectives 18, no. 4 (Fall 2004): 135–158.

Recommended: - Bela Balassa, “The Purchasing-Power Parity Doctrine: A Reappraisal,” Journal of Political Economy 72 (1964), pp. 584-96. - Valerie Cerra and Sweta C. Saxena, “The Monetary Model Strikes Back: Evidence from the World,” Journal of International Economics 81, no. 2 (July 2010): 184-96. - Irving Fisher, Appreciation and Interest (New York: Macmillan for the American Economic Association, 1896). - International Economics • SIS-616-A01-2016X • Summer 2016, p. 8 -

-Barbara Rossi, “Exchange Rate Predictability,” J. of Economic Literature 51, no. 4 (December 2013): 1063-1119.

*** PROBLEM SET #5 POSTED AFTER JUNE 13 SESSION; DUE ON JUNE 15 BEFORE CLASS.

June 15. Exchange Rate Model, part 2: The Asset Approach in the Short Run, and a Unified Model. - Feenstra and Taylor, chapter 12. - “An on-off relationship: Countercyclical capital controls are great in theory but less useful in practice,” Economist, 13 December 2014.

Recommended: - Jeannine Bailliu and Michael R. King, “What drives Movements in Exchange Rates?” Bank of Canada Review (Autumn 2005): 27-39. - Charles Engel, Nelson C. Mark, Kenneth D. West, “Exchange Rate Models Are Not as Bad as You Think,” NBER Working Paper No. 13318 (August 2007). - Jacob A. Frenkel and Michael L. Mussa, “The Efficiency of Foreign Exchange Markets and Measures of Turbulence,” American Economic Review 70, no. 2 (May 1980), pp. 374-81. - Marion Kohler, “Exchange Rates during Financial Crises,” BIS Review (March 2010): 39-50.

June 20. Output, Exchange Rates, and Macroeconomic Policies in the Short Run. - Feenstra and Taylor, chapter 14. - Barry Eichengreen, “Does the Federal Reserve care about the Rest of the World?” Journal of Economic Perspectives 27, no. 4 (Fall 2013), pp. 87-104. - “Worse than nothing: Negative interest rates do not seem to spur inflation or growth—but they do hurt banks,” Economist, 21 February 2015. - S.J. Silvia video, “Exchange-rate Determination in Practice” https://vimeo.com/112642662 (password: FXD).

Recommended: - Daron Acemoglu and James A. Robinson, “Economics versus Politics: Pitfalls of Policy Advice,” Journal of Economic Perspectives 27, no. 2 (Spring 2013), pp. 173-92. - Bernardin Akitoby et al., “Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies,” IMF Policy Paper, 17 September 2013. - Rebecca Hellerstein, Deirdre Daly, and Christina Marsh, “Have U.S. Import Prices Become Less Responsive to Changes in the Dollar?” Current Issues in Economics and Finance, Federal Reserve Bank of New York, 12, no. 6 (September 2006). - Andrew Berg and Yanliang Miao, “The Real Exchange Rate and Growth Revisited: The Washington Consensus Strikes Back?” IMF Working Paper 10/58 (2009). - A. K. Rose and J. L. Yellen, “Is there a J-curve?” Journal of Monetary Economics 24, no. 1 (1989), pp. 53-68. - Barbara Rossi, “Exchange Rate Predictability,” Journal of Economic Literature 51, no. 4 (2013), pp. 1063-119.

*** PROBLEM SET #6 POSTED AFTER JUNE 20 SESSION; DUE JUNE 22 BEFORE CLASS.

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June 22. Fixed versus Floating: International Monetary Experience.

- Feenstra and Taylor, chapter 15. - Kevin H. O’Rourke and Alan M. Taylor, “Cross of Euros,” Journal of Economic Perspectives 27, no. 3 (Summer 2013), pp. 167-192.

Recommended: - Guillermo A. Calvo and Frederic S. Mishkin, “The Mirage of Exchange Rate Regimes for Emerging Market Countries,” Journal of Economic Perspectives 17, no. 4 (Fall 2003): 99-118. - Stanley Fischer, “Exchange Rate Regimes: Is the Bipolar View Correct?” Journal of Economic Perspectives 15, no. 2 (Spring 2001), pp. 3-24. - Andrew Rose, “Exchange Rate Regimes in the Modern Era: Fixed, Floating, and Flaky,” Journal of Economic Literature 49, no. 3 (September 2013), pp. 652–72. - Martha A. Starr, “One World, One Currency: Exploring the Issues,” Contemporary Economic Policy 24, no. 4 (October 2006), pp. 618-33.

JUNE 22: TAKE HOME FINAL EXAM, POSTED AFTER JUNE 22 SESSION, DUE BY 5 PM ON JUNE 27.