International Trade Theory and Policy

obligatory courses

Knowledge of rules of differentiation of functions of several variables

Ability to interpret regression results

Microeconomics

Calculus

Statistics

BA level course.

This course constitutes the first part of the undergraduate sequence in international economics (followed by the Open Economy Macroeconomics given in the spring semester). The main objective of the course is to provide students a non-technical introduction into the theory and policy of international trade and investment. The course consists of two parts. The first part explains reasons and gains from trade using classical and neoclassical trade theories based on absolute and comparative advantage as well as more recent theories based on increasing returns, product differentiation and demand similarity. The second part investigates effectiveness of various trade policy instruments under perfect and imperfect competition, explains the political economy of trade policy and the role of preferential trading arrangements and international trade organizations in shaping the contemporary patterns of international trade and investment.

Part 1. Trade theory

Topic 1. Introduction. A historical overview of trade theory, the importance of international trade and investment, contemporary patterns of international trade and investment, classical trade theory, absolute advantage, gains from trade.Course hours: 2, hours of students’ self study 4.

Topic 2. Ricardian model. Simple Ricardian 2x2x1 model, comparative advantage, excess demand functions, international equilibrium, the role of wages, gains from trade, extensions: 3 and more goods. Course hours: 2, hours of students’ self study 4.

Topic 3. Modified Ricardian model. 2x2x3 factor specific model, pattern of trade, commodity prices and factor prices, Haberler theorem, endowment changes and outputs, income distribution, gains from trade. Course hours: 2, hours of students’ self study 4.

Topic 4. Heckscher-Ohlin model. 2x2x2 factor abundance model, pattern of trade, Heckscher-Ohlin theorem, factor price equalization theorem, Stolper-Samuelson theorem, Rybczyński theorem, Jones magnification effects, extensions: many goods, many factors. Course hours: 4, hours of students’ self study 8.

Topic 5. New trade theories. External versus internal economies of scale, Marshallian externalities, market structure and increasing returns, monopolistic competition versus oligopoly, trade as a competition policy instrument, Dixit-Stiglitz preference for variety, intra-industry trade, demand similarity and Burenstam-Linder hypothesis, life cycle theories of international trade.Course hours: 2, hours of students’ self study 4.

Topic 6. International factor movements. Multinational corporations, foreign direct investment, Dunning OLI eclectic framework, knowledge capital model, FDI in developed and developing economies, international fragmentation of production, international labor migration, gains from FDI and labor flows. Course hours: 2, hours of students’ self study 4.

Topic 7. Empirical tests. Empirical tests of the Ricardian model, empirical tests of the Heckscher-Ohlin model, the Leontief paradox and its explanations, empirical tests of new trade theories. Course hours: 4, hours of students’ self study 8.

Part 2. Trade policy

Topic 8. Instruments of trade policy. Import tariffs, import quotas, quotas versus tariffs, optimum tariff, non-tariff barriers, effective protection, export taxes, export subsidies, voluntary export restraints, effects of trade liberalization. Course hours: 2, hours of students’ self study 4.

Topic 9. Strategic trade policy. Import protection as export promotion, export rivalry, quotas and VERs as facilitating practices, evaluation of strategic trade policy. Course hours: 2, hours of students’ self study 4.

Topic 10. Political economy of trade policy. Free trade and efficiency, political arguments for free trade, income distribution and trade policy, protection for sale, median voter model, empirical evidence. Course hours: 2, hours of students’ self study 4.

Topic 11. Preferential trading agreements. Neoclassical theory of economic integration, types of regional economic integration, trade creation versus trade diversion, European integration, regionalism and the new trade theory. Course hours: 2, hours of students’ self study 4.

Topic 12. International trade organizations. International institutions and rules, bilateralism versus multi multilateralism, GATT/WTO, United Nations and UNCTAD, OECD, administered protection, safeguards, trade policy and environmental regulations. Course hours: 2, hours of students’ self study 4.

Required Reading:

Selected chapters from:

Krugman, P.R.; Obstfeld, M. 2008, International Economics: Theory and Policy, Addison Wesley, Boston.

Marrewijk, Ch. van 2002, International Trade and the World Economy, Oxford University Press, Warsaw.

Markusen, J.R.; Melvin, J.R.; Kaempfer, W.H.; Maskus K.E. 1995, International Trade: Theory and Evidence, McGraw-Hill, Boston.

Topic 1. Introduction

Required Reading: Krugman and Obstfeld (2008), ch. 1.

Recommended Reading: Markusen et al. (1995), ch. 1.; Marrewijk (2002), ch. 2.

Topic 2. Ricardian model

Required Reading: Krugman and Obstfeld (2008), ch. 2.

Recommended Reading: Markusen et al. (1995), ch. 7.

Topic 3. Modified Ricardian model

Required Reading: Krugman and Obstfeld (2008), ch. 3.

Recommended Reading: Markusen et al. (1995), ch. 9.

Topic 4. Heckscher-Ohlin model

Required Reading: Krugman and Obstfeld (2008), ch. 4-5.

Recommended Reading: Markusen et al. (1995), ch. 8.

Topic 5. New trade theories

Required Reading: Krugman and Obstfeld (2008), ch. 6.

Recommended Reading: Markusen et al. (1995), ch. 11-13.

Topic 6. International factor movements

Required Reading: Krugman and Obstfeld (2008), ch. 7.

Recommended Reading: Markusen et al. (1995), ch. 21-22.

Topic 7. Empirical tests

Required Reading: Markusen et al. (1995), ch. 14.

Recommended Reading: Leamer, E.E.; Levinsohn, J. (1995), International trade theory: The evidence, in: Grossman, G.; Rogoff, K. (eds.), Handbook of International Economics, vol. 3., North Holland, Amsterdam.

Part 2. Trade policy

Topic 8. Instruments of trade policy

Required Reading: Krugman and Obstfeld (2008), ch. 8.

Recommended Reading: Markusen et al. (1995), ch. 15-16.

Topic 9. Strategic trade policy

Required Reading: Krugman and Obstfeld (2008), ch. 11.

Recommended Reading: Markusen et al. (1995), ch. 17.

Topic 10. Political economy of trade policy

Required Reading: Krugman and Obstfeld (2008), ch. 9.

Recommended Reading: Markusen et al. (1995), ch. 19.

Topic 11. Preferential trading agreements

Required Reading: Markusen et al. (1995), ch. 18.

Recommended Reading: Marrewijk (2002), ch. 13.

Topic 12. International trade organizations

Required Reading: Markusen et al. (1995), ch. 20.

Recommended Reading: Marrewijk (2002), ch. 12.

EXPERTISE

The course provides students with the basic tools of international trade theory and policy. Upon the completion of the course students will be able to write their undergradutate dissertations in the field of international trade. The course provides excellent preparation for the MA program in International Economics. Upon the lecture completion a student:

- knows basic neoclassical and new international trade theories

- knows basic neoclassical and new theories of international factor flows

- knows basic trade policy tools and their effects

- knows basic theories of international economic integration

- knows major international economic organizations that shape trade policy

SKILLS

Upon the lecture completion a student:

- is able to interpret developments in international trade using basic neoclassical and new trade theories

- is able to explain the pattern of North-South, South-South and North-North trade

- is able to understand and interpret determinants of trade policies in developed and developing countries

- is able to study the international flows of factors of production

- is able to analyse the relationships between international trade policy and lobbying groups

- is able to understand the reasons and outcomes of trade policy tools

KW01, KW02, KW03, KU01, KU02, KU03, KU04,

Grading is based on one final exam given at the end of the course. Exam is composed of analytical problems. Students choose any three of five problems. The passing grade is at fifty one percent.