Econ 861                            

International Trade and Open Macroeconomics for Graduate Students                              

Syllabus (PDF) 

Instructor: Nan Li, 403 Arps Hall. E-mail: 

Time and Location: Tue 1:30 - 5:18, Biological Sciences Building 0668

Office Hours: Fri, by appointments

Overview:  This is a second-year graduate course for those who are interested in international economics. The goal is to get you familiar with the up-to-date literature and to equip you with sufficient workhorse models so that you may proceed to do interesting research. The first part of the class will cover the standard models in trade and empirical applications of these models, including why countries trade and the welfare implications of trade. In particular, the Ricardian model of comparative advantage, Heckscher-Ohlin(-Samuelson) Model of factor abundance and general equilibrium implications of trade, and the new trade theory (Helpman-Krugman Model) with imperfect competition for intra-industry trade. Since Econ 863 is not given in this academic year, in the second part of the course we will mix the advanced topics in trade with those in open macroeconomics depending on the interests of the class, such as firm structure and trade, trade cost and geography, trade and growth, international business cycle, exchange rate, sovereign debt, etc. 

Textbook:  No textbook is required for this course. However, the following books are excellent resources for various topics in this course. I strongly recommend you to read the relevant chapters of these books.
    Feenstra, R. (2004), Advanced International Trade: Theory and Evidence, Princeton Press (F)
    Helpman, E. and P. Krugman (1985), Market Structure and Foreign Trade, MIT Press (HK)
    Obstfeld, M. and K. Rogoff (1996), Foundations of International Macroeconomics, MIT Press (OR)

    Grossman, G (1992), Imperfect Competition and International Trade, MIT Press 

Assessment:  Idea and content are always important, but in this class I will also emphasize the presentation and writing skills. Therefore, your grade will be based on class participation (20%), two presentations (40%) and a written project (40%).
    Each of you will give two presentations, including one 40-minute presentation on an existing
paper in the syllabus and another 20-minute presentation on your original research idea related to
the course material. The presentation should use slides of some sorts and be well organized. Think about the simplistic and intuitive way to explain a possibly complicated model. The presentation on the existing paper should also include the critique of the paper and possible extensions. You should choose a paper and discuss with me before the third week of the quarter. Everyone is supposed to read the paper to be presented and participate in class discussions. Before each paper presentation, I will randomly select one of you to give a 5-minute intelligent summary of the paper and brief criticisms. If you failed to prepare, you would face a much higher possibility of being chosen for the rest of the course (of course, this may give you low incentive to prepare for the last presentation, at which time we may play a different game).
   The written project should be on your research ideas. You should clearly outline a question,
provide a brief review of the relevant literature, your contribution and solution strategy (a model
or description of available data and empirical approach). You should talk to me before deciding on
a topic for your written pro ject. It is due on Dec 11.

Organization:  For the first three weeks, I will give lectures on standard trade theories. I will also include one talk on presentation skills to get you ready for your task. After that, we will get to the papers on more advanced topics. The course time will then be divided into my lecture, your presentation and discussions. You can check the course website at for handouts, links to many of the papers in the reading list, and other course information. Also we should feel free to modify the topics according to our interests. Feel free to let me know if there are something you would like to see more of.


Outline and Readings:
    You are not expected to read thoroughly through all the papers on the list. They intend to serve as a useful starting point for your search for a research topic. It may be better for you to read some of the papers of your interest really carefully, and have a meaningful discussion in class.

Part I Trade Theories

0.Comparative Advantage and Gains from Trade
      ∙  F, pp. 1-4
      ∙  Deardorff, A., "The General Validity of the Law of Comparative Advantage", Journal of Political Economy, 1980.
      ∙  Dixit, A. and V. Norman, "Gains from trade without Lump-Sum Compensation", Journal of International Economics, 1986.

1.Ricardian Models of Trade
      ∙  Dornbusch, R., S. Fisher and P. Samuelson, "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods", American Economic Review, 1977. (*)
      ∙  Eaton, J. and S. Kortum, "Technology, Geography and Trade", Econometrica, 2002.
(*) Lecture Slides
      ∙  Alvarez, F. and Lucas, R. Jr., "General Equilibrium Analysis of the Eaton-Kortum Model of International Trade", mimeo, 2006. (*)

2.Heckscher-Ohlin: Factor Endowment Models and Empirical Test
      ∙  F, Ch. 2-3
      ∙  HK, Ch. 1
      ∙  Jones, R., "The Structure of Simple General Equilibrium Models", Journal of Political Economy, 1965.      

      ∙  Courant, P. and A. Deardorff, "International Trade with Lumpy Countries", Journal of Political Economy, 1992. (*)

      ∙  Davis, D., "Intra-Industry Trade: A Heckscher-Ohlin-Ricardo Approach", Journal of International Economics, 1995. (*)
      ∙  Deardorff, A., "The General Validity of the Heckscher-Ohlin Theorem", American Economic Review, 1982.
      ∙  Dornbusch, R., S. Fischer, and P. Samuelson, "Heckscher-Ohlin Trade Theory with a Continuum of Goods", Quarterly Journal of Economics, 1980. (*)
      ∙  Ethier, W., "Higher Dimensional Issues in Trade Theory", in R.W. Jones and P.B. Kenen, eds., Handbook of International Economics Vol. I, North-Holland, 131-184
      ∙  Harrigan, J., "Technology, Factor Supplies, and International Specialization: Estimating the Neoclassical Model", American Economic Review, 1997.
      ∙  Krishna, P., "The Factor Content of Bilateral Trade: An Empirical Test", Journal of Political Economy, 2004.

      ∙  Romalis, J. "Factor Proportions and the Structure of commodity Trade", American Economic Review, 2004.
      ∙  Trefler, D., "The Case of Missing Trade and Other Mysteries", American Economic Review, 1995.(*)

3.  Economies of Scale and Imperfect Competition 
      ∙  HK, Ch. 2-3 and 6-8
      ∙  F, Ch. 5
      ∙  Bergoeing, R. and T. Kehoe, "Trade Theory and Trade Facts", mimeo, 2003.
      ∙  Broda, C. and D. Weinstein. "Globalization and the Gains from Variety," NBER working paper 10314, 2004.
      ∙  Eaton, J. and G. Grossman. "Optimal Trade and Industrial Policy under Oligopoly," Quarterly Journal of Economics, 1986.
      ∙  Helpman, E. "International Trade in the Presence of Production Differentiation, Economics of Scale, and Monopolistic Competition: A Chamberlin-Heckscher-Ohlin Approach", Journal of International Economics, 1981.
      ∙  Hummels, D., and J. Levinsohn, "Monopolistic Competition and International Trade: Reconsidering the Evidence", Quarterly Journal Of Economics, 1995.(*) 

        Hummels. D., and P. Klenow, "The Variety and Quality of a Nation's Export", American Economic Review, 2005. (*) Lecture Slides

     ∙  Krugman, P.R. "Increasing Returns, Monopolistic Competition, and International Trade", Journal of International Economics, 1979
      ∙  Krugman, P. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review 1980. (*)
      ∙  Krugman, P. "Intra-industry Specialization and the Gain from Trade," Journal of Political Economy, 1981.  (*)  
Part II Advanced Topics in Trade and Open Macroeconomics

1. Firm Structure, Heterogeneous Firms, Credit Constraint and Trade
      ∙  F, Ch.11
      ∙  HK, Ch. 12-14    
      ∙  Alessandria, G. and H. Choi, "Do Sunk Costs of Exporting Matter for Net Export Dynamics?" Quarterly Journal of Economics, 2008. (*)
      ∙  Antràs, P., "Firms Contracts and Trade Structure," Quarterly Journal of Economics, 2003.
      ∙  Antràs, P., "Incomplete Contracts and the Product Cycle", American Economic Review, 2005.
      ∙  Antràs, P. and Helpman "Global Sourcing", Journal of Political Economy, 2004.  (*)
      ∙  Atkeson, A. and A. Burstein, “Innovation, Firm Dynamics, and International Trade”,
NBER working paper 13326, 2007. (*)
      ∙  Grossman, G. and E. Helpman, "Integration versus Outsourcing in Industry Equilibrium," Quarterly Journal of Economics 2002.
      ∙  Ghironi, F. and M. Melitz, "International Trade and Macroeconomic Dynamics with Heterogeneous Firms", Quarterly Journal of Economics, 2005. (*)
      ∙  Helpman E., M. Melitz and S. Yeaple, "Exports vs. FDI with Heterogeneous Firms," American Economic Review, 2004.
      ∙  Helpman, E., "Trade, FDI, and the Organization of Firms", Journal of Economic Literature, 2006.
      ∙  Helpman, E., "A Simple Theory of International Trade and Multinational Corporations," Journal of Political Economy, 1984.    
      ∙  Melitz, M. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, 2003. (*)
     ∙  Melitz, M. and G. Ottaviano. "Market Size, Trade, and Productivity", Review of Economic Studies (2008)
    ∙  Manova, K. "Credit Constraints, Heterogeneous Firms and International Trade", Stanford, 2008.
   ∙ Nunn, N. “Relationship-specificity, Incomplete Contracts and the Pattern of Trade”,
Quarterly Journal of Economics, 2007

2. Trade Costs and Geography
      ∙  HK Ch. 10
      ∙  F Ch. 5
      ∙  Anderson, J. and E. van Wincoop, "Gravity and Gravitas: A Solution to the Border Puzzle", American Economic Review, 2003 (*)
      ∙  Arkolakis, K. "Market Access Costs and the New Consumers Margin in International Trade", mimeo, University of Minnesota, 2007.
     ∙  Bergstrand, J., P. Egger and M. Larch, "Gravity Redux: Structural Estimation of Gravity Equations with Asymmetric Bilateral Trade Costs", Journal of International Economics, 2008
      ∙  Chaney, T. "Distorted Gravity: Heterogeneous Firms, Market Structure, and the Geography of International Trade", University of Chicago, 2005.
      ∙  Eaton, J., S. Kortum and F. Kramarz, "Dissecting Trade: Firms, Industries, and Export Destinations", American Economic Review, 2004.
      ∙  Engel, C. and J. H. Rogers, "How Wide Is the Border?" American Economic Review, 1996.   
      ∙  Helpman, E., M. Melitz and Y. Rubinstein, "Estimating Trade Flows: Trading Partners and Trade Volumes", Quarterly Journal of Economics, 2008. (*)
      ∙  Krugman, P., "Increasing Returns and Economic Geography," Journal of Political Economy, 1991.(*)
      ∙  McCallum, J., "National Borders Matter: Canada-U.S. Regional Trade Patterns", American Economic Review, 1995.
      ∙  Rossi-Hansberg, E., "A Spatial Theory of Trade", American Economic Review, 2005
      ∙  Yi, K. "Can Vertical Specialization Explain the Growth of World Trade?" Journal of Political Economy, 2003.
3. Trade, Growth and Technology   
      ∙  Acemoglu, D. and J. Ventura, “The World Income Distribution”, Quarterly Journal of Economics 2002.
      ∙  Eaton, J. and S. Kortum "Innovation, Diffusion and Trade", University of Minnesota
      ∙  Feenstra, R. and G. Hanson, "Globalization, Outsourcing, and Wage Inequality," American Economic Review, 1996.
      ∙  Feenstra, R. and G. Hanson, "The Impact of Outsourcing and High-Technology Capital on Wages: Estimates for the United States, 1979-1990" Quarterly Journal of Economics, 1999.
      ∙  Grossman, G. and E. Helpman, “Product Development and International Trade”, Jour-
nal of Political Economy 1989. (*)
      ∙  Grossman, G. M. and E. Helpman, "Quality Ladders in the Theory of Growth", Review of Economic Studies, 1991 (*)
      ∙  Grossman, G. and G. Maggi, "Diversity and Trade," American Economic Review, 2000.   
      ∙  Kraay, A. and J. Ventura, "Comparative Advantage and the Cross-section of Business Cycles", Journal of the European Economic Association, 2007.
      ∙ Romalis, J. "Market Access, Openness and Growth.pdf," NBER 13048, 2007
      ∙  Rodriguez-Clare, A. “Trade, Diffusion and the Gains form Openness”, mimeo 2006. 
      ∙  Segerstrom, P., T. Anant and E. Dinopoulos, "A Schumpeterian Model of the Product Life Cycle", American Economic Review, 1990.
      ∙  Wacziarg, R. and J. S. Wallack, "Trade Liberalization and Intersectoral Labor Movements", Journal of International Economics, 2004.
      ∙  Yeaple, S., "A Simple Model of Firm Heterogeneity, International Trade, and Wages," Journal of International Economics, 2004.
4. Producer Level
       ∙ Bernard, A.B., J. Eaton, J.B.Jensen and S. Kortum "Plants and Productivity in International Trade", American Economic Review, 2003.

5. International Real Business Cycle
     ∙  OR, Ch.1-2
     ∙  Backus, D.K., P. J. Kehoe and F.E. Kydland, “International Real Business Cycles",
Journal of Political Economy, 1992. (*)
 ∙  Backus, D. K. “Interpreting Comovements in the Trade Balance and the Terms of Trade",
Journal of International Economics, 1993. (*)
     ∙  Aguiar, M. and G. Gopinath, “Emerging Market Business Cycles: The Cycle is the
Trend", Quarterly Journal of Economics, 2007. (*)
     ∙  Boz, E., Daude, C. and B. Durdu, "Emerging Market Business Cycles Revisited: Learning about the Trend", working paper.
     ∙  Bergin, P.R. and R. Glick, “Endogenous Tradability and Macroeconomic Implications",
mimeo 2006.
     ∙  Coeurdacier, N., “Do Trade Costs in Goods Market Lead to Home Bias in Equities?",
mimeo, 2007.
     ∙  Devereux, M. and A. Sutherland, “Solving for Country Portfolios in Open Economy
Macro Models", mimeo 2006.
    ∙  Heaton, J. and Luca, “Evaluating the Effects of Incomplete Markets on Risk Sharing
and Asset Pricing", Journal of Political Economy, 1996.
    ∙  Heathcote, J. and F. Perri, “Financial Autarky and International Business Cycles",
Journal of Monetary Economics 2002. (*)
    ∙  Kehoe, P. and F. Perri “International Business Cycles with Endogenous Incomplete
Markets," Federal Reserve Bank of Minneapolis, 1996.
    ∙  Mendoza, E.  “Real Business Cycles in a Small Open Economy." American Economic
Review, 1991. (*)
    ∙   Mendoza, E. , Quadrini, V. and J. Victor Rios-Rull, “Financial Integration, Financial Development and Global Imbalances” forthcoming, Journal of Political Economy)
    ∙  Neumeyer, P. and F. Perri, “Business Cycles in Emerging Economies: the Role of Interest
Rates", Journal of Monetary Economics, 2005.
   ∙  Obstfeld, Maurice and Kenneth Rogoff ,“The Six Major Puzzles In International Macroe-
conomics: Is there a common cause?" NBER Macroeconomics Annual 2000.
   ∙  Raffo, Andrea, “Techonolgy Shocks” Novel Implications for International Business Cycles”, 2009
   ∙  Stockman, A. C. and L.L. Tesar, “Tastes and Technology in a Two-Country Model of
Business cycle: Explaining International Comovements", American Economic Review,

6. Exchange Rate and International Relative Prices
    ∙  OR, Ch. 4-5, 8-10
    ∙   Alvarez, F., A. Atkeson, and P.J. Kehoe, “Money, Interest Rates, and Exchange Rates
with Endogenously Segmented Markets”, Journal of Political Economy, Feb. 2002
    ∙  Alvarez, F., A. Atkeson, and P. J. Kehoe, “Time-Varying Risk, Interest Rates and
Exchange Rates in General Equilibrium”, Federal Reserve Bank of Minneapolis Working
Paper 627
    ∙   Betts, C. and M. B. Devereux, “Exchange rate dynamics in a model of pricing-to-
market”, Journal of International Economics 2000.
    ∙  Burstein, A., J. Neves and S. Rebelo, “Distribution Costs and Real Exchange Rate Dy-
namics During Exchange Rate Based Stabilizations”, Journal of Monetary Economics,
    ∙  Chari, V.V., P.J. Kehoe and E.R. McGrattan, “Can Sticky Price Models Generate
Volatile and Persistent Real Exchange Rates?” Review of Economic Studies, 2002.
    ∙  Devereux, M. and C. Engel, “Exchange Rate Pass-through, Exchange Rate Volatility,
and Exchange Rate Disconnect”, Journal of Monetary Economics, 2002.
     ∙  Dornbusch, R.“Expectations and Exchange Rate Dynamics”, Journal of Political Econ-
omy, 1976.
     ∙  Drozd, L. and J. Nosal, “Understanding International Prices: Customers as Capital”,
memo, 2007.
     ∙  Duarte, M. and A. Stockman, “Rational Speculation and Exchange Rates”, Journal of
Monetary Economics, 2002.
     ∙  Engel, C. and K. D. West, “Exchange Rates and Fundamentals”, Journal of Political
Economy 2005.
     ∙  Imbs, J. H. Mumtaz, M. Ravn and H. Rey, “PPP Strikes Back: Aggregation and the
Real Exchange Rate”, Quarterly Journal of Economics 2005.
     ∙  Itskhoki, O., G. Gopinath and R. Rigobon, “Currency Choice and Exchange Rate Pass-
through”, mimeo 2007.
     ∙  Lucas, R., “Interest Rates and Currency Prices in a Two-Country World”, Journal of
Monetary Economics 1982. (*)
     ∙  Obstfeld, M. and K. Rogoff , “New directions for stochastic open economy models.” Jour-
nal of International Economics, 2000.

7. Crises and Sudden Stops in Small Open Economy
      ∙  Burnside, C., M. Eichenbaum and S. Rebelo,"On the Fiscal Implications of Twin Crises," Federal Reserve Bank of Chicago Working Paper 2002
       ∙  Chari, V.V., P. Kehoe and E. McGrattan, "Sudden Stops and Output Drops", American Economic Review P&P, 2005
      ∙  Obstfeld, M. "Models of Currency Crises with Self-Fulfilling Features", European Economic Review, 1996
      ∙  Chari, V. V. and P. Kehoe, "Hot Money", Federal Reserve Bank of Minneapolis, 2003.
      ∙  Martin, P. and H. Rey, "Financial Globalization and Emerging Markets: With or Without Crash?" American Economic Review, forthcoming.
     ∙  Mendoza, E. "Endogenous Sudden Stops in a Business Cycle Model with Collateral Constraints", mimeo 2006.
      ∙  Mendoza, E. “Sudden Stops, Financial Crises and Leverage: A Fisherian Deflation of Tobin's Q”
mimeo 2008.
      ∙  Morris, S. and H. S. Shin, "Rethinking Multiple Equilibria in Macroeconomic Modeling", National Bureau of Economic Research Macroeconomics Annual, 2000

8. Growth, Finance and Volatility
      ∙  Aghion, P. G. Angeletos, A. Banerjee and K. Manova, "Volatility and Growth: Credit Constraints and the Composition of Investment", mimeo 2006.
      ∙  Hnatkovska, V., and N. Loayza
      ∙  Koren, M. and S. Tenreyro, "Volatility and Development", Quarterly Journal of Economics, 2007.
      ∙  Kraay, A. and Ventura, J.,"Comparative Advantage and the Cross-section of Business Cycles", NBER Working Paper 8104, 2001.
      ∙  Manova, K., "Credit Constraints in Trade: Financial Development and Export Composition", mimeo 2007.
      ∙  Rajan, R.G. and L. Zingales, "Financial Dependence and Growth", American Economic Review, 1998.
      ∙  di Giovanni, Julian and Andrei Levchenko, "International Trade and Aggregate Fluctuations in Granular Economies", 2008.