Teaching International Trade and Finance Using Computer Spreadsheets

By Gregorowicz, Philip; Hegji, Charles E. | American Economist, Fall 2000 | Go to article overview
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Teaching International Trade and Finance Using Computer Spreadsheets


Gregorowicz, Philip, Hegji, Charles E., American Economist


Philip Gregorowicz [*]

Charles E. Hegji [*]

The possibility of the use of computer spreadsheet models as an aid to teaching economics is clearly established. The work of Smith and Smith (1988), Smith and Ellis (1990), Clark and Hegji (1997) and others clearly demonstrates that computer spreadsheets can be used to model standard micro economic concepts such as marginal revenue, marginal cost, and value of marginal product. Hegji (1998) has shown that managerial economics topics such as determining the firm's optimal level of advertising can be readily modeled with computer spreadsheets. The present paper builds on this approach by developing examples in which computer spreadsheets can be used to enhance the teaching of international economics and finance.

The importance of using computer spreadsheets to teach international economics comes from two sources. First, there has been a growing interest in international economics by the teaching profession. This is suggested by the increased international coverage in most principles of economics texts written since 1990. Second, the authors believe that topics covered in international trade and finance are difficult for most students. The idea of modeling international economics topics with computer spreadsheets is that this approach allows students to learn through experimentation. We are convinced that a hands-on approach is an effective way to teach such material.

With this in mind, the present paper develops several examples of how computer spreadsheets can be used as an aid in teaching international economics. The choice has been made based on the authors' experiences.

Using Supply and Demand Curves to Determine Exports and Imports in a Two Country Model

The following example was adapted from Managerial Economics: Theory, Applications, and Cases by Edwin Mansfield. A two-country model is assumed, with supply and demand curves for a single product specified for each country. The object of the exercise is to determine imports and exports for both countries.

Suppose that the supply (s) and demand (d) curves for a product manufactured and purchased in both the United States (u) and Germany (g) are given by

[[Q.sup.u].sub.s] = 5 + 2.6[P.sub.u],

[[Q.sup.u].sub.d] = 100 - 2[P.sub.u],

[[Q.sup.g].sub.s] = 2 + 2[P.sub.g],

[[Q.sup.g].sub.d] = 120 - 4[P.sub.g]. (1)

Prices in the United States are measured in $, while prices in Germany are in DDM.

Solution to above problem requires an exogenous exchange rate. Given this exchange rate, prices can be converted to a single currency. Given this conversion, the "law of one price" is invoked by equating worldwide supply and demand, and solving for the worldwide equilibrium price and quantity. Substituting this price into (1) obtains the quantities supplied and demanded in the two countries. These quantities can, in turn, be used to determine if a country is a net exporter or importer of the good.

Suppose that the exchange rate is e = 1.6 DM/$. This implies that [P.sub.g] = l.6[P.sub.u]. Substituting into (1), and letting

[[Q.sup.u].sub.s] + [[Q.sup.g].sub.s] = [[Q.sup.u].sub.d] + [[Q.sup.g].sub.d], (2)

results in an equilibrium price [P.sub.u], = $15 = 24 DM = [P.sub.g]. With these prices, the US demands 70 units of the above good and supplies 44 units. Germany demands 24 units and supplies 50 units. Therefore, the US imports 26 units and Germany exports 26 units.

An important concept for students to grasp is how these net export and import positions change with the exchange rate. The spreadsheet in Example 1 is set up to do this.

The exchange rate in DM/$ is entered into one cell in Column A of the spreadsheet. This exchange rate is used in the formulas in the remainder of the spreadsheet. The $ price of the good is entered in Col B, with US demand and supply expressed as a function of this price in Cols C and D.

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