International Trade and Finance 4003-201HFM
The purpose of the lecture in International Finance and Trade (HiFM) is to present and explain the functioning of an open economy, connected to the world by trade ties. It is to explain why liberalisation of international trade and integration leads to globalisation of the world economy.
The lecture is based on microeconomic foundations and covers issues related to the theory of international trade and trade policy. The first part of the course will include the presentation of the classical, neoclassical and the so called new theory of trade – first- and second-generation (the Krugman and the Melitz models). The teacher will explain the reasons for international trade, the factors that determine its structure as well as the impact of the trade exchange between states on prosperity; describe the consequences of the functioning of the individual instruments of trade policy in the conditions of perfect and imperfect competition; present the so called strategic trade policy, which analyses the consequences of state intervention in the conditions of imperfect competition; and finally, explain the political reasons for the ineffective protectionist policy still applied by many countries through political economy models of trade policy. The lecture is also meant to present the fundamental principles of functioning of the main international trade institutions (GATT/WTO).
The detailed plan of the lecture in International Finance and Trade (HiFM) is as follows (in brackets: reference to literature listed later in the syllabus):
1. Intra-industry trade: early explanations and diverse products
The work of H. Grubel and P. Lloyd, measurement of IIT, theory of overlapping demand (S. Linder), neo-factor theories, technological gap theory (R. Vernon), hypothesis of overlapping demands, Vernon’s product life-cycle theory, Dixit-Stiglitz demand function (love for variety), Chamberlin-Lancaster demand function (ideal variety approach),
References: copied materials: the Dixit-Stiglitz function
2. Intra-industry trade: imperfect competition and the economies of scale:
The significance of the internal and external advantages of economies of scale, Chamberlin’s perfect monopolistic competition – with a possibility of entering the market (a revision), simplified Krugman model (chapter 6 of the textbook), the Krugman model (increasing returns),
References: Textbook, chapter 6, E. Czarny, chapter 2.3.
3. Diverse products and diverse companies in intra-industry trade.
The Falvey-Kierzkowski model. Horizontal and vertical intra-industry trade.
Melitz’s heterogeneous firms model. Motives behind and consequences of firm export.
Empirical studies of horizontal and vertical intra-industry trade, the significance and application of the gravitational model.
WTO: Word Trade Report 2008, Trade in Globalizing Word, pp. 53–64 (available at:
– From liberalisation to Poland’s integration with the European Union (eds: J. Michałek, W. Siwiński, M. Socha), PWN, Warszawa 2003, chapters 1–2 and 3,
– A. Cieślik, pp. 90–99,
– copied materials concerning the Melitz model.
4. Agglomeration and deagglomeration in international economy: elements of the new economic geography.
The new economic geography: adding mobility to the primary Krugman model. The importance of transport costs and the elasticity of substitution in the Krugman model of new economic geography.
References: Cieślik, cahpter 3.
Optional reading: Brakman Garretsen and Marrewijk, chapters 3.1–3.2 and copied materials.
5. Trade policy in the conditions of free competition: tariffs
Tariffs in large and small countries, analysis under partial and general equilibrium, the influence of tariffs on terms of trade, customs war.
References: textbook: chapter 8,
J. Michałek, chapter 1.
6. Trade policy in the conditions of free competition: tariffs, continued
The optimal tariff (graphic illustration and proof), the Metzler paradox, trade policy in the conditions of market imperfections, effective customs protection,
References: textbook: chapter 8,
J. Michałek, chapter 1.
7. Trade policy: non-tariff barriers (quantitative restrictions, VERs),
quantitative restrictions, equivalency of quantitative restrictions and tariffs, quantitative restrictions in the conditions of market monopolisation, the influence of the distribution of licences on prosperity, ‘voluntary’ export restraints (VER) – two and three country model, local content requirements,
Literature: textbook, chapter 8,
J. Michałek, chapters 7 and 10.
8. Trade policy: non-tariff barriers (subsidies and dumping), subvention mechanism, tariffs and production subventions, export subventions, strategic export policy, the specificity of subventions applied in agricultural trade, countervailing duties, dumping in the conditions of monopolisation of the domestic market, anti-dumping duties, minimum export requirements
Literature: textbook: chapter 8,
J. Michałek, chapters 8–9.
9. Strategic trade policy (in the conditions of imperfect competition)
Industrial policy in industrialised countries: Protectionism as a form of strategic (pro-export) trade policy meant to intercept profits and achieve the economies of scale (the role of R&D), general analysis of policies in the conditions of oligopoly (Grossman analysis), optimal trade policy depending on the manner of oligopolistic competition (the Brander-Spencer and the Eaton-Grossman models).
Literature: textbook: chapter 11;
J. Michałek, chapter 2, Ch. Marrewijk, chapter 11.
The Brander-Spencer and the Eaton-Grossman models: simplified version according to Marrewijk (copied material).
10. Political economy of trade policy.
Analysis of the goods distribution sector in the conditions of import restrictions, the phenomenon of rent-seeking, a comparison of tariffs and quantitative restrictions for the distribution sector, different approaches to modelling political economy: Ann Kruger’s model and the Findlay-Wellisz model,
Literature: J. Michałek, chapter 11.
lecture - 30 h
preparation to the lecture - 30 h
preparation to the exam - 60 h
total time - 120 h
Type of course
The students after passing exam know:
1. assumptions, structure and conclusions from the trade thoery models (neo classical new trade theory of I generation (Krugman) and II generation with heterogeneous firms (Melitz)
2. mechanisms and implications of main trade policy instruments (tariffs, quantitative restrictions, subsidies, anti-dumping measures)
3. models of strategic trade policy (imperfect competition)
4. neoclassical models of political economy of trade policy
5. key notions regarding new economic geography
Abilities: students should be able to analyze:
1. the determinants of the volume and structure of international trade flows
2. welfare implications for the consumers, producers and fiscal revenues resulting from applications of various trade policy instruments
3. political motivations of governments applying various economically inefficient trade policy instrument and the role played by different interest groups (lobbies)
Students should be able to understand:
4. the causes of international trade flows and globalization of the world economy.
5. the constraints of efficient applicataions of the strategic tarde policy
Students should be able to explain:
6. the significance of empirical analysis for verification of trade theories and policies
7. the roots of agglomeration process in the context of economic integration polices
The basis for the graduation is the written exam at the end of the lecture. It consists of 20 multiple choice questions and 6 open questions. In addition there is premium for regular attendance at the lecture; up to 15 percent of the number of points at the examination.
• Paul R. Krugman, Maurice Obstfeld, Marc Melitz, International Economics, Theory and Policy, Pearson, 202
• C. Marrewijk, International Economics, Oxford University Press, 2012
J.J. Michałek, (2002), Międzynarodowa Polityka handlowa. Mechanizmy ekonomiczne i regulacje międzynarodowe. PWN.
• and other handouts to the lecture available in the electronic formats (PDF) in the intranet.
• K. Gawlikowska-Hueckel, A. Zielińska-Głębocka, Integracja Europejska. Od jednolitego rynku do unii walutowej, Wyd. C.H. Beck, Warszawa 2004;
• J. J. Michałek, W. Siwiński, M. Socha red. naukowa: Polska w Unii Europejskiej. Dynamika konwergencji ekonomicznej, PWN Warszawa 2007;
• J. Francois, K. Reinert, Applied Methods for Trade Policy Analysis, A Handbook, H. Bowen, A. Hollander, J.M. Viaene, Applied International Trade Analysis, Macmillan Press, 1998,
• Brakman S., Garretsen H., van Marrevijk Ch., An introduction to geographical economics, Cambridge U.P., 2003.
Information on level of this course, year of study and semester when the course unit is delivered, types and amount of class hours - can be found in course structure diagrams of apropriate study programmes. This course is related to the following study programmes:
Additional information (registration calendar, class conductors, localization and schedules of classes), might be available in the USOSweb system: