I) Trade Facts and Figures (with emphasis on U.S.) A) Growth of trade B) Composition of trade C) Importance of trade for different countries II) Mercantilism (1500-1750) A) Overall goal: Increase country's power and wealth B) Goal with Trade: Maximize exports; minimize imports 1) Trade as zero sum game III) Adam Smith and Absolute Advantage A) Absolute advantage as argument against Mercantilism B) Role of specialization C) Numerical example of trade from absolute advantage (Portugal and England trading Cloth and Wine) 1) Based on labor theory of value 2) Autarky prices as opportunity costs of production 3) Numerical calculation of gains from trade
I) Ricardian model of comparative advantage (Differences in labor productivities) A) Basic notion of comparative advantage even when one country has absolute advantage in both goods B) Construction of straight-line PPF from labor productivity/technology coefficients and labor endowment C) Graphical representation of autarky prices and composition of production. D) Graphical representation of trade equilibrium and gains from trade 1) Trade gains from pure exchange 2) Additional trade gains from production specialization (complete in Ricardian model) E) Adding exchange rates and wages to Ricardian model 1) Assuming perfect competition, prices equal wages times unit labor coefficient. 2) Comparison of prices, after converting with exchange rate, indicates comparative advantage 3) Absolute advantage determines wage levels! F) Ricardian model with more than two commodities G) Ricardian model with transportation costs H) Evidence for Ricardian model - MacDougal diagram II) Neoclassical Model of Trade - Comparative Advantage Could Come from Either Supply or Demand Side A) Arguments for concave (or "bowed out") PPF B) Graphical representation of autarky equilibrium. C) Graphical representation of trade equilibrium. 1) Relative autarky prices depend on both supply (PPF) and demand (indifference curves) conditions 2) There is NOT complete specialization of production into just one product. III) Offer Curve Analysis - How the International Terms of Trade is Determined in These Models. A) Derivation of offer curves from trade triangles B) General shape of offer curves - bend back toward country's import axis C) Intersection of offer curves determines equilibrium international terms of trade 1) Be able to argue why it is an equilibrium D) Shifts in offer curves and effects on international terms of trade E) Offer curve explanation for why small country gains more than large country IV) Heckscher-Ohlin Model - Neoclassical Model Where Relative Factor Endowments Determine Comparative Advantage A) Know many assumptions of model B) Derivation of different PPFs for both countries from different relative endowments, which leads to different autarky prices with assumption of identical technologies and preferences. C) Graphical representation of autarky equilibrium D) Graphical representation of trade equilibrium E) Heckscher-Ohlin theorem about pattern of trade F) Factor price equalization - theorem and casual proof with numerical example G) Stolper-Samuelson theorem - theorem and numerical example H) Rybczynski theorem - theorem and "Dutch Disease" example V) Empirical Relevance of Heckscher-Ohlin model A) Leontief paradox B) Possible resolutions to paradox (often due to relaxing strict assumptions of model) C) Leamer's resolution of paradox D) Remaining problems with theory versus evidence that led to new trade theory
I) Motivation A) Real world displays substantial intra-industry trade between countries: Traditional trade theory (Ricardian, Heckscher-Ohlin) imply only inter-industry trade. B) Many products are differentiated and markets are imperfectly competitive: Traditional trade theory assumes homogeneous goods and perfect competition. C) Many industries display economies of scale: Traditional trade theory assumes constant returns to scale. II) Paul Krugman Model of Intra-industry Trade; i.e, New Trade Theory A) Model assumptions and features 1) Differentiated products 2) Consumers experience utility gains from greater variety of differentiated goods. 3) Production side is monopolistic competition a) Each firm produces a different variety of industry product. b) Each firm cost's exhibit economies of scale. c) Entry drives firm's economic profits to zero in long-run. B) Economic effects from two countries opening to trade in this model 1) Assume no sources of traditional comparative advantage - identical technologies, endowments, and preferences. 2) Instead, trade occurs because each country has different sets of differentiated goods that are desired by consumers. 3) Worldwide variety of goods goes up, though number of varieties in each individual country goes down. 4) Remaining firms have larger demand, realize economies of scale, which lowers costs, and leads to lower prices for consumers. C) Sources of gains from trade in model 1) Consumers gain from more varieties of products overall. 2) Consumers gain form lower prices.
I) Instruments of Trade Policy A) Import tariffs - specific and ad valorem. B) Import subsidies (negative import tariffs) - specific and ad valorem C) Non-tariff import barriers 1) Quantitative restrictions a) Quotas b) Voluntary Export Restraints (VERs) 2) Government procurement provisions 3) Domestic content provisions 4) Labeling, sanitary and environmental regulations D) Export subsidies or tariffs E) Administered protection 1) Antidumping trade protection 2) Countervailing duty trade protection II) Analysis of Trade Policies A) Import tariffs 1) Small country case - domestic supply and demand diagram 2) Small country case - excess demand and excess supply diagram (or otherwise known as import demand and export supply diagram) 3) Large country case - excess demand and excess supply diagram a) Possibility of optimal tariff 4) Large country case with offer curves B) Import subsidy 1) Small country case - domestic supply and demand diagram C) Import quantitative restriction 1) Small country case - excess demand and excess supply diagram a) Quota has equivalent effects on prices and imports as a tariff b) Welfare effects depend on who gets quota rents 2) Large country case - excess demand and excess supply diagram a) Possibility of optimal quota for foreign exporters if they get quota rents 3) Large country case with offer curves D) Export subsidies 1) Small country case - domestic supply and demand diagram 2) Large country case - excess demand and excess supply diagram a) Welfare effects worse than small country case because of terms of trade loss III) Possible Arguments for Trade Protection Policies A) Arguments 1) Optimal tariff 2) To protect an infant industry 3) For national defense purposes 4) To increase employment in a specific sector 5) To prevent foreign firms from dumping in the market B) General problems with arguments 1) Ignore retaliation effects by foreign country 2) Assumes substantial information by policymakers 3) If goal is to help a particular industry, a production subsidy provides identical benefits to that industry with lower deadweight losses for country IV) Economic Integration A) Types of Economic Integration 1) Free trade areas 2) Customs unions 3) Common markets 4) Economic unions B) Analysis of free trade area 1) Welfare change ambiguous due to both a trade creation and trade diversion effect.