1 Chapter 1. Introduction to International Trade Theory Hyun-Hoon Lee Professor Kangwon National University

2 Contents 1. Trend of world trade 2. What are the reasons for fast expansion of international trade? 3. What are the fundamental reasons for international trade? 4. What are the consequences (i.e. benefits and costs) of international trade? 5. Who are the major trade partners? 6. What are the consequences of (i.e. benefits and costs) of trade policy? 7. Introduction to the course

1. Trend of World Trade Source: WTO, World Trade Report ■ Growth of World trade

1. Trend of World Trade Source: WTO, World Trade Report ■ Growth of World trade

1. Trend of World Trade Source: Bank of Korea ■ Growth of Korea’s trade

1. Trend of World Trade Source: WTO, World Trade Report 2013.

1. Trend of World Trade Source: WTO, World Trade Report 2013.

1. Trend of World Trade Source: WTO, World Trade Report 2013.

Case Study 1-1: The Dell PCs, iPhones, and iPads sold in the United States Are Anything but American Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

2. What are the Reasons for Fast Expansion of International Trade?

 Liberalization of Trade  GATT/WTO  Economic Integration  Development of Transport  Sea Transport  Air Transport  Development of Telecommunication  Telephone  Internet 2. Reasons for Fast Expansion of International Trade

Container shipping dramatically reduced shipping costs making it much easier and cost effective to ship world-wide.

3. What are the Fundamental Reasons for International Trade?

14 Top 10 export items of Korea (%)  Source : KOTIS 3. Fundamental Reasons for International Trade

15 Top 10 import items of Korea  Source : KOTIS 3. Fundamental Reasons for International Trade

 Comparative advantage  Difference in technology - David Ricardo  Difference in factor endowments – Heckscher-Ohlin  Inter-industry trade  Economies of scale and product differentiation  Economies of scale  Product differentiation  Intra-industry trade 3. Fundamental Reasons for International Trade

■ Costs of International Trade 4. What are the Consequences (Benefits and Costs) of International Trade? ■ Benefits of International Trade

 Individuals  Consumption of better quality products with lower prices  Consumption of diverse products  Firms  Greater business opportunities  Greater profit  Nation  Fast economic growth  Job creation 4. What are the Consequences (Benefits and Costs) of International Trade?

■ Relation between Growth Rates of GDP and Trade 4. What are the Consequences (Benefits and Costs) of International Trade?

■ Costs of International Trade  Individuals  Loss of jobs employed in the less competitive industries  Firms  Face stronger competition and may lose competitive edge  Nation  Greater income disparity  Possibility of environmental degradation in developing countries  Greater vulnerability to foreign shocks 4. What are the Consequences (Benefits and Costs) of International Trade?

■ Net Benefit of International Trade  Firms  Greater business opportunity but may lose competitive edge  Individuals  As consumers, individuals become better off, but as workers, individuals may become worse off.  Nation  Overall national welfare becomes greater, but the nation may face the problems of income disparity, environmental degradation, etc. 4. What are the Consequences (Benefits and Costs) of International Trade?

22 Top 10 export markets for Korea  Source : KOTIS 5. Who are the major trade partners Rank Country% % % % % % U.S. Japan Hong Kong Germany Canada Netherlands U.K. Vietnam Singapore Sweden U.S. Japan Saudi Arabia Germany Hong Kong Iran U.K. Indonesia Netherlands Canada U.S. Japan Hong Kong Germany Singapore U.K. Canada Taiwan France Indonesia U.S. Japan China Hong Kong Taiwan Singapore U.K. Germany Malaysia Indonesia China U.S. Japan Hong Kong Singapore Taiwan Germany India Mexico Indonesia China U.S. Japan Hong Kong Singapore Vietnam Taiwan Indonesia India Russia Total

23 Top 10 import markets for Korea  Source : KOTIS 5. Who are the major trade partners Rank Country% % % % % Japan U.S Saudi Arabia Kuwait Australia Ira Germany Malaysia Canada U.K Japn U.S Germany Australia China Saudi Arabia Indonesia Malaysia Canada U.K Japan U.S China Saudi Arabia Australia Indonesia Malaysia Arab Emirate Taiwan Germany China Japan U.S Saudi Arabia Australia Germany Indonesia Arab Emirate Qatar Kuwait China Japan U.S Saudi Arabia Qatar Australia Kuwait Germany Arab Emirate Taiwan Total

 Gravity Model Other things equal, the bilateral trade between two countries is proportional, or at least positively related, to the product of the two countries’ GDPs, and the greater the distance between the two countries, the smaller is their bilateral trade. That is, the larger (and more equal in size) and the closer two countries are, the larger the volume of trade between them is expected to be. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc. 5. Who are the major trade partners

■ Multilateralism vs. regionalism 6. What are the Consequences (Benefits and Costs) of Trade Policy? ■ Free trade vs. non-free trade ■ Tariff and non-tariff barriers

■ Aims of the course  To understand reasons for international trade  Traditional trade theory  Modern trade theory  To understand benefits and costs of international trade  To understand international trade policy  Effects of tariffs and non-tariff barriers, etc. 7. Introduction to the course

■ Texts  Main textbook  Dominick Salvatore, International Economics, 11th edition, John Wiley & Sons,  Auxiliary textbooks  Recent research articles  Economic daily news papers.  Cf: Undergraduate course  Danbi Park, Mon 9:00-10:15, Thr 9:00-10:15; Room 2406  Meehwa Shin, Wed 9;00-11:35; Room 2303  Meehwa Shin, Fri 9;00-11:35; Room Introduction to the course

■ Grading  Mid-term exam: 30%  Final exam: 30%  Home work: 15%  Empirical project: 15%  Attendance: 10% (absence: -2 pts; late show up: – 1 pt)  (Note: More than five-time absences will incur automatically an “F”.) 7. Introduction to the course

■ Contents of the Text 7. Introduction to the course Part One (Chapters 2-7) International Trade Theory Part Two (Chapters 8-12) International Trade Policies Part Three (Chapters 13-15) Balance of Payments, Foreign Exchange Part Four (Chapters 16-21) Adjusting Balance of Payments Equilibria

■ Requirements  Intellectually  Basic knowledge of microeconomics  Physically  Healthy enough not to miss any of the lectures and homework!!  Academic integrity  Professionalism  Academic integrity 7. Introduction to the course

■ Academic Integrity  A student's work for academic credit should be the work of the student's own.  All papers submitted for the course may be subject to textual similarity review for the detection of plagiarism. 7. Introduction to the course

What is “To Study”( 학문 )?

 學文 : To learn letters? - ≪서경≫, ≪시경≫, ≪주역≫, ≪춘추≫, 예 ( 禮 ), 악 ( 樂 ) 따위의 시서ㆍ육예를 배우는 일. - i.e., To learn old-time classical philosophy?

What is “To Study”( 학문 )?  學聞 : To listen? - i.e., To listen to lectures in classroom?

What is “To Study”( 학문 )?  學問 : To ask questions? - 어떤 분야를 체계적으로 배워서 익힘. - i.e., Learning by asking

Who is your instructor?  Ph.D. in economics from Univ of Oregon  Professor, Dept of International Trade and Business, KNU  Senior Analyst, Asia-Pacific Economic Cooperation (APEC)  Senior Environmental Affairs Officer, United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP)  Visiting professor, Univ of British Columbia, Keio Univ, Melbourne Univ, Univ of Oregon, Bank of Korea  Homepage:

Hyun-Hoon Lee