OverviewofSectionI:InternationalTradeTheorySectionIofthetextiscomprisedofsixchapters:Chapter2 WorldTrade:AnOverviewChapter3 LaborProductivityandComparativeAdvantage:TheRicardianModelChapter4 Resources,ComparativeAdvantage,andIncomeDistributionChapter5 TheStandardTradeModelChapter6 EconomiesofScale,ImperfectCompetition,andInternationalTradeChapter7 InternationalFactorMovementsSectionIOverviewSectionIofthetextpresentsthetheoryofinternationaltrade.Theintentofthissectionistoexplorethemotivesforandimplicationsofpatternsoftradebetweencountries.Thepresentationproceedsbyintroducingsuccessivelymoregeneralmodelsoftrade,wherethegeneralityisprovidedbyincreasingthenumberoffactorsusedinproduction,byincreasingthemobilityoffactorsofproductionacrosssectorsoftheeconomy,byintroducingmoregeneraltechnologiesappliedtoproduction,andbyexaminingdifferenttypesofmarketstructure.ThroughoutSectionI,policyconcernsandcurrentissuesareusedtoemphasizetherelevanceofthetheoryofinternationaltradeforinterpretingandunderstandingoureconomy.Chapter2givesabriefoverviewofworldtrade.Inparticular,itdiscusseswhatweknowaboutthequantitiesandpatternofworldtradetoday.Thechapterusestheempiricalrelationshipknownasthegravitymodelasaframeworktodescribetrade.Thisframeworkdescribestradeasafunctionofthesizeoftheeconomiesinvolvedandtheirdistance.Itcanthenbeusedtoseewherecountriesaretradingmoreorlessthanexpected.Thechapteralsonotesthegrowthinworldtradeoverthepreviousdecadesandusesthepreviouseraofglobalization(pre-WWI)ascontextfortoday’sexperience.Chapter3introducesyoutointernationaltradetheorythroughaframeworkknownastheRicardianmodeloftrade.Thismodeladdressestheissueofwhytwocountrieswouldwanttotradewitheachother.Thismodelshowshowmutually-beneficialtradeariseswhentherearetwocountries,eachwithonefactorofproductionwhichcanbeappliedtowardproducingeachoftwogoods.Keyconceptsareintroduced,suchastheproductionpossibilitiesfrontier,comparativeadvantageversusabsoluteadvantage,gainsfromtrade,relativeprices,andrelativewagesacrosscountries.Chapter4introduceswhatisknownastheclassicHeckscher-Ohlinmodelofinternationaltrade.Usingthisframework,youcanworkthroughtheeffectsoftradeonwages,pricesandoutput.Manyimportantandintuitiveresultsarederivedinthischapterincluding:theRybczynskiTheorem,theStolper-SamuelsonTheorem,andtheFactorPriceEqualizationTheorem.ImplicationsoftheHeckscher-Ohlinmodelforthepatternoftradeamongcountriesarediscussed,asarethefailuresofempiricalevidencetoconfirmthepredictionsofthetheory.Thechapteralsointroducesquestionsofpoliticaleconomyintrade.One4 d?InternationalEconomics:Theoryandoimportantreasonforthisadditiontothemodelistoconsidertheeffectsoftradeonincomedistribution.Thisapproachshowsthatwhilenationsgenerallygainfrominternationaltrade,itisquitepossiblethatspecificgroupswithinthesenationscouldbeharmedbythistrade.Thisdiscussion,andrelatedquestionsaboutprotectionismversusglobalization,becomesbroaderandevenmoreinterestingasyouworkthroughthemodelsanddifferentassumptionsofsubsequentchapters.Chapter5presentsageneralmodelofinternationaltradewhichadmitsthemodelsofthepreviouschaptersasspecialcases.This“standardtrademodel”isdepictedgraphicallybyageneralequilibriumtrademodelasappliedtoasmallopeneconomy.Relativedemandandrelativesupplycurvesareusedtoanalyzeavarietyofpolicyissues,suchastheeffectsofeconomicgrowth,thetransferproblem,andtheeffectsoftradetariffsandproductionsubsidies.Theappendixtothechapterdevelopsoffercurveanalysis.Whileanextremelyusefultool,thestandardmodeloftradefailstoaccountforsomeimportantaspectsofinternationaltrade.Specifically,whilethefactorproportionsHeckscher-Ohlintheoriesexplainsometradeflowsbetweencountries,recentresearchininternationaleconomicshasplacedanincreasingemphasisoneconomiesofscaleinproductionandimperfectcompetitionamongfirms.Chapter6presentsmodelsofinternationaltradethatreflectthesedevelopments.Thechapterbeginsbyreviewingtheconceptofmonopolisticcompetitionamongfirms,andthenshowingthegainsfromtradewhichariseinsuchimperfectlycompetitivemarkets.Next,internalandexternaleconomiesofscaleinproductionandcomparativeadvantagearediscussed.Thechaptercontinueswithadiscussionoftheimportanceofintra-industrytrade,dumping,andexternaleconomiesofproduction.Thesubjectmatterofthischapterisimportantsinceitshowshowgainsfromtradeariseinwaysthatarenotsuggestedbythestandard,moretraditionalmodelsofinternationaltrade.Thesubjectmatteralsoisenlighteninggiventheincreasedemphasisonintra-industrytradeinindustrializedcountries.Chapter7focusesoninternationalfactormobility.Thisdepartsfrompreviouschapterswhichassumedthatthefactorsofproductionavailableforproductionwithinacountrycouldleaveacountry’sborders.Reasonsforandtheeffectsofinternationalfactormobilityarediscussedinthecontextofaone-factor(labor)productionandtrademodel.Theanalysisoftheinternationalmobilityoflabormotivatesafurtherdiscussionofinternationalmobilityofcapital.Theinternationalmobilityofcapitaltakestheformofinternationalborrowingandlending.Thisfacilitatesthediscussionofinter-temporalproductionchoicesandforeigndirectinvestmentbehavior.Chapter2WorldTrade:AnOverviewChapterOrganizationWhoTradeswithWhom?SizeMatters:theGravityModelTheLogicoftheGravityModelUsingtheGravityModel:LookingforAnomaliesImpedimentstoTrade:Distance,Barriers,andBordersTheChangingPatternofWorldTradeHastheWorldGottenSmallerWhatDoWeTrade?ServiceOutsourcingDoOldRulesStillApply?SummaryKeyThemesBeforeenteringintoaseriesoftheoreticalmodelsthatexplainwhycountriestradeacrossbordersandthebenefitsofthistrade(Chapters3–11),Chapter2considersthepatternofworldtradewhichweobservetoday.Thecoreideaofthechapteristheempiricalmodelknownasthegravitymodel.Thegravitymodelisbasedontheobservationsthat:(1)countriestendtotradewithothernearbyeconomiesand(2)countries’tradeisproportionaltotheirsize.Themodeliscalledthegravitymodelasitissimilarinformtothephysicsequationthatdescribesthepullofonebodyonanotherasproportionaltotheirsizeanddistance.ThebasicformofthegravityequationisTAYY/D.Thelogicsupportingthisequationisthatij i j ijlargecountrieshavelargeincomestospendonimportsandproducealargequantityofgoodstosellasexports.Thismeansthatthelargereithertradepartner,thelargerthevolumeoftradebetweenthem.Atthesametime,thedistancebetweentwotradepartnerscansubstituteforthetransportcoststhattheyfaceaswellasproxyformoreintangibleaspectsofatradingrelationshipsuchastheeaseofcontactforfirms.Thismodelcanbeusedtoestimatethepredictedtradebetweentwocountriesandlookforanomaliesintradepatterns.Thetextshowsanexamplewherethegravitymodelcanbeusedtodemonstratetheimportanceofnationalbordersindeterminingtradeflows.Accordingtomanyestimates,theborderbetweentheU.S.andCanadahastheimpactontradeequivalenttoroughly2000milesofdistance.Otherfactors,suchastariffs,tradeagreements,andcommonlanguagecanallaffecttradeandcanbeincorporatedintothegravitymodel.6 Krugman/Obstfeld?InternationalEconomics:TheoryandPolicy,EighthEditionThechapteralsoconsidersthewaytradehasevolvedovertime.Whilepeopleoftenfeelthatthemodernerahasseenunprecedentedglobalization,infact,thereisprecedent.Fromtheendofthe19thcenturytoWorldWarI,theeconomiesofdifferentcountrieswerequiteconnected.TradeasashareofGDPwashigherin1910than1960,andonlyrecentlyhavetradelevelssurpassedthepreWorldWartrade.Thenatureoftradehaschangethough.Themajorityoftradeisinmanufacturedgoodswithagricultureandmineralproducts(andoil)makinguplessthan20%ofworldtrade.Evendevelopingcountriesnowexportprimarilymanufactures.Incontrast,acenturyago,moretradewasinprimaryproductsasnationstendedtotradeforthingsthatliterallycouldnotbegrownorfoundathome.Today,thereasonsfortradearemorevariedandtheproductswetradeareeverchanging(forexample,theriseintradeofthingslikecallcenters).Thechapterconcludesbyfocusingononeparticularexpansionofwhatis“tradable”—theincreaseinservicestrade.Moderninformationtechnologyhasgreatlyexpandedwhatcanbetradedasthepersonstaffingacallcenter,doingyouraccounting,orreadingyourX-raycanliterallybehalf-wayaroundtheworld.Whilestillrelativelyrare,thepotentialforalargeincreaseinserviceoutsourcingisanimportantpartofhowtradewillevolveinthecomingdecades.Thenextfewchapterswillexplainthetheoryofwhynationstrade.AnswerstoTextbookProblemsWesawthatnotonlyisGDPimportantinexplaininghowmuchtwocountriestrade,butalso,distanceiscrucial.Givenitsremoteness,Australiafacesrelativelyhighcostsoftransportingimportsandexports,therebyreducingtheattractivenessoftrade.SinceCanadahasaborderwithalargeeconomy(theU.S.)andAustraliaisnotnearanyothermajoreconomy,itmakessensethatCanadawouldbemoreopenandAustraliamoreself-reliant.MexicoisquiteclosetotheU.S.,butitisfarfromtheEuropeanUnion(EU).SoitmakessensethatittradeslargelywiththeU.S.Brazilisfarfromboth,soitstradeissplitbetweenthetwo.MexicotradesmorethanBrazilinpartbecauseitissoclosetoamajoreconomy(theU.S.)andinpartbecauseitisamemberofafreetradeagreementwithalargeeconomy(NAFTA).Brazilisfartherawayfromanylargeeconomyandisinafreetradeagreementwithrelativelysmallcountries.No,ifeverycountry’sGDPweretodouble,worldtradenotquadruple.OnewaytoseethisusingtheexamplefromTable2-2wouldsimplybetoquadrupleallthetradeflowsin2-2andalsodoubletheGDPin2-1.WewouldseethatthefirstlineofTable2-2would6.4,1.6,1.6.Ifthatweretrue,CountryAwouldhaveexported$8trillionwhichisequaltoitsentireGDP.Likewise,itwouldhaveimported$8trillion,meaningithadzerospendingonitsowngoods(highlyunlikely).IfinsteadwefilledinTable2-2asbefore,bymultiplyingtheappropriatesharesoftheworldeconomytimesacountry’sGDP,wewouldseethefirstlineofTablereads—,3.2,0.8,0.8.Inthiscase,60%ofCountryA’sGDPisexported,thesameasbefore.ThelogicisthatwhiletheworldGDPhasdoubled,increasingthelikelihoodofinternationaltrade,thelocaleconomyhasdoubled,increasingthelikelihoodofdomestictrade.Thegravityequationstillholds.Ifyoufillintheentiretable,youwillseethatwherebeforetheequationwas0.1GDPGDP,itnowis0.05GDPGDP.Thei j i jcoefficientoneachGDPisstillone,buttheoverallconstanthaschanged.AstheshareofworldGDPwhichbelongstoEastAsianeconomiesgrows,thenineverytraderelationshipwhichinvolvesanEastAsianeconomy,thesizeoftheEastAsianeconomyhasgrown.ThismakesthetraderelationshipswithEastAsiancountrieslargerovertime.Thelogicissimilarforwhythecountriestrademorewithoneanother.Previously,theywerequitesmalleconomies,meaningthattheirmarketsweretoosmalltoimportasubstantialamount.Asthey