International Trade Theory and Policy

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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 with a non-technical introduction to 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 the effectiveness of various trade policy instruments under perfect and imperfect competition and 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, the gravity model of trade.

Topic 2. Ricardian model. Simple Ricardian 2x2x1 model, comparative advantage, excess demand functions, international equilibrium, the role of wages, gains from trade.

Topic 3. Extensions of the Ricardian model. Ricardian model with more goods and more countries, the role of relative wages and the patterns of trade.

Topic 4. The specific factors model of trade, pattern of trade, commodity prices and factor prices, Haberler theorem, endowment changes and outputs, income distribution, gains from trade.

Topic 5. Heckscher-Ohlin model. 2x2x2 factor abundance model, pattern of trade, Heckscher-Ohlin theorem, factor price equalization theorem, Stolper-Samuelson theorem, Rybczyński theorem, Jones magnification effect.

Topic 6. Heckscher-Ohlin model with substitutable factors of production. Extensions: many goods, many factors of production. Empirical tests of the HO theory.

Topic 7. New Trade Theory. Intra-industry trade under oligopoly. The Brander-Krugman model, role of transportation costs, welfare effects of opening to trade. Empirical tests.

Topic 8. New Trade Theory. External versus internal economies of scale, market structure and increasing returns, monopolistic competition, Dixit-Stiglitz preference for variety, intra-industry trade in the Krugman model.

Topic 9. Heterogenous firms in international trade. Melitz model and the impact of differentiated productivity on the structure of trade and gains from trade.

Topic 10. International factor movements. Multinational corporations, foreign direct investment, Dunning OLI eclectic framework, horizontal and vertical FDI in developed and developing economies, international fragmentation of production, international labor migration, gains from FDI, and labor flows. Proximity-concentration trade-off.

Part 2. Trade policy

Topic 11. Instruments of trade policy. Import tariffs in the partial and general equilibrium in a small and large economy. Welfare effects of tariffs, optimal tariff, and retaliation. The effective protection rate.

Topic 12. Import quotas, quotas versus tariffs, non-tariff barriers, export subsidies, voluntary export restraints.

Topic 13. Strategic trade policy. Import protection as export promotion, export rivalry, quotas, and VERs as facilitating practices, evaluation of strategic trade policy.

Topic 14. 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.

Topic 15. 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.

Selected chapters from:

Krugman, P.R.; Obstfeld, M., Melitz M. J. (2022), International Economics: Theory and Policy, Pearson.

Marrewijk, Ch. Van, (2017), International Trade, Oxford University Press.

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 undergraduate 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:

- can interpret developments in international trade using basic neoclassical and new trade theories

- can explain the pattern of North-South, South-South and North-North trade

- can understand and interpret determinants of trade policies in developed and developing countries

- can study the international flows of factors of production

- can analyse the relationships between international trade policy and lobbying groups

- can 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. The exam is composed of analytical problems. Students choose any four of six problems.

The passing grade is at fifty percent.