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Trade Theory D Last updated on 2005-03-16 16:32

Summary of course contents Lecturer Literature (books, articles and lecture notes) Course outline and list of required readings Schedule Grading Assignments Old exams Useful links

Recent changes to this page

Some more details have been added to the instructions for the paper on Palestinian trade. Those instructions are no longer preliminary. (Monday, February 14 at 1000) The slide outlining strategies for analyzing trade and its consequences is now available as "article" A22 below. (Wednesday, February 16 at 0950) Belatedly, an interesting article by Krugman called "Ricardo's Difficult Idea" has been added as article A23 and entered in the "helpful or simply interesting reading" column next to the contents for the first set of lectures. (Wednesday, February 16 at 1050) The first section of article A11 (denoted A11: 1.1) is actually best read in connection with the material for lecture 6 and has therefore been moved up to that point in the reading list. (Wednesday, February 16 at 1130) Since time does not permit a thorough lecture treatment of the articles on trade, wages and outsourcing, a few "home study questions" have been added (as article A24). Those will serve as a guide to what you should know about these topics for the exam. (Monday, February 21 at 1200) As we are somewhat behind schedule and have some fairly difficult stuff in front of us that can not be rushed, the number of lectures has been extended by two (of which one is a reserve). The lecture plan below has been amended to take those into account. Even if we are behind schedule at the time of lecture 16, it will be devoted to the new economic geography because a special guest lecturer (Fredrik Gallo, whose main research specialty is the new economic geography) is going to do that. The preliminary dates for the additional lectures are Monday, March 14, and Wednesday, March 23. Look and listen f鰎 confirmation. (Thursday, March 3 at 2330) The deadline for the computer simulation assignment has been extended until Tuesday, March 22 at 1330. (Monday, March 7 at 1110) Additional lectures will be held on Monday, March 14, and Wednesday, March 23, both at 12-14 (and probably in EC135). (Monday, March 7 at 1410) The problem set for computer simulations is now available through a link below. (Wednesday, March 9 at 1532) Major deadline extensions have been made for the two essay assignments (the computer simulation deadline has not and will not be changed). You can hand in the essays as late as April 21, but if you want them graded before the exam held on March 29 you must hand them in by March 18. Papers handed in between March 19 and April 21 will not be graded until after April 21. (Tuesday, March 15 at 1025) Article A14. "Gravity with Gravitas: A Solution to the Border Puzzle" has been removed from the reading list. (Wednesday, March 16 at 1120) The deadline for the computer simulation exercises has been extended until Wednesday, March 23 at 1200. (Wednesday, March 15 at 1630) As paper deadlines have been extended, there will not be any opportunity to answer extra questions on the exam to make up for not having handed in the assignments. (Wednesday, March 15 at 1630) Summary of course contents

The course is intended to provide a solid basis for qualified analyses of international trade and its consequences, as well as exposure to economic analyses of contentious issues related to globalization and the world trading system. New trade theories starting from product differentiation, increasing returns, and imperfect competition, as well as traditional trade theories based on differences in technology or factor endowments, are presented in a common analytical framework. Empirical tests of trade theories, as well as more recently evolved research fields such as the new economic geography and the political economy of trade policy, are introduced. In order to facilitate understanding, most theoretically derived results will be examined by means of exercises with a simple general equilibrium model in Excel-format as well as examinations of actual production and trade data. The strictly theoretical material will be complemented by readings and the writing of short papers on arguments against free trade and the role of trade in an area where it is heavily restricted by outside interference.

Lecturer

Carl-Johan Belfrage, Ph.D.

Room: EC1-281. Phone: 046-222 46 44. E-mail: carl-johan.belfrage@nek.lu.se. Web: www.nek.lu.se/nekcjb

Literature

Books

B1. Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy by Elhanan Helpman and Paul Krugman, MIT Press 1985. Available in local bookstores.

B2. Against the Tide: An Intellectual History of Free Trade by Douglas A. Irwin, Princeton University Press 1996. For use in essay writing. Not available in local bookstores, but readily available by internet order, or on temporary loan from Carl-Johan.

B3. Markusen, J.R., Melvin, J.R., Kaempfer, W.H. and Maskus, K.E., International Trade: Theory and Evidence, McGrawHill, 1995. When you feel the need to repeat trade theory from earlier studies.

B4. Caves, R. E., Frankel, J.A., and Jones, R. W., World Trade and Payments, Harper-Collins, 1993.

Articles and lecture notes (For copyright reasons, only those marked H will be handed out in class)

A1. "Some of the main results of traditional trade theory: an algebraic treatment" by Carl-Johan Belfrage. H

A2. "The Structure of Simple General Equilibrium Models", by Ronald W. Jones, in the Journal of Political Economy, 73(6), 1965, pp. 557-572.

A3. Slides shown during lectures (in PowerPoint-format, in pdf-format), by Carl-Johan Belfrage. H

A4. "Trade Policy and Labor Services: Final Status Options for the West Bank and Gaza" by Maurice Schiff, World Bank Policy Research Paper 2824, 2002.

A5. "Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects. Technical Paper I: Borders and Trade Logistics" by the World Bank, 2004.

A6. "Free trade in classical economics" in Against the Tide: An Intellectual History of Free Trade, by Douglas A. Irwin, Princeton University Press, 1996. H

A7. "Are Your Wages Set in Beijing?", by Richard B. Freeman, in the Journal of Economic Perspectives, 9(3), pp. 15-32, 1995.

A8. "Integration of Trade and Disintegration of Production in the Global Economy", by Robert Feenstra in the Journal of Economic Perspectives, Fall 1998, pp. 31-50.

A9. "Talking About a Revolution", by Paul Krugman in Slate, 1999.

A10. "Increasing Returns to Scale External to Firms - notes and an example", by Carl-Johan Belfrage. H

A11. Excerpt from "Increasing Returns, Imperfect Competition and the Positive Theory of International Trade", by Paul Krugman in the Handbook of International Economics, vol. III. H

A12. Table showing the equilibrium conditions for an integrated equilibrium with both CRS sectors producing homogeneous goods and IRS sectors producing differentiated goods, by Carl-Johan Belfrage. H

A13. Description of the Simple General Equilibrium Model for Computer Simulations in Trade Theory D, by Carl-Johan Belfrage. H

A14. "Gravity with Gravitas: A Solution to the Border Puzzle" by James E. Anderson and Eric van Wincoop, NBER Working Paper 8079, 2001.

A15. Table with the proof of sufficient conditions for gains from trade, by Carl-Johan Belfrage. H

A16. "Introduction" to The Spatial Economy, by Masahisa Fujita, Paul R. Krugman and Anthony J. Venables. H

A17. "Globalization and the Inequality of Nations", by Paul R. Krugman and Anthony J. Venables, in the Quarterly Journal of Economcs, 110(4), pp. 857-880, 1995.

A18. Slides on the history of economic thought about free trade, by Carl-Johan Belfrage.

A19. "Is Free Trade Pass?", by Paul R. Krugman, in the Journal of Economic Perspectives, 1(2), pp. 131-144, 1987.

A20. "The West Bank and Gaza Strip: A case of unfulfilled potential", by Carl-Johan Belfrage, Country Economic Report 2001:7, Swedish International Development Cooperation Agency (Sida), 2001. (H on demand)

A21. "Palestine Facts and Info", by the Palestinian Academic Society for the Study of International Affairs (PASSIA), 2005.

A22. Slide named "Analyzing Trade and Its Consequences", by Carl-Johan Belfrage.

A23. "Ricardo's Difficult Idea", by Paul R. Krugman, 1996.

A24. "Study questions for personal study of the articles on trade, wages and outsourcing", by Carl-Johan Belfrage.

To view some of the articles and notes you will need Acrobat Reader which you can download here.

Course outline and list of required readings

Lecture Topic Required reading Helpful or simply interesting reading 1-3 The main results of traditional trade theory A1 A2 A23 B3: 7, 8 B4 (app) 4-8 Factor proportions theory - an integrated equilibrium approach

Trade conditions in the West Bank and Gaza Strip

Free trade in classical economics

Trade, wages and outsourcing B1: 1.1, 1.2, 1.3, 1.6 A3 A11: 1.1

A4 A5

A6

A7 A8 B3: 8 A22

A20 A21

A18 B2: 1, 2, 3, 4, 5, 6

A24* 9-10 Economies of scale and representations of demand for differentiated products B1: 2.1, 2.2, 2.3, 3.7, 6.1, 6.2, 7.1, 7.2 A9 A10: 1.1, 1.2, 1.3 A11: 1.3 B3: 12 11 Trade structure in the presence of differentiated products and scale economies A11: 1.2 B1: 7.3, 7.4, 7.5 A12 12 Computer simulations of trade A13 13-14 Trade volumes and composition in the presence of differentiated products, scale economies and trade costs B1: 8.1, 8.3 A14 15 Welfare analysis of trade in the presence of scale economies A11: 1.3 A15 B1: 9.1, 9.4, 9.5 B2: 12 16 Introduction to the new economic geography A16 A17 17 Reserve

*Guide to potential exam questions on these topics.

Schedule

Schedule

Grading

The course grade will be determined as follows:

Final exam score 60 % Exercise/paper 1 15 % Exercise/paper 2 15 % Exercise/paper 3 10 %

In case you are not willing or able to hand in one of the exercises on time, the final exam will include questions dealing with the same subject areas. This option will only be available if you notify Carl-Johan about it. The fact that the final exam questions are unknown ahead of time, the nature of the subject areas, and the need to answer more questions during the exam, together imply that it will normally be advantageous to hand in the papers/exercises.

Exercises and short papers

1) Trade issues in a trade-constrained economy: the case of the West Bank and Gaza Strip (15 percent of the final grade) Extended deadline: Thursday, April 21 (but still Friday, March 18 if you want a grade on the paper before April 21)

People in the Palestinian territories suffer from a number of constraints on their ability to trade amongst themselves, with Israel and with the rest of the world. While difficult for people there to live with, it has the benefit of presenting a trade theorist with some interesting questions to ponder. You are expected to analyze the trade, income and income distribution consequences of changes in restrictions on trade in goods and labor that may take place according to a couple of peace process scenarios. Make use of your own trade theoretic insights as well as articles A4 and A5 and other texts that you come across on the internet. For further information see

Instructions for the paper on Palestinian trade

You may of course engage in discussions on these topics with other students but the paper must be written individually.

2) Free trade in the history of economic thought (15 percent of the final grade) Extended deadline: Thursday, April 21 (but still Friday, March 18 if you want a grade on the paper before April 21)

Write a short paper on the major objections, based on economic (or possibly philosophical) analysis, to the free trade doctrine which has prevailed among professional economists since the days of Adam Smith and his contemporaries. The book Against the Tide: An Intellectual History of Free Trade by Douglas Irwin (book B2 in the literature list above) is in itself an excellent guide and can be used as your main reference. In the cases of the increasing returns argument and the strategic trade policy argument, article A19 by Paul Krugman is also useful.

The first half of your paper should be devoted to brief explanations (approximately 200 words each) of all but one of the following arguments against free trade: (a) The terms of trade argument (b) The infant industry argument (c) The increasing returns argument (d) The domestic wage differentials argument (e) The welfare economics of free trade (f) The macroeconomics of protection (g) Strategic trade policy

Your explanations should concern the arguments themselves, as well as their possible weaknesses.

The second half of your paper (containing approximately 1200 words) should go into a little more depth in explaining the remaining argument on the list just mentioned. Here you should (i) include at least one quote from the economic literature on the subject (aside from the above mentioned book, but you can make use of its reference lists), and (ii) discuss instances of modern/current use of the argument in question (perhaps after checking out the useful links at the bottom of this page).

The paper must be written individually.

3) Computer simulations of trade (10 percent of the final grade, and some help in understanding final exam topics) Extended deadline: Wednesday, March 23 at 1200

Simulations in Excel of a simple general equilibrium model with differentiated products and monopolistic competition. Use the links t

A detailed description of the model The model itself, contained in an Excel file The problems to solve and questions to answer

You are encouraged to work in groups (of no more than 3 persons) to benefit from each other's ideas about what is going on in the model. Note that, as explained in the document with problems and questions, the exercise gets somewhat larger the more people you are in the group.

Old exams

The course contents have gone through some substantial changes this year, but these may still be of some interest.

Exam on 991104 Exam on 991125 Exam on 001028 (suggested, and sometimes only partial, answers to the exam on 001028) Exam on 001129 (suggested answers to question 1 of the exam on 001129) Exam on 011024 (suggested answers to exam on 011024) Exam on 030328 (suggested answers to exam on 030328)

Useful links

The Global Trade Negotiations Homepage at Harvard University's Center for International Development is probably the most complete collection of links useful for dealing with issues involving international trade.

Some of the most influential and eloquent economists involved in the public debate on globalization issues are Jagdish Bhagwati, Robert Feenstra, Paul Krugman, and Dani Rodrik.

Globkom (the Swedish parliamentary commission on Swedish policies for global development) has collected some very interesting papers on trade and global development (as well as other topics).

The Human Development Report 2004 is a great source of data.

If you are already thinking about C- or D-level essays (only for students in the Swedish system), here are some suggested essay topics.

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