International Trade Theory and Policy: Syllabus and Study Guide

International Trade Theory and Policy

Course Overview

This course provides an advanced overview of international trade theory and policy. The first part of the course covers general equilibrium models of trade, including the effects of tariffs and quotas, and trade liberalization. The second part focuses on policy issues and recent topics, such as political economy of trade policy and new trade theories.

• Prerequisite: ECON 300/3200 with a grade of C+ or higher.

• Technical Content: The course assumes knowledge of theoretical and mathematical techniques from ECON 2020, ECON 2030/3200, ECON/MATH 1401, and ECON/MATH 1402. Students without a strong background in these areas are advised to seek ECON 3601 or a similar course.

Objectives

• Develop a solid understanding of international trade theory and policy.

• Apply theoretical models to analyze real-world trade issues.

• Understand the effects of trade policies such as tariffs, quotas, and trade liberalization.

• Explore advanced topics including the political economy of trade policy and new trade theories.

Evaluation

Component	Weight
Chapter Reviews and Class Participation	15%
Weekly Homework	15%
Major Assignment	20%
In-Class Test 1 (October 29th)	25%
In-Class Test 2 (December 3rd)	25%

Textbook and Resources

• Required Textbook: Paul R. Krugman, Maurice Obstfeld, and Marc Melitz, International Economics (12th edition).

• Recommended: Robert C. Feenstra, Advanced International Trade: Theory and Evidence.

• Online resources and MyLab Economics assignments may be used.

Course Outline

Module 1: Neoclassical International Trade Theory

This module introduces the foundational models of international trade, focusing on comparative advantage, the Ricardian model, and the Heckscher-Ohlin model.

1.1 Labor Productivity and Comparative Advantage: The Ricardian Model

• Definition: The Ricardian model explains international trade based on differences in labor productivity due to technological differences between countries.

• Key Concept: Comparative advantage—countries export goods in which they have a lower opportunity cost.

• Formula: The opportunity cost of producing good X in terms of good Y is $OC_{X} = \frac{a_{LX}}{a_{LY}}$, where $a_{LX}$ and $a_{LY}$ are labor requirements for goods X and Y.

• Example: If Country A can produce 10 units of wine or 5 units of cheese with the same labor, its opportunity cost of wine is 0.5 cheese per wine.

1.2 The Specific Factor Model and Income Distribution

• Definition: The specific factor model considers multiple factors of production, some of which are specific to certain industries.

• Key Point: Trade can benefit the economy overall but may hurt owners of specific factors in import-competing industries.

• Formula: Wage determination: $w = P_M \cdot MPL_M = P_A \cdot MPL_A$, where $P$ is price and $MPL$ is marginal product of labor in each sector.

1.3 Resource and Trade: The Heckscher-Ohlin Model

• Definition: The Heckscher-Ohlin model explains trade by differences in countries' factor endowments (labor, capital).

• Key Point: Countries export goods that use their abundant factors intensively.

• Formula: Factor price equalization theorem: Under certain conditions, $w = w^*$ and $r = r^*$, where $w$ and $r$ are wages and returns to capital in both countries.

1.4 Terms of Trade and Gains from Trade

• Definition: Terms of trade is the ratio at which a country can trade its exports for imports from other countries.

• Formula: $\text{Terms of Trade} = \frac{\text{Export Price Index}}{\text{Import Price Index}} \times 100$

• Key Point: Trade allows countries to consume beyond their production possibilities frontiers.

Module 2: Trade Policy

This module examines the effects of trade policies such as tariffs, quotas, and subsidies under different market structures.

2.1 Trade Policy: Perfect Competition

• Definition: Perfect competition assumes many buyers and sellers, with no single agent able to influence prices.

• Key Point: Tariffs and quotas can distort market outcomes, leading to deadweight losses.

• Formula: Deadweight loss from a tariff: $DW = \frac{1}{2} \times (\text{Tariff}) \times (\text{Reduction in Imports})$

2.2 Trade Policy: Imperfect Competition

• Definition: Imperfect competition includes market structures such as monopolies and oligopolies.

• Key Point: Trade policy can have different effects when firms have market power, potentially leading to strategic trade policy considerations.

Module 3: New Trade Theory and Policy; Political Economy of Trade Policy

This module explores modern developments in trade theory, including increasing returns to scale, monopolistic competition, and the political economy of trade policy.

3.1 External Economies of Scale and International Location of Production

• Definition: External economies of scale occur when the cost per unit depends on the size of the industry, not the firm.

• Key Point: Can lead to industry agglomeration and affect trade patterns.

3.2 Intra-industry Trade, Monopolistic Competition, and Heterogeneous Firms

• Definition: Intra-industry trade refers to the exchange of similar products belonging to the same industry.

• Key Point: Monopolistic competition allows for product differentiation and economies of scale.

3.3 Political Economy of Trade Policy

• Definition: The political economy of trade policy examines how political forces influence trade policy decisions.

• Key Point: Interest groups and lobbying can lead to protectionist policies even when free trade is welfare-improving.

3.4 Trade Policy in Developing and Developed Countries

• Key Point: Trade policy challenges differ between developing and developed countries, including issues of industrialization, technology transfer, and market access.

Additional Resources

• Suggested problems for self-practice and understanding are provided for each topic.

• Relevant video links and further readings are included in the course outline for deeper exploration.

Additional info: The syllabus includes references to specific chapters and problems in the required textbook, as well as online resources and video materials for supplementary learning.