ECN 765: Advanced International Trade: theory and Evidence Fall 2009

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1 SYRACUSE UNIVERSITY DEPARTMENT OF ECONOMICS ECN 765: Advanced International Trade: theory and Evidence Fall 2009 Professor Mary E. Lovely 131 Eggers Hall Office Hours: Mon 3-4, Fri. 9-10:30, and by appt. Office Phone: COURSE DESCRIPTION Economics 765 presents international trade theory at the Ph.D. level. The course focuses almost entirely on general equilibrium approaches to modeling trading relations and to testing hypotheses derived from these models. Topics covered include models of trade with constant returns and perfect competition, models of trade with variable returns and imperfect competition, positive and normative analyses of commercial policy, the political economy of trade policy, and topics related to offshoring/outsourcing. To complete the Ph.D. sequence in trade and development, students should follow this course with Economics 865, Topics in International Trade. Lectures, class discussions, and assignments are geared toward developing competency in understanding and creating models of open economic systems. We will also assign a series of empirical exercises using the statistical program STATA. These exercises are a required part of the course. Problem sets, two take-home examinations, and a critical literature review allow students to demonstrate competency. Course Prerequisites: A working knowledge of multivariate calculus and linear algebra is required, as is completion of a Ph.D.-level course in microeconomic theory (Economics 611 or the equivalent). Course Requirements and Evaluation Procedures: 1. Take-home examinations. Students are required to take two take-home exams. Each of the two exams accounts for 25 percent of the final grade. 2. Literature Review. The literature review accounts for 20 percent of the final grade. Each student will pick a topic that he or she may wish to develop further. The student will prepare a

2 Economics 765, Fall 2009, Syllabus -2- bibliography of papers that offer a theoretical basis for further investigation of the topic. From this bibliography, he or she will prepare a paper that surveys (integrates and critiques) the main papers on the topic (typically 3 or 4 papers). THE PAPER IS DUE AT NOON ON DECEMBER 21, PAPERS SUBMITTED AFTER THIS DATE WILL NOT BE ACCEPTED. 3. Problem Sets. Problem sets account for an additional 20 percent of the final grade. 4. Course Participation. The remaining 10 percent of the grade will be determined by all aspects of course participation, including in-class and out-of-class discussion and problem sets. We expect all participants to have read (at least) all the assigned material by the first class for which they are assigned. This is a necessary condition for intelligent participation and, thus, for a passing grade. A grade of "A" for this course requires a more active approach to the material involving discussion or writing past the immediate content of the papers being presented. Policy on academic honesty: In completing all assignments in this course, absolute academic honesty is demanded of you. Plagiarism, in the form of unacknowledged use of another's ideas or expressions, will result in a failing grade for the course. If you are uncertain about the proper way to cite or extend others work, please see us before you submit your paper. For more information and the Syracuse University Academic Integrity Policy, see Course Materials: The reading list contains more material than we can cover in one semester. Required readings are noted with an asterisk and are available through JSTOR or other online resources. Other listed readings may prove useful as supplements or as sources of ideas for further research. You are required to purchase one text, Robert Feenstra, Advanced International Trade: Theory and Evidence, Princeton University Press, We will also use empirical exercises from the site. Find datasets and programs for these exercises at: You may wish to consult the following textbooks and collections of articles. Wong, Kar-yiu, International Trade in Goods and Factor Mobility, MIT Press, Choi, E. Kwan and James Harrigan, Handbook of International Trade, Blackwell Publishing, Grossman, Gene, ed., Imperfect Competition and International Trade, MIT Press, Woodland, A.D., International Trade and Resource Allocation, North-Holland, (This book is currently out of print. The library has it.) Data and Information Sources on Trade and Trade Policies World Bank's World Development Indicators (import and export duties, trade volumes, other

3 Economics 765, Fall 2009, Syllabus -3- cross-national data). Maxwell network users can find this database on the P: drive. United Nations COMTRADE data base: UNCTAD Trade Analysis and Information System (TRAINS): US Census Bureau Foreign Trade Statistics: Detailed US and Canada imports by source (6-digit HS) from Industry Canada: Jon Haveman s International Trade Data: tml Office of the United States Trade Representative National Trade Estimate Report on Foreign Trade Barriers: U.S. Department of State Country Summaries: The Global Trade Negotiations Home Page: This Harvard-based web site contains extensive links to further material:

4 Economics 765, Fall 2009, Syllabus -4- A HANDY TABLE OF TOPICS AND DUE DATES Class DATE TOPIC NOTES 1 Aug. 31 Introduction to Course 2 Sept. 2 The GNP Function and the Four-Equation System 3 Sept. 7 Rybczynski Theorem and Magnification Effect 4 Sept. 9 Stolper-Samuelson 5 Sept. 14 Ricardian Model - theory PS #1 Due 6 Sept Sept. 23 Ricardian Model empirical 8 Sept. 30 The Heckscher-Ohlin Model 9 Oct Oct. 7 Testing and Estimating the Neoclassical Model 11 Oct Oct. 14 Ricardo-Viner Model PS #2 Due 13 Oct. 19 Many Goods and Factors 14 Oct.21 Trade in Intermediate Inputs and Wages Oct. 23 Take-Home Exam Due 15 Oct. 26 Trade and the Environment 16 Oct. 28 Gains from Trade 17 Nov. 2 Gains from Trade 18 Nov. 4 Increasing Returns and International Trade 19 Nov. 9 Increasing Returns and International Trade 20 Nov. 11 Increasing Returns and International Trade 21 Nov. 16 Increasing Returns and International Trade PS #3 Due 22 Nov. 18 Trade Policy: Welfare Effects 23 Nov.23 Trade Policy: Welfare Effects 24 Nov.30 Trade Policy: Political Economy 25 Dec. 2 Trade Policy: Political Economy 26 Dec. 7 Firm Heterogeneity and Trade 27 Dec. 9 Firm Heterogeneity and Trade PS #4 Due 28 Dec. 14 Gravity Approaches Dec. 16 Take-Home Exam Due by 5pm Dec. 21 Critical Literature Review Due by Noon

5 Economics 765, Fall 2009, Syllabus -5- Class 1: Introduction to the Course Class 2: The GNP (or Revenue) Function SCHEDULE OF CLASSES *Silberberg, E., 1990, General Equilibrium II: Nonlinear Models, Chapter 16, The Structure of Economics, McGraw-Hill. Dixit, A.K., 1990, Optimization and Economic Theory, Oxford University Press, 2nd Edition. Chapter 5, "Maximum Value Functions." Class 3 and 4: Comparative Statics of the Production Sector * Chapter 1 in Robert Feenstra, 2004, Advanced International Trade, Princeton University Press. *Mussa, M., 1979, The Two-Sector Model in Terms of its Dual: A Geometric Exposition, Journal of International Economics 9: *Jones, R.W., 1965, The Structure of Simple General Equilibrium Models, Journal of Political Economy 73: , Sections 1-5. Classes 5 and 6: The Ricardian Model and the Theory of Comparative Advantage *Dornbusch, R., S. Fischer, and P.A. Samuelson, 1977, Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods, American Economic Review 67: *Deardorff, A., 1980, The General Validity of the Law of Comparative Advantage, Journal of Political Economy 88: Chipman, J.S., 1965, A Survey of the Theory of International Trade: Part 1, The Classical Theory, Econometrica: Class 7: Empirical Tests of Comparative Advantage *Bernhofen, Daniel M. and John C. Brown, A Direct Test of the Theory of Comparative Advantage: The Case of Japan, Journal of Political Economy 112 (1): Bernhofen, Daniel M. and John C. Brown, 2005, An Empirical Assessment of the Comparative Advantage Gains from Trade: Evidence from Japan, American Economic Review 95 (1):

6 Economics 765, Fall 2009, Syllabus -6- Class 8 and 9: The Heckscher-Ohlin Model * Chapter 2 in Robert Feenstra, Advanced International Trade. *Deardorff, A., 1979, Weak Links in the Chain of Comparative Advantage, Journal of International Economics 9: Deardorff, A., 1982, The General Validity of the Heckscher-Ohlin Theorem, American Economic Review 2: Dixit, A. and A. Woodland, 1982, The Relationship between Factor Endowments and Commodity Trade, Journal of International Economics 13: Classes 10-11: Testing and Estimating the Neoclassical Model *Trefler, Daniel, 1995, The Case of the Missing Trade and Other Mysteries, American Economic Review 85: *Romalis, John, 2004, Factor Proportions and the Commodity Structure of Trade, American Economic Review 94: *Davis, Donald R. and David E. Weinstein, 2003, The Factor Content of Trade, Handbook of International Trade, in E. K. Choi and J. Harrigan, eds., Handbook of International Trade, Oxford: Blackwell. Harrigan, James, 1997, Technology, Factor Supplies, and International Specialization: Estimating the Neoclassical Model, American Economic Review 87: Bowen H. P., E. E. Leamer, and L. Sveikauskas, 1987, Multicountry, Multifactor Tests of the Factor Abundance Theory, American Economic Review 77: Trefler, Daniel, 1993, International Factor Price Differences: Leontief Was Right! Journal of Political Economy 101: Class 12: The Ricardo-Viner Model *Mussa, M., 1974, Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run, Journal of Political Economy 82: *Jones, R.W., 1971, A Three-Factor Model in Theory, Trade, and History, in Trade, Balance of Payments, and Growth:Essays in Honor of C.P. Kindleberger, J.N. Bhagwati, ed., North-Holland, Amsterdam.

7 Economics 765, Fall 2009, Syllabus -7- Classes 13: Many Goods and Factors *Chapter 3 in Advanced International Trade by Robert Feenstra. *Jones, R.W., and J.A. Scheinkman, 1977, The Relevance of the Two-Sector Production Model in Trade Theory, Journal of Political Economy 85: *Davis, Donald R., and David E. Weinstein, 2001, An Account of Global Factor Trade, American Economic Review 91: Ethier, W. J., Higher Dimensional Issues in Trade Theory, in the Handbook of International Economics, Volume I, Ch. 3, pp , , Jones, R.W., 1985, Relative Prices and Real Factor Rewards: A Reinterpretation, Economic Letters 19: Class 14: Trade in Intermediate Inputs and Wages *Chapter 4 in Advanced International Trade by Robert Feenstra. *Slaughter, Matthew, 2001, International Trade and Labor-Demand Elasticities, Journal of International Economics, 54:1, *Hasan, R., D. Mitra, and K.V. Ramaswamy, 2007, Trade Reforms, Labor Regulations, and Labor-Demand Elasticities: Empirical Evidence from India, The Review of Economics and Statistics 89:3, Class 15: Applications of the Theory: Trade and the Environment *Copeland, Brian R. and M. Scott Taylor, North-South Trade and the Environment, Quarterly Journal of Economics V: *Judith M. Dean and Mary E. Lovely, 2008, Trade Growth, Production Fragmentation, and the Environment, NBER Working Paper #13860 Classes 16-17: Gains from Trade *Chapter 6 in Advanced International Trade by Robert Feenstra. *Chapters 18 and 19 in Lectures on International Trade by Bhagwati, Panagariya and Srinivasan. Dixit, A., 1986, Tax Policy in Open Economies, sections 1, 2 and 3, in Handbook of Public Economics, Volume I.

8 Economics 765, Fall 2009, Syllabus -8- Classes 18-21: Increasing Returns and International Trade: Theory and Empirics *Krugman, P., 1979, Increasing Returns, Monopolistic Competition and International Trade, Journal of International Economics 9: *Krugman, P., 1995, Increasing Returns, Imperfect Competition and the Positive Theory of International Trade, in G. Grossman and K. Rogoff, eds., Handbook of International Economics Vol 3, North-Holland. *Deardorff, Alan, 2003, Introduction to External Increasing Returns, mimeo. *Chapter 5 in Advanced International Trade by Robert Feenstra. *Debaere, Peter, 2005, Monopolistic Competition and Trade, Revisited: Testing the Model Without Testing for Gravity, Journal of International Economics. *Antweiler, W. and Trefler, D. 2002, Increasing Returns and All That: A View from Trade, American Economic Review 92: Chapter 11 in Lectures on International Trade by Bhagwati, Panagariya and Srinivasan. Dixit, A. and V. Norman, 1980, Product Differentiation and Intraindustry Trade, Chapter 9, Theory of International Trade: A Dual, General Equilibrium Approach, Cambridge, Cambridge University Press. Ethier, Wilfred J., 1982, National and International Returns to Scale in the Modern Theory of International Trade, American Economic Review 72: Krugman, Paul, 1980, "Scale Economies, Product Differentiation and the Pattern of Trade," American Economic Review 70: Hanson, Gordon and Chong Xiang, 2004, The Home-Market Effect and Bilateral Trade Patterns, American Economic Review 94(4): Lovely, Mary, Devashish Mitra, and Cong Pham Si, 2007, The Home-Market Effect and Bilateral Trade Patterns: A Comment, Syracuse University, mimeo. Classes 22-25: Trade Policy: Welfare Effects, Political Economy *Chapters 7, 8 and 9 in Advanced International Trade by Robert Feenstra. *Rodrik, D., 1995, The Political Economy of Trade Policy, Ch. 28 in Gene Grossman and Kenneth Rogoff, eds., Handbook of International Economics Vol 3, North-Holland.

9 Economics 765, Fall 2009, Syllabus -9- *Gawande, K. and Krishna, P., 2003, The Political Economy of Trade Policy: Empirical Approaches, in E. Kwan Choi and James Harrigan, eds,.handbook of International Trade, Blackwell Publishers. Mayer, W., 1984, Endogenous Tariff Formation, American Economic Review 74(5), *Grossman, G and Helpman, E., 1994, Protection for Sale, American Economic Review 84 (4), *Goldberg, P and Maggi, G. Protection for Sale: An Empirical Investigation, American Economic Review 89(5), *Gawande, K and Bandyopadhyay, U., 2000, Is Protection for Sale? A Test of the Grossman-Helpman Theory of Endogenous Protection, Review of Economics and Statistics 82(1), *Mitra, D., Thomakos, D. and Ulubasoglu, M., 2002 Protection for Sale In A Developing Country: Democracy vs. Dictatorship, Review of Economics and Statistics 84(3), *Dutt, P. and Mitra, D., 2002 Endogenous Trade Policy Through Majority Voting: An Empirical Investigation, Journal of International Economics 58(1), Findlay, R. and Wellisz, S., 1982, Endogenous Tariffs, the Political Economy of Trade Restrictions and Welfare, Jagdish Bhagwati ed., Import Competition and Response, University of Chicago Press, Helpman, E., Politics and trade policy, in D.M.Kreps and K.F.Wallis (eds.), Advances in Economics and Econometrics: Theory and Applications (New York: Cambridge University Press) 1997, pp Mitra, D., 1999, Endogenous Lobby Formation and Endogenous Protection: A Long Run Model of Trade Policy Determination, American Economic Review 89(5), December 1999, pp Gawande, K., Krishna, P. and Robbins, M., 2002, Foreign Lobbies and US Trade Policy, mimeo, Brown University

10 Economics 765, Fall 2009, Syllabus -10- Classes 26-27: Firm Heterogeneity and Trade *Helpman, E. (2006) Trade, FDI, and the organization of firms, Journal of Economic Literature 44: *Melitz, Marc J. (2003), The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity, Econometrica, 71:6, pp *Bernard, A.B., J. Eaton, J.B. Jensen and S. Kortum (2003), Plants and Productivity in International Trade, American Economic Review 93(4), September, pp Eaton, Jonathan, Samuel Kortum, and Francis Kramarz (2003), An Anatomy of International Trade: Evidence from French Firms, mimeo, NYU. Eaton, Jonathan, Samuel Kortum, and Francis Kramarz (2003), Dissecting Trade: Firms, Industries, and Export Destinations, AER Papers and Proceedings, 94, pp *Chaney, Thomas (2005), Distorted Gravity: The Intensive and Extensive Margins of International Trade, American Economic Review 98(4), Class 28: Gravity Approaches *Helpman, Elhanan, Marc Melitz, and Yona Rubenstein, 2004, Trading Partners and Trading Volumes, August 26, 2004, mimeo Anderson, James E. and Eric van Wincoop, 2003, Gravity with Gravitas: A Solution to the Border Puzzle, American Economic Review 93 (1): Harrigan, James, 2003, Specialization and the Volume of Production: Do the Data Obey the Laws? in E. K. Choi and J. Harrigan, eds., Handbook of International Trade, Oxford: Blackwell.