Email: hatran@neu.edu.

vn

COURSE:

INTERNATIONAL ECONOMICS
Tel: 0918726074

MSc. Tran Hoang Ha

Department of International Economics
School of Trade and International Economics

Get started
Hanoi, December 2023
 COURSE GOALS
1. Help students remember and understand the basis for and effects of international
trade and international investment
2. Provide knowledge of obstructions to the flow of international trade
3. Offer knowledge of the stages and impacts of international economic integration
4. Give knowledge of a nation’s balance of payment and related accounts
5. Provide student knowledge to explain how exchange rate is determined in the
short run and long run
6. Offer knowledge for student to analyze impacts of exchange rate on international
economic relation

MSc. Tran Hoang Ha

 What is the story
behind those
boxes?

Image Credit: Interaction Institute for Social Change |

Artist: Angus Maguire

MSc. Tran Hoang Ha

 Your opinion?

Image Credit: Interaction Institute for Social

Change | Artist: Angus Maguire

MSc. Tran Hoang Ha

 Course assessment
COURSE ASSESSMENT
10%

1. Participation (min. 5/10)

20%
2. Mid-term exam – W8 (?)
50%
3. Group presentation
15-20 minutes /group
Week 4 – 7 20%
4. Final exam

Participation Mid-term exam

Group presentation Final exam

MSc. Tran Hoang Ha

 COURSE REQUIREMENT
1. Students are only allowed to take the final exam if they score at least 5/10
participation points
2. Students must come to class on time (being late more than 10 mins will be
considered as being absence). For each absence, 1 point will be deducted.
3. Missing more than 3 classes (with or without reason) will be considered as failing
to complete the course and have to re-register.
4. Students will be awarded points during the course by giving decent answers to
questions or constructive comments. The awarded points will be added to
attendance points, mid-term exams or group assignments

MSc. Tran Hoang Ha

 COURSE REQUIREMENT (Continued)

5. Those who do not submit group assignments or mid-term exams will receive a score of zero.
Late submissions will have points deducted.
6. Disorderly and disruptive behavior in the classroom; as well as behavior that is inappropriate to
the pedagogical environment are strictly prohibited.
7. To get the fullest learning experience, students should prepare laptops, tablets or smartphones
with good internet connection to use on class (with learning purposes, not for other purpose)
8. This class considers learners as the center of the learning progress. Therefore, students are
required to be Responsible – Active – Critical and Eager to achieve the best results
9. Students should proactively combine theoretical learning and accumulate practical knowledge
regularly
MSc. Tran Hoang Ha
 COURSE GOALS
1. Help students remember and understand the basis for and effects of international
trade and international investment
2. Provide knowledge of obstructions to the flow of international trade
3. Offer knowledge of the stages and impacts of international economic integration
4. Give knowledge of a nation’s balance of payment and related accounts
5. Provide student knowledge to explain how exchange rate is determined in the
short run and long run
6. Offer knowledge for student to analyze impacts of exchange rate on international
economic relation

MSc. Tran Hoang Ha

 COURSE MATERIALS
1. Course book
• Dominick Salvatore (2020), International Economics,
13th edition, Jon Wiley & Sons, Inc
2. Reference books:
• Paul R. Krugman, Maurice Obstfeld, Marc Melitz
(2015), International Economics: Theory and Policy
(10th Edition), Prentice Hall
• Đỗ Đức Bình và Ngô Thị Tuyết Mai (2023), Giáo
trình Kinh tế quốc tế, tái bản lần thứ 5, NXB Đại học
Kinh tế quốc dân
MSc. Tran Hoang Ha
 International Trade
International Economics 01 Chapter 1, 2, 3, 5, 6, 8, and 9
Week 1, 2, 3, 4, 5, 6

Main content Economic Integration

02 Chapter 10
International economics deals with the economic Week 7

and financial interdependence among nations. It International Direct Investment

analyzes the flow of goods, services, payments, and 03 Chapter 12
Week 8, 9
monies between a nation and the rest of the world,
the policies directed at regulating these flows, and Balance of Payment
their effect on the nation’s welfare. 04 Chapter 13
This economic and financial interdependence is Week 10

affected by, and in turn influences, the political, Exchange rates

social, cultural, and military relations among nations. 05 Chapter 14 and 15
Week 11, 13
MSc. Tran Hoang Ha
 INTRODUCTION

“We all sense it―something big is going on.

You feel it in your workplace.
You feel it when you talk to your kids. You can’t miss
it when you read the newspapers or watch the news.
Our lives are being transformed in so many realms
all at once―and it is dizzying.”
00
___(Thomas L. Friedman,
Thank you for being late_2016)___

MSc. Tran Hoang Ha

 We live in a globalized world …

We can connect Our tastes are

instantly converging

All aspects (trade, Economic and political

investment, finance, fluctuations and risks
etc.) are globalized from crisis

S
MSc. Tran Hoang Ha
 Globalizing the world economy

Globalization: is the trend of change towards integration and

interdependence of the world economy
Globalization includes: Globalization of markets & Globalization of
production

- Globalization of production: the tendency for individual companies to disperse parts of their production
processes to different locations around the world to take advantage of differences in costs and quality. .
=> This dispersion creates a global supply chain
- Market globalization: the trend of shifting from an isolated economic system (of each country) to an
economic system in which national markets merge into a global market

MSc. Tran Hoang Ha

 Globalization
Globalization is a revolution which in
terms of scope and significance is
comparable to the Industrial Revolution,
but whereas the Industrial Revolution
took place over a century, today’s
global revolution is taking place under
our very eyes in a decade or two
Industry 4.0
3rdIndustrial
The structure of international
2nd Industrial revolution
(1912-1950)
production and exchange has been
1stIndustrial revolution
revolution (1870-1913) qualitatively transformed by industrial
(1820-1870)
revolutions
MSc. Tran Hoang Ha
 THE WORLD ECONOMY

“The three largest forces on the planet –

technology, globalization, and climate change
– are all accelerating at once.”
___(Thomas L. Friedman,
Thank you for being late, 2016)___

What challenges the world is facing nowadays?

How do the current world issues affect Vietnam?

MSc. Tran Hoang Ha

 THE WORLD ECONOMY The formation of a new economic order
• Great economic union
New context of the world economy:
• EU
• The growth rate of the world economy is uneven
• NAFTA
• International trade and international cooperation
• APEC
continue to increase
• Emerging power
• Global financial markets develop
• BRICS
• Social and environmental issues pose challenges
• NICS
• Competition in international accounting activities is
• => In recent years, a series of
fierce
events have occurred that have
• New economic centers and economic powerhouses
caused drastic changes in the world
• Wars, epidemics and instability take place in many
economic order and activities.
places…

MSc. Tran Hoang Ha

 INTERNATIONAL TRADE
THEORY
1. What is International Trade ?
2. What are the origins and benefits of
International Trade ?
3. What are some major Theories of
International Trade ?
01a
4. The advantages and disadvantages
of each Theory
5. Calculus Exercises

MSc. Tran Hoang Ha

 INTERNATIONAL TRADE
THEORY

“Every man lives by exchanging”

___Adam Smith,
01a
The wealth of nations, 1776___

MSc. Tran Hoang Ha

 [1] Mercantilism (17th – 18th centuary)
• How international trade
happened?
• Historical background of
mercantilism?
• Mercantilism ideology?

Interesting fact:
Columbus is a city of
Landing of Christopher Columbus, engraving by H. B. Hall, 1856.
(Gilder Lehrman Collection) Indian State
MSc. Tran Hoang Ha
[1] Mercantilism (17th – 18th century)

1. Precious metals are considered as means of payment and are the ONLY
measure of the wealth of nations.
2. Exports enrich a country while imports make one poor
3. One can only gains at the expense of others
4. Emphasize the role of the State/Government as well as protectionism

Interesting fact:
In mercantilists’ point of view, the more gold and silver a nation had, the
richer and more powerful it was
 [1] Mercantilism (17th – 18th century)

What are the advantages & disadvantages of Mercantilists’ view on int. trade?

Advantages / Contributions Disadvantages

(1) (1)
(2) (2)
(3) (3)

MSc. Tran Hoang Ha

 [2] Absolute Advantage Theory – Adam Smith

Both nations can gain by each specializing in the

Adam Smith (1723 – 1790)

production of the commodity of its absolute advantage

and exchange part of its output with the other nation
for the commodity of its absolute disadvantage
_____ Adam Smith_____

Interesting fact:
Many of Adam Smith’s famous economic catchphrases, like “the invisible hand”,
were taken from Shakespeare.
MSc. Tran Hoang Ha
 [2] Absolute Advantage Theory – Adam Smith
• What is Absolute (dis)advantage?
• How Smith proved his point
numerically?
• How The Theory of Absolute
advantage outrage Mercantilism?
• Does the Theory of Absolute
Advantage have any drawback?
MSc. Tran Hoang Ha
A country is said to have an absolute advantage in a product if it
can produce and sell that product at a lower cost than any other
country, or is the only country that can produce that product
Assumption
1. 2 countries – 2 commodities
2. Trade is free
3. Zero shipping cost
4. Labor is the only factor of production
5. Perfect market competition
6. Technology is the same among countries
 [2] Absolute Advantage Theory – Adam Smith
• Solve the problem
a. According to Adam Smith’s Theory of
Hour/product Japan Vietnam
Absolute Advantage, in what commodity
Steel 2 6
does each country have an absolute
Cloth 5 3 advantage? Why?

b. Assume that each country has 24 hours to

The world has only 2 countries (Japan and allocate to produce both Steel and Cloth.
Vietnam), producing 2 types of goods (Steel Prove that international trade benefits both
and Cloth). Using the information given in countries following Theory of Absolute
the table to answer the following questions: Advantage. Knowing that the international
exchange rate is 1 Steel : 1Cloth
MSc. Tran Hoang Ha
 [3] Comparative Advantage Theory – David Ricardo

Both nations can gain by each specializing in the

David Ricardo (1772 – 1823)

production of the commodity of its comparative

advantage and exchange part of its output with the
other nation for the commodity of its comparative
disadvantage

_____ David Ricardo_____

Interesting fact:
Some critics debate that Robert Torrens (1780 – 1864)
is the first to discover comparative advantage.
MSc. Tran Hoang Ha
 [3] Comparative Advantage Theory – David Ricardo

• What is Comparative A country is said to have a comparative advantage in a

product if it can produce and sell that product at a relatively
(dis)Advantage?
• How Ricardo proved his point
numerically?
• How The Theory of Comparative
advantage outrage other
theory?
• Does the Theory of Absolute
Advantage have any drawback?
MSc. Tran Hoang Ha
lower cost of production (or has relatively higher
production efficiency) than other country
Assumption
1. 2 countries – 2 commodities
2. Trade is free
3. Zero shipping cost
4. Labor is the only factor of production
5. Perfect market competition
6. Technology is the same among countries
7. Economy of scales remain constant
 [3] Comparative Advantage Theory – David Ricardo
• Solve the problem
a. According to David Ricardo’s Theory of
Hour/product Japan Vietnam
Comparative Advantage, in what commodity
Steel 2 12
does each country have an absolute
Cloth 5 6 advantage? Why?

b. Assume that each country has 24 hours to

The world has only 2 countries (Japan and allocate to produce both Steel and Cloth.
Vietnam), producing 2 types of goods (Steel Prove that international trade benefits both
and Cloth). Using the information given in countries following Theory of Absolute
the table to answer the following questions: Advantage. Knowing that the international
exchange rate is 1 Steel : 1Cloth
MSc. Tran Hoang Ha
 [3] Comparative Advantage Theory – David Ricardo

What are the advantages & disadvantages of David Ricardo’s

Comparative advantage theory?

Advantages / Contributions Disadvantages

(1) (1)
(2) (2)
(3) (3)

MSc. Tran Hoang Ha

 [3a] Comparative Advantage – Constant Opportunity cost

A country that can produce a goods at a lower

Gottfried Haberler (1900 – 1995)

opportunity cost has a comparative advantage

in producing that goods.
____ Gottfried Haberler____

Interesting fact:
In fact, opportunity cost are not constant
MSc. Tran Hoang Ha
 [3a] Comparative Advantage – Constant Opportunity cost
y

Eg. 500

1 Milk tea (X) = VND 50.000/X

1 Sticky rice (Y) = VND 10.000/Y
Buying 1 X means giving up the
𝑃𝑀
opportunity to buy 5 Y 𝑃𝑆

=> The relative price (PX/PY) or the

Opportunity cost of X is
(50.000/X) / (10.000/Y) = 5 Y/X
100 x

MSc. Tran Hoang Ha

[3a] Comparative Advantage – Constant Opportunity cost
Steel (kg)
C
Steel (kg) Cloth (m)
100 0
What is the
A
80 30 opportunity cost
60 60 of producing an
B extra unit of steel?
40 90
20 120
0 150
Cloth (m)

• In 1936, G.H developed a trade model with constant opportunity cost

• Accordingly, the exchange rate between goods is displayed as their opportunity cost
• Production Possibility Frontier (PPF)
MSc. Tran Hoang Ha
 [3a] Comparative Advantage – Constant Opportunity cost
• Solve the problem

Hour/product Japan Vietnam a. What is the opportunity cost to produce an extra unit

Steel 2 12 of Steel or Cloth in Japan and Vietnam (assuming

opportunity costs remain constant). Accordingly,
Cloth 5 6
identify the comparative advantage of each nation

b. Draw PPF of Japan and Vietnam (assuming each

The world has only 2 countries (Japan nation has 300 hours).
and Vietnam), producing 2 types of
c. Identify the Consumption Possibility Frontier and the
goods (Steel and Cloth). Using the
benefit domain from participating in international trade
information given in the table to answer of each countries on the graph. Knowing that the
the following questions: international exchange rate is 1 Steel : 1Cloth.
MSc. Tran Hoang Ha
 [4] THE STANDARD THEORY OF INTERNATIONAL TRADE

1. The production frontier with increasing cost

2. Community indifference curves

3. Equilibrium in isolation

4. The basis for and the gain from trade with increasing costs

5. Trade based on differences in tastes

MSc. Tran Hoang Ha

 [4] THE STANDARD THEORY OF INTERNATIONAL TRADE

1. The production frontier with increasing cost

2. Community indifference curves

3. Equilibrium in isolation

4. The basis for and the gain from trade with increasing costs

5. Trade based on differences in tastes

MSc. Tran Hoang Ha

[4a] THE PRODUCTION FRONTIER WITH INCREASING COST

Marginal rate of ▪ In reality, opportunity cost is

transformation (MRT)
not constant

▪ Increasing opportunity costs

mean that in order to produce
an extra unit of a commodity,
more and more of the other
commodity must be given up

▪ The production frontier is

concave
Figure 3.1. Production Frontier of Nation 1 and Nation 2
with increasing opportunity costs MSc. Tran Hoang Ha
 [4b] COMMUNITY INDIFFERENT CURVES

Marginal rate of ▪ Tastes or demand preferences are

substitution (MRS)
reflected by Community ICs

▪ A community IC includes the

combinations of 2 commodities
which yield the equal utility

▪ Higher IC ~ higher utility;

Lower IC ~ lower utility

▪ Community ICs are convex

▪ One’s community ICs must not

Figure 3.2. Community Indifferent Curves cross
for Nation 1 and Nation 2
MSc. Tran Hoang Ha
 [4c] EQUILIBRIUM IN ISOLATION

MRT = MRS • A nation is in equilibrium when it

reaches the highest indifferent curve
possible given its production frontier

Figure 3.3. Equilibrium in Isolation

MSc. Tran Hoang Ha
 [4d] GAINS FROM TRADE WITH INCREASING COSTS
▪ A nation should specialize in the
production of its comparative
advantage, which has the lower relative
price compared to the other nations

▪ Specializing in producing the

commodity of comparative advantage
incurs increasing opportunity cost

▪ The specialization will continue until

trade is in equilibrium where relative
prices of the commodity in the two
nations become equal.
Figure 3.4. The Gains from Trade with Increasing Cost
MSc. Tran Hoang Ha
[4e] TRADE BASED ON DIFFERENCES IN TASTES
1. The difference in relative commodity
prices is based on the difference in the
production frontier and indifferent curve in
the two nations

2. With increasing cost, countries gains even if

they have identical production possibility
frontier due to the differences in tastes

3. The nation with the relatively smaller

demand or preference for a commodity will
have a lower autarky – relative price of that

Figure 3.5. Trade based on differences in tastes commodity

MSc. Tran Hoang Ha
 [5] FACTOR ENDOWMENTS AND HECKSCHER – OHLIN THEORY

A country will export a commodity that uses a

relatively abundant factor of production,
and imports a commodity that uses a relatively
scarce factor of production

__Heckscher – Ohlin theory___

Eli Heckscher Bertil Gotthard Ohlin

(1879 – 1952) (1899 – 1979)

MSc. Tran Hoang Ha

 [5] FACTOR ENDOWMENTS AND HECKSCHER – OHLIN THEORY
• A country’s comparative advantage
is determined by:
its relative abundance of
factors of production
the usage rate of factors of
production in its commodity
• Identify Factor intensity and Factor
abundance
Factor intensity
Factor abundance
MSc. Tran Hoang Ha
Assumption
1. 2 countries – 2 commodities – 2 factors of
production (Labor – L and Capital – K).
2. Technology is the same among countries
3. Commodity X use relatively more Labor than Y;
Commodity Y use relatively more Capital than X
4. Economy of scales remain constant
5. Specialization is incomplete in both countries
6. Countries share the same tastes
7. Perfect market competition
8. Factors of Production can move freely within a
country but cannot move between countries
9. Trade if free
10.International trade between countries is balanced
11.All resources are fully utilized in both countries
 [5] FACTOR ENDOWMENTS AND HECKSCHER – OHLIN THEORY
A: K-abundant nation; B: L-abundant nation
Y X: K-intensive good; Y: L-intensive good

❑ Identify the comparative advantage of the countries and

explain the benefits of international trade using the H-O model

The H-O model is often referred to as the factor-

proportions or factor-endowment theory. That is,
each nation specializes in producing and exporting
the commodity which is intensive in its relatively
abundant and cheap factor and importing the
commodity intensive in its relatively scarce and
expensive factor.
X
MSc. Tran Hoang Ha
 [5] FACTOR ENDOWMENTS AND THE H-O THEORY

What are the advantages & disadvantages of H-O theory?

Advantages / Contributions Disadvantages

(1) (1)
(2) (2)
(3) (3)

MSc. Tran Hoang Ha