EAE 307: International Economics I Notes

TABLE OF CONTENTS
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
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 Introduction 100
94
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

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