International Trade

The lecture aims to present key elements neoclassical and modern trade theories and explain how they can explain different types of trade flows. The lecture is also intended to analyze the economic implications of the main instruments of trade policy.

The lecture is based on microeconomic foundations and covers issues related to international trade theory and trade policy. In this class, both neoclassical and new trade theories will be discussed. The effects of the functioning of main trade policy instruments in the perfect and imperfect competition framework will also be shown.

Detailed programme:

2-nd semester: International trade: lecture for WNPiSM

1. World economy:

Trade flows, major trading nations, trade openness, gains from trade, global value chains (GVC’s), globalization, gravity model

Lit.: K&O.: chap 1&2.

2. Classical trade theory: Ricardo & Smith

Model assumptions, geometric presentation, terms of trade, absolute and comparative advantage, model with many goods, relative wages.

Lit.: K&O.: chap. 3:,

3. Classical trade theory: Heckscher-Ohlin (H-O) Model: Factor specific model

Factor specific model (3 factors ), assumptions, structure of the model, productivity of factor and their remunerations, Haberler theorem, production possibility frontier (PPF), gains form trade.

Lit: K&O.: chap. 4:,

4. Neo-classical H-O model (2x2x2)

H-O assumptions, production structure, factor abundance, firm equilibrium, H-O theorem, Stolper-Samuelson the, the equilibrium of firms, Factor Price Equalization theorem, gains from trade. Rybczynski theorem,

Lit: K&O: chap. 4 & 5

5. Neoclassical model continued and Leontieff paradox

empirical verification of H-O model: Leontieff paradox interpreted, other alternative (neo-technological) trade theories

Lit: K&O: chap. 6

6. Intra-industry trade: imperfect competition and increasing returns to scale (IRS)

Empirical analysis of Grubel-Lloyd, Dixit-Stiglitz (love for variety) demand function, Brander-Krugman model: reciprocal dumping.

Lit ChM, chap. 9

7. Krugman model

Krugman model (1979), the role of IRS, product differentiation and imperfect competition, new trends, heterogeneous firms in the context Melitz Model.

Lit.: K&O: chap. 8.

8. Empirical analysis of inter-industry and intra-industry trade flows.

Empirical analysis of inter-industry trade and intra-industry trade flows, determinants of firms’ exports

Lit. ChM, chap. 10

9. trade policy in perfect competition: Tariffs

Tariff analysis: partial equilibrium approach: small and large country, general equilibrium effects, optimal tariff, infant-industry argument, tariffs and market imperfections.

Lit.: K&O, chap. 9 & 11

10. Trade policy: non-tariff measures (NTMs)

Tariff in imperfect competition, quantitative restrictions (QRs), Tariff and QRs equivalency, Voluntary export restrains (VERs)

Lit.: K&O, chap. 9 continued

11. Trade policy: non-tariff measures (NTMs): subsidies and AD measures

Production and export subsidies under perfect competition, Countervailing duties, dumping and AD duties, agricultural subsidies

Lit.:, K&O, chap. 11 continued & ChM cap. 8

12. Strategic trade policy

Strategic trade policy: basic concepts and examples, Brander-Spencer model (Cournot competition) & Eaton-Grossman model (Bertrand competition)

Lit: K&O: chap. 12 and ChM: chap. 11

13. Political economy of trade policy continued

Findlay-Wellisz neo-classical model of political economy, tariff formation function, sketch of Protection for sale model

Lit.: K&O chap. 10,, Findlay, Wellisz: Endogenous Tariff, the Political Economy of Trade Restrictions and Welfare”

14. Framework for international trade policy: World Trade Organization (WTO)

Basic rules of GATT/WTO system. The importance of non-discrimination and national treatment, prohibition of QRs, multilateral system of trade negotiations, threats to multilateral trade system: risk of raising protectionism and trade wars.

Lit.: ChM: chap 12, K&O chap. 12.2

• Paul R. Krugman, Maurice Obstfeld, Marc Melitz: International Economics, Theory and Policy, vol. 1., Eleventh Edition, Pearson, 2018 (cited as K&O). Or:

• Ch. van Marrewijk (ChM), International Economics; Theory, Applications and Policy. Oxford University Press, 2012. (cited as ChM).

There is also Polish translation of the first textbook published by PWN.

The students will be able to explain what are the sources and implications of international trade flows, in the context of neoclassical and new trade theories. They will also understand the effects of the functioning of main trade policy instruments in the perfect and imperfect competition framework.

Students participating in the classes shall have basic knowledge in the microeconomics I. The grading will be based on a written multiple-choice test, with several open questions. The classes (labs) are accompanying the lecture on International Trade (30 hours). All students shall pass the labs in international economics before staring the final exam.

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