MIT14 54F16 Lecture 1

14.
54 International Trade
— Lecture 1: Introduction
14.54
Week 1
Fall 2016
14.54 (Week 1) Introduction Fall 2016 1 / 25

Today’s Plan
1 Course logistics
2 Why study international trade?
3 What is globalization?

1. Course Logistics
Required textbook: Paul Krugman, Maurice Obstfeld, and Marc

Melitz, International Economics, 9th edition, Addison-Wesley
Course requirements:
Midterm exam (10/17): 35% of the course grade
Final exam (TBA): 50% of the course grade
Six problem sets: 15% of the course grade
There is no lecture on Wednesday Nov. 23 (Thanksgiving)

1. Course Logistics
Course outline:
1 Basic facts (1 week)
2 Comparative advantage and gains from trade (2.5 weeks)
3 Technology and trade (1 week)
4 Factor endowments and trade (3.5 weeks)
5 Increasing returns (1.5 week)
6 Trade policy (1.5 week)
7 International factor mobility (1.5 week)

2. Why Study International Trade?
Because national governments can—and do—restrict international

movement of goods/services and factors of production
International movements of production factors (immigration, foreign
direct investment) are most severely restricted (relative to trade in
goods and services)
... with the most severe restrictions imposed on labor/immigration
Which forces are dominant is an empirical matter

Production technologies do not flow easily across borders

There are massive differences in production technologies across
countries (Not just tied to differences in the availability of physical
factors of production)
The use of some technologies is tied to human capital
... which can not be transferred across countries
Government institutions have a huge impact on the effectiveness of
different technologies
Infrastructure for transport/communication
Legal system
Labor market institutions

In contrast, governments often protect and enable the free flow of

goods and factors within borders
Example of US constitution interstate commerce clause (section 8)
U.S. congress has the sole authority to regulate all forms of interstate
commerce
Covers all movements of people, goods, and services across state lines
... as well as communication and transportation between states
In effect, states are prohibited from interfering with any form of
interstate commerce
So why is international trade so different than intra-national trade?
Because factors of production and production technologies are most
often specific to countries
Countries have the ability to restrict trade

Because many politicians are opposed to trade...
Courtesy of the White House. Image is in the public domain.

American voters are often opposed to trade...
© Gallup, Inc. All rights reserved. This content is excluded from our Creative Commons
license. For more information, see https://ocw.mit.edu/help/faq-fair-use/.

But economists, overwhelmingly, are not...
www.igmchicago.org/igm-economic-experts-panel www.igmchicago.org/igm-economic-experts-panel
© Chicago Booth. All rights reserved. This content is excluded from our Creative
Commons license. For more information, see https://ocw.mit.edu/help/faq-fair-use/.

3. What is Globalization?
Definition from Deardorff and Stern Article:

1 Increase in international transactions in markets for goods, services,
and factors
2 Growth and expanded scope of international institutions and
organizations
Multinational Corporations
International Institutions: UN, World Bank, IMF, WTO

How Can Globalization Be Measured?
Trade flows: exports and imports of goods

Trade in services: transportation, healthcare, telecommunications,
business services (consulting, IT, back-office, call center)...
Foreign asset ownership
Immigration
Price convergence: Possibility of trade (even if it does not occur)
may have important effects

Measure 1: World Exports Relative to World GDP
© Source unknown. All rights reserved. This content is excluded from our Creative

Substantial Variation Across Countries in this Measure
Courtesy of Alan V. Deardorff and Robert M. Stern. Used with permission.
U.S. and Japan are relatively closed economies (especially relative to

other developed countries)
Two waves of globalization: late 19th century and post WW2
Substantial Variation Across Countries in this Measure
(Cont.)
Figure 1-2 from International Economics by Paul Krugman, Maurice

Obstfeld, and Marc Melitz removed due to copyright restrictions.

Accounting for Regional Trade Groups

The U.S. Experience

U.S. Exports and Manufacturing Output
U.S. exports are a much more important part of total U.S.

manufacturing:
As the U.S. economy has substantially concentrated into services

Measure 2: Foreign Asset Ownership
Explosion in foreign asset ownership since 1990s

World Assets and Liabilities
© International Monetary Fund. All rights reserved. This content is excluded from our Creative

Measure 3: Immigration
Courtesy of the United States Census Bureau. Image is in the public domain.

Measure 4: Price Convergence
Fall in transportation costs in 19th century led to much greater price

convergence than has been observed at any time since WW2
Example: Grain prices between Chicago and Liverpool
60% difference in 1870 dropped to 15% in 1912
Similarly, there was substantially more real wage convergence in the

19th century than since WW2

Causes of Globalization
Drop in transport costs and communication costs
Telegraph vs. phone vs. internet
Drop in tariffs: advent of GATT and then WTO

Tariffs Across Countries and Industries in 2013
Courtesy of Elsevier, Inc., http://www.sciencedirect.com. Used with permission.

MIT OpenCourseWare
https://ocw.mit.edu
14.54 International Trade

Fall 2016
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14.

14.54 (Week 1) Introduction Fall 2016 1 / 25

14.54 (Week 1) Introduction Fall 2016 2 / 25

Required textbook: Paul Krugman, Maurice Obstfeld, and Marc

14.54 (Week 1) Introduction Fall 2016 3 / 25

2 Comparative advantage and gains from trade (2.5 weeks)

3 Technology and trade (1 week)

4 Factor endowments and trade (3.5 weeks)

5 Increasing returns (1.5 week)

6 Trade policy (1.5 week)

7 International factor mobility (1.5 week)

14.54 (Week 1) Introduction Fall 2016 4 / 25

Because national governments can—and do—restrict international

14.54 (Week 1) Introduction Fall 2016 5 / 25

Production technologies do not ﬂow easily across borders

14.54 (Week 1) Introduction Fall 2016 6 / 25

In contrast, governments often protect and enable the free ﬂow of

14.54 (Week 1) Introduction Fall 2016 7 / 25

Because many politicians are opposed to trade...

Courtesy of the White House. Image is in the public domain.

14.54 (Week 1) Introduction Fall 2016 8 / 25

American voters are often opposed to trade...

14.54 (Week 1) Introduction Fall 2016 9 / 25

14.54 (Week 1) Introduction Fall 2016 10 / 25

Deﬁnition from Deardorﬀ and Stern Article:

14.54 (Week 1) Introduction Fall 2016 11 / 25

Trade ﬂows: exports and imports of goods

14.54 (Week 1) Introduction Fall 2016 12 / 25

14.54 (Week 1) Introduction Fall 2016 13 / 25

Courtesy of Alan V. Deardorff and Robert M. Stern. Used with permission.

U.S. and Japan are relatively closed economies (especially relative to

Figure 1-2 from International Economics by Paul Krugman, Maurice

14.54 (Week 1) Introduction Fall 2016 15 / 25

14.54 (Week 1) Introduction Fall 2016 16 / 25

14.54 (Week 1) Introduction Fall 2016 17 / 25

U.S. exports are a much more important part of total U.S.

As the U.S. economy has substantially concentrated into services

14.54 (Week 1) Introduction Fall 2016 18 / 25

Courtesy of Alan V. Deardorff and Robert M. Stern. Used with permission.

Explosion in foreign asset ownership since 1990s

14.54 (Week 1) Introduction Fall 2016 20 / 25

14.54 (Week 1) Introduction Fall 2016 21 / 25

Fall in transportation costs in 19th century led to much greater price

Similarly, there was substantially more real wage convergence in the

14.54 (Week 1) Introduction Fall 2016 22 / 25

Courtesy of Alan V. Deardorff and Robert M. Stern. Used with permission.

Courtesy of Elsevier, Inc., http://www.sciencedirect.com. Used with permission.

14.54 (Week 1) Introduction Fall 2016 24 / 25

14.54 International Trade

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