C4 INTERNATIONALTRADE AutumnTerm2004

Transcription

1 C4 INTERNATIONALTRADE AutumnTerm2004 CourseOutlineandReadingList Lecturer and ClassTeacher: Dr. R.N.Vaughan Room329: DRAYTON HOUSE Aims and Objectives of Course: To provide students who have satisfactorily completed the second-year core course on microeconomics with a framework for understanding modern ideas in the theory of international trade; to use this framework to analyse the major policy issues and the roles of the key institutions of world trade. At the end of the course students should: be familiar with theories of why trade exists and the pattern of specialisation; understand the theory of comparative advantage and its relation to the pro tability of the industries producing traded goods; be aware of the relation between trade and the distribution of income; know how to appraise the e ects of trade policy including preferential trading agreements; have a working knowledge of models of imperfect competition and their application to strategic trade policy. Outline Syllabus : The Ricardian Model of International Trade and extension to many goods; the speci c factors model and the impact of trade on the distribution of income; the Heckscher-Ohlin model of trade; factor price equalization; Stolper-Samuelson Theorem; Rybczynski Theorem; Market Imperfections and Trade. Trade and welfare; trade policy under perfect competition; strategic trade policy and imperfect markets. Trade integration. Tutorials and Required Coursework: Four Tutorials; Two Essays, Two Question Sheets Examination Format: C4: Two Hours. Unit Value: 0.5. A Dummy Examination Paper will be provided 1

2 C4 INTERNATIONALTRADE AutumnTerm2004 CourseOutlineandReadingList I.MarketEquilibriumforaSingleEconomy: Autarky 1. Introduction: TheMajorQuestionsofInternationalTrade 2. TheAgents 3. Technology andresources 4. TheBehaviourofConsumers 5. TheBehaviourofProducers 6. Market Equilibrium International trade textbooks do not usually cover this material in any great depth, essentially taking this knowledge for granted, with the exception of Markusen et al. Most microeconomic textbooks should be adequate for discussion of market equilibrium. For a discussion of the major issues of international trade read any of the introductory chapters of the recommended textbooks. Notes: The aim of this section is to give a brief outline of the equilibrium of a market economy, prior to that economyengaging ininternational trade; this original trading stance is known as autarky. A major distinguishing feature of this course of lectures is that the rationale for trade is based rmly on the optimising behaviour of agents within the economy; welfare maximising individuals andpro tmaximising rms. Inadditionto technologyand resources, di erent equilibria resultfrom, forexample, di erencesinmarketstructure; i.e. whether rms operate within competitive or non-competitive markets. 2

3 II The Ricardian Model of International Trade 1. SingleCountryEquilibrium 2. Two Country Equilibrium 3. PatternofTradeinEquilibrium 4. TheRicardianManyGoodsModel P.R.Krugman and M.Obstfeld, International Economics, Ch.2 in particular Appendix to Chapter 2, (3rd ed. only). Trade: Theory and Evidence, Ch.7. J.Williamson and C.Milner, The World Economy, Ch.2 S.He ernan and P.Sinclair, Modern International Economics, Ch.2 J.Bhagwati andt.srinivasan, Lectures oninternational Trade (1st.ed.), Ch.3 or J.Bhagwati, A.Panagariya, and T.Srinivasan, Lectures on International Trade (2nd.ed.), Ch.3 J.Bhagwati, "The pure theory of international trade: A survey",economic Journal, vol 74, 1964, pp.1-84; reprinted in, Royal Economic Society, Surveys of Economic Theory, Vol.2. W.Ethier, Modern International Economics, Ch Notes: Almost all textbooks on international economics have a sectionon the Ricardian model of trade, the main distinguishing feature of the present course is that the theory of comparative advantage is considered via discussion of the pro tability of the industries producing the traded goods. Beware, not all textbooks explicitly follow this approach; although it is implicit in their arguments, and, of course, under perfect competition the same conclusions are reached. All the above texts are at a similar level of di±culty, except for Bhagwati and Srinivasan, which has a rather more mathematical approach, and is usually of a higher standard than that required for the majority of sections of this course. 3

4 IIITheSpeci cfactorsmodeloftrade 1. AssumptionsoftheSpeci cfactorsmodel. 2. SingleCountryEquilibrium 3. Two Country Equilibrium 4. Income Distribution andcomparison withthe RicardianModel. P.R.Krugman and M.Obstfeld, International Economics, Ch.3 University Press, Ch.5.5, Ch. 4 (for o er curve anaysis). Trade: Theory and Evidence, Ch.9. W.Ethier, Modern International Economics, Ch.3.10 J.Williamson and C.Milner, The World Economy, Ch.3.7 S.He ernan and P.Sinclair, Modern International Economics, Ch J.Bhagwati and T.Srinivasan (1st. ed.)., Lectures on International Trade, Ch.8.1. A longer discussion of this model is provided in, J.Bhagwati, A.Panagariya, and T.Srinivasan, Lectures on International Trade (2nd.ed.), Ch.7. Notes: The Ricardian model assumed only one factorwas utilisedinproduction which wasfreelytransferable betweensectors. The speci c factor model (SFM) typically considers two factors, one of which remains freely transferable across sectors, the other non transferable once assigned to a sector. In this respect the SFM may be viewed as a half way house between the Ricardian model and the Heckscher-Ohlin model, which has two freely transferable factors. The impact of trade on income distribution di ers markedly in the SFM compared to the Ricardian case. 4

5 IVThe Heckscher-Ohlin Model of Trade 1. AssumptionsoftheH-Oeconomy. 2. TheIsopriceDiagram. 3. SingleCountryEquilibrium. 4. TradeEquilibrium: FourTheorems (i) Factor-price equalization (ii) Stolper-Samuelson (iii) Rybczynski (iv) the Heckscher-Ohlin Theorem. P.R.Krugman and M.Obstfeld, International Economics, Ch.4,5 University Press, Ch.3, Ch Trade: Theory and Evidence, Ch.8. J.Williamson and C.Milner, The World Economy, Ch.3.7 S.He ernan and P.Sinclair, Modern International Economics, Ch.2 J.N.Bhagwati and T.N.Srinivasan, Lectures on International Trade, Ch. 33. and, J.Bhagwati, A.Panagariya, and T.Srinivasan, Lectures on International Trade (2nd.ed.), Section 9.2 on the Unit-Cost Function. J.Bhagwati, "The pure theory of international trade: A survey", Economic Journal, vol 74, 1964, pp.1-84; reprinted in, Royal Economic Society, Surveys of Economic Theory, Vol.2. Notes: The Heckscher-Ohlin model was the dominant theory in international trade for most of the period since the second world war; it emphasised di erencesinfactorendowmentsbetweencountries asthe mainbasisof trade. Most textbooks usually present the model in terms of the production functions of the economiesconcerned; anduse such techniques as the Edgeworthbox to demonstrate the four major theorems of the H-O model noted above. In the present course in addition we use cost functions to prove some of these results; the references following the cost function approach are Bhagwati and Srinivasan; the essential tool of the isoprice line is discussed in both in Brenton, Scott, and Sinclair and in He ernan and Sinclair. 5

6 V The New Trade Theory: Market Imperfections and Trade 1. Types of Imperfect Markets. 2. IncreasingReturnstoScale. 3. CournotModelsofInternationalTrade 4. Non-homogeneousProductsandMonopolistic Competition. P.R.Krugman and M.Obstfeld, International Economics, Ch.6. University Press, Ch.7. Trade: Theory and Evidence, Ch.11,12. J.Williamson and C.Milner, The World Economy, Ch.5,6 W.J.Ethier, Modern International Economics, Ch.3. S.He ernan and P.Sinclair, Modern International Economics, Ch.4. E.Helpman, "Increasing Returns, Imperfect Markets, and Trade Theory" in R.W.Jones and P.B.Kenen (eds.), Handbook of International Trade. Notes: The present section is concerned with what has been popularly described as "the New Trade Theory"; the essential ingredient is the replacement of the assumption of perfect competition in the classical and neoclassical theories by that of imperfect competition, where imperfections mainly arise either from product di erentiation, economies of scale or barriers to entryin particular markets. The texts by Krugman and Obstfeld, Markusen et al.,and He ernan and Sinclair both give introductions to the new theory. 6

7 VITradeandWelfare 1. De nitionofwelfare 2. GainsfromTrade: Theory 3. GainsfromTrade: Measurement 4. TradeandIncomeDistribution P.R.Krugman and M.Obstfeld, International Economics, Ch.3,4,5. (sections on income distribution). Trade: Theory and Evidence, Ch.5. University Press, Ch.9. W.M.Corden, "The Normative Theory of International Trade". Sec.1-3, in R.W.Jones and P.B.Kenen (eds.), Handbook of International Trade. S.He ernan and P.Sinclair, Modern International Economics, Ch.2, Sec.6. L.A.Winters, International Economics, Ch.7. Notes: The previous sections have been concernedwith the motivating factors for world trade, the impact of trade on prices and production in the countries concerned; and the importance of market structure in in uencing trade patterns. Suchproblems fall under the general heading of positive theories of international trade. In the present andsubsequent sections we considerthe consequences for welfare of such trade, i.e. normative trade theory. Corden provides a survey of literature in this eld; whilst Markusen et al. and Winters provide brief introductions. A further important problem treated in this section is the impact of trade on income distribution; i.e. the possible existence gainers and losers within a country through trade. Income distribution is treated in the texts of He ernan and Sinclair, and Krugman and Obstfeld. 7

8 VII Trade Policy I: The Perfect Competition Case 1. Instruments of Policy Intervention 2. Tari s 3. ExportSubsidies P.R.Krugman and M.Obstfeld, International Economics: Theory and Policy,Ch. 8. Trade: Theory and Evidence, Ch.15,16. University Press, Ch.9. R.Pomfret, International Trade,Part III, in particular Ch.10,11. J.Williamson and C.Milner, The World Economy, Ch.8 E.Helpman andp.r.krugman, Trade Policy and Market Structure, Ch.2. S.He ernan and P.Sinclair, Modern International Economics, Ch.3. W.M.Corden, "The Normative Theory of International Trade". in R.W.Jones and P.B.Kenen (eds.), Handbook of International Trade. L.A.Winters, International Economics, Ch.8,9,10. W.J.Ethier, Modern International Economics, Ch.7. Notes: The literature on the impact of policy intervention on trade ows and welfare is the most extensive in the eld of international economics, and to many economists the raison d'etre for study in this eld. The emphasis also tends to switchfromgeneral to partialequilibriumanalysis; eg.. the impactof taxes, subsidies and quotas on speci c industries, rather than the whole economy. The modern literature also subdivides into a categorisation by market structure; the older literature concerning the role for intervention under conditions of perfect competition in domestic production, although not necessarily in respect of sales on the world market. Basic instruments of policy and their e ects are considered in most texts, including Winters, Markusen et al., He ernanandsinclair, andkrugmanandobstfeld; Pomfretprovides a wide-ranging non-technical discussion of the major issues; whilst a succinct introduction is given by Helpman and Krugman. 8

9 VIII Trade PolicyII: ImperfectMarkets 1. MarketPowerandFreeTrade 2. Domestic Market Power andprotection 3. TheOptimalTari 4. ForeignMarketPowerandStrategicTradePolicies. P.R.Krugman and M.Obstfeld, International Economics: Theory and Policy, Appendix II, Ch.9 (3rd ed.) (Ch.8 6th ed.). Trade: Theory and Evidence, Ch.17. University Press, Ch.10. J.Bhagwati, Protectionism (The Ohlin Lectures). J.Williamson and C.Milner, The World Economy, Ch.9,10 R.E.Baldwin, "Are Economists' Traditional Trade Policy Views Still Valid", Journal of Economic Literature, Vol.XXX, June 1992,pp E.Helpman andp.r.krugman, Trade Policy and Market Structure. P.R.Krugman, "Is Free Trade Passe?", Journal of Economic Perspectives, 1987, Vol.1, No.2, pp S.He ernan and P.Sinclair, Modern International Economics, Ch.4. L.A.Winters, International Economics, Ch.11 Notes: The central problem of this section is the role for trade policy in the presence of market imperfections, in particular whether the classic welfare arguments in favour of free trade still hold. Much of the work in this eld is on the current boundaries of economic research, and is only now becoming accessible in the undergraduate literature. A lengthy survey of the entire eld is given in the book by Helpman and Krugman, and rather more brie y by Krugman in Schmalensee and Willig. The textbook by Krugman and Obstfeld is however disappointing in respect of this eld, with only a brief Appendix to Chapter 8. Policy under oligopoly is also only brie y considered by He ernan and Sinclair in Sec In earlier texts, e.g. Winters, imperfect markets and industrial structure are largely ignored. A non-technical discussion of protectionismvs free trade is found in Krugman's JEP article, and in the short work, Protectionism, by Bhagwati. The recent textbook by Markusen et al. also only provides a rather brief coverage of strategic trade issues. 9

10 IXTrade Integration 1. Theory of CustomsUnions: PartialEquilibrium 2. Theory of CustomsUnions: GeneralEquilibrium Trade: Theory and Evidence, Ch.18. University Press, Ch.13. S.He ernan and P.Sinclair, Modern International Economics, Ch.5. W.M.Corden, "The Normative Theoryof InternationalTrade",sec.11 inr.w.jones and P.B.Kenen (eds.), Handbook of International Trade. L.A.Winters, International Economics, Ch 13 J.N.Bhagwati and T.N.Srinivasan, Lectures on International Trade, Ch. 27. R.Lipsey, "The Theoryof Customs Unions: A General Survey", Economic Journal, 1960,Vol.70, pp Reprinted in J.Bhagwati (ed.) International Trade ( In both Penguin and MIT Editions). Notes: The nal section is concerned with the study of economic integration, either through the formal creation of customs unions and free trade areas such as the EEC and EFTA; or through reduction in tari s under the aegis of such bodies as the GATT. The standard introduction to the customs unions literature is the now classic survey by Lipsey. Both texts by He ernan and Sinclair, and Winters have introductorychapters on Customs Union Theory withstrong emphasis on the EEC. A major omissions in the Krugman and Obstfeld text is the lack of any substantive discussion of customs unions, either with respect to the EEC or any other trade area, perhaps exemplifying a di erence in the preoccupations of American and European trade theorists. The recent text by Markusen et al. goes some way to rectifythis defectby Americantrade theorists with a chapter on preferential trade areas. 10

11 RecommendedTextbooks There is no single textbook which covers the entire course; however the following covermostaspects: P.R.Krugman and M.Obstfeld, International Economics: Theory and Policy, (6th ed), Addison-Wesley, Boston, Mass., Note that the third edition of this book published by Harper Collins, New York, 1994, is also suitable. University Press, Oxford,1997. Trade: Theory and Evidence, McGraw-Hill, New York, W.J.Ethier, Modern International Economics, Norton, New York,1995 J.WilliamsonandC.Milner, The WorldEconomy, Harvester Wheatsheaf,London, S.He ernan and P.Sinclair, Modern International Economics, Basil Blackwell, Oxford, If only one book is to be purchased then I would suggest Krugman and Obstfeld, however it is necessary to supplement thistext with additional reading. Useful supplementary texts for purchase are Markusen et al or Brenton et al.. The above are written at a level accessible to undergraduates. Most, except Brenton et al. and Markusen et al., deal with international economics, not just international trade. A more advanced text dealing mainly with international trade is, J.N.Bhagwati and T.N.Srinivasan, Lectures on International Trade, MIT Press, Cambridge, Mass, A Second Edition of this book is, J.Bhagwati, A.Panagariya, and T.Srinivasan, Lectures on International Trade (2nd.ed.)MIT Press, Cambridge, Mass References to both are used above. Check carefully the edition as there are substantive di erences in the ordering of topics. It is not necessary to purchase this advanced text. R.N.Vaughan September

12 C4 International Trade Class 1 Questions Answer ALL questionsfor Class 1 The answers should be brought to the class by you.you may be called upon to provide your answer in the class. 1. The "home" country undertakes a restructuring of one of its industries which results in an increase in the labour productivity of that industry. (i) What are the consequences for relative wages as between the home and foreign countries? (ii) What are the consequences for the equilibrium relative world prices? (iii) What happens to the pro tability of each of the industries in the home country? (iv) Are there circumstances in which the productivity change has no e ect on relative world prices (the terms of trade)for the "home" country? In your answer you may assume that the two country, two good Ricardian model is applicable. Section II 2. A country has joined a monetary union, i.e. the exchange rate is xed irrevocably with respect to those of its neighbours. Over time the production in this country becomes progressively uncompetitive, until eventually no profitable opportunities for production exist. Does this mean that the theory of comparative advantage no longer applies to countries which are members of a monetary union? In answering the question you may use the two good, two country Ricardian model. Section II 3. What role does pro tability play in determining the specialisation of a country within the context of the two good Ricardian model of trade. Section 2. 12

13 Class 2 Answer ONE of these essay questions and hand it in to be marked by the deadline for your particular class. Length of essays should be 1500 to 2000 words. You may be able to write a good essay in less than 1500 words by careful use of algebra or diagrams, but remember thatnotation mustbe explainedanddiagrams related to text. Wordprocessed essays are welcome but not essential. Pages should be numbered. 1. (i) How is the pattern of specialization of goods production determined in the two country Ricardian model "with verymanygoods"? (ii) Are Gains from Trade in this model assured? (iii) In the Ricardian model "with very many goods", assume tastes within the world economy change. Analyse the economic impact in terms of welfare of a change in taste (a) towards commodities currently produced in the "Home" country, (b)against commodities currentlyproducedin the "Home" country. Now assume that the labour force of the foreign country expands relative to that of the home country. Is this detrimental (a) to the welfare of the home country, (b) detrimental to the welfare of the foreign country? Section II 2. In the "speci c factors model" in which labour is the mobile factor, assume that in the home country there is a marked improvement in the productivity of labour in the sector which currently exports. Analyse the impact on the income distribution and the pattern of trade in the home country under the assumptions: (a) the prices of internationally traded goods are xed; (b) the prices of internationally traded goods mayvary dependent on outputs in the home country. How would your answer di er if it was the productivity of labour employed in the sector competing with imports which improved? Section III 13

14 UNIVERSITYOFLONDON (University College London) B.Sc.(Econ.) DEGREE2004 ECONOMICSC4: INTERNATIONALTRADE Answer THREE questions 1. In the two good, two country Ricardian model assume that a trade equilibrium has been reached. You note that for one of the countries the international price ratio is the same as that of the autarkic price ratio. Does this country trade? How are exports and imports of both countries determined? If the Labour supply in one of the countries increases explain the possible impact on relative wages as betweenthe two countries. 2. In the two country Ricardian model with "verymany goods" assume that a trading equilibrium has been reached. How would you determine which goods are produced ineach country? Assume that labour now becomes freely mobile as between the two countries. How would you propose to measure the impact on economic welfare within each country as compared to the situation when there was no labour mobility? 3. In the speci c factors model assume that labour is the mobile factor. A trade equilibrium has been reached. Assess the impact on trade of an increase in (a) capital employed by the export sector and then (b) capital employed by the import sector. What e ects on the distribution of income may you observe for each case? 4. (a) "The equalisation of factor prices asbetweencountries in the Heckscher- Ohlin model of trade results from an assumption of complete mobility of capital and labour as between countries". Discuss. (b) "If there is no mobility of labour between countries then an increase in the labour supply of one country will result in a fall in real wages in that country". Discuss within the context of the Heckscher-Ohlin model of trade. Answer BOTH parts (a) and (b). 5. "In order to explain intra-industrytrade some form of imperfect competition must be assumed." Discuss. You mayuse any model of imperfect competition with whichyouare familiar in appraising the above statement. TURN OVER 14

15 6. In the context of the two-good Heckscher Ohlin model appraise the following statement. "If market imperfections exist within a country, opening the country to trade together with the imposition of a tari may increase welfare." 7. (a) "The impact of a tari on a country which always consumes goods in xed proportions is not as worse as where the proportions consumed change as prices change". Discuss for both the small and large country cases. (b) "Retaliation will always negate the e ects of an optimal tari ". Discuss. Answer BOTH parts (a) and (b). In each part, assume that the two-good case is applicable. 8. "Customs unionsalways resultin some formof trade diversion, andtherefore always result in loss of welfare for the country concerned". Discuss within the context of any model of trade with which you are familiar. END OF PAPER 15