EAE 307: INTERNATIONAL ECONOMICS I NOTES

	TABLE OF CONTENTS	1
LECTURE ONE		6
1.0	INTRODUCTORY LECTURE	6
1.1	Why We Study International Economics	8
1.2	The Subject Matter of International Economics	11
LECTURE TWO		14
2.0	FIRST INTERNATIONAL TRADE THEORY	14
2.1	Introduction	14
2.2	Early Trade Theory: The Mercantilist Doctrine	15
2.3	Mercantilist Beliefs	16
2.4	How Mercantilists Achieved Their Objectives	18
2.5	Commentary on Mercantilism	18
LECTURE THREE		20
3.0	CHALLENGES TO MERCANTILIST DOCTRINE	20
3.1	Introduction	20
3.2	Free Trade Theory	21
3.3	Adam Smith’s Contribution to the Theory of Trade	22
	3.3.1 Smith’s Theory of Absolute Advantage	23
3.4	David Ricardo’s Contribution to the Theory of Trade	24
	3.4.1 Ricardo’s Theory of Comparative Advantage	25
	3.4.2 Use of Modern Concept of Opportunity Cost to Explain the
	Theory of Comparative Advantage	26
3.5	Group Activity in Class	27
LECTURE FOUR		22
4.0	THE RICARDIAN MODEL	28
4.1	Production in Autarky	30
4.2	Summary	34
4.3	Developing Community Indifference Curve	34
	1

4.3.1 Consumption in Autarky		34
4.3.2	Why Community Indifference Curves (CIC) Are Used	36
4.4	Equilibrium in Autarky	37
4.5	The Ricardian Model with Trade	38
4.6	Modern Presentation of Adam Smith’s and David Ricardo’s
	Theories of Absolute and Comparative Advantages	40
4.6.1	Adam Smith’s Theory	40
4.6.2	David Ricardo’s Theory	41
4.7	Group Assignments	44
LECTURE FIVE		45
5.0	INTERNATIONAL EQUILIBRIUM WITH FREE TRADE	45
5.1	Consumption and Production Gains from Trade	50
5.2	Some Important Assumptions in the Analysis	52
5.2.1	Costless Factor Mobility	52
5.2.2	Full Employment of Factors of Production Assumption	53
5.2.3	Community Indifference Curve Showing Welfare Changes	53
LECTURE SIX		55
6.0	THE NEO-CLASSICAL MODEL	55
6.1	Neo-Classical Model in Autarky	56
6.2	Production Function: Isoquants and Isocosts	58
6.3	Capital/Labor Ratio	63
6.4	Equilibrium in Autarky with Increasing Costs	67
6.5	The Neo-Classical Model with Trade	70
6.5.1	Productive Specialization Under Increasing Costs	70
6.5.2	International Equilibrium with Free Trade and Increasing Costs	74
LECTURE SEVEN		78
7.0	OFFER CURVES	78
7.1	The “Trade Triangle Approach” to Deriving Offer Curves	79
7.2	The “Tabular Approach” to Deriving Offer Curves	85
7.3	Trading Equilibrium	89
LECTURE EIGHT		90
8.0	THE HECKSCHER-OHLIN (H-O) MODEL	90
8.1	Introduction	90
8.2	The Role of Factor Endowment in Determining Comparative
	Advantage	90
8.2.1	The Heckscher-Ohlin Model/Theorem	90
8.2.2	Factor Abundance	91
8.2.3	What H-O Theorem says	92

	8.2.4	The Role of Taste in Determining Comparative Advantage	94
8.3	Group Activity		99
LECTURE NINE			100
9.0		EMPIRICAL TESTING OF TRADE THEORIES	100
9.1	94	Introduction	100
9.2	94	Empirical Testing of Trade Theories	100
9.2		Empirical Testing of Trade Theories	100
	9.2.1	Test of the Heckscher-Ohlin Theory	101
	9.2.2	Leontief Test of H-O and the Leontief Paradox	102
9.3		Modification of H-O Model to Explain Patterns of Trade	103
	9.3.1	The Role of Tastes	103
	9.3.2	The Role of Trade Barriers	104
	9.3.3	Classification of Inputs	105
	9.3.4	Intra-Industry Trade	106
	9.3.5	Trade with Economies of Scale	106
	9.3.6	Effect of Transport Costs on Trade	107
	9.3.7	Effect of Location of Industry on Trade	108
9.4		Factor Intensity Reversal and H-O Theory	108
9.5		Paul Samuelson’s Factor Price Equalisation Theory (1948)	109
9.6		The Stolper-Samuelson Theorem: The Relationship Between
		Output Prices and Factor Prices	111
LECTURE TEN			117
10.0		ALTERNATIVE THEORIES OF TRADE	117
10.1		Introduction	117
10.2		The Imitation Lag Theory of Trade	117
10.3		The Product Cycle Theory of Trade	119
10.4		The Linder Theory of Trade	121
10.4		Further Readings	122
LECTURE ELEVEN			123
11.0		PROTECTIONISM	123
11.1		Introduction	123
11.2		Trade Barriers to Trade	123
	11.2.1	Tariffs	123
	11.2.2	Types of Tariffs	124
	11.2.3	Effects of Tariffs Imposed by a Small Country	125
	11.2.4	Partial Equilibrium Welfare Effects of a Tariff	128
LECTURE TWELVE			131
12.0		MEASUREMENT OF TARIFF EFFECTS	131

12.1		Effective Rate of Protection (ERP)	131
12.2		The Height of a Tariff	136
LECTURE THIRTEEN			138
13.0	NON-TARIFF BARRIERS AND NEW PROTECTION		138
13.1		Production Subsidies	138
13.2		Quotas	139
13.3		Voluntary Export Restraint (VER)	141
	13.4	Export Subsidies and Counter-veiling Duties	142
13.5		Administrative and Technical Standards	143
13.6		Government Procurement Rules and Policies	144
13.7		National Security or Defence (Strategic Industries)	144
13.8		Dumping	144
13.9		Types of Dumping	145
	13.9.1	Sporadic Dumping	145
	13.9.2	Persistent Dumping	146
	13.9.3	Predatory Dumping	146
LECTURE FOURTEEN			148
14.0		IMPORT SUBSTITUTION: THE INFANT INDUSTRY	148
14.1		Introduction	148
14.2		Import Substitution Strategy of Industrial Development in
		Developing Countries	149
	14.2.1	The Infant Industry Argument	149
BIBILIOGRAPHY			155
APPENDIX			159

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