International Trade Theory and Policy Springer Texts in Business and Economics

With contributions by Federico Trionfetti In the present text the author deals with both conventional and new approaches to trade theory and policy, treating all important research topics in international economics and clarifying their mathematical intricacies. The textbook is intended for undergraduates, graduates and researchers alike. It addresses undergraduate students with extremely clear language and illustrations, making even the most complex trade models accessible. In the appendices, graduate students and researchers will find self-contained treatments in mathematical terms. The new edition has been thoroughly revised and updated to reflect the latest research on international trade. International Trade Theory and Policy is a masterful exposition of the core ideas of international trade. The book updates the classic monograph of Professor Gandolfo and is now the single most comprehensive and up-to-date book in the field. I highly recommend it for advanced undergraduates, PhD students, and professional economists. Even specialists in international trade will find new insights. Professor Donald R. Davis, Kathryn and Shelby Cullom Davis Professor of Economics and International Affairs, Columbia University This new edition of International Trade Theory and Policy continues the fine tradition set by Giancarlo Gandolfo with his first edition. This is a comprehensive and up to date textbook ideal for both undergraduate and graduate trade courses. This new edition includes the latest on globalization, economic geography as well as a trade integration and wage inequality. It is an essential addition to any academics bookshelf and an important reference in any quality international trade course. Professor Pasquale M. Sgro, Associate Dean Research, Faculty of Business and Law, Deakin University and Editor, Journal of International Trade and Economic Development Preface......Page 8 Contents......Page 10 List of Figures......Page 22 List of Tables......Page 26 List of Boxes......Page 28 Part I Introduction......Page 29 1.1 International Economics as a Distinct Subject......Page 30 1.2 The Theory and Policy of International Trade: An Overview......Page 32 1.3 Small and Large Open Economies......Page 33 References......Page 34 Part II Foundations of Trade Theory......Page 35 2.1 Comparative Costs (Advantages) and International Trade......Page 36 2.2 Alternative Graphic Representations......Page 39 2.3.1 Maximization of Real Income in Each Country......Page 44 2.3.2 Maximization of Real World Income......Page 46 2.4 Generalizations......Page 48 2.4.1 Two Goods and n Countries......Page 49 2.4.2 m Goods and n Countries......Page 50 2.5 The Problem of the Determination of the Terms of Trade......Page 54 References......Page 55 3.1 The Transformation Curve and the Box Diagram......Page 57 3.1.1 The Box Diagram......Page 58 3.1.2 The Transformation Curve and Its Properties......Page 59 3.2.1 The Supply Curves......Page 63 3.2.2 The Demand Curves......Page 65 3.2.3 General Equilibrium and Walras' Law......Page 66 3.3 General Equilibrium in Open Economies and International Trade......Page 67 3.4.1 Derivation of the Offer Curve......Page 71 3.4.2 International Equilibrium and Stability......Page 73 3.5 Increasing Returns to Scale......Page 77 3.6 The Gains from Trade......Page 80 3.7 Generalizations......Page 83 3.8 Duality Approach......Page 84 References......Page 85 4.1 Basic Assumptions and Their Meaning......Page 87 4.1.1 Relative Price of Goods and Relative Price of Factors......Page 91 4.2 The Heckscher-Ohlin Theorem......Page 93 4.3 Factor Price Equalization......Page 96 4.3.1 A Graphic Treatment......Page 98 4.3.2 The Factor Price Equalization Set......Page 101 4.4 The Factor Content of Trade and the Heckscher-Ohlin-Vanek Theorem......Page 104 4.5 Extensions and Qualifications......Page 106 4.5.1 Non-identical Structures of Demand......Page 107 4.5.2 Factor-Intensity Reversals......Page 109 4.5.3 The Heckscher-Ohlin-Vanek Generalization......Page 111 4.6.1 Leontief's Paradox......Page 114 4.6.2.1 Mistakes in Calculations?......Page 115 4.6.2.2 Wrong Assumptions in the Model?......Page 117 4.6.3 What Paradox? There Is No Paradox......Page 119 4.6.4 Factor Content of Trade Studies......Page 121 4.6.5 Concluding Remarks......Page 123 References......Page 124 5.2 The Heckscher-Ohlin and Factor-Price-Equalization Theorems......Page 126 5.3 The Stolper-Samuelson Theorem......Page 127 5.4 The Rybczynski Theorem......Page 128 5.4.1 An Alternative Diagram......Page 129 References......Page 131 6.2 The Specific Factors Model......Page 132 6.3 Transport Costs and International Trade......Page 137 6.4 Intermediate Goods......Page 141 6.4.1 Intermediate and Capital Goods in the Neoclassical Theory......Page 144 6.4.1.1 The Methodological Debate Between Neoclassical and Neoricardian Theories......Page 145 6.5 Elastic Factor Supply......Page 146 6.6 Non-traded Goods......Page 147 6.7 Natural Resources, ``Dutch Disease'', and De-industrialization......Page 151 6.8 International Factor Mobility and Trade in Factors......Page 157 6.8.1 Factor Mobility, and the Theoremsof International Trade......Page 158 6.8.2 International Movements of Labour (Migration)......Page 162 6.8.3 International Movements of Capital......Page 163 6.8.4 Foreign Direct Investment and MultinationalCorporations......Page 164 6.8.4.1 Types and Determinants of FDI......Page 165 6.8.4.2 Effects of FDI......Page 166 6.8.5 Offshoring......Page 168 6.9 International Trade under Uncertainty......Page 171 6.10 Illegal International Trade and the Economic Theory of Smuggling......Page 173 References......Page 177 Part III New Explanations for International Trade......Page 180 7.1 Introduction......Page 181 7.2 Theory......Page 184 7.4 Growth......Page 185 References......Page 186 8.1 Availability......Page 187 8.2 Technology Gaps......Page 188 8.3 The Product Cycle......Page 189 8.4.1 Linder's Theory......Page 191 8.4.2 Barker's Variety Hypothesis......Page 192 8.5 Intra-industry Trade or, the Traditional Theory Strikes Back......Page 194 8.5.1 Perfectly Homogeneous Goods......Page 195 8.5.2 Differentiated Products......Page 196 References......Page 198 9.1 Neo-Heckscher-Ohlin Theories......Page 199 9.2 Monopolistic Competition and International Trade......Page 201 9.2.1.2 The Demand Side......Page 202 9.2.1.3 Technology and Production......Page 204 9.2.2 A Simple Synthesis Model......Page 208 9.2.3 Monopolistic Competition and Welfare Effects of Trade Opening......Page 211 9.2.4.1 Demand and Wages......Page 212 9.2.4.2 Demand and Specialization......Page 215 9.2.5.1 Variable Mark-Up......Page 217 9.2.5.2 Multiproduct Firms......Page 218 9.2.7 Heterogeneous Firms......Page 219 9.3.2 Homogeneous Commodities......Page 224 9.3.3 Vertically Differentiated Goods......Page 226 9.3.4 Horizontally Differentiated Goods......Page 228 9.4 Empirical Studies in the Light of Theory......Page 229 References......Page 232 Part IV Trade Policy......Page 235 10.1 Introduction......Page 236 10.2 GATT and WTO......Page 237 10.3 Partial Equilibrium Effects of a Tariff......Page 239 10.4 The Social Costs of a Tariff......Page 241 10.5.1 The Production-Possibility Frontier and Tariffs......Page 244 10.5.1.1 The Redistributive and Welfare Effects of a Tariff......Page 246 10.5.2 Tariffs and Reciprocal Demand Curves......Page 247 10.5.2.1 The Metzler and Lerner Cases......Page 249 10.6 Quotas and Other Non-tariff Barriers......Page 251 10.6.1 Quotas......Page 252 10.6.2 Export Duties......Page 254 10.6.3 International Cartels......Page 255 10.6.4 Other Impediments to Free Trade......Page 260 10.7 Intermediate Goods and Effective Rate of Protection......Page 263 10.8 Imperfect Competition and Trade Policy......Page 266 10.8.1 A Tariff Under Vertical Product Differentiation......Page 267 10.8.3 Strategic Trade Policy Under Oligopoly with Homogeneous Good......Page 268 10.8.4 Strategic Trade Policy Under Oligopoly with Differentiated Good......Page 269 References......Page 271 Chapter11 Free Trade vs. Protection, and Preferential Trade Cooperation......Page 273 11.1 The Optimum Tariff......Page 274 11.2 The Infant Industry......Page 276 11.3 Distortions in Domestic Goods Markets......Page 278 11.4 Distortions in Domestic Factor Markets......Page 281 11.6 The Theory of Second Best......Page 283 11.7.1 The Various Degrees of Cooperation......Page 285 11.7.2 The Effects of a Customs Union......Page 286 11.7.3 Empirical Problems......Page 291 11.8.1 The European Common Market (Now European Union)......Page 292 11.8.2 NAFTA......Page 293 References......Page 294 12.2 Why the New Protectionism?......Page 296 12.3 Voluntary Export Restraints and Import Expansion......Page 297 12.4 Subsidies......Page 299 12.5 The Political Economy of Protectionism......Page 301 12.5.1 The Demand for and Supply of Protection......Page 302 12.6 Administered and Contingent Protection, and Fair Trade......Page 304 12.6.1 Dumping and Antidumping......Page 306 12.6.2 Countervailing Duty......Page 310 12.6.3 Safeguard Actions......Page 313 References......Page 314 Part V Growth and Trade......Page 315 13.1 Introduction......Page 316 13.2.1 Consumption Effects......Page 317 13.2.2 Production Effects......Page 319 13.2.3 A Reformulation in Terms of Elasticities: The Total Effect......Page 320 13.3.1 The Large Country and the Terms of Trade......Page 322 13.3.2 Immiserizing Growth......Page 324 13.4 Increase in Factor Endowments and International Trade: Rybczynski's Theorem......Page 326 13.5.1 Types of Technical Progress......Page 327 13.5.2 Effects of Neutral Technical Progress on Production Levels and the Terms of Trade......Page 329 13.5.3.1 Capital-Saving Progress in the Capital-Intensive Sector......Page 332 13.5.3.2 Labour-Saving Progress in the Capital-Intensive Sector......Page 334 References......Page 336 14.1 Dynamic Models......Page 338 14.2 A Simple Closed-Economy Two-Sector Growth Model......Page 339 14.3 Extension to an Open Economy......Page 342 References......Page 344 15.1 Introduction......Page 345 15.2 A Small Open Economy with Endogenous Technical Progress......Page 346 15.3 Endogenous Growth, North-South Trade and Imitation: A New Version of the Product Cycle......Page 347 References......Page 350 Part VI Globalization......Page 351 16.1 Introductory Remarks......Page 352 16.2 Transport Cost, Location Theory, and Comparative Advantage......Page 353 16.3 The Core-Periphery Model......Page 355 16.3.1 Description of the Model......Page 356 16.3.1.1 Instantaneous Equilibrium......Page 357 16.3.1.2 Dynamics......Page 359 16.3.1.3 Market Integration and Industrial Localization......Page 361 16.3.2 Conclusion......Page 363 16.4.1.1 Description of the Model......Page 364 16.4.1.2 Dynamics......Page 365 16.4.1.3 Market Integration and Industrial Localization......Page 366 16.4.2 Input-Output Linkages......Page 367 16.4.2.2 Dynamics......Page 368 16.4.2.3 Market Integration and Industrial Localization......Page 369 16.4.3 Diminishing Returns to Labour in the A Sector......Page 370 16.4.4.1 Description of the Model......Page 371 16.4.4.2 Equilibrium......Page 372 16.5 Too Much or Too Little Agglomeration?......Page 373 16.6 Conclusion......Page 376 References......Page 378 17.1 Introduction......Page 380 17.2.1 Trade Integration......Page 381 17.2.2 Technical Change......Page 382 17.2.3 Trade Integration and Skill-Biased Technical Change......Page 383 17.2.4 Trade Integration Between Countries with Different Technology......Page 384 17.2.5 Trade-Induced Skill-Biased Technical Change......Page 387 17.2.6.1 The Model......Page 390 17.2.6.2 Equilibrium......Page 392 17.3.1 Fragmentation of Production......Page 395 17.3.2 Offshoring Knowledge Output......Page 397 17.4.1 Intermediate Inputs and Productivity......Page 400 17.4.2 Skill Biased Economies of Scale and DemandElasticity......Page 403 17.5 Heterogeneous Firms, and the Skill Premium......Page 405 17.5.1 Trade Integration and Firm Revenue Inequality......Page 406 17.5.2 Quality and Heterogeneous Fixed Inputs......Page 407 17.5.3 Endogenous Technology Adoption with Heterogeneous Workers......Page 409 17.5.4 Heterogeneous Hiring (Fixed) Costs......Page 413 17.5.5 Heterogeneous Globalization Modes......Page 417 17.6 Endogenous Market Size......Page 421 17.7 Conclusion......Page 422 References......Page 423 Part VII Appendices......Page 424 18.1 Maximization of World Income and the Dual Problem......Page 425 18.2 Maximization of National Income and Minimization of Real Cost......Page 427 18.3.1 Supply......Page 429 18.3.2 Demand......Page 430 18.3.3 Determination of the Relative Wage Rateand Specialization......Page 432 18.3.4 Trade Policy......Page 433 18.4 On the Determination of the Terms of Trade......Page 436 References......Page 440 19.1.1 A Formal Derivation of the Transformation Curve and Its Properties......Page 442 19.1.2 Convexity or Concavity of the Transformation Curve......Page 444 19.1.3 Homogeneous Production Functions and Transformation Curve......Page 445 19.2.1 The Basic Model......Page 447 19.2.2 The Supply Side of the Model......Page 448 19.2.3 The Demand Side of the Model......Page 449 19.3.1 The Equilibrium Conditions: The Offer Curve and Its Slope......Page 450 19.3.2 Relationships Between the Various Elasticities......Page 452 19.4.1 Terms-of-Trade Adjustment......Page 453 19.4.2 Quantity Adjustment......Page 454 19.5.1 The Jones Model......Page 456 19.5.2 Revenue Functions and Expenditure Functions......Page 460 References......Page 462 20.1 Factor-Intensity Reversals......Page 463 20.2 Proof of the Fundamental Theorem......Page 466 20.4 A Brief Outline of the Generalizationsof the Heckscher-Ohlin Model......Page 468 20.5 The Factor Price Equalization Set......Page 471 20.6 The Heckscher-Ohlin-Vanek Theorem......Page 472 References......Page 474 21.2 The Stolper-Samuelson Theorem......Page 475 21.3 The Rybczynski Theorem......Page 476 References......Page 477 22.1 The Specific Factors Model......Page 478 22.2 The Cost of Transport......Page 483 22.3.1 Final Goods as Inputs......Page 484 22.3.2 Pure Intermediate Goods......Page 485 22.4 Elastic Supply of Factors......Page 489 22.5 Non-traded Goods......Page 491 22.5.1 The Behaviour of the Offer Curve......Page 492 22.6 Specific Factors and De-industrialization......Page 495 22.6.1 Effects on Prices, Outputs and Factor Rewards......Page 497 22.7 International Factor Mobility......Page 498 22.7.1 The Theorems of International Trade Theory Under Factor Mobility......Page 501 22.7.1.3 The Rybczynski Theorem......Page 503 22.7.1.4 The Stolper-Samuelson Theorem......Page 504 22.8 Uncertainty and International Trade......Page 506 22.9 Smuggling......Page 509 References......Page 511 23.1 A Neo-Heckscher-Ohlin Model......Page 513 23.2.1 Love for Variety and Demand......Page 516 23.2.2 The Production Side......Page 519 23.2.3 International Trade......Page 520 23.2.3.1 A Simple Gravity Equation......Page 522 23.3.1 A Cournot-Type Model......Page 523 23.3.2 The Equilibrium Solution......Page 524 23.4.1 Consumers......Page 526 23.4.2 Firms, and Market Equilibrium......Page 528 23.4.3 International Trade......Page 531 23.5.1 Demand for Characteristics......Page 532 23.5.2 The Production Side......Page 533 23.5.3 International Trade......Page 534 References......Page 535 24.1 Tariffs, Terms of Trade, Domestic Relative Price......Page 536 24.2 Cartels......Page 539 24.3 The Effective Rate of Protection......Page 541 24.4.1 A Tariff Under Vertical Product Differentiation......Page 542 24.4.1.1 Tariffs and Intra-industry Trade......Page 543 24.4.2 Monopolistic Competition and Welfare-Improving Tariff......Page 544 24.4.3.1 Tariffs......Page 545 24.4.3.2 Subsidies......Page 546 24.4.4 Strategic Trade Policy Under Oligopoly with Differentiated Good......Page 550 References......Page 551 25.1 The Optimum Tariff......Page 552 25.2 The Theory of Second Best......Page 553 References......Page 555 26.1 Lobbies, Political Parties, and Endogenous Determination of Protection......Page 556 26.2 Dumping......Page 558 References......Page 559 27.1 Classification of the Effects of Growth......Page 560 27.2 Comparative Statics of the Effects of Growth in General......Page 562 27.2.1 Immiserizing Growth......Page 565 27.3 Changes in Factor Endowments, Rybczynski's Theorem, and the Terms of Trade......Page 566 27.3.1 Simultaneous Increase in Both Factors......Page 570 27.4 Technical Progress......Page 572 27.4.1 Effects of Technical Progress on Factor Intensities and Rewards......Page 573 27.4.2 Effects of Technical Progress on Output Levels......Page 576 27.4.3 Effects of Technical Progress on the Terms of Trade......Page 578 References......Page 579 28.1 A Dynamic Model of Growth and Trade......Page 580 28.2 Momentary Equilibrium......Page 582 28.3 Long Run Equilibrium......Page 584 References......Page 587 29.1 Endogenous Growth and Traditional Trade Theory......Page 588 29.2.1 Demand......Page 590 29.2.2.1 The Manufacturing Sector......Page 593 29.2.2.2 Innovation......Page 595 29.2.2.3 Imitation......Page 596 29.2.3 The No-Arbitrage Conditions......Page 597 29.2.5 Steady-State Equilibrium......Page 598 29.2.5.1 Efficient Followers......Page 600 29.2.5.2 Inefficient Followers......Page 602 29.2.6.1 Efficient Followers......Page 603 29.2.6.2 Inefficient Followers......Page 610 References......Page 613 30.1 Numerical Phase Lines......Page 615 30.2.1 The Model......Page 617 30.2.2 Calibration of the Model......Page 619 References......Page 623 31.1.1 The Demand Side......Page 624 31.1.2 The Supply Side......Page 625 31.1.3 Equilibrium......Page 626 31.2 The Dynamics of the Model and the Emergence of a Core-Periphery Pattern......Page 627 31.2.1 The Manufacturing Sector......Page 628 31.2.2 The Dynamics: Bifurcation Analysis......Page 634 References......Page 635 Bibliography......Page 636 Index......Page 659