Econ 39: International Trade

Day #1: Preliminaries

Treb Allen

January 3, 2018
Plan for the day

Syllabus
Introduction
Grading
Additional policies
Overview of the class

Preliminaries
Why study trade?
An introduction to modeling
Outline

Syllabus
Introduction
Grading
Additional policies
Overview of the class

Preliminaries
Why study trade?
An introduction to modeling
What is this course?
I International Trade (Econ 39).
What is this course?
I International Trade (Econ 39).
I Goals of the course:
What is this course?
I International Trade (Econ 39).
I Goals of the course:
1. Introduce students to a number of theories of
international trade:
What is this course?
I International Trade (Econ 39).
I Goals of the course:
1. Introduce students to a number of theories of
international trade:
1.1 200 years of theory
What is this course?
I International Trade (Econ 39).
I Goals of the course:
1. Introduce students to a number of theories of
international trade:
1.1 200 years of theory
1.2 3 Nobel Prizes (since 1970)
What is this course?
I International Trade (Econ 39).
I Goals of the course:
1. Introduce students to a number of theories of
international trade:
1.1 200 years of theory
1.2 3 Nobel Prizes (since 1970)
1.3 ≥1 Nobel Prize to come (probably).
What is this course?
I International Trade (Econ 39).
I Goals of the course:
1. Introduce students to a number of theories of
international trade:
1.1 200 years of theory
1.2 3 Nobel Prizes (since 1970)
1.3 ≥1 Nobel Prize to come (probably).
1.4 All in 10 weeks!
What is this course?
I International Trade (Econ 39).
I Goals of the course:
1. Introduce students to a number of theories of
international trade:
1.1 200 years of theory
1.2 3 Nobel Prizes (since 1970)
1.3 ≥1 Nobel Prize to come (probably).
1.4 All in 10 weeks!
2. Use these theories to:
What is this course?
I International Trade (Econ 39).
I Goals of the course:
1. Introduce students to a number of theories of
international trade:
1.1 200 years of theory
1.2 3 Nobel Prizes (since 1970)
1.3 ≥1 Nobel Prize to come (probably).
1.4 All in 10 weeks!
2. Use these theories to:
2.1 Analyze consequences of international trade and
implications of globalization.
What is this course?
I International Trade (Econ 39).
I Goals of the course:
1. Introduce students to a number of theories of
international trade:
1.1 200 years of theory
1.2 3 Nobel Prizes (since 1970)
1.3 ≥1 Nobel Prize to come (probably).
1.4 All in 10 weeks!
2. Use these theories to:
2.1 Analyze consequences of international trade and
implications of globalization.
2.2 Assess recent policy debates.
What is this course?
I International Trade (Econ 39).
I Goals of the course:
1. Introduce students to a number of theories of
international trade:
1.1 200 years of theory
1.2 3 Nobel Prizes (since 1970)
1.3 ≥1 Nobel Prize to come (probably).
1.4 All in 10 weeks!
2. Use these theories to:
2.1 Analyze consequences of international trade and
implications of globalization.
2.2 Assess recent policy debates.
2.3 Bring the models to the data.
What is this course?
I International Trade (Econ 39).
I Goals of the course:
1. Introduce students to a number of theories of
international trade:
1.1 200 years of theory
1.2 3 Nobel Prizes (since 1970)
1.3 ≥1 Nobel Prize to come (probably).
1.4 All in 10 weeks!
2. Use these theories to:
2.1 Analyze consequences of international trade and
implications of globalization.
2.2 Assess recent policy debates.
2.3 Bring the models to the data.
I This will be fundamentally a theoretical course, but the
theories have real world applications!
Who am I?

I Professor Treb Allen

Who am I?

I Professor Treb Allen

I Office: 324 Rockefeller Hall
Who am I?

I Professor Treb Allen

I Office: 324 Rockefeller Hall
I Office hours: Tuesdays & Thursdays 4:30-5:30pm
Who am I?

I Professor Treb Allen

I Office: 324 Rockefeller Hall
I Office hours: Tuesdays & Thursdays 4:30-5:30pm
I Email: treb@dartmouth.edu
Who am I?

I Professor Treb Allen

I Office: 324 Rockefeller Hall
I Office hours: Tuesdays & Thursdays 4:30-5:30pm
I Email: treb@dartmouth.edu
I Important: email is for setting up appointments only, ask
questions in person!
About me

I Second year at Dartmouth.

About me

I Second year at Dartmouth.

I Ph.D. Yale ’12

About me

I Second year at Dartmouth.

I Ph.D. Yale ’12

I Previous positions at Princeton, Northwestern, and

Stanford.
About me

I Second year at Dartmouth.

I Ph.D. Yale ’12

I Previous positions at Princeton, Northwestern, and

Stanford.

I Research interests: trade, economic geography,

development.
About me

I Second year at Dartmouth.

I Ph.D. Yale ’12

I Previous positions at Princeton, Northwestern, and

Stanford.

I Research interests: trade, economic geography,

development.

I Live in Hanover with my wife (Marcela - in English

department), dog (Rigley), and newborn daughter
(Theda).
Who are you?

?
What should you know?
I Prerequisites: Econ 1.
What should you know?
I Prerequisites: Econ 1.
I The course is meant for economics majors, so you should
be familiar with:
What should you know?
I Prerequisites: Econ 1.
I The course is meant for economics majors, so you should
be familiar with:
I Indifference curves.
What should you know?
I Prerequisites: Econ 1.
I The course is meant for economics majors, so you should
be familiar with:
I Indifference curves.
I Production possibility sets.
What should you know?
I Prerequisites: Econ 1.
I The course is meant for economics majors, so you should
be familiar with:
I Indifference curves.
I Production possibility sets.
I Consumer surplus.
What should you know?
I Prerequisites: Econ 1.
I The course is meant for economics majors, so you should
be familiar with:
I Indifference curves.
I Production possibility sets.
I Consumer surplus.
I Etc.
What should you know?
I Prerequisites: Econ 1.
I The course is meant for economics majors, so you should
be familiar with:
I Indifference curves.
I Production possibility sets.
I Consumer surplus.
I Etc.
I Calculus, while helpful, is not essential.
What should you know?
I Prerequisites: Econ 1.
I The course is meant for economics majors, so you should
be familiar with:
I Indifference curves.
I Production possibility sets.
I Consumer surplus.
I Etc.
I Calculus, while helpful, is not essential.
I Lectures (and exams) will be a combination of diagrams
and math.
What should you know?
I Prerequisites: Econ 1.
I The course is meant for economics majors, so you should
be familiar with:
I Indifference curves.
I Production possibility sets.
I Consumer surplus.
I Etc.
I Calculus, while helpful, is not essential.
I Lectures (and exams) will be a combination of diagrams
and math.
I The goal is to gain an understanding of the mechanisms
at work rather than formally prove results.
Text book

I Krugman, Obstfeld, and Melitz. “International Trade:

Theory and Policy.” 10th edition.
Text book

I Krugman, Obstfeld, and Melitz. “International Trade:

Theory and Policy.” 10th edition.

I Looks like this:

Text book

I Krugman, Obstfeld, and Melitz. “International Trade:

Theory and Policy.” 10th edition.

I Looks like this:

I Notes: Earlier editions fine, but make sure you are

answering the correct questions on problem sets.
Class website
I Class website is:
https://sites.google.com/site/treballen/undergraduate-
trade
Class website
I Class website is:
https://sites.google.com/site/treballen/undergraduate-
trade

I Step #1: Google “Treb Allen”

Class website
I Class website is:
https://sites.google.com/site/treballen/undergraduate-
trade

I Step #1: Google “Treb Allen”

I Step #2: Click on first link.
Class website
I Class website is:
https://sites.google.com/site/treballen/undergraduate-
trade

I Step #1: Google “Treb Allen”

I Step #2: Click on first link.
I Step #3: Click on undergraduate trade.
Class website
I Class website is:
https://sites.google.com/site/treballen/undergraduate-
trade

I Step #1: Google “Treb Allen”

I Step #2: Click on first link.
I Step #3: Click on undergraduate trade.
I Will have links to syllabus, lecture slides, additional
readings, problem sets, exam preparation, etc.
Class website
I Class website is:
https://sites.google.com/site/treballen/undergraduate-
trade

I Step #1: Google “Treb Allen”

I Step #2: Click on first link.
I Step #3: Click on undergraduate trade.
I Will have links to syllabus, lecture slides, additional
readings, problem sets, exam preparation, etc.
I Recommendation: bring printed handout of lecture slides
to class to take notes.
Class website
I Class website is:
https://sites.google.com/site/treballen/undergraduate-
trade

I Step #1: Google “Treb Allen”

I Step #2: Click on first link.
I Step #3: Click on undergraduate trade.
I Will have links to syllabus, lecture slides, additional
readings, problem sets, exam preparation, etc.
I Recommendation: bring printed handout of lecture slides
to class to take notes.
I Hint: Exams based more closely on lecture slides than on
book.
Outline

Syllabus
Introduction
Grading
Additional policies
Overview of the class

Preliminaries
Why study trade?
An introduction to modeling
Grading: Overview
I Assignments:
Grading: Overview
I Assignments:
I Two in-class midterms (25% each)
Grading: Overview
I Assignments:
I Two in-class midterms (25% each)
I Final Exam (30%)
Grading: Overview
I Assignments:
I Two in-class midterms (25% each)
I Final Exam (30%)
I Problem Sets (10%)
Grading: Overview
I Assignments:
I Two in-class midterms (25% each)
I Final Exam (30%)
I Problem Sets (10%)
I Class Participation (10%)
Grading: Overview
I Assignments:
I Two in-class midterms (25% each)
I Final Exam (30%)
I Problem Sets (10%)
I Class Participation (10%)
I Bad news:
Grading: Overview
I Assignments:
I Two in-class midterms (25% each)
I Final Exam (30%)
I Problem Sets (10%)
I Class Participation (10%)
I Bad news:
I “The final letter grade will be based on your relative
performance in accordance with departmental
recommendations” (Median grade: B+)
Grading: Overview
I Assignments:
I Two in-class midterms (25% each)
I Final Exam (30%)
I Problem Sets (10%)
I Class Participation (10%)
I Bad news:
I “The final letter grade will be based on your relative
performance in accordance with departmental
recommendations” (Median grade: B+)
I Good news:
Grading: Overview
I Assignments:
I Two in-class midterms (25% each)
I Final Exam (30%)
I Problem Sets (10%)
I Class Participation (10%)
I Bad news:
I “The final letter grade will be based on your relative
performance in accordance with departmental
recommendations” (Median grade: B+)
I Good news:
I The final exam is take home and open note.
Midterms
I Midterm #1: Thursday January 25.
Midterms
I Midterm #1: Thursday January 25.

I Midterm #2: Thursday February 22.

Midterms
I Midterm #1: Thursday January 25.

I Midterm #2: Thursday February 22.

I In class.
Midterms
I Midterm #1: Thursday January 25.

I Midterm #2: Thursday February 22.

I In class.

I Typical exams (combination of true/false and modeling

questions).
Midterms
I Midterm #1: Thursday January 25.

I Midterm #2: Thursday February 22.

I In class.

I Typical exams (combination of true/false and modeling

questions).

I Rules
Midterms
I Midterm #1: Thursday January 25.

I Midterm #2: Thursday February 22.

I In class.

I Typical exams (combination of true/false and modeling

questions).

I Rules
I Closed book.
Midterms
I Midterm #1: Thursday January 25.

I Midterm #2: Thursday February 22.

I In class.

I Typical exams (combination of true/false and modeling

questions).

I Rules
I Closed book.

I No communication (electronic or otherwise), notes, etc.

Midterms
I Midterm #1: Thursday January 25.

I Midterm #2: Thursday February 22.

I In class.

I Typical exams (combination of true/false and modeling

questions).

I Rules
I Closed book.

I No communication (electronic or otherwise), notes, etc.

I Time limit strictly enforced (through incentives!).

Final Exam

I Take home exam.

Final Exam

I Take home exam.

I Assigned on the last day of class (March 6).

Final Exam

I Take home exam.

I Assigned on the last day of class (March 6).

I Open book.
Final Exam

I Take home exam.

I Assigned on the last day of class (March 6).

I Open book.

I Due March 13 by 12:00pm EST (noon). No exceptions!

Problem Sets

I Only 10% of your grade.

Problem Sets

I Only 10% of your grade.

I Graded on a check/no check basis. Check = tried your

best.
Problem Sets

I Only 10% of your grade.

I Graded on a check/no check basis. Check = tried your

best.

I However, it is good preparation for the exams to go

through the problem sets.
Problem Sets

I Only 10% of your grade.

I Graded on a check/no check basis. Check = tried your

best.

I However, it is good preparation for the exams to go

through the problem sets.

I I will post problem set solutions after the due date.

Problem Sets

I Only 10% of your grade.

I Graded on a check/no check basis. Check = tried your

best.

I However, it is good preparation for the exams to go

through the problem sets.

I I will post problem set solutions after the due date.

I Time permitting, we can walk through similar problems at

the end of class.
Class participation
I We will be playing daily games to encourage class
participation.
Class participation
I We will be playing daily games to encourage class
participation.

I [Answer questionnaire]
Class participation
I We will be playing daily games to encourage class
participation.

I [Answer questionnaire]

I I will be keeping track of daily score for each team.

Class participation
I We will be playing daily games to encourage class
participation.

I [Answer questionnaire]

I I will be keeping track of daily score for each team.

I Since teams change every class, I can also calculate each

person’s contribution to the team. Class participation will
be related to your “wins above replacement” statistic.
Class participation
I We will be playing daily games to encourage class
participation.

I [Answer questionnaire]

I I will be keeping track of daily score for each team.

I Since teams change every class, I can also calculate each

person’s contribution to the team. Class participation will
be related to your “wins above replacement” statistic.

I Because class participation is only 10% of your grade, this

will only matter if you are on the margin between two
grades.
Outline

Syllabus
Introduction
Grading
Additional policies
Overview of the class

Preliminaries
Why study trade?
An introduction to modeling
Class attendance

I You should attend class and actively participate!

Class attendance

I You should attend class and actively participate!

I Students must be in their seats at the beginning of class.

Class attendance

I You should attend class and actively participate!

I Students must be in their seats at the beginning of class.

I Do not arrive late: one verbal warning, then class

participation penalites.
Technology

I Except in the case of proven medical necessity, no laptops.

Technology

I Except in the case of proven medical necessity, no laptops.

I No cell phones.
Technology

I Except in the case of proven medical necessity, no laptops.

I No cell phones.

I I will do my best to post the lecture slides for each class

the night before so you can print them out to take notes.
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
I Write “arithmetic appeal” on the top of the first page of
the exam, sign, and return.
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
I Write “arithmetic appeal” on the top of the first page of
the exam, sign, and return.
I I will add up all the scores again.
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
I Write “arithmetic appeal” on the top of the first page of
the exam, sign, and return.
I I will add up all the scores again.
I Full exam appeal
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
I Write “arithmetic appeal” on the top of the first page of
the exam, sign, and return.
I I will add up all the scores again.
I Full exam appeal
I If you feel there were any grading mistakes.
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
I Write “arithmetic appeal” on the top of the first page of
the exam, sign, and return.
I I will add up all the scores again.
I Full exam appeal
I If you feel there were any grading mistakes.
I Write “full appeal” on the top of the first page of the
exam, sign, and return to me.
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
I Write “arithmetic appeal” on the top of the first page of
the exam, sign, and return.
I I will add up all the scores again.
I Full exam appeal
I If you feel there were any grading mistakes.
I Write “full appeal” on the top of the first page of the
exam, sign, and return to me.
I I will regrade the entire exam.
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
I Write “arithmetic appeal” on the top of the first page of
the exam, sign, and return.
I I will add up all the scores again.
I Full exam appeal
I If you feel there were any grading mistakes.
I Write “full appeal” on the top of the first page of the
exam, sign, and return to me.
I I will regrade the entire exam.
I For both types of appeals:
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
I Write “arithmetic appeal” on the top of the first page of
the exam, sign, and return.
I I will add up all the scores again.
I Full exam appeal
I If you feel there were any grading mistakes.
I Write “full appeal” on the top of the first page of the
exam, sign, and return to me.
I I will regrade the entire exam.
I For both types of appeals:
I I will not discuss grading prior to an appeal.
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
I Write “arithmetic appeal” on the top of the first page of
the exam, sign, and return.
I I will add up all the scores again.
I Full exam appeal
I If you feel there were any grading mistakes.
I Write “full appeal” on the top of the first page of the
exam, sign, and return to me.
I I will regrade the entire exam.
I For both types of appeals:
I I will not discuss grading prior to an appeal.
I Appeals are final. I am happy to discuss grading after an
appeal during office hours, but will not change the grade.
Grade appeals
I Because grades are relative, I am very strict about the
grade appeal process. Two types of appeals:
I Arithmetic error appeal
I If I added up the total score wrong.
I Write “arithmetic appeal” on the top of the first page of
the exam, sign, and return.
I I will add up all the scores again.
I Full exam appeal
I If you feel there were any grading mistakes.
I Write “full appeal” on the top of the first page of the
exam, sign, and return to me.
I I will regrade the entire exam.
I For both types of appeals:
I I will not discuss grading prior to an appeal.
I Appeals are final. I am happy to discuss grading after an
appeal during office hours, but will not change the grade.
I The grade after an appeal may be lower than the original
Academic dishonesty

I Do not cheat.
Academic dishonesty

I Do not cheat.

I I take cheating very seriously.

Academic dishonesty

I Do not cheat.

I I take cheating very seriously.

I I will be taking precautions against cheating, so

probability of getting caught higher than you think.
Academic dishonesty

I Do not cheat.

I I take cheating very seriously.

I I will be taking precautions against cheating, so

probability of getting caught higher than you think.

I In the long run, much better to flunk the exam than get
caught cheating.
Academic dishonesty

I Do not cheat.

I I take cheating very seriously.

I I will be taking precautions against cheating, so

probability of getting caught higher than you think.

I In the long run, much better to flunk the exam than get
caught cheating.

I Do not cheat.
Outline

Syllabus
Introduction
Grading
Additional policies
Overview of the class

Preliminaries
Why study trade?
An introduction to modeling
Part I: Comparative Advantage
I Week #2: Start with the basics: Ricardian model
Part I: Comparative Advantage
I Week #2: Start with the basics: Ricardian model
I 200 years old (1817).
Part I: Comparative Advantage
I Week #2: Start with the basics: Ricardian model
I 200 years old (1817).
I Simple model (2 countries, 2 goods, 1 factor of
production)...
Part I: Comparative Advantage
I Week #2: Start with the basics: Ricardian model
I 200 years old (1817).
I Simple model (2 countries, 2 goods, 1 factor of
production)...
I ...All the more striking for its important implications.
Part I: Comparative Advantage
I Week #2: Start with the basics: Ricardian model
I 200 years old (1817).
I Simple model (2 countries, 2 goods, 1 factor of
production)...
I ...All the more striking for its important implications.
I “Thousands of important and intelligent men have never
been able to grasp the doctrine for themselves or to
believe it after it was explained to them.”
Part I: Comparative Advantage
I Week #2: Start with the basics: Ricardian model
I 200 years old (1817).
I Simple model (2 countries, 2 goods, 1 factor of
production)...
I ...All the more striking for its important implications.
I “Thousands of important and intelligent men have never
been able to grasp the doctrine for themselves or to
believe it after it was explained to them.”

I Week #3: Modern comparative advantage

Part I: Comparative Advantage
I Week #2: Start with the basics: Ricardian model
I 200 years old (1817).
I Simple model (2 countries, 2 goods, 1 factor of
production)...
I ...All the more striking for its important implications.
I “Thousands of important and intelligent men have never
been able to grasp the doctrine for themselves or to
believe it after it was explained to them.”

I Week #3: Modern comparative advantage

I Nobel prize #1 (Samuelson): Comparative advantage
with many goods (1977).
Part I: Comparative Advantage
I Week #2: Start with the basics: Ricardian model
I 200 years old (1817).
I Simple model (2 countries, 2 goods, 1 factor of
production)...
I ...All the more striking for its important implications.
I “Thousands of important and intelligent men have never
been able to grasp the doctrine for themselves or to
believe it after it was explained to them.”

I Week #3: Modern comparative advantage

I Nobel prize #1 (Samuelson): Comparative advantage
with many goods (1977).
I Comparative advantage with many goods and many
countries (2002).
Part I: Comparative Advantage
I Week #2: Start with the basics: Ricardian model
I 200 years old (1817).
I Simple model (2 countries, 2 goods, 1 factor of
production)...
I ...All the more striking for its important implications.
I “Thousands of important and intelligent men have never
been able to grasp the doctrine for themselves or to
believe it after it was explained to them.”

I Week #3: Modern comparative advantage

I Nobel prize #1 (Samuelson): Comparative advantage
with many goods (1977).
I Comparative advantage with many goods and many
countries (2002).

I Week #4: Bringing the theory to the data...

Part I: Comparative Advantage
I Week #2: Start with the basics: Ricardian model
I 200 years old (1817).
I Simple model (2 countries, 2 goods, 1 factor of
production)...
I ...All the more striking for its important implications.
I “Thousands of important and intelligent men have never
been able to grasp the doctrine for themselves or to
believe it after it was explained to them.”

I Week #3: Modern comparative advantage

I Nobel prize #1 (Samuelson): Comparative advantage
with many goods (1977).
I Comparative advantage with many goods and many
countries (2002).

I Week #4: Bringing the theory to the data...

I ...and midterm #1 (January 26).
Part II: Winners and Losers of Trade

I Week #5: The Specific Factors model

Part II: Winners and Losers of Trade

I Week #5: The Specific Factors model

I 2 countries, 2 goods, 2 factors of production.
Part II: Winners and Losers of Trade

I Week #5: The Specific Factors model

I 2 countries, 2 goods, 2 factors of production.

I One of the factors is immobile (“specific”)

Part II: Winners and Losers of Trade

I Week #5: The Specific Factors model

I 2 countries, 2 goods, 2 factors of production.

I One of the factors is immobile (“specific”)

I Generates winners and losers from trade.

Part II: Winners and Losers of Trade

I Week #5: The Specific Factors model

I 2 countries, 2 goods, 2 factors of production.

I One of the factors is immobile (“specific”)

I Generates winners and losers from trade.

I Week #6: The Heckscher-Ohlin model

Part II: Winners and Losers of Trade

I Week #5: The Specific Factors model

I 2 countries, 2 goods, 2 factors of production.

I One of the factors is immobile (“specific”)

I Generates winners and losers from trade.

I Week #6: The Heckscher-Ohlin model

I “Classical” trade model that was dominant from 1930s to
1970s.
Part II: Winners and Losers of Trade

I Week #5: The Specific Factors model

I 2 countries, 2 goods, 2 factors of production.

I One of the factors is immobile (“specific”)

I Generates winners and losers from trade.

I Week #6: The Heckscher-Ohlin model

I “Classical” trade model that was dominant from 1930s to
1970s.

I Nobel Prize #2 (Ohlin).

Part III: Trade and Firms

I Week #7: Monopolistic competition.

Part III: Trade and Firms

I Week #7: Monopolistic competition.

I “New” trade theory that has been dominant from the
1970s to 2000s.
Part III: Trade and Firms

I Week #7: Monopolistic competition.

I “New” trade theory that has been dominant from the
1970s to 2000s.

I Nobel Prize #3 (Krugman).

Part III: Trade and Firms

I Week #7: Monopolistic competition.

I “New” trade theory that has been dominant from the
1970s to 2000s.

I Nobel Prize #3 (Krugman).

I Week #8: Heterogeneous firms

Part III: Trade and Firms

I Week #7: Monopolistic competition.

I “New” trade theory that has been dominant from the
1970s to 2000s.

I Nobel Prize #3 (Krugman).

I Week #8: Heterogeneous firms

I “New” new trade theory, dominant for past 15 years...
Part III: Trade and Firms

I Week #7: Monopolistic competition.

I “New” trade theory that has been dominant from the
1970s to 2000s.

I Nobel Prize #3 (Krugman).

I Week #8: Heterogeneous firms

I “New” new trade theory, dominant for past 15 years...

I ... and midterm #2 (February 23).

Part IV: Policy Analysis with Trade Models

I Week #9: Gravity

Part IV: Policy Analysis with Trade Models

I Week #9: Gravity

I Explaining patterns of trade flows between countries.
Part IV: Policy Analysis with Trade Models

I Week #9: Gravity

I Explaining patterns of trade flows between countries.

I Explaining patterns of trade flows within countries.

Part IV: Policy Analysis with Trade Models

I Week #9: Gravity

I Explaining patterns of trade flows between countries.

I Explaining patterns of trade flows within countries.

I Week #10: “Quantitative” trade models.

Part IV: Policy Analysis with Trade Models

I Week #9: Gravity

I Explaining patterns of trade flows between countries.

I Explaining patterns of trade flows within countries.

I Week #10: “Quantitative” trade models.

I How to take combine theory with data to perform
counterfactual analysis.
Outline

Syllabus
Introduction
Grading
Additional policies
Overview of the class

Preliminaries
Why study trade?
An introduction to modeling
Why do people trade?
I [Class question]: What are some ways which you have
traded today?
Why do people trade?
I [Class question]: What are some ways which you have
traded today?
I Possible answers:
Why do people trade?
I [Class question]: What are some ways which you have
traded today?
I Possible answers:
I Trading your (or your parent’s) current or future
earnings for my teaching.
Why do people trade?
I [Class question]: What are some ways which you have
traded today?
I Possible answers:
I Trading your (or your parent’s) current or future
earnings for my teaching.
I I am teaching you so that I can repair the fence the dog
chewed.
Why do people trade?
I [Class question]: What are some ways which you have
traded today?
I Possible answers:
I Trading your (or your parent’s) current or future
earnings for my teaching.
I I am teaching you so that I can repair the fence the dog
chewed.
I [Class question]: What makes countries (or people) trade?
Why do people trade?
I [Class question]: What are some ways which you have
traded today?
I Possible answers:
I Trading your (or your parent’s) current or future
earnings for my teaching.
I I am teaching you so that I can repair the fence the dog
chewed.
I [Class question]: What makes countries (or people) trade?
I Typical theoretical answers:
Why do people trade?
I [Class question]: What are some ways which you have
traded today?
I Possible answers:
I Trading your (or your parent’s) current or future
earnings for my teaching.
I I am teaching you so that I can repair the fence the dog
chewed.
I [Class question]: What makes countries (or people) trade?
I Typical theoretical answers:
I Different skill sets (with countries, we call them
“technologies”).
Why do people trade?
I [Class question]: What are some ways which you have
traded today?
I Possible answers:
I Trading your (or your parent’s) current or future
earnings for my teaching.
I I am teaching you so that I can repair the fence the dog
chewed.
I [Class question]: What makes countries (or people) trade?
I Typical theoretical answers:
I Different skill sets (with countries, we call them
“technologies”).
I Different endowments.
Why do people trade?
I [Class question]: What are some ways which you have
traded today?
I Possible answers:
I Trading your (or your parent’s) current or future
earnings for my teaching.
I I am teaching you so that I can repair the fence the dog
chewed.
I [Class question]: What makes countries (or people) trade?
I Typical theoretical answers:
I Different skill sets (with countries, we call them
“technologies”).
I Different endowments.
I Produce different things.
Why study trade?

I Reason #1: Trade is an increasingly important part of the

world economy.
Why study trade?

I Reason #1: Trade is an increasingly important part of the

world economy.

I Reason #2: Trade seems closely linked with economic

growth.
Reason #1: Trade over time

.5
.4
Exports / GDP
.3
.2
.1
Importance of trade over time

1950 1960 1970 1980 1990 2000

Year
Average over all countries. Nonparametric regression, bandwidth 1 year, Epanechnikov kernel
Reason #2: GDP per capita over time

6 7 9
Log GDP per capita
5 8
Economic growth over time

1950 1960 1970 1980 1990 2000

Year

More open countries Less open countries

All countries. More open = export/GDP ratio greater than median in a year
Nonparametric regression, bandwidth 1 year, Epanechnikov kernel.
Why study trade (ctd)?

I Central message of class: In almost all cases, trade makes

all countries better off.
Why study trade (ctd)?

I Central message of class: In almost all cases, trade makes

all countries better off.

I We call this the gains from trade.

Why study trade (ctd)?

I Central message of class: In almost all cases, trade makes

all countries better off.

I We call this the gains from trade.

I Despite the potential gains, much resistance to freer

trade.
Why study trade (ctd)?

I Central message of class: In almost all cases, trade makes

all countries better off.

I We call this the gains from trade.

I Despite the potential gains, much resistance to freer

trade.

I Reason #3: How can we understand this resistance?

Outline

Syllabus
Introduction
Grading
Additional policies
Overview of the class

Preliminaries
Why study trade?
An introduction to modeling
An introduction to economic models
I Trade models are general equilibrium models.
An introduction to economic models
I Trade models are general equilibrium models.

I What does this mean? Roughly speaking, there are a lot

of moving pieces.
An introduction to economic models
I Trade models are general equilibrium models.

I What does this mean? Roughly speaking, there are a lot

of moving pieces.

I To avoid confusion, it is very important to be organized

while modeling.
An introduction to economic models
I Trade models are general equilibrium models.

I What does this mean? Roughly speaking, there are a lot

of moving pieces.

I To avoid confusion, it is very important to be organized

while modeling.

I Three parts of any trade model:

An introduction to economic models
I Trade models are general equilibrium models.

I What does this mean? Roughly speaking, there are a lot

of moving pieces.

I To avoid confusion, it is very important to be organized

while modeling.

I Three parts of any trade model:

I Exogenous model parameters.
An introduction to economic models
I Trade models are general equilibrium models.

I What does this mean? Roughly speaking, there are a lot

of moving pieces.

I To avoid confusion, it is very important to be organized

while modeling.

I Three parts of any trade model:

I Exogenous model parameters.

I Endogenous model outcomes.

An introduction to economic models
I Trade models are general equilibrium models.

I What does this mean? Roughly speaking, there are a lot

of moving pieces.

I To avoid confusion, it is very important to be organized

while modeling.

I Three parts of any trade model:

I Exogenous model parameters.

I Endogenous model outcomes.

I An equilibrium concept.
Exogenous model parameters

I The exogenous model parameters are the elements of the

model that are taken “as given.”
Exogenous model parameters

I The exogenous model parameters are the elements of the

model that are taken “as given.”

I You as the economist choose their values.

Exogenous model parameters

I The exogenous model parameters are the elements of the

model that are taken “as given.”

I You as the economist choose their values.

I They do not respond to other elements of the model.

Exogenous model parameters

I The exogenous model parameters are the elements of the

model that are taken “as given.”

I You as the economist choose their values.

I They do not respond to other elements of the model.

I But these are the things that you as an economist can

change to see how the outcome of the model can change.
Endogenous model outcomes

I The endogenous model outcomes are the elements of the

model that “move around.”
Endogenous model outcomes

I The endogenous model outcomes are the elements of the

model that “move around.”

I You as the economist do not get to choose their values.

Endogenous model outcomes

I The endogenous model outcomes are the elements of the

model that “move around.”

I You as the economist do not get to choose their values.

I Instead, they respond to the other elements of the model

(including both the exogenous model parameters and
other endogenous outcomes).
Endogenous model outcomes

I The endogenous model outcomes are the elements of the

model that “move around.”

I You as the economist do not get to choose their values.

I Instead, they respond to the other elements of the model

(including both the exogenous model parameters and
other endogenous outcomes).

I These are the parts of the model that you are interested
in watching change when you change the exogenous
model parameters.
An equilibrium concept

I An equilibrium concept is the set of rules that tells you

what the endogenous model outcomes should be for a
given set of exogenous model parameters.
An equilibrium concept

I An equilibrium concept is the set of rules that tells you

what the endogenous model outcomes should be for a
given set of exogenous model parameters.

I An equilibrium may be one or more conditions.

An equilibrium concept

I An equilibrium concept is the set of rules that tells you

what the endogenous model outcomes should be for a
given set of exogenous model parameters.

I An equilibrium may be one or more conditions.

I Every model should have the following phrase:

An equilibrium concept

I An equilibrium concept is the set of rules that tells you

what the endogenous model outcomes should be for a
given set of exogenous model parameters.

I An equilibrium may be one or more conditions.

I Every model should have the following phrase:

“Given a [insert set of exogenous model
parameters here], equilibrium is defined by the
[insert endogenous model outcomes here] such
that [list equilibrium conditions here].”
Example from one of my recent papers
Example: Supply and Demand
Example: Supply and Demand

I What are the three parts of that model?

Example: Supply and Demand

I What are the three parts of that model?

I Exogenous model parameters:

Example: Supply and Demand

I What are the three parts of that model?

I Exogenous model parameters:

I Supply curve and demand curve.
Example: Supply and Demand

I What are the three parts of that model?

I Exogenous model parameters:

I Supply curve and demand curve.
I Endogenous model outcomes:
Example: Supply and Demand

I What are the three parts of that model?

I Exogenous model parameters:

I Supply curve and demand curve.
I Endogenous model outcomes:
I Price and quantity.
Example: Supply and Demand

I What are the three parts of that model?

I Exogenous model parameters:

I Supply curve and demand curve.
I Endogenous model outcomes:
I Price and quantity.
I Equilibrium concept:
Example: Supply and Demand

I What are the three parts of that model?

I Exogenous model parameters:

I Supply curve and demand curve.
I Endogenous model outcomes:
I Price and quantity.
I Equilibrium concept:
I “For a given supply curve and demand curve, equilibrium
is defined by a price and quantity such that demand
equals supply.”
A precautionary note
I Benefit of economic models: clearly state assumptions,
follow model to logical conclusion.
A precautionary note
I Benefit of economic models: clearly state assumptions,
follow model to logical conclusion.
I A good economic model abstracts from the unimportant
to focus on a particular mechanism.
A precautionary note
I Benefit of economic models: clearly state assumptions,
follow model to logical conclusion.
I A good economic model abstracts from the unimportant
to focus on a particular mechanism.
I However, models are (at best) a stylized notion of reality.
A precautionary note
I Benefit of economic models: clearly state assumptions,
follow model to logical conclusion.
I A good economic model abstracts from the unimportant
to focus on a particular mechanism.
I However, models are (at best) a stylized notion of reality.
I In particular, the exogenous parameters of one model may
very well be the endogenous outcomes of another.
A precautionary note
I Benefit of economic models: clearly state assumptions,
follow model to logical conclusion.
I A good economic model abstracts from the unimportant
to focus on a particular mechanism.
I However, models are (at best) a stylized notion of reality.
I In particular, the exogenous parameters of one model may
very well be the endogenous outcomes of another.
I Economics in general requires careful thought about:
A precautionary note
I Benefit of economic models: clearly state assumptions,
follow model to logical conclusion.
I A good economic model abstracts from the unimportant
to focus on a particular mechanism.
I However, models are (at best) a stylized notion of reality.
I In particular, the exogenous parameters of one model may
very well be the endogenous outcomes of another.
I Economics in general requires careful thought about:
I How the model assumptions affect the model outcomes
(“thinking within the model”).
A precautionary note
I Benefit of economic models: clearly state assumptions,
follow model to logical conclusion.
I A good economic model abstracts from the unimportant
to focus on a particular mechanism.
I However, models are (at best) a stylized notion of reality.
I In particular, the exogenous parameters of one model may
very well be the endogenous outcomes of another.
I Economics in general requires careful thought about:
I How the model assumptions affect the model outcomes
(“thinking within the model”).
I What other aspects are missing from the model that
may affect the outcomes in reality (“thinking outside the
model”).