Topics to prepare for the mid-term exam in International Economics

1. The Classical Theory of International Trade

• Early trade theories: mercantilism, D. Hume, A. Smith
• D. Ricardo model of comparative advantage
o assumptions of the basic model
o Ricardian comparative advantage
o comparative advantage and gains from trade
o representing the Ricardian model with a PPF

2. Neoclassical Trade Theory

• Tools of Analysis for Neoclassical Trade Theory
o community indifference curves
o production possibilities frontier with increasing costs
• Gains from trade in Neoclassical Theory
o autarky equilibrium
o gains from trade with increasing costs
o trade between countries with identical PPFs
o trade between countries with identical demand
• Offer Curves and the Terms of Trade
o a country’s offer curve
o trading equilibrium and equilibrium terms of trade
o shifts of offer curves
o the terms of trade (income TOT, commodity TOT, factoral TOT)

3. Factor Endowments and the Heckscher – Ohlin Model

• assumptions of the theory
• factor endowments and the HO theory
• the factor price equalization theorem
• the Stolper-Samuelson theorem
• empirical tests of the Factor Endowments Approach
o Leontief Paradox
o suggested explanation for the Leontief Paradox

4. Alternative Theories of Trade

• Imitation lag hypothesis
• Product cycle theory
• Linder theory
• Economies of scale (Kemp model and Krugman model)
• Intra-industry trade

5. Instruments of Trade Policy and their Impact on Economy

• Tariffs
• Nominal and effective tariff rates
• Non-tariff barriers
• Impact of an import tariff (in a small and large country)
• Impact of an import quota
• Impact of a production subsidy
 • Impact of an export subsidy (in a small and large country case)
• Dumping

6. International trade policy: GATT/WTO

• GATT: origin, functions, rules governing international trade policy
• Trade negotiations under GATT auspices
• The Uruguay Round achievements
• The Doha Round
• Outstanding trade problems

8. Preferential Trade Arrangements

• Types of preferential trade arrangements
• Welfare effects of preferential trade agreements (trade creation and trade diversion)
• Regionalism versus Multilateralism

9. Arguments for protection

• Traditional arguments:
o The infant industry argument
o The terms – of – trade argument
o Tariff to reduce aggregate unemployment
o Tariff to increase employment in a particular industry
o Tariff to offset foreign dumping
o Tariff to offset a foreign subsidy
o Tariff to benefit a scarce factor of production
o National defence argument for a tariff
o Tariff to improve the balance of trade
• New arguments: Strategic approaches to trade policy intervention

10. International Trade and Economic Growth

• Sources of growth
• Effects of technological change
• Effects of factor growth
• Factor growth, trade and welfare in a small country case
• Factor growth, trade and welfare in a large country case