Business Economics

Doc. Ing. Klára Čermáková, Ph.D.
klara.cermakova@vsci.cz

The changing degree of economies interdependence
•Economies are more closely linked than ever before
•The world economy is unprecedently turbulent
•Domestic economic policies can hardly ignore the role of IE relations
•GLOBALIZATION OF THE WORLD ECONOMY
•Our aim: understand key new issues of the global economy stressing continuing usefulness of
existing models and theories

Transactions in International Economy
•Methods and tools same as Micro and Macro - principles of behavior of economic subjects identical
in national and int. transactions.
•Transactions occur between sovreign nations –  factors of production less mobile + nations can put
all sorts of barriers between their residents and the outside world
–(2002) G.W.Bush – tariff on steal
–D. Trump´s campain – 45% T on China IM – stealing US jobs?
•Transactions are influenced by national currencies rate. Economic policy tools in an open economy
are never available at national level.
–(2002) – The Euro
•

Case study

1. Unemployment and Import penetration
2. Steel
3. Euro
4. Changing Pattern of World Trade

World trade – an overview of facts
-More than 30% of production is sold accress borders
- openess = NX i /GDP i or Xi+Mi/GDP i ….
-Exports have shifted from agriculture to manufactures and services -Information technologies
allowed booming of offshoring/outsourcing (call centers in Bangalore, India) bringing new
competition to labour market
-
•

The Gravity model
The Size of European Economies, and the Value of Their Trade with the United States
-empirical relationship between the value of trade and size of an economy
-Volume of trade between two countries can be predicted by equation:
T ij = A * Yi * Yj / D ij
-the value of trade is proportional to GDP and diminishes with the distance

Patterns of trade – basic model of S and D
•Dispute of protectionists and liberal economists – Should government allow trade?
•Efficiency of free trade can be easily proved, but there will always be people who gain and those
who lose from trade.
•We will apply tools of D and S to seek answers to four key questions:
–What determines which products a country exports and imports?
–How does trade affect production and consumption in each country?
–How does trade affect well being of each country?
–How does trade affect distribution of well being or income among various groups wihin a country?

National Home market with no trade
•If there is no trade, then equilibrium occurs at P where the market cleares domestically
(SH =DH) •Both C and P benefit from having this market – gain surplus (depending on relative
elasticity)
c
h
Quantity
Price
(thousands)
($/unit)
SH
DH
H. no trade price
2000
400

If IT is allowed, arbitrage will occur
•Arbitrage increases efficiency (sacrificed MU x acquired MU / net effect = difference between
producer and consumer surplus)
•Additional S in H created by Im, reduces the PH
•Additional D met by exports increases the market price in F
•If there are no transport costs or other frictions, free trade results in the two countries having
the same P – free trade equilibrium
P
Q
SH
DH
2000
P
Q
SF
DF
700
(700,2000)
QCZ
X
X
Home
Foreign

1,000
2,000
15
40
65
a
b
c
d
e
A
B
C
Imports
Quantity
Price
(thousands)
($/unit)
SH
DH
H pretrade price
1,000
2,000
700
50
b + d
n
E
F
Quantity
Price
(thousands)
($/unit)
Sx
Dm
Home national market vs. International market
Intl. market -demand for imports (Dm= DH- SH) can be determined for each P at which H might import.
In the international market, the desire to trade is (B-C) at PW. Analogically supply of exports
(Sx=SF-DF) determined by the difference of F supply and demand at each P where F might export (if
PF>700).

Foreign national market vs. International market
World price with trade
1,000
700
25
50
75
k
n
j
J
H
Exports
Quantity
Price
(thousands)
($/unit)
Sf
Df
l
1,000
2,000
700
50
b + d
n
E
F
Quantity
Price
(thousands)
($/unit)
Sx
Dm
Free trade equilibrium occurs where Dm=Sx.

Welfare aggregate effects of free trade
by „one-dollar, one vote“  metrics
•H: ↓P↑Q consumed and ↓Q produced, ↑CS (+a+b+d), ↓PS (-a)
•Net trade effect (b+d)
•F: ↑P ↓Q consumed and ↑Q produced, ↓CS (-j-k), ↑PS (j+k+n)
•Net gain (+n)
•The country that experiences the larger price change has a larger value of of the net gains from
trade. It is the country with less elastic (steeper) trade curve (Sx or DM).

Early answers to our four questions
•What determines which products a country exports /imports?
•D and S conditions differ between countries, price differencies  motivate arbitrage.
•How does trade affect production and consumption in each country?
•Trade adjusts PH and PF to PW . Price changes result in change in Q produced and demanded.
•How does trade affect well being of each country?
•Each country´s net national gains from trade are proportional to the change in its P that occurs
in the shift from no trade to trade.
•How does trade affect distribution of well being or income among various groups within a country?
•Gainers are the consumers of imported products and producers of exported products.
•

Problem 1
•The equation for the D and S curve for writing paper in Belgium is
•QD=350-P/2
•QS=-200+5P
a)What are the equilibrium price and quantity for Belgium if there is no IT?
b)What are the equilibrium quantities for Belgium if the nation can trade freely with the rest of
the world at a price of 120? How much paper will be produced by domestic producers at this price
and how much will be traded?
c)What is the effect of the shift from no trade to free trade on CS and on PS? What is the net
national gain from trade in Belgium?

Problem 2
•Country A imports apricots for $ 10 per unit. Demand and supply in the domestic economy are given
by the equations: Q = 400-10P and Q = - 50 + 5P. a)Find the domestic equilibrium price in case of
NO trade and draw graph. Calculate CS and PS b)In case of free trade, what will be the demand for
imports of country A? How much will domestic producers produce? How will PS and CS change? c)Should
the import be limited to 50 units, how would the domestic price change? Show also in the graph.

Problem 3
•Immagine that the following functions determine the grain market in country A: •QD = 100-P and
QS = 40+2P. Corresponding functions in country B are the following:
•Q*D = 80-20P and Q*S = 40+20P
a)Which country will be exporting grain? Formulate the export supply and import demand equations
and draw in graph.
b)Calculate national equilibrium prices in NO trade situation.
c)If free trade is allowed and there are zero transaction costs, what will be the equilibrium price
on international market? How many units of grain will be traded? d)Discuss changes in graph if the
exporting country (A or B) is very small and produces a very small share of world production.