This is an archived course. A more recent version may be available at ocw.mit.edu.
Lectures: 2 sessions / week, 1.5 hours / session
This course covers, with a focus on both theory and empirics, advanced topics in international trade (as well as inter-regional trade and economic geography). It includes the study of positive issues, such as: Why do countries trade? What goods do countries trade? What are the implications of openness for the location of production, industries, occupations, and innovative activity? And, what impedes trade and why do some countries deliberately erect policy impediments to trade? The course also concerns normative issues, such as: Is trade openness beneficial to a representative agent? And, Are there winners and losers from trade and if so, can we identify them? Throughout, these issues are approached in neoclassical settings as well as those with market failures, at the industry-level as well as the firm-level, and in the presence of both mobile and immobile factors (e.g., foreign direct investment (FDI), offshoring of tasks, multinational firms and immigration).
The reading list for each topic is separated into two groups: "essential" and "recommended." Essential readings will be covered extensively in class. Recommended readings combine classical references and examples of recent papers in a particular area, which may or may not be covered in class. There are no required textbooks, but many of the books listed are worth owning.
Four problem sets (worth 50% of your final grade). These are designed to build a mixture of theoretical and empirical skills. The problem sets are each due two to three weeks after the last lecture on material contained in the problem set. Late problem sets won't be accepted without prior permission (and will receive a grade of zero).
One referee report (worth 15% of your final grade) on either:
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These are two recent and successful job market papers on topics in international trade. Your report should be 3-4 pages long and include: a summary of the main features of the paper (one paragraph); a description of its contribution to the literature (one paragraph); its main strengths and weaknesses; and your recommendations to improve it (2-3 pages).
One research proposal (worth 35% of your final grade). The proposal should be 15-20 pages long (double-spaced) and describe: the question you want to address; why you think it is important; why you think the answer of the previous literature is unsatisfactory; and how you plan to improve it. Your mark will reflect both the precision with which you answer these questions (in particular, the concreteness of your proposed improvement, i.e. how far you have thought it through and progressed to date) and the quality of the proposed improvement (i.e. how good an idea for a paper it seems). The proposal will be due late in the semester.
| ACTIVITIES | PERCENTAGES |
|---|---|
| Four problem sets | 50% |
| Referee report | 15% |
| Research proposal | 35% |
The course is comprised of three main sections, each of which touches on core models and topics in the study of International Trade. Throughout there is a heavy emphasis on first developing theories and then discussing the empirical evidence for these theories.
We begin with the simplest approach to trade theory: trade among constant returns to scale, perfectly competitive economies. Here we first study, in completely general production settings, the conditions under which trading is Pareto efficient ('Gains from Trade') and the predictions about who will trade what with whom ('Law of Comparative Advantage'). Then we move on to useful and famous models that restrict the supply side in different manners (Ricardian, Ricardo-Viner, and Heckscher-Ohlin) in order to generate richer predictions about what will happen when economies trade.
Starting in the early 1980s the study of international trade was heavily influenced by the arrival of models in which countries would trade purely to exploit economies of scale, and in which production was imperfectly competitive. We begin by studying this body of work and then proceed through to the more recent work that it inspired, on models of trade in which firms are heterogeneous within industries. These models (as well as some neoclassical models) typically predict that trade flows take the 'gravity equation' form. We discuss the conditions under which a model is therefore a 'gravity model' and relate this to the enormous body of work that estimates gravity equations using trade data (often to shed light on the magnitude of various barriers to trade).
Finally we discuss a series of unconnected topics that extend the above ideas to specific applications of interest. These include: how trade affects growth; how trade affects labor markets; the consequences of an ability to trade inputs to the production process such as intermediate goods/tasks (offshoring and fragmentation); the consequences of an ability to move a firm/plant across borders as well as goods (multinational firms); and what sorts of trade policy we should expect to see if policymakers are self-interested (political economy of trade policy) and if countries set trade policy under various non-cooperative or cooperative regimes (the WTO).
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