Econ 861

International Trade for 2nd year graduate students

Syllabus (pdf) 

Instructor: Nan Li, 403 Arps Hall.  E-mail: Office hour by appointment

Time and Location: M W 1:30 - 5pm, CV 0239

Teaching Assistant: Yuko Imura, E-mail:

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 (revived by Eaton and Kortum 2002), Heckscher-Ohlin 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. In the second part of the class, we will cover important papers of various topics.

Textbooks: No textbook is required for this course. However, the following books are excellent resources for various topics in this course. I 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

 Assessments: 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 two written projects (40%).

    Presentations can be conducted by a team of two (the idea is to encourage collaboration). Each team will give two 60-minute presentations on an existing paper in the syllabus. 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 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.

   The written projects include one empirical project and one referee report of a paper in the syllabus that is not presented by anyone. Both of them are due on March 20.

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. Check course website: for handouts and links to papers in the reading list. Feel free to let me know if there is something you would like to see more of.

Part I Trade Theories

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", Journal of Macroeconomics, 2006. (*)

2. Heckscher-Ohlin: Factor Endowment Models and Empirical Test
      ∙  F, Ch. 2-3
      ∙  HK, Ch. 1    

      ∙  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.(*) Lecture Slides

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," Quarterly Journal of Economics, 2006.(*)
      ∙  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.(*) 
Lecture Slides

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

     ∙  Krugman, P. "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.  (*)         

      ∙  Mandel, B. "Heterogeneous Firms and Import Quality: Evidence From Transaction-Level Prices", mimeo, 2008

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, "Export Versus 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. (*) Lecture Slides

        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.   

      ∙  Grossman and Rossi-hansberg, "Trading Task: A Simple Theory of Offshoring" American Economic Review, 2008

        Helpman, E., M. Melitz and Y. Rubinstein, "Estimating Trade Flows: Trading Partners and Trading Volumes", Quarterly Journal of Economics, 2008. (*) Lecture Slides

      ∙  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 Gains from 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.

      ∙  Bernard, A.B., J. Eaton, J.B.Jensen and S. Kortum "Plants and Productivity in International Trade", American Economic Review, 2003.


4.  Exchange Rate and International Relative Prices
    • OR, Ch. 4-5, 8-10
    • Alvarez, F., A. Atkeson, and P.J. Kehoe, “Money and Interest 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.   

    • Kocherlakota and Pistaferri, "Household Heterogeneity and Real Exchange Rates", Economic Journal, 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. 

5. 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, 2006.
Mendoza, E. G. “Real Business Cycles in a Small Open Economy.” American Economic
Review, 1991. (*)

      ∙  Mendoza, E. "Endogenous Sudden Stops in a Business Cycle Model with Collateral Constraints", mimeo 2006.
      ∙  Morris, S. and H. S. Shin, "Rethinking Multiple Equilibria in Macroeconomic Modeling", National Bureau of Economic Research Macroeconomics Annual, 2000

6. 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.

      ∙  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.