Lahore University of Management Sciences BSc. Program Spring 2018 ECON 351 International Trade Course Outline Instructor Turab Hussain Office Hours: TBA e-mail: turab@lums.edu.pk Course Description and Objectives The International Trade course is structured into two parts. The first part introduces students to the theoretical models of trade which explain the rationale, pattern and effect of trade on the participant countries. The second part of the course focuses on trade policy. Here the various instruments of trade policy are analysed, the political economy of trade policy introduced and finally the debates in trade policy are highlighted from the perspective of the developing world. The objectives of the course are thus twofold. The first is to explain how economic theory can be used to understand the reasons why countries trade with each other and the welfare impact of this trade on the countries as a whole and on groups (consumers, producers, government) within these. These theoretical models will be motivated by real world examples and their predictions corroborated by empirical evidence. The second objective is to introduce students to the menu of policy interventions and instruments available to countries used to limit or enhance trade so that they understand the impact of 1
these policies on economic welfare of the country and the various groups within a country. The political economy aspect of trade policy will also be covered with the objective of informing students about the role of competing interests and lobbying behaviour in policy making. Finally, students would be introduced to current and historical trade policy debates and issues in both developing and developed countries under the broader ambit of the WTO. The major topics/modules covered in each part are the following: Part I: Pattern of Trade 1. The Gravity Model 2. The Principle of Comparative Advantage The Ricardian Model. 3. The Heckscher-Ohlin Model. 4. The Specific Factor Model. 5. The Standard Trade Model. 6. Economies of Scale and Imperfect Competition Part II: Trade Policy 1. Policy Instruments Tariffs, Quotas and VERS (Voluntary Export Restraints) Dumping 2. Political Economy Free trade? Trade Agreements and Trading Blocks. 3. Debates in Trade Policy 2
Prerequisites Math 101, Principles of Microeconomics. Textbook The main textbook for the course is P R Krugman and M Obstfeld, 2009, International Economic: Theory and Policy, Eighth Edition, Addison-Wesley. You are strongly encouraged to obtain a copy. You should also use the textbook 's website at www.awlonline.com/krugman_obstfeld where you will find PowerPoint lecture slides, applications and a battery of tests for each chapter of the book. The site will also direct you to other web sites where you can obtain related statistical data. Complementary Readings Complementary readings TBA. Other useful textbooks include: R E Caves, J A Frankel and R W Jones, 2002, World Trade and Payments: An Introduction, Ninth Edition, Addison-Wesley D. Salvatore, 2001, International Economics, Seventh Edition, Wiley. Lectures & Classes The weekly class complements the lectures. The class time is devoted to solve analytical exercises designed to enhance the 3
students understanding of the basic models of trade, to answer questions and to discuss current policy issues. Lecture Notes The transparencies used in the lectures will be posted on the LMS. Grading 30% Exams (2 exams pre and post midterm) 30% Midterm 40% Final Week 1 Detailed Outline What is international economics about? Why study international trade theory? The gravity model. Krugman and Obstfeld, Chapter 1 & 2 Week 2 & 3 The principle of Comparative advantage and the Ricardian model. Empirical evidence on the Ricardian model. Krugman and Obstfeld, Chapter 3 Week 4, 5 & 6 4
The role of factor abundance: pattern of trade and specialisation in the Hecksher-Ohlin (H-O) model. Empirical evidence on the H-O model. Specific factors, pattern of trade and local distribution of income in the Specific Factors (SF) model. Comparing the implications of the H-O model and the SF model. Krugman and Obstfeld, Chapter 4 Week 7 The standard trade model: terms of trade, international transfers and growth. Krugman and Obstfeld, Chapter 5 Week 8 & 9 Economies of scale, imperfect competition and trade patterns. Krugman and Obstfeld, Chapter 6 Week 9, 10 & 11: Policy instruments (tariffs, export subsidies and quotas) in perfect and imperfectly competitive markets 5
II Krugman and Obstfeld, Chapter 8, appendix1 and appendix Week 12 The political economy of trade policy: arguments for and against free trade, income distribution and trade policy, and international trade agreements. Week 13 Krugman and Obstfeld, Chapter 9. Trade Policy in Developing countries: Import substitution Industrialization, Export Oriented Industrialization. Krugman and Obstfeld, Chapter 10. Week 14 Controversies in trade policy. Course review Krugman and Obstfeld, Chapters 11 6