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CARLETON UNIVERSITY
Department of Economics

ECON 5601 (ECO 6160, ECO 6560)

International Trade: Theory and Policy

Instructor: R.A. Brecher Winter 2014

_______________________________________________________________________________________

EXAMINATIONS:

There will be a take-home mid-term examination (in accordance with the next paragraph), and a 3-hour final
examination (to be scheduled by the University). In the determination of the overall final grade for the
course, the mid-term examination will have a weight of 40%, and the final examination will have a weight
of 60%.

Questions for the mid-term examination should be taken from the instructor on February 3 at 4:30 p.m. in
class. Answers to the questions must be given to the instructor on February 10 at 2:35 p.m. in class.
Answers must be typewritten.

COURSE OUTLINE AND READINGS:

Starred (*) items are assigned, and unstarred ones are supplementary. Students may find a textbook helpful
(in addition to the assigned readings), in which case Lectures on International Trade (M.I.T. Press, second
edition, 1998) by J.N. Bhagwati, A. Panagariya and T.N. Srinivasan is recommended. Students may also
wish to consult The Theory of International Trade (Cambridge University Press, 1980) by A. Dixit and V.
Norman, Advanced International Trade: Theory and Evidence (Princeton University Press, 2004) by R.C.
Feenstra, The Pure Theory of International Trade and Investment (Prentice-Hall, l969) by M.C. Kemp,
International Trade in Goods and Factor Mobility (MIT Press, 1995) by K-y. Wong, and International
Trade and Resource Allocation (North-Holland Publishing Company, 1982) by A.D. Woodland.

I. SURVEYS

Bhagwati, J., "The Pure Theory of International Trade: A Survey," Economic Journal, March 1964,
reprinted in American Economic Association and Royal Economic Society, Surveys of Economic Theory
(Macmillan), Vol. 2, 1966; also reprinted (with addendum) in J. Bhagwati, Trade, Tariffs and Growth
(M.I.T. Press), 1969.

Chipman, J.S., "A Survey of the Theory of International Trade," Econometrica, Vol. 33, No. 3, July 1965;
Vol. 33, No. 4, October 1965; Vol. 34, No. 1, January 1966.

Corden, W.M., "The Normative Theory of International Trade", in R.W. Jones and P.B. Kenen (eds.),
Handbook of International Economics (North-Holland Publishing Company), Vol. I, 1984.

Jones, R.W. and J.P. Neary, "The Positive Theory of International Trade", in Jones and Kenen.

Mundell, R.A., "The Pure Theory of International Trade", American Economic Review, Vol. 50, March
1960; from which is adapted Chapters 1-3 of his International Economics (The Macmillan Company), 1968.
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II. DETERMINANTS OF TRADE AND SPECIALIZATION

A. Ricardian (and Related) Theory

*Ricardo, D., On the Principles of Political Economy and Taxation, third edition (John Murray), 1821,
Chapter 7; reprinted in P. Sraffa (editor with the collaboration of M.H. Dobb), The Works and
Correspondence of David Ricardo, Vol. 1 (Cambridge University Press), 1951.

*Mill, J.S., Principles of Political Economy (Longmans, Green and Co.), 1871, Book 3, Chapters 17-18.

*Findlay, R., "Relative Prices, Growth and Trade in a Simple Ricardian System", Economica, February
1974.

Dornbusch, R., S. Fischer and P. Samuelson, "A Ricardian Model of Trade and Payments", American
Economic Review, Vol. 67, December 1977, pp. 823-839.

B. Heckscher-Ohlin-Samuelson (and Related) Theory

Heckscher, Eli, "The Effect of Foreign Trade on the Distribution of Income", Economisk Tidskift, Vol. 21,
1919; reprinted in H.S. Ellis and L.A. Metzler (editors), Readings in the Theory of International Trade (The
Blakiston Company), 1949.

Findlay, R., Trade and Specialization (Penquin Books), 1970, Chapters 2-3.

Lerner, A.P., "Factor Prices and International Trade", Economica, Vol. 19, No. 73, 1952.

Samuelson, P.A., "International Factor-Price Equalization Once Again", Economic Journal, Vol. 59, June
1949; reprinted in J.N. Bhagwati (editor), International Trade: Selected Readings (M.I.T. Press), second
edition, 1987; also reprinted in R.E. Caves and H.G. Johnson (editors), Readings in International Economics
(Richard D. Irwin), 1968; also reprinted in J.E. Stiglitz (editor), The Collected Scientific Papers of PaulA.
Samuelson (M.I.T. Press), Vol. 2, 1966.

*Jones, R.W., "The Structure of Simple General Equilibrium Models", Journal of Political Economy, Vol.
73, No. 6, December 1965.

*Mussa, M. "The Two-Sector Model in Terms of its Dual: A Geometric Exposition", Journal of
International Economics, Vol. 9, No. 4, November 1979, pp. 513-526; reprinted in Bhagwati, International
Trade.

*Findlay, R., Factor Proportions, Trade, and Growth (MIT Press), 1995, chapter 1.

*Deardorff, A.V., "Weak Links in the Chain of Comparative Advantage", Journal of International
Economics, Vol. 9, No. 2, May 1979, pp. 197-209; reprinted in Bhagwati, International Trade.

*Vanek, J., "The Factor Proportions Theory: The N-Factor Case", Kyklos, Vol. 21, 1968.

Brecher, R.A. and Choudhri, E.U., "The Factor Content of International Trade Without Factor-Price
Equalization”, Journal of International Economics, Vol. 12, No. 3/4, May 1982, pp. 277-283.
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Helpman, E., "The Factor Content of Foreign Trade", Economic Journal,Vol. 94, March 1984, pp. 84-94.

Ethier, W.J., "Higher Dimensional Issues in Trade Theory", in Jones and Kenen.

*Mayer, W., "Short-Run and Long-Run Equilibrium for a Small Open Economy", Journal of Political
Economy, Vol. 82, No. 5, 1974, pp. 955-967.

Anderson, J.E., “The Heckscher-Ohlin and Travis-Vanek Theorems under Uncertainty”, Journal of
International Economics, Vol 11, No. 2, 1981, p.p. 23-247.

C. Empirical Verification of Ricardian and Heckscher-Ohlin-Samuelson Theories

Deardorff, A.V., "Testing Trade Theories and Predicting Trade Flows", in Jones and Kenen.

Leamer, E.E. and J. Levinsohn, "International Trade Theory: The Evidence", in G.M. Grossman and K.
Rogoff (eds), Handbook of International Economics (Elsevier Science B.V.), Vol. 3, 1995.

*MacDougall, G.D.A., "British and American Exports: A Study Suggested by the Theory of Comparative
Costs", Economic Journal, Vol. 61, No. 244, December 1951; reprinted in Caves and Johnson.

Costinot, A. and D. Donaldson, “Ricardo’s Theory of Comparative Advantage: Old Ideas, New Evidence”,
American Economic Review, Vol. 102, No. 3, May 2012, pp. 453-458.

Leontief, W.W., "Domestic Production and Foreign Trade: The American Capital Position Re-Examined",
Economia Internazionale, Vol. 7, February 1954, pp. 3-32; reprinted in Caves and Jonson.

*Leamer, E.E., "The Leontief Paradox, Reconsidered", Journal of Political Economy, Vol. 88, No. 3, June
1980, p. 495-503; reprinted in Bhagwati, International Trade.

Brecher, R.A. and E.U. Choudhri, "The Leontief Paradox, Continued", Journal of Political Economy, Vol.
90, No. 4, August 1982, pp. 820-823.

Morrow, P.M., “Ricardian–Heckscher–Ohlin Comparative Advantage: Theory and Evidence”, Journal of

International Economics, Vol.82, Issue 2, November 2010, pp. 137-151.

Trefler, D. and S.C.Zhu, “The Structure of Factor Content Predictions”, Journal of International Economics,
Vol.82, Issue 2, November 2010, pp. 195-207.

Baldwin, R.E., The Development and Testing of Heckscher-Ohlin Trade Models: A Review (Cambridge:
MIT Press), 2008, chapters 3-5.

D. Some Other Explanations of Trade and Their Empirical Verification

Findlay, Trade and Specialization, Chapter 4, pp. 106-107.

Linder, S.B., An Essay on Trade and Transformation (John Wiley and Sons), 1961, Chapter 3.

*Vernon, R., "International Investment and International Trade in the Product Cycle", Quarterly Journal of
Economics, May 1966.
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Brecher, R.A. and E.U.Choudhri, "New Products and the Factor Content of International Trade", Journal of
Political Economy, Vol. 92, No. 5, October 1984, pp. 965-971.

Markusen, J.R. and J.R. Melvin, "Trade, Factor Prices and the Gains from Trade with Increasing Returns to
Scale", Canadian Journal of Economics, Vol. 14, No. 3, August 1981, pp. 450-469.

Grossman, G. M. and E. Rossi-Hansberg, “External Economies and International Trade Redux", Quarterly
Journal of Economics, Vol. 125, Issue 2, May 2010, pp. 829-858.

Helpman, E. and P.R. Krugman, Market Structure and Foreign Trade: Increasing Returns, Imperfect
Competition, and the International Economy (M.I.T. Press), 1985, Chapters 5-8.

*Krugman, P., “Increasing Returns, Imperfect Competition and the Positive Theory of International Trade”,
in Grossman and Rogoff.

Bernard, A.B., S.J. Redding and P.K. Schott, “Comparative Advantage and Heterogeneous Firms”, Review
of Economic Studies, Vol. 74, No. 1, January 2007, pp. 31-66.

Arkolakis, C., A. Costinot and A. Rodríguez-Clare, “New Trade Models, Same Old Gains?”, American
Economic Review, Vol. 102, No. 1, February 2012, pp. 94-13.

III. GAINS FROM TRADE AND COMMERCIAL POLICY

A. Trade Versus Autarchy

Findlay, Trade and Specialization, pp. 108-122.

Baldwin, R.E., "Equilibrium in International Trade: A Diagrammatic Analysis", Quarterly Journal of

Economics, Vol. 62, November 1948.

*Samuelson, P.A., "The Gains from International Trade Once Again", Economic Journal, Vol. 72,
December 1962.

*Dixit, A. and V. Norman, "Gains from Trade without Lump-Sum Compensation", Journal of International
Economics, Vol. 21, No.1/2, August 1986, pp. 111-122.

Brecher, R.A. and E.U. Choudhri, "Pareto Gains from Trade, Reconsidered: Compensating for Jobs Lost",
Journal of International Economics, Vol. 36, No. 3/4, May 1994, pp. 223-238.

*Krugman, P., "Increasing Returns, Imperfect Competition and the Positive Theory of International Trade",
in Grossman and Rogoff.

Brecher, R.A., “Minimum Wage Rates and the Pure Theory of International Trade”, Quarterly Journal of
Economics, Vol. 88, No. 1, February 1974, pp. 98-116.

Davis, D.R., “Does European Unemployment Prop Up American Wages? National Labor Markets and
Global Trade”, American Economic Review, Vol. 88, No. 3, June 1998, pp. 478-494.
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Bernhofen, D.M. and J.C. Brown, “An Empirical Assessment of Comparative Advantage Gains from
Trade”, American Economic Review, Vol. 95, No. 1, March 2005, pp. 208-225.

B. Departures from Free Trade

Findlay, Trade and Specialization, pp. 123-134.

*Corden, W.M., The Theory of Protection (Oxford University Press), 1971, Chapter 2 and Chapter 4
(sections I and II).

*Lerner, A.P., "The Symmetry Between Import and Export Taxes", Economica, Vol. 3, No. 11, August
1936; reprinted in Caves and Johnson.

*Metzler, L.A., "Tariffs, the Terms of Trade and the Distribution of National Income", Journal of Political
Economy, Vol. 17, No. 1, February 1949; reprinted in Caves and Johnson.

*Johnson, H.G., "Optimum Welfare and Maximum Revenue Tariffs", Review of Economic Studies, Vol. 19,
No. 48, 1950-51.

*Corden, W.M., "The Structure of a Tariff System and the Effective Protective Rate", Journal of Political
Economy, Vol. 74, 1966, pp. 221-237; reprinted in Bhagwati, International Trade.

Bhagwati, J.N. and T.N. Srinivasan, "The General Equilibrium Theory of Effective Protection and
Allocation", Journal of International Economics, Vol. 3, No. 3, August 1973.

Anderson, J.E., “Effective Protection Redux”, Journal of International Economics, Vol. 44, No. 1, February
1998, pp. 21-44.

Corden, W.M., Trade Policy and Economic Welfare (Oxford University Press), 1974.

*Johnson, H.G., "Optimal Trade Intervention in the Presence of Domestic Distortions", in R.E. Baldwin et
al. (editors), Trade, Growth and the Balance of Payments: Essays in Honor of Gottfried Haberler (Rand
McNally and Company), 1965; reprinted in Bhagwati, International Trade.

Brecher, R.A., “Optimal Commercial Policy for a Minimum-Wage Economy”, Journal of International
Economics, Vol. 4, No. 2, May 1974, pp. 139-149.

*Bhagwati, J.N. and T.N. Srinivasan, "Revenue Seeking: A Generalization of the Theory of Tariffs",
Journal of Political Economy, Vol. 88, December 1980, pp. 1069-1087

Keen, M. and D. Wildasin, “Pareto-Efficient International Taxation”, American Economic Review, Vol.94,
No.1, March 2004, pp 259-275.

*Bhagwati, J., "On the Equivalence of Tariffs and Quotas", in Baldwin et al.

Brander, J.A. and B.J. Spencer, "Tariffs and the Extraction of Foreign Monopoly Rents Under Potential
Entry", Canadian Journal of Economics, Vol. 14, No. 3., August 1981, pp. 371-389; reprinted in Bhagwati,
International Trade.
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*Eaton, J. and G.M. Grossman, " Optimal Trade and Industrial Policy under Oligopoly", Quarterly Journal
of Economics, Vol. 101, May 1986, pp. 383-406, reprinted in Bhagwati, InternationalTrade.

Helpman, E. and P.R. Krugman, Trade Policy and Market Structure(M.I.T. Press), 1989, Chapter 7.

Brander, J.A., "Strategic Trade Policy", in Grossman and Rogoff.

C. Customs Unions and Multi-Country Trade Liberalization

*Lipsey, R.G., "The Theory of Customs Unions: A General Survey", Economic Journal, Vol. 70, No. 279,
September 1960; reprinted in Caves and Johnson; also reprinted in Bhagwati, International Trade; also
reprinted in J. Bhagwati et al. (editors), Trading Blocs: Alternative Approaches to Analyzing Preferential
Trade Agreements (MIT Press), 1999.

Kemp, M.C., A Contribution to the General Equilibrium Theory of Preferential Trading (North-Holland
Publishing Company), 1969.

Vanek, J., General Equilibrium of International Discrimination (Harvard University Press), 1965.

Cooper, C.A. and B.F. Massel, "Towards a General Theory of Customs Unions for Developing Countries",
Journal of Political Economy, October 1965.

*Kemp, M.C. and H. Wan, Jr., "An Elementary Proposition Concerning the Formation of Customs Unions",
in M.C. Kemp, Three Topics in the Theory of International Trade: Distribution, Welfare and Uncertainty
(North-Holland Publishing Co.), 1976; reprinted in Bhagwati, International Trade; also reprinted in
Bhagwati et al.

Grossman, G. M. and E. Helpman, “The Politics of Free-Trade Agreements,” American Economic Review,
Vol. 85, No. 4, September 1995, pp.667-690; reprinted in Bhagwati et al.

IV. INTERNATIONAL MOBILITY OF FACTORS

*Samuelson, P.A., "The Transfer Problem and Transport costs: The Terms of Trade When Impediments are
Absent", Economic Journal, Vol. 62, No. 246, June 1952; reprinted in Stiglitz; abridged version reprinted in
Caves and Johnson.

Samuelson, P.A., "The Transfer Problem and Transport Costs, II: Analysis of Effects of Trade
Impediments", Economic Journal, Vol. 64, No. 254, June 1954; reprinted in Stiglitz; abridged version
reprinted in Caves and Johnson.

Brecher, R.A. and , J.N. Bhagwati, "Immiserizing Transfers from Abroad", Journal of International
Economics, Vol. 13, No. 3/4, November 1982, pp. 353-364.

Bhagwati, J.N., R.A. Brecher and T. Hatta, "The Generalized Theory of Transfers and Welfare: Bilateral
Transfers in a Multilateral World", American Economic Review. Vol. 73, No. 4, September 1983, pp. 606-
618; reprinted in Bhagwati, International Trade.

Corden, Trade Policy and Economic Welfare, Chapter 12.

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*MacDougall, G.D.A., "The Benefits and Costs of Private Investment from Abroad: A Theoretical
Approach", Economic Record, Special Issue, March 1960; also published in Bulletin of the Oxford
University Institute of Statistics, Vol. 22, No. 3, 1960; reprinted in Caves and Johnson.

*Mundell, R.A., "International Trade and Factor Mobility", American Economic Review, Vol. 47, No. 3,
June 1957; from which is adapted Chapter 6 of his International Economics; reprinted in Bhagwati,
International Trade.
Wong, K., "Are International Trade and Factor Mobility Substitutes?", Journal of International Economics,
Vol. 21, August l986, pp. 25-44; reprinted in Bhagwati, International Trade.

Brecher, R.A. and C.F.Diaz Alejandro, "Tariffs, Foreign Capital and Immiserizing Growth", Journal of
International Economics, Vol. 7, No. 4, November 1977, pp. 317-322; reprinted in Bhagwati,
nternationalTrade.

Jones, R.W., "International Capital Movements and the Theory of Tariffs and Trade", Quarterly Journal of
Economics, Vol. 81, No. 1, February 1967.

Brecher, R.A., "Second-Best Policy for International Trade and Investment", Journal of International
Economics, Vol. 14, No. 3/4, May 1983, pp. 313-320.

*Singer, H.W., "The Distribution of Gains Between Investing and Borrowing Countries", American
Economic Review, Vol. 40, No. 2, May 1950, pp. 473-485; reprinted in Caves and Johnson.

Brecher, R.A. and E.U. Choudhri, "Immiserizing Investment from Abroad: The Singer-Prebisch Thesis
Reconsidered", Quarterly Journal of Economics, Vol. 97, February 1982, pp. 182-190.

Helpman and Krugman, Market Structure and Foreign Trade, Chapters 12 and 13.

Bhagwati, J.N. and T.N.Srinivasan, "On the Choice Between Capital and Labour Mobility", Journal of
International Economics, Vol. 14, No. 3/4, May 1983, pp. 209-221.

Brecher, R.A. and Z. Chen, “Unemployment of Skilled and Unskilled Labor in an Open Economy:
International Trade, Migration, and Outsourcing”, Review of International Economics, Vol. 18, No. 5,
November 2010, pp. 990-1000.

Brecher, R. A., Z. Chen and Z. Yu, “The Trouble with Offshoring: Static and Dynamic Losses in the
Presence of Unemployment”, The World Economy, Vol. 36, Issue 1, January 2013, pp. 1-11.

V. TRADE, GROWTH AND DEVELOPMENT

*Johnson, H.G., "Economic Development and International Trade", National Ekonomisk Tidskrift, 97 Bund,
5-6 Hefte, 1959; reprinted in his Money, Trade and Economic Growth (Harvard University Press), 1962;
also reprinted in Caves and Johnson.

Rybczynski, T.M., "Factor Endowment and Relative Commodity Prices", Economica, Vol. 22, No. 84,
November 1955; reprinted in Caves and Johnson.

*Findlay, R. and H. Grubert, "Factor Intensities, Technological Progress and the Terms of Trade", Oxford
Economic Papers, February 1959.
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Brecher, R.A., "Increased Unemployment from Capital Accumulation in a Minimum-Wage Model of an

Open Economy", Canadian Journal of Economics, Vol. 13, No. 1, February 1980, pp. 152-158.
Kreickemeir, U. and D. Nelson, “Fair Wages, Unemployment and Technological Change in a Global
Economy”, Journal of International Economics, Vol. 70, Issue 2, December 2006, pp. 451-469.

*Prebisch, R., "Commercial Policies in Underdeveloped Countries", American Economic Review, Papers
and Proceedings, Vol. 44, May 1959.

*Lewis, W.A., Aspects of Tropical Trade, 1883-1965, Wiksell Lectures (Almqvist and Wiksell), 1969; and
the review by H.G. Johnson in the Journal of International Economics, Vol. 1, No. 1, February 1971.

Findlay, R., "Growth and Development in Trade Models", in Jones and Kenen.

Grossman, G.M. and E. Helpman, Innovation and Growth in the Global Economy (MIT Press), 1991,
Chapters 6 and 7.

*Findlay, Factor Proportions, Trade, and Growth, chapters 2 and 3.

Brecher, R. A., Z. Chen and E. U. Choudhri, “Absolute and Comparative Advantage, Reconsidered: The
Pattern of International Trade with Optimal Saving”, Review of International Economics, Vol 10, Issue 4,
November 2002, pp. 645-656.

Brecher, R. A., Z. Chen and E. U. Choudhri, “Dynamic Stability in a Two- Country Model of Optimal
Growth and International Trade”, Journal of Economic Dynamics & Control, Vol. 29, Issue 3, March 2005,
pp. 583-594.