This course will provide you with an analytical framework for the study of international trade. Historically, international trade has played a critical role in enabling countries to grow, develop, and become economically powerful. Through international trade in goods and services, the economies of different countries are more closely linked to one another now than ever before. At the same time, the world economy is more turbulent now than it has been in decades. Keeping up with the shifting international environment has become a central concern in business strategy and national economic policy. This course uses the same fundamental methods of analysis deployed in other branches of economics, as the motives and behavior of individuals and firms remain the same whether they are in the context of international trade or domestic transactions. You will learn, however, that international trade introduces an entirely new and different set of concerns as well.
This course will cover a broad array of relevant topics. We will explore both theoretical models and empirical studies as we seek to determine a model that best fits "real world” data. This course will frequently compare and contrast competing theories concerning the nature of international trade and the gains or losses thereof. We will work to understand the economic intuition behind technically demanding models and define the assumptions behind various theories before evaluating how well those models fit actual trading economies. We will also explore the relevance and policy implications of various theories/models, especially in terms of growth, income distribution, and development.
Unit 1: International Trade Theory
Countries engage in international trade for two basic reasons, each of which contributes to the country's gain from trade. First, countries trade because they are different from one another. Nations, like individuals, can benefit from their differences by reaching agreements in which each party contributes its strengths and focuses on producing goods in which each is especially efficient. Second, countries trade to achieve economies of scale in production. That is, if each country produces only a limited range of goods, it can produce each of these goods at a larger scale and hence more efficiently than if it tried to produce everything. In the real world, patterns of international trade reflect the interaction of both of these motives.
This unit will help you develop the tools you need to understand how differences between countries give rise to trade between them and why this trade is mutually beneficial. After a brief introduction to the general topic of international trade, we will begin by analyzing how comparative advantage acts as a trade pattern determinant. You will also be introduced to the Ricardian model of trade. The unit will then discuss capital as a factor of production, covering the Heckscher-Ohlin model of trade. We will investigate which factors gain and lose from trade in the short-run as well as in the long-run before learning how economies of scale, technology, demand, and transport costs contribute to patterns of trade. The unit will conclude with a discussion of the reasons behind intra-industry trade, taking note of what new trade theories have to say about it.
Unit 2: International Trade Policy
The previous unit answered the question, "Why do nations trade?” by describing the causes and effects of international trade and the functioning of a trade world economy. While this question is interesting in and of itself, its answer is much more interesting if it helps us answer the question: "What should a nation's trade policy be?”
In this unit, we will begin our investigation of trade policy issues by analyzing the implications of tariffs for trade and welfare. We will then move on to non-tariff barriers and their implications before concluding with a discussion of the arguments for restricting trade and an overview of the political economy of trade policy.
Unit 3: Exchange Rates and Open-Economy Macroeconomics
The previous units were concerned primarily with the problem of making the best use of the world's scarce productive resources at a single point in time. In this unit, we shift our focus and ask: How can economic policy ensure that factors of production are fully employed? And what determines how an economy's capacity to produce goods and services changes over time? We will learn how the interactions between national economies influence the worldwide pattern of macroeconomic activity. We will also discuss the role of trade in growth and welfare in an open economy, the causes and consequences of factor mobility, as well as the role of multinationals.
Unit 4: International Macroeconomic Policy
In the previous unit, we saw how a country can use monetary, fiscal, and exchange rate policy to change the levels of employment and production within its borders. The inherent independence of open national economies has sometimes made it more difficult for governments to achieve such policy goals as low unemployment and stable prices. The channels of independence depend, in turn, on the monetary and exchange rate arrangements that are adopted by countries and are collectively known as the international monetary system.
In this unit, we will examine how the international monetary system influences macroeconomic policy-making and performance. We will also apply models of fixed and floating exchange rates to examine the recent performance of floating rates and to compare the macroeconomic policy problems of different exchange rate regimes. Then, we will study the role that international trade plays in both developing countries and economies transitioning from a central planning system to a market-based one.
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