We all want power, we all want success, but the ultimate reward is the simple joy of understanding —— Paul Krugman

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Hi, there! This page is the summary and notes from textbook, International Economics Theory and Policy 12th written by professor Krugman, Obstfeld and Melitz. This page is aimed to serve as a supplementary material for the students enrolled in ECON 5510 at HKUST, which might also benefit those who are interested in international trade.

The main objective is to understand the key concepts and how they relate to each other and then how to use various models to generate trade patterns and evaluate the trade policy impacts on the variables of interests.

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Two kinds of questions are needed to be differentiated in any science:

• Positive questions: what is it ?
• Normative questions: what should it be?

Chapter 3 Labor Productivity and Comparative Advantage: the Ricardian Model

However, the Ricardian model predicts specialization of the economy, which is not common in the real world. We would like to expand the framework to be more realistic. The potential reasons are as follows:

1. The existence of more than one factor of production reduces the tendency toward specialization (as we will see in Chapters 4 and 5)
2. Countries sometimes protect industries from foreign competition (discussed at length in Chapters 9 through 12)
3. It is costly to transport goods and services; in some cases the cost of transportation is enough to lead countries into self-sufficiency in certain sectors

Chapter 4 Specific Factors and Income Distribution

Chapter 5 Resources and Trade: the Heckscher-Ohlin Model

Chapter 6 The Standard Trade Model

Chapter 7 External Economics of Scale and the International Location of Production

Chapter 8 Firms in the Global economy: Export and Foreign Sourcing Decisions and Multinational Enterprises