14.54 International Economics 
                                             Fall 2001 
                
               Jonathan Kearns 
               jkearns@mit.edu 
               Office: E52-243d 
                
               TA’s:  Bjoern Bruegemann (bjoernb@mit.edu, office: E52-201) 
                
               Course Description 
               The course covers both halves of international economics – international trade and 
               international finance or open economy macroeconomics. 
               The first half of the course examines the determinants of the pattern of international 
               trade, the effects of trade on domestic resource allocation, the effects of trade policies 
               (such as tariffs and quotas) on trade and economic welfare, and other theoretical and 
               policy issues relating to trade relations among nations. 
               The second half of the course considers open economy macroeconomics, including such 
               topics as the balance of payments, the functioning of foreign exchange markets, the 
               determination of exchange rates, and how monetary and fiscal policy function under 
               different exchange rate regimes. 
                
               Reading Material 
               The main textbook is Paul Krugman and Maurice Obstfeld, International Economics: 
                                  th
               Theory and Policy, 5  Edition, Addison Wesley Longman, 2000 (“KO”). A 
               supplementary text is Paul Krugman, Pop Internationalism, MIT Press, 1996 (“PI”). 
               There are two additional recommended texts. For an understanding of the history of 
               trade, read Douglas Irwin, Against the Tide: An Intellectual History of Free Trade, 1998. 
               For some topics there are optional readings drawn from Gene Grossman and Ken Rogoff 
               (eds.) (1995) Handbook of International Economics Volume 3. These articles are marked 
               with a #. Unless you are keen to pursue studies in international economics, you need not 
               purchase the last book. All of these books should be available at the Coop and on Reserve 
               at Dewey Library.  
                
               Grades 
               Grades will be based on performance in about 10 problem sets, a mid-term examination 
               and a final examination. The problem sets carry a total weight of 20 percent, and 
               cooperation is explicitly encouraged. A group of up to 3 students may submit a joint 
               answer to any problem set (i.e. one copy, the names of all persons in the group must 
               appear at the top of each problem set, no ex-post additions of names will be allowed). An 
               in-class mid-term is scheduled for Tuesday 23 October and will be weighted at 40 
               percent. A 90-minute final exam will be scheduled in exam week and will also be 
               weighted at 40 percent. The exams will cover the lectures, the readings, the problem sets, 
               and other material handed out or discussed in class up to that time. 
        Course Outline 
         
        1. Introduction 
           KO, Ch.1 
            
        2. Comparative Advantage and Competitiveness 
           KO, Ch. 2 
           PI, Chs. 1,2,5,8 
         
        3. Factor Endowments, Trade, and Income Distribution 
           KO, Ch. 3-4 
           PI, Chs. 3,4 
           # Leamer, E. and J. Levinsohn, “International Trade Theory: The Evidence” 
         
        4. The Gains from Trade 
         KO, Ch.5 
         Mill, J.S., Principles of Political Economy, Ch. 17 
         
        5. Economies of Scale and Imperfect Competition 
           KO, Ch. 6 
           # Krugman, P. “Increasing Returns, Imperfect Competition and the Positive Theory of 
             International Trade” 
         
        6. International Trade Policy and The World Trading System 
           KO, Ch. 8-11 
           PI, Ch. 10 
         Irwin, Against the Tide 
         Bovard, J., The Fair Trade Fraud, St Martins Press, 1981, Ch. 5-7 
           # Brander, J. “Strategic Trade Policy” 
         
        7. The Balance of Payments 
           KO, Ch. 12 
           # Obstfeld, M. and K. Rogoff “The Intertemporal Approach to the Current Account” 
         
        8. The Foreign Exchange Market and Exchange Rate Determination 
           KO, Ch. 13-15 
           # Frankel, J. and A. Rose “Empirical Research on Nominal Exchange Rates” 
         
        9. Open Economy Macroeconomics 
           KO, Ch 16 
         
        10. Exchange Rate Regimes and International Macroeconomic Policy 
         KO, Ch.17-22 
           Friedman, “The Case for Flexible Exchange Rates”, in Essays in Positive Economics, 
               (1950) 
           Obstfeld and Rogoff, “The Mirage of Fixed Exchange Rates”, Journal of Economic 
           Perspectives 8 (4), 1995. 
           # Garber, P. and L. Svensson “The Operation and Collapse of Fixed Exchange Rates”