• 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.

    Completing this unit should take you approximately 12 hours.

    • 1.1: Introduction

    • 1.2: World Trade: An Overview

    • 1.3: Labor Productivity and Comparative Advantage: The Ricardian Model

    • 1.4: Resources, Comparative Advantage, and Income Distribution

    • 1.5: The Standard Trade Model

    • 1.6: Economies of Scale, Imperfect Competition, and International Trade

    • 1.7: International Factor Movements