Contents I The classical theory of international trade Basic issues 1 Comparative advantage with two goods 1.2 Explaining comparative advantage 2 Analytical tools 2.1 The revenue function 2.2 The cost function 122366790 2.3 Consumer choice 2.4 The Meade utility functions 3 Equilibrium and the gains from trade 3. 1 Defining the equilibrium 3.2 Gains from trade 4 Factor price equalization 4.1 General results 4.1.1 Comparative advantage 4.1.2 Factor proportions 4.1.3 Factor prices 55678 4.2 Factor price equalization 4.2.1 More factors than goods 4.2.2 At least as many goods as factors 4.3 The pattern of trade under FPE 5 Comparative statics and and welfare 5.1 The transfer proble 5.2 The effect of a small tariff
Contents I The classical theory of international trade 1 1 Basic issues 2 1.1 Comparative advantage with two goods . . . . . . . . . . . . . 2 1.2 Explaining comparative advantage . . . . . . . . . . . . . . . . 3 2 Analytical tools 6 2.1 The revenue function . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 The cost function . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.3 Consumer choice . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.4 The Meade utility functions . . . . . . . . . . . . . . . . . . . 10 3 Equilibrium and the gains from trade 11 3.1 Defining the equilibrium . . . . . . . . . . . . . . . . . . . . . 11 3.2 Gains from trade . . . . . . . . . . . . . . . . . . . . . . . . . 12 4 Factor price equalization 15 4.1 General results . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.1.1 Comparative advantage . . . . . . . . . . . . . . . . . . 15 4.1.2 Factor proportions . . . . . . . . . . . . . . . . . . . . 16 4.1.3 Factor prices . . . . . . . . . . . . . . . . . . . . . . . 17 4.2 Factor price equalization . . . . . . . . . . . . . . . . . . . . . 18 4.2.1 More factors than goods . . . . . . . . . . . . . . . . . 20 4.2.2 At least as many goods as factors . . . . . . . . . . . . 20 4.3 The pattern of trade under FPE . . . . . . . . . . . . . . . . . 20 5 Comparative statics and and welfare 23 5.1 The transfer problem . . . . . . . . . . . . . . . . . . . . . . . 23 5.2 The effect of a small tariff . . . . . . . . . . . . . . . . . . . . 26 v
CONTENTS 5.3 Growth in factor endowments 5.4 Technological change 6 Simple trade models 6.1 The Heckscher-Ohlin model -the role of factor endowments. 30 6.2 The generalized Ricardian model -the role of technology 6.3 The specific factors model - income distribution Empirical strategies 7. 1 The basic equation 40 7.2 Extensions with Fpe 40 7.3 Results without FPE II Increasing returns and the "New Trade Theory'45 8 External economies of scale 47 8.1 Gains from trade 4 8. 2 An example 8.3 Factor price equalization 51 9 Oligopoly, dumping and strategic trade 9.1 Reciprocal dumping 9.2 Strategic trade policy 10 Monopolistic competition 10.1 Basics 10.1.1 Consumption 59 10.1.2 Productio 61 10.2 The trading equilibrium 61 0.2.1 The integrated equilibrium 61 10.2.2 Factor price equalization 10.3 Transport costs and the home market effect 63 0.3.1 Autarch 64 10.3.2 Trade equilibrium 11 The New Economic Geography 67 11.1 A model of agglomeration 11.2 Specialization in international trade
CONTENTS vi 5.3 Growth in factor endowments . . . . . . . . . . . . . . . . . . 28 5.4 Technological change . . . . . . . . . . . . . . . . . . . . . . . 28 6 Simple trade models 30 6.1 The Heckscher-Ohlin model – the role of factor endowments . 30 6.2 The generalized Ricardian model – the role of technology . . . 33 6.3 The specific factors model – income distribution . . . . . . . . 36 7 Empirical strategies 39 7.1 The basic equation . . . . . . . . . . . . . . . . . . . . . . . . 40 7.2 Extensions with FPE . . . . . . . . . . . . . . . . . . . . . . . 40 7.3 Results without FPE . . . . . . . . . . . . . . . . . . . . . . . 41 II Increasing returns and the “New Trade Theory” 45 8 External economies of scale 47 8.1 Gains from trade . . . . . . . . . . . . . . . . . . . . . . . . . 47 8.2 An example . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 8.3 Factor price equalization . . . . . . . . . . . . . . . . . . . . . 51 9 Oligopoly, dumping and strategic trade 54 9.1 Reciprocal dumping . . . . . . . . . . . . . . . . . . . . . . . . 54 9.2 Strategic trade policy . . . . . . . . . . . . . . . . . . . . . . . 57 10 Monopolistic competition 59 10.1 Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 10.1.1 Consumption . . . . . . . . . . . . . . . . . . . . . . . 59 10.1.2 Production . . . . . . . . . . . . . . . . . . . . . . . . 61 10.2 The trading equilibrium . . . . . . . . . . . . . . . . . . . . . 61 10.2.1 The integrated equilibrium . . . . . . . . . . . . . . . . 61 10.2.2 Factor price equalization . . . . . . . . . . . . . . . . . 62 10.3 Transport costs and the home market effect . . . . . . . . . . 63 10.3.1 Autarchy . . . . . . . . . . . . . . . . . . . . . . . . . 64 10.3.2 Trade equilibrium . . . . . . . . . . . . . . . . . . . . . 65 11 The New Economic Geography 67 11.1 A model of agglomeration . . . . . . . . . . . . . . . . . . . . 67 11.2 Specialization in international trade . . . . . . . . . . . . . . . 71
CONTENTS 2 Empirical strategies 12.1 Testable predictions 12.2 The gravity equation 77 Iii Trade and growth 13 Trade, growth and factor proportions 13. 1 The model 81 13. 2 A small open economy 13. 3 A large country 14 Learning-by-doing 14.1 A Ricardian model 14.1.1 The model 14.1.2 Dynamics and the steady state 86 14.1.3 Industrial policy 14.2 Agriculture and the Dutch Disease 14. 2. 1 The closed economy 14.2.2 A small open economy 8g0 14.3 North-South trade 14.3.1 The model 14.3.2 Autarchy 14.3.3 Free trade 15 Endogenous growth and trade 98 15.1 Autarchy 15.2 International knowledge diffusion 102 15.3 Trade with knowledge diffusion 103 15.4 Trade with no knowledge diffusion 105 15.5 Imitation and North-South trade 107
CONTENTS vii 12 Empirical strategies 75 12.1 Testable predictions . . . . . . . . . . . . . . . . . . . . . . . . 75 12.2 The gravity equation . . . . . . . . . . . . . . . . . . . . . . . 77 III Trade and growth 80 13 Trade, growth and factor proportions 81 13.1 The model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 13.2 A small open economy . . . . . . . . . . . . . . . . . . . . . . 83 13.3 A large country . . . . . . . . . . . . . . . . . . . . . . . . . . 83 14 Learning-by-doing 85 14.1 A Ricardian model . . . . . . . . . . . . . . . . . . . . . . . . 85 14.1.1 The model . . . . . . . . . . . . . . . . . . . . . . . . . 85 14.1.2 Dynamics and the steady state . . . . . . . . . . . . . 86 14.1.3 Industrial policy . . . . . . . . . . . . . . . . . . . . . 88 14.2 Agriculture and the Dutch Disease . . . . . . . . . . . . . . . 88 14.2.1 The closed economy . . . . . . . . . . . . . . . . . . . 89 14.2.2 A small open economy . . . . . . . . . . . . . . . . . . 90 14.3 North-South trade . . . . . . . . . . . . . . . . . . . . . . . . 91 14.3.1 The model . . . . . . . . . . . . . . . . . . . . . . . . . 91 14.3.2 Autarchy . . . . . . . . . . . . . . . . . . . . . . . . . 93 14.3.3 Free trade . . . . . . . . . . . . . . . . . . . . . . . . . 94 15 Endogenous growth and trade 98 15.1 Autarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 15.2 International knowledge diffusion . . . . . . . . . . . . . . . . 102 15.3 Trade with knowledge diffusion . . . . . . . . . . . . . . . . . 103 15.4 Trade with no knowledge diffusion . . . . . . . . . . . . . . . . 105 15.5 Imitation and North-South trade . . . . . . . . . . . . . . . . 107
Part I The classical theory of international trade
Part I The classical theory of international trade 1
Chapter 1 Basic issues The basic questions in the classical theory of international trade can be ana- lyzed in the two-by-two model. Thus we will assume here that there are two factors of production(indexed by i) and two goods(indexed by j). Factors are mobile across sectors but not across countries, both goods can be traded We do not always have to worry about the trade equilibrium explicitly, when we do, we will assume that there are two countries(Home and Foreign) 1.1 Comparative advantage with two goods The doctrine of comparative advantage links autarchy price ratios with trade We can illustrate it by a simple exchange ny with resentative agent. Let good l be the numeraire, and let pa and pf stand for the autarchy and free trade relative price of good 2. We can summarize an equilibrium by the net import vector m of the agent and the equilibrium price vector p. Let m and ms be the autarchy and free trade net import vectors. A competitive equilibrium is efficient, so that consumption maximizes utility given the value of endowments. At any price vector, agents can consume their endowment, so that m must be on the budget line. In particular mi+pmg=mi+pm Since m is affordable at free-trade prices, m must be revealed preferred to You can find a graphical treatment in DN Ch. 1, p.7
Chapter 1 Basic issues The basic questions in the classical theory of international trade can be analyzed in the two-by-two model. Thus we will assume here that there are two factors of production (indexed by i) and two goods (indexed by j). Factors are mobile across sectors but not across countries, both goods can be traded. We do not always have to worry about the trade equilibrium explicitly, when we do, we will assume that there are two countries (Home and Foreign). 1.1 Comparative advantage with two goods The doctrine of comparative advantage links autarchy price ratios with trade patterns. We can illustrate it by a simple exchange economy with one representative agent.1 Let good 1 be the numeraire, and let p a and p t stand for the autarchy and free trade relative price of good 2. We can summarize an equilibrium by the net import vector m of the agent and the equilibrium price vector p. Let ma and mt be the autarchy and free trade net import vectors. A competitive equilibrium is efficient, so that consumption maximizes utility given the value of endowments. At any price vector, agents can consume their endowment, so that ma must be on the budget line. In particular: ma 1 + p tma 2 = mt 1 + p tmt 2 . Since ma is affordable at free-trade prices, mt must be revealed preferred to 1You can find a graphical treatment in DN Ch. 1, p.7. 2