Course Objectives

International economics is generally divided into two parts: real analysis or trade theory, and monetary analysis or international finance. This course focuses on the real analysis, addressing a wide range of issues of international trade in goods, international factor mobility, and the interaction between the two. The topics to be examined are quite extensively, including the theory of international trade (e.g., Ricardian model, Heckscher-Ohlin theory, specific-factor model, and new trade theory based on increasing returns to scale and imperfect competition) and its applications, welfare economics (e.g., gains from trade, and static analysis of autarky and open economies), trade policy (e.g., policy instruments such as tariffs and quotas, trade policies related to development and long-term growth), and some special issues (e.g., foreign direct investment made by multinational corporations, free trade areas, and World Trade Organization. In presenting analyses of the issues, both sophisticated techniques and simple economic intuitions are used.

The objective of the course is to provide students with the ability to conduct and evaluate economic analyses of policy issues relating to international trade. Special attention is to be paid to three themes of international trade: the gains from trade, the pattern of trade, and protectionism. The course begins with a discussion of the reasons why countries trade and how countries trade. It proceeds to a discussion of the arguments for and against protection and managed trade. Then we discuss the issues that arise in the design of policy for declining, import-competing industries (e.g., income distribution, unemployment, adjustment assistance), and for dynamic, export industries (e.g., strategic policies and dynamic externalities). In each case the theory is illustrated by industry case studies.

Course Prerequisites

ECO 345 (International Trade) or equivalent courses are required.

Required Textbook

Krugman and Obstfeld (KO), International Economics: Theory and Policy, 6^th edition,

2003, Addison-Wesley Longman, Inc..

Major References

Baldwin, ed., Trade Policy Issues and Empirical Analysis, University of Chicago Press.

Baldwin, ed., Empirical Studies of Commercial Policy, 1991, U of Chicago Press.

Bhagwati, ed., International Trade: Selected Readings, 2^nd edition, MIT Press.

Bhagwati and Srinivasan (BS), ed., Lectures on International Trade, MIT Press.

Dixit and Norman (DN), Theory of International Trade, 1980, Cambridge U Press.

Feenstra, ed. Empirical Methods for International Trade, MIT Press

Grossman, ed., Imperfect Competition and International Trade, 1992, MIT Press.

Grossman and Helpman (GH), Innovation and Growth in the Global Economy, 1991,

MIT Press

Grossman and Rogoff (GR), ed., Handbook of International Economics, Volume 3

(1995), North-Holland

Helpman And Krugman (HK), Market Structure and Foreign Trade, 1985, MIT Press.

Helpman And Krugman (HK), Trade Policy and Market Structure, 1989, The MIT Press

Jones and Kenen (JK), ed., Handbook of International Economics, Volume 1 (1984),

North-Holland.

Krugman, “Growing World Trade: Causes and Consequences”, Brookings Papers on

Economic Activity, 1995 (No. 1)

Krugman and Smith (KS), ed., Empirical Studies of Strategic Trade Policy, University of

Chicago Press.

Leamer, Sources of International Comparative Advantage, 1984, MIT Press.

Markusen, Melvin, Kaempfer, and Maskus (MMKM), International Trade: Theory and

Evidence, 1995, McGraw-Hill, Inc..

Vousden, The Economics of Trade Protection, 1990, Cambridge University Press.

Wong, International Trade in Goods and Factor Mobility, 1995, MIT Press

Undergraduate Texts (Useful for Review)

Caves, Frankel, and Jones, World Trade and Payments, 6^th edition, Harper-Collins.

. Ethier, Modern International Economics, 3^rd edition, Norton.

Husted and Melvin, International Economics, 3^rd edition, 1995, Harper-Collins.

Course Grades

Grades are based on a total of 500 possible points. The points are acquired as follows:

2 Exams = 250 points total, 100 points for mid term and 150 point for final

2 Assignments = 60 points total, 30 points for each

1 Term Paper = 150 points total, 30 points for proposals, 20 points for oral

presentations, and 100 points for papers

Participations = 40 points

Total = 500

Grades are based completely on the work listed above. No extra credit work is given under any circumstances. The scale for semester grades is as follows:

425 - 500 = A

375 - 424 = B

300 - 274 = C

250 - 299 = D

0 - 249 = F

Exams: There are 2 non-comprehensive exams: midterm and final. The exam format will be essay questions, which come from lectures, assignments, and readings. The purpose of exams is twofold: to enhance your understanding of fundamental theories and concepts and to encourage you to apply the theories to the real world. Therefore you may expect application questions as well as theory or technical questions in both exams. By application questions, I mean those in which you need to use the knowledge of trade models or theories learned in explaining particular issues in the real world. Examples of this kind of questions are how to explain the US-China trade pattern by the Heckscher-Ohlin model, and why the US direct investment behaves differently in industrialized and developing countries.

Midterm Exam (75 minutes): Thursday, October 9, in class

Final Exam (120 minutes): 10:00am, Thursday, December 11, in the same classroom

Assignments: Each assignment contains essay questions that are designed to help you to review what you have learned and to prepare you for exams. Since we will cover a lot of materials and many questions in assignments, you may expect completed assignments to be around typed 5-8 pages. If you are not in class the day the assignment is distributed, please stop by my office for a copy.

Class Participations: In addition to attendance, you are required to participate in discussions of literatures on trade policy issues. The purpose of the discussion is to have a further understanding of key issues of trade, and to understand the latest development in international trade. Journal articles are to be assigned to each of you to read and write down comments. You will have a chance to be a main speaker on a article in the class discussions.

Term Paper: The term paper is expected to use the knowledge, understanding, and skills in international trade to carry out independent research. The purpose of the exercise is to give you experience in conducting economic research and in communicating the results to others, both orally and in writing. The results of the papers are of secondary importance, and it is not expected to be a piece of publishable research. The papers serve as a test of your own scientific judgment, ability to evaluate the research of others, and skill in conducting independent research in international economies.

You may choose any topics you wish, but they must be related to international trade issues. The papers should involve one of the following: (1) Test a hypothesis stemming from international trade theories, and (2) Assess a policy proposal or an argument of international trade. The papers should be 25-28 double-spaced pages, typed with 1-inch margin on all sides, and with the same format as those in academic journals (e.g., abstract, footnotes or endnotes, citations, and references).

The organization of the paper may vary, but it should include elements as follows:

(1) Introduction. You should specify the issue and its significance. In other wards, you need to explain the motivations of the topic you choose and why it is important in both academic and policy implications.

(2) Literature review. To describe the status of literature on your topic, you need to take a look at over 10 relevant articles. It would be desirable but not required that you find out missing points or gap in the literature and try to work on the issues.

(3) Theoretical framework. Set up an analytical framework that stems from what you have learned in class. Your analysis will be conducted with the framework.

(4) Evidence: Your arguments should be supported by evidence, which should be from regression estimates or other econometric methods, as well as the data that you collect/compile, or some kinds of facts that are already proved.

(5) Conclusions: State your results clearly and draw some policy implications in this section.

(6) References: You may include a brief list of references used in your paper

You may find following journals useful in preparing your papers:

The World Economy Journal of International Economics

Economic Development and Cultural Change Journal of Development Studies

Journal of Development Economics World Development.

American Economic Review European Economic Review

Journal of Political Economy Quarterly Journal of Economics

The major trade data and other relevant data may be found from:

Direction of Trade Statistics Yearbook by International Monetary Fund (IMF)

International Trade Statistics Yearbook by United Nations (UN)

World Investment Report by United Nations (UN)

World Development Report (various years) by World Bank.

Proposals: Due on Thursday, October 23

Presentation: Tuesday, December 2

Papers: Due on Thursday, December 4

Grading Policies

(1) If you are on the borderline at the end of the semester (defined as minus 5 points), your grades are determined on improvement, class participations and attendance.

(2) No make-up exams are given. If you miss an exam without an excused absence, you will receive a zero on it. If an illness or some emergency prevents you from taking one of exams, please try to discuss this with me before the exam, and other arrangements will be made. Documentation (notification from doctor, for instance) may be required. If you don’t contact me until after the exam, documentation will be required.

(3) Late assignments and term papers (including proposals) will be penalized 50% of the point value for each day they are late. No make-up assignments will be given.

(4) Anyone caught cheating on any exam will receive an “F” in the class and will have their case referred to the Student Judicial Office for additional disciplinary action.

Help and Hints:

(1) Additional Office Hours: My regular office hours are indicated on the front page, and please make use of them. Moreover, I will hold additional office hours everyday in a week before exams and assignment-due days. I strongly urge you to make an appointment to see me at a mutually convenient time should you be encountering difficulties but not able to come at the regular office hours. I also take advantage of email system to seek for more convenient connections with you. Please write me through email for any kind of questions.

(2) Attendance: I strongly recommend that you attend class every day, because the material in this course is often challenging and much of it builds on previous lectures. If you cannot take the trouble to attend class, take notes, work through examples in class, and ask questions, you will not do very well in this course.

(3) Review Sessions: There are review sessions before each exam. I will take all kinds of questions such as related to assignments and exams.

I recommend the following approach to this course:

· Read over the materials we will be covering in class before each session. The idea is not to master the material being covered but simply to familiarize you with the concepts to be covered in class.

· Attend each class and take good notes. After class, read the text again, study your notes and start working on assignments.

· Form a study group that meets outside of class on a regular basis to go over the material, and work on assignments.

· Take a look at reference books listed on the first page. You may get more insights from reading reference books (more intuitions and examples), along with the required text. Moreover, you may get ideas for your term papers.

Please see me if you feel lost. Don’t wait as thing will only get worse! You (and the taxpayers of Illinois) are paying me to teach this course, so take advantage of my services. If you can’t make office hours, see me after class or call / email me and we will set up a mutually convenient time

Course Outline and Reading Assignments

I Basic Concepts and Foundations

1. Three Key Themes of International Trade

KO, Chapter 1

2. Supply and Production Possibility Frontier

MMKM, Chapter 2

DN, Chapter 1 and Chapter 2.1-2,3

Wong, Chapter 2.1-2.4

Mussa, “The Two-Sector Model in Terms of Its Dual: A Geometric Exposition”, in

Bhagwati, Readings Chapter 4

3. Demand and National Utility

MMKM, Chapter 3 and Appendix 1.

DN, Chapter 2.4

Wong, Chapter 2.7

Tower, “The Geometry of Community Indifference Curves”, Weltwirtschaf. Archiv, 1974 (4)

4. General Equilibriums of Autarky and Open Economies

MMKM, Chapter 4

Wong, Chapter 2.8-2.11

Vousden, Chapter1.1-1.5

DN, Chapter 3.1

Jones, “The Structure of Simple General Equilibrium Models”, Journal of Political

Economy, December 1965

5. The Gains from Trade

KO, Chapter 2

MMKM, Chapter 5

HK, Chapter 1.7

Corden, “The Normative Theory of International Trade”, in JK’s Handbook, Chapter 2.1-2.3

DN, Chapter 3.2-3.4

Baldwin, “The New Welfare Economics and Gains from International Trade”, Quarterly

Journal of Economics, 1952

Samuelson, “The Gains from International Trade Once Again”, Economic Journal, 1962

Grossman, “The Gain from International factor Movements”, Journal of International

Economics, 1984

Dixit and Norman, “Gains from trade without Lump-Sum Compensation”, Journal of

International Economics, 1986

II International Trade Theories

1. Ricardian Trade Theory

KO, Chapter 2

MMKM, Chapters 6-7

Jones and Neary, “The Positive Theory of International Trade”, in JK’s Handbook, Chapter 1

Dornbush, Fischer, and Samuelson, “Comparative Advantage, Trade, and Payments in a

Ricardian Model with A Continuum of Goods”, American Economics Review, December 1977

Ruffin, “The Missing Link: The Ricardian Approach to the factor endowments Theory of

Trade”, American Economic Review, September 1988

BS, Chapters 2-4

Markusen and Svensson, “Trade in Goods and Factors with International Differences in

Production Technology”, International Economic Review, 1985

Davis, “Intra-Industry Trade: A Hechscher-Ohlin-Ricardo Approach”, Journal of

International Economics, 1995

2. The Heckscher-Ohlin Model and The Specific-Factor Model

KO, Chapters 3-5

MMKM, Chapters 8-9

HK, Chapter 1

Leamer, Chapter 1

Vousden, Chapter 1.2-1.4

Jones and Neary, “The Positive Theory of International Trade”, in JK’s Handbook, Chapter 1

Trefler, “The Case of Missing Trade and Other Mysteries”, American Economic Review,

December, 1995

DN, Chapter 4 and Chapter 5.2-5.3

BS, Chapters 5-7

Deardorff, “Weak Links in the Chain of Comparative Advantages”, Journal of International

Economics, 1979

Deardorff, “The General Validity of the Heckscher-Ohlin Theorem”, American Economic

Review, 1982

Maskus, “A Test of the HOV Theorem: the Leontief Commonplace”, Journal of

International Economics, August 1985

Vanek, “The Factor Proportion Theory: The N-Factor case”, Kyklos, 1968

Helpman, “The Factor Content of Foreign Trade”, Economic Journal, 1984

Dixit and Woodland, “The Relationship between Factor Endowments and Commodity

Trade”, Journal of International Economics, 1982

3. Scale Economies and Imperfect Competition

KO, Chapter 6

MMKM, Chapter 12

HK, Chapters 2-9

DN, Chapter 9

Helpman, “Increasing Returns, Imperfect Markets, and Trade Theory”, In JK, Chapter 7

Brander and Krugman, “A Reciprocal Dumping Model of International Trade”, in Grossman

(1992), Chapter1

Krugman, “Scale Economies, Product Differentiation, and the Pattern of Trade”, American

Economic Review, 1980, also in Grossman (1992), Chapter 11.

Krugman, “Increasing Returns, Imperfect Competition and the Positive theory of

International Trade”, in GR (1995), Chapter 24

Ethier, “National and International Returns to Scale in the Modern Theory of International

Trade”, American Economic Review, 1982, also in Grossman (1992), Chapter 14

Markusen, “Trade and the Gains from Trade with imperfect Competition”, Journal of

International Economics, 1981, also in Grossman (1992), Chapter 3.

Markusen, “Trade in Producer Services and in Other Specialized Intermediate Inputs”,

American Economic Review, 1989

Harris, “Applied General Equilibrium Analysis of Small Open Economies with Scale

Economies and Imperfect Competition”, American Economic Review, 1984

Feenstra, “Gains from trade in Differentiated Products: Japanese Compact trucks”, in

Feenstra, Chapter 5

4. International Factor Movements and Multinational Firms

KO, Chapter 7

MMKM, Chapter 21-22

HK, Chapters 12 and 13

BS, Chapters 28 and 29

Markusen, “Factor Movement and Commodity Trade as Complements”, Journal of

International Economics, 1983

Ruffin, International Factor Movements”, in JK’s Handbook, Chapter 5

Svensson, “Factor Trade and Goods Trade”, Journal of International Economics, 1985

Wong, “Are International Trade and Factor Mobility Substitutes?”, in Bhagwati’s Readings,

Chapter 3

Markusen, “The Boundaries of Multinational Enterprises and the Theory of International

Trade”, Journal of Economic Perspectives, Spring 1995

Markusen, “Multinationals, Multi-Plant Economies, and Gains from Trade”, Journal of

International Economics, and also in Bhagwati’s Readings, Chapter 28

Ethier, “The Multinational Firm”, Quarterly Journal of Economics, 1986, and also in

Grossman (1992), Chapter 16

Caves, Multinational Enterprises and Economic Analysis, Cambridge University Press, 1996

Helleiner, “Transnational Corporations and Direct Foreign Investment”, in Chenery and

Srinivasan, ed., Handbook of Development Economics, Vol.1 (1988), North Holland

5. Demand Patterns and Technological Changes

MMKM, Chapter 13

Markusen, “Explaining the Volume of Trade: An Eclectic Approach”, American Economic

Review, December 1986

Hunter, “The Contribution of Nonhomothetic Preferences to Trade”, Journal of International

Economics, May 1991

Linder, An Essay on Trade and Transformation, Almqvist and Wiksell, 1961

Bergstrand, “The Heckscher-Ohlin Theorem, the Linder Hypothesis, and the Volume and

Pattern of International Trade”, Economic Journal, December 1991

III International Trade Policy

1. The Instruments of Trade Policy and Political Economy of Trade Policy

KO, Chapter 8-9

MMKM, Chapters 15-16 and 18

Vousden, Chapters 2-4, and 8-10

Corden, “The Normative Theory of International Trade”, in JK, Chapter 2

Feenstra, “Estimating the Effects of Trade Policy, in GR, Chapter 30

DN, Chapter 5.5-5.7

BS, Chapters 9, 11, and 16-17

Rodrik, Dani (1995), “Political Economy of Trade Policy,” in GR’s Handbook, Chapter 28

Baldwin and Venables (1995), “Regional Economic Integration”, in GR’s Handbook, Ch.31

Lipsey, “The Theory of Customs Union: A General Survey”, Economic Journal, 1960, and

also in Bhagwati’s Readings, Chapter 20

Cooper and Massell, “Towards A General Theory of Customs Union for Developing

Countries”, Journal of Political Economy, 1965

Cox and Harris, “Trade Liberalization and Industrial Organization: Some Estimates for

Canada”, Journal of Political Economy, 1985

2. Trade Policy in Developing Countries

KO, Chapter 10

Pack, H. “Industrialization and Trade”, in Chenery and Srinivasan eds. Handbook of

Development Economics, Vol. 1, 1988, Elsevier Science Publishers B.V., 1988

Bliss, C. “Trade and Development”, in Chenery and Srinivasan eds. Handbook of

Development Economics, Vol. 2, 1988, Elsevier Science Publishers B.V., 1988

Ram, Rati, “Exports and Economic Growth in Developing Countries: Evidence from Time-

Series and Cross-Section Data”, Economic Development and Cultural Change, Vol. 36,

Oct. 1987, pp. 51-72

Ram, Rati, “Exports and Economic Growth: Some Additional Evidence”, Economic

Development and Cultural Change, Vol. 33, Jan. 1985, pp. 415-425

3. Strategic Trade Policies and Controversies in Trade Policy

KO, Chapter 11

MMKM, Chapter 17

Vousden, Chapters 6-7

Eaton and Grossman, “Optimal Trade and Industrial Policy under Oligopoly”, Quarterly

Journal of Economics, May 1986, and also in Grossman (1992), Chapter 7

Dixit, “International Trade Policy for Oligopolistic Industries”, Economic Journal:

Supplement, 1984, and also in Bhagwati’s Readings, Chapter 12

Krugman, “Import Protection as Export Promotion”, in Grossman, Chapter 4

Helpman and Krugman (1989), Chapters3-7

Brander (1995), “Strategic Trade Policy”, in GR’s Handbook, Chapter 27

Markusen and Venables (1988), “Trade Policy with Increasing Returns and Imperfect

Competition: Contradictory Results from Competing Assumptions”, Journal of International Economics

Brander and Spencer (1985), “Export Subsidies and International market Share Rivalry”,

Journal of International Economics, 1985