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FACULTY OF BUSINESS AND LAW

MPE711

Global Trade

and Markets

READINGS

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GUIDE TO THIS READER

You will find in this document the readings that form a part of the material that complements

each week’s lecture slides. The material in this reader can never form a substitute to the

material presented during the lectures. The intent of providing you these readings is tosupplement the concepts you will learn in class with more context and examples.

You will notice that the course covers a wide range of topics; however, the core concepts will

be used repeatedly, and the emphasis of the unit will be on recognising the link between

seemingly varied topics. While some papers in this reader will contain algebra and calculus, it

is okay for you to skim over such sections.

This reader also has a useful secondary purpose in allowing you to read ahead of the lectures.

Browsing through this reader will also help you gain a wider picture of the breadth of options

available to you in choosing your research topic.

It is also advisable that at the end of each week you refer to the ‘key concepts’ of the current

topic and ensure that you understand them.

I hope this unit will serve you well.

Best wishes,

Aaron Nicholas

([email protected])

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mailto:[email protected]




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TOPIC ONE: The Free-market and Comparative Advantage

___________________________________________________________________________

Readings:

• McTaggart, D., C. Findlay and M. Parkin. 2010. Economics, 6th edition. Pearson.

Chapter 3

Chapter 4

Chapter 12

Chapter 13

Chapter 14

Chapter 15

___________________________________________________________________________

1: The basics of free-market economics

a)

Demand and supply

• What is the law of demand and supply?

• When do demand and supply curves shift?

• What is the difference between a movement along and a shift of the curve?

b)

Elasticity

• What determines the slope of demand and supply curves?

• How does elasticity affect prices and quantity as a response to a curve shift?

c) Welfare and Surplus

• What is efficiency?

• How do we measure efficiency?

d)

The efficiency of the free-market• Why is the free-market efficient?

e) The inefficiency of monopolies

• Why are monopolies inefficient?

2: Introduction to comparative advantage

a) Absolute versus comparative advantage

• What is the difference between absolute and comparative advantage?

• Why is comparative advantage a better theory?

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TOPIC TWO: Neoclassical Trade Theory

__________________________________________________________________________

Readings:

• Salvatore, D. 2007. International Economics, 9th edition. Wiley. Chapter 2: 31-48.

•

Beveridge, T. 2013. A Primer on Macroeconomics. Business Expert Press. Chapter 8.Link to reading on comparative advantage

__________________________________________________________________________

1. Opportunity Costs and the Production Possibility Frontier

a) What do differences in the linear, concave, and PPF curves represent?

b) What does the slope of the PPF represent?

2. Terms of trade and specialisationa) What are gains from specialisation?

b) What are terms of trade?

c) What is the maximum price a country is willing to pay for a good?

d) What is the minimum price a country is willing to sell a good at?

e) What determines terms of trade?

3. Factor endowments and the Hecksher-Ohlin model of trade

a) How does the H-O model of trade motivate reasons for comparative advantage?

b)

What is the link between the H-O model of trade and the shape of the PPF curve?

4. Preferences and trade

a)

Can countries with the same sloped PPF curves trade? Under what conditions?

3

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TOPIC THREE: Trade Policy and Politics

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Readings:

• Baldwin, R. 1989. “The Political Economy of Trade Policy”. Journal of Economic

Perspectives, 3:119-135.

___________________________________________________________________________

1. Violations of neoclassical trade theory predictions

a) According to Neoclassical trade theory, what are the main reasons that countries

trade?

b) How do we explain violations of prediction in trading patterns made by

Neoclassical trade theory?

2. Trade barriers

a)

What are the differences between the VER, production subsidy and import tariff?

3. Reasons for protection

a) Why would a government adopt inefficient trade policies?

4.

Coalitions and types of goods

a) What are the four types of goods generated by the characteristics of rivalry and

excludability?

b) What are the advantages and disadvantages of having larger versus smaller groups

in terms of lobbying power and coordination in influencing trade policy?

5. Trade Policy and the Prisoner’s Dilemmaa)

What is the Prisoner’s Dilemma?

b) What is the most likely outcome of a single-period Prisoner’s Dilemma?

c) How does the Prisoner’s Dilemma relate to consumers and trade policy?

d) How does the Prisoner’s Dilemma relate to trade policy across different countries?

4

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TOPIC FOUR: The Role of Government

___________________________________________________________________________

Readings:

• Tsebelis, G. 1995. “Decision Making in Political Systems: Veto Players in

Presidentialism, Parliamentarism, Multicameralism and Multipartyism”. British

Journal of Political Science, 25:289-325.

• Ulbrich, H. 2011. Public Finance in Theory and Practice (second edition). Taylor and

Francis. Chapter 7. Link to reading on externalities

___________________________________________________________________________

1. Political stability and the status quo

a) What is the likelihood of the status quo changing as more veto players are added

to the decision process?

b) What is the likelihood of the status quo changing as the distance between players

are reduced?c) How do the insights from the above questions apply to democracies and

authoritarian regimes?

2.

Property rights and common goods

a) What is the link between property rights and common goods?

b) What changes between the single-period versus multi-period Prisoner’s Dilemma?

c) Do we always need governments to intervene in cases of non-excludable goods?

d) What are the conditions under which the government should intervene?

3. Externalities

a)

What are externalities and why do they justify government intervention? b) What are the differences between positive and negative externalities in terms of

efficient output production?

4.

The Pigouvian tax

a) When should a good be taxed or subsidised?

5. Coase’s Theorem

a) When should a good not be taxed and left to market forces even when there are

externalities?

b) What is the difference between the Coase solution and Pigouvian tax, both in

terms of feasibility and outcomes?

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TOPIC FIVE: Growth and Redistribution

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Readings:

• Ulbrich, H. 2011. Public Finance in Theory and Practice (second edition). Taylor and

Francis. Chapter 5. Link to reading on redistribution ___________________________________________________________________________

1. Solow-Swan (Neoclassical) growth model

a) What is the relationship between economic growth and the rate of economic

growth?

b) What is the role of capital and labour in explaining this relationship?

c)

At equilibrium, what should be the growth rate of income and income per capita?

d) What does the Solow-Swan model have to say about economic convergence?

2.

Growth and tradea)

What is the effect of growth on production?

b) What is the effect of growth on consumption?

c) What is the overall effect of growth on the quantity of trade?

d) How do ‘large countries’ influence the terms of trade as they grow?

3. Efficiency, Equality and Pareto Improvements

a) What is a Pareto Improvement?

b)

What type of policies result in a Pareto Improvement?

4. The government as insurance

a)

How does the government act as an insurer against bad luck? b) Why do we demand this insurance?

5.

Limits on redistribution

a) What are the two main factors that limit the ability of governments to redistribute

wealth to the poor?

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TOPIC SIX: Economic Transition and Privatisation

___________________________________________________________________________

Readings:

• Roland, G. 2002. “The Political Economy of Transition”. Journal of Economic

Perspectives, 16: 29-50.

• Roland, G. 1994. “On the Speed and Sequencing of Privatisation and Restructuring”.

The Economic Journal, 104: 1158-1168.

• https://www.imf.org/external/pubs/ft/fandd/2000/09/fischer.htm

___________________________________________________________________________

1. What is transition?

a) What are the key reforms required for a country to transition into a market

economy?

b) Who wins and loses from transition?

2. The Big Bang versus the gradual approach

a) What is the logic behind the big bang approach?

b) What are the problems associated with the big bang approach?

c) What are the advantages of the gradual approach?

d)

What is the endowment effect?

3.

Regulation of natural monopolies

a) What are the characteristics of a natural monopoly?

b) What are the benefits of a monopoly being privately versus publicly owned?

c)

What are the ways in which a private monopoly can be regulated?

4. Rent seeking

a) What is rent seeking?

b) How does deadweight loss arise from rent-seeking?

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TOPIC SEVEN: Trade Reform and Development

___________________________________________________________________________

Readings:

• Rodrick, D. 1992. “The Limits of Trade Policy Reform in Developing Countries”. The

Journal of Economic Perspectives, 6: 87-105.

• Stiglitz, J. 2004. “Globalization and Growth in Emerging Markets”. Journal of Policy

Modeling, 26: 465-484.

___________________________________________________________________________

1.

Export instability

a) What is the relationship between elasticity and export stability?

2. Trade reform and loss-aversion

a) What is the link between loss-aversion and trade reform?

3. Trade reform and the Washington Consensusa)

What is the role of the World Bank and the IMF in debt relief and the Washington

Consensus?

4. Trust and credibility

a) What does a lack of trust and credibility lead to in terms of trade liberalisation?

5.

Trade theory with Imperfect Competition

a) How do local import-competing monopolies react to the removal of import

barriers?

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TOPIC EIGHT: Economics of Ideas and Technology

___________________________________________________________________________

Readings:

• Jones, C. 2002. “The Economics of Ideas”. Introduction to Economic Growth, WW

Norton & Company: 78–95.

• Quah, D. 1999. “The Weightless Economy in Economic Development”. LSE

Economics Department, Centre for Economic Performance Discussion Paper No. 417:

1–48. (read the first 15 pages)

___________________________________________________________________________

1. Technology and growth

a) How is technology defined and measured?

2. The characteristics of ideas-driven goodsa)

What are the six primary characteristics of ideas and ideas-based goods that

differentiate them from other goods?

3. Path dependencea)

What is path dependence and what are its consequences?

4.

Intellectual property rights

a) When is digital piracy efficient versus inefficient?

b) What are the benefits and costs of intellectual property rights enforcement?

5.

The monopoly nature of knowledgea)

What is the relationship between ideas-driven goods, natural monopolies, and the

convergence hypothesis of growth?

6. Demand and the ‘Weightless Economy’a)

Why is demand-side economics of key importance for the success of ideas-driven

goods?

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http://e/files/text-readable/quah.pdf

http://e/files/text-readable/quah.pdf

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TOPIC NINE: Economics of Migration

___________________________________________________________________________

Readings:

• Freeman, R. 2006. “People Flows in Globalization”. The Journal of Economic

Perspectives, 20: 145-170.

___________________________________________________________________________

1. The international market for labour

a) What are the conditions under which the international market for labour would be

considered efficient versus inefficient?

b) What makes labour different from capital?

2. How are Receiving Countries affecteda)

Who wins, and who loses? Does elasticity matter?

b)

How does this change when we also consider the market for jobs that are

complementary to the migrant sector?

3.

How are Sending Countries affected

a) Who wins, and who loses? Does elasticity matter?

b) How does this change when we also consider the market for jobs that are

complementary to the migrant sector?

c) Are low or high-skilled workers more willing to migrate?

4. Brain drain and gain

a)

What are the possible gains from having skilled workers leave the country?

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The law of comparative

advantage

Dominick Salvatore

Source: Salvatore, D. (2007). The law of comparative advantage. InternationalEconomics (9th ed., pp. 31–48). Hoboken, NJ: Wiley.

S

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The political economy of trade

policy

Robert E. Baldwin

Source: Baldwin, R. E. (1989). The political economy of trade policy. Journal ofEconomic Perspectives, 3(4), 119–135.

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Decision making in political

systems

George Tsebelis

Source: Tsebelis, G. (1995). Decision making in political systems: Veto players inpresidentialism, parliamentarism, multicameralism and multipartyism. British Journal of

Political Science, 25 (3), 289–325.

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The political economy of

transition

Gérard Roland

Source: Roland, G. (2002). The political economy of transition. Journal of EconomicPerspectives, 16 (1), 29–50.

R

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On the speed and sequencing of

privatisation and restructuring

Gérard Roland

Source: Roland, G. (1994). On the speed and sequencing of privatisation andrestructuring. Economic Journal, 104, 1158–1168.

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The limits of trade policy reform

in developing countries

Dani Rodrik

Source: Rodrik, D. (1992). The limits of trade policy reform in developing countries.Journal of Economic Perspectives, 6 (1), 87–105.

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Globalization and growth in

emerging markets

Joseph E. Stiglitz

Source: Stiglitz, J. E. (2004). Globalization and growth in emerging markets. Journal ofPolicy Modeling, 26 (4), 465–484.

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The economics of ideas

Charles I. Jones

Source: Jones, C. I. (2002). The economics of ideas. Introduction to economic growth (2nd ed., pp. 78–95). New York: W. W. Norton & Company.

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The weightless economy in

economic development

Danny Quah

Source: Quah, D. (1999). The weightless economy in economic development (LSEEconomics Department, Centre for Economic Performance Discussion Paper No. 417,pp. 1–48). Retrieved October 14, 2011 fromhttp://eprints.lse.ac.uk/2291/1/The_Weightless_Economy_in_Economic_Development.

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People flows in globalization

Richard B. Freeman

Source: Freeman, R. B. (2006). People flows in globalization. Journal of EconomicPerspectives, 20 (2), 145–170.

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Documents

Unit Reader (2015)