International Trade

ECONOMICS 181
SUMMER 2015
UC BERKELEY

LECTURE 1
INTRODUCTION
 Syllabus

Professor: Calanit Kamala

E-mail: calanit@berkeley.edu

Mailbox: 508-1 Evans Hall

Office Hours: Mondays after class or by

appointment
 Course Resources

Textbook: International Trade, 10th edition,

Krugman, Obstfeld and Melitz

Electronic version via myeconlab is $106

 E-mails

I always prefer that you approach me in person

If you really want to e-mail me, expect a reply within

48 hours
Grading
 Problem Sets

3 problems sets assigned

3*5% = 15%

PS are due at the beginning of class on June 4th,

11th and July 1st

NO LATE PROBLEM SETS

NO ELECTRONIC PS
 Quizzes

Total 8 quizzes assigned

5 counted towards grade

2%*5 = 10%
 Research Assignment

One research assignment

Due on 06/22

5%*1 = 5%
 Group presentations

In the last week of classes we will dedicate time for

group presentations.
Groups of 4.
Any SPECIFIC trade topic
Each group member to come up with a research
question and a graph
10 minutes presentation
Presentation: 5%
 Midterm

Midterm will be on June 15th, 10:00-12:00.

30% of grade

There will be no make-up midterms.

 Final

Cumulative final (35%) is on

July 2nd, 10:00-12:00

Excused absence= I

Unexcused absence = 0 points on final

 Lecture slides

Lectures will include both lecture and section

I will periodically post handouts before class you

should print it and bring it to class

I will post lecture slides after lecture

 How to do well

Attend Class and section

Stay awake have your favorite form of caffeine before

class.

Do not fall behind!

Read along in the textbook, Solve extra problems

Ask Questions!
 Course Overview

Classical models of International Trade explain

trade patterns.

Micro Models of Trade Policy - explain the effects of

government policy.

International Trade agreements history, as well as

current and controversial issues.

 Course Goals

Understand
Patterns of trade: relative & absolute differences in
productivity

Imapct of government policy such as tariffs, quotas & subsidies

Achieve this by

Learning classical trade models

Discussing impact of trade policies

Introduction

READING: CHAPTER 1
 What is International Economics?

International economics studies the special issues

raised by economic transactions between sovereign

nations.
 International Economics

International Trade: focus on exchange of goods

and services: gains, patters and policy issues.

International Finance: focus on the financial

infrastructure that allows trade: financial

institutions, exchange rates, foreign investment, etc.
 Why Learn International Economics?

Nations are more closely linked through trade in

goods and services, through flows of money, and

through investment than ever before.
How much of American apparel is produced in the U.S.?

Which car company creates more American jobs: Toyota or

Ford?
 Why Learn International Economics?

As geographical and technological barriers diminish,

trade is becoming an integral part of nearly all

economic activities.

U.S. trade as a fraction of the national economy has

tripled in the past 40 years.

Exports and Imports as a Percentage of U.S. National Income
Trade volume comparison
 Reasons for increased trade flows

1. Cheaper Transportation

2. Better Communication & Technology

3. Policy changes

4. Better financial institutions

World trade
U.S. top trading partners
Top 10 Traded Commodities (Legal)
Trade in illicit goods
 Illicit Trade

Total drug trade is estimated to be 1-3% of global

GDP

Opium trade in 2007, was half of Afghan licit GDP

and totaled $4 billion

 Trade Terminology

Autarky: a state of economic isolation.

Free Trade: a state with no regulations that would

impede or encourage the free voluntary exchange of

goods between countries.
 Trade Terminology

Trade Liberalization: a movement in trade policy

away from autarky and in the direction of free trade.

Protectionism: a movement in trade policy away

from free trade and in the direction of autarky

 Trade Terminology

Trade Liberalization

Autarky Free Trade

Protectionism
 Reasons for Trade

Differences in:

1. Resource Endowment

2. Productivity &/or Technology

3. Demand

4. Scale of production

5. Government policies
What we trade?
Changing composition of trade
Changing composition of trade
 The Gravity Model

The size of an economy is directly related to the

volume of imports and exports.

Larger economies produce and demand more goods and

services, so they have more to sell in the export market.

Trade between any two countries is larger, the larger

is either country.
European economies size & trade
 The gravity model

The gravity model assumes that size and distance are

important for trade in the following way:
Tij = A x Yi x Yj /Dij
where
Tij is the value of trade between country i and country j
A is a constant
Yi the GDP of country I, Yj is the GDP of country j
Dij is the distance between country i and country j
Or more generally
Tij = A x Yia x Yjb /Dijc
European economies size & trade
 The gravity model

The gravity equation excludes:

Effect of multi-national corporations

Impact of trade regulation

Cultural affinity

Geography
 Gains From Trade

When a buyer and a seller engage in a voluntary

transaction, both receive something that they want

and both can be made better off.
 Gains From Trade

Countries can specialize in production of goods &

services with the highest productivity and consume

other goods & services through trade.

Specialization can lead to increasing gains from

scale.

Specializations curse?
Losses from Trade
 Losses From Trade

Although an economy as a whole can benefit from

trade, trade creates distinct winners and losers

within a country
Labor

Farmers

Resource owners
China
 China & trade

China is one of the leading forces in world trade

In 2013 China surpassed the U.S. in trade volume

#1 in exports and #2 in imports

90% of Chinese exports is manufactured goods

Between 2005 & 2013 Chinas GDP, exports and

imports grew by 10%

 http://www.ted.com/talks/
eric_x_li_a_tale_of_two_political_systems/
transcript?language=en

http://www.ted.com/talks/yasheng_huang