Introduction

The most fundamental question about international trade is: why do people (and countries) trade? There are a few options:

• Comparative advantgage: Countries trade to exploit their comparative advantages, which means they specialize in producing goods and services where they have a lower opportunity cost compared to other countries. The Ricardian Model of trade, developed by David Ricardo, illustrates how countries can benefit from specialization and trade even if one country is more efficient in producing all goods.
• Resource Endowments: Countries trade to leverage their unique resource endowments, such as natural resources, labor, and capital. The Heckscher-Ohlin Model posits that countries will export goods that use their abundant factors of production intensively and import goods that use their scarce factors intensively.
• Economies of Scale: Trade allows countries to benefit from economies of scale, where the cost per unit of production decreases as the scale of production increases. The New Trade Theory, pioneered by economists like Paul Krugman, explains how economies of scale and imperfect competition drive trade. Countries can produce more efficiently by expanding their markets through trade, leading to lower prices and increased variety for consumers. Not in this course.

In all cases, a relevant underlying conclusion is that by trading, countries can increase the welfare of their citizens by increasing their consumption possibilities beyond what they could produce without trade. NOTE: A country that is closed and does not trade is said to be in autarky. In this course, we will explain trade using three different models: the Ricardian Model, the Heckscher-Ohlin Model, and the Standard Trade Model. However, despite the fact that trade is Pareto-improving, we see that countries put on tariffs and other trade barriers. The second part of the course will analyze how these barriers affect countries and try to make sense of them.

The course closely follows “International Economics, Theory and Policy” by Krugman, Obstfeld and Melitz.

You can find a sample of a previous exam here