Chapter 1. Introduction
to
International Trade Theory
Hyun-Hoon Lee
Professor
Kangwon National University
1
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
2
https://www.wto.org/english/res_e/booksp_e/wtr13-2b_e.pdf
1. Trend of World Trade
■ Growth of World trade
Source: WTO, World Trade Report 2013.
1. Trend of World Trade
■ Growth of World trade
Source: WTO, World Trade Report 2013.
1. Trend of World Trade
■ Growth of Korea’s trade
Source: Bank of Korea
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?
2. 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
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?
3. Fundamental Reasons for
International Trade
Top 10 export items of Korea (%)
Source : KOTIS
14
3. Fundamental Reasons for
International Trade
Top 10 import items of Korea
Source : KOTIS
15
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
4. What are the Consequences (Benefits
and Costs) of International Trade?
■ Benefits of 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?
.15
■ Relation between Growth Rates of GDP and Trade
VNM
.1
CHN
CHL
SGP
PER
MYS
IDN KOR
NZL
.05
AUS
USA
TWN
CAN
MEX
PHLTHA
HKG
PNG
0
JPN
0
.05
.1
Trade_growth
GDP_growth
.15
Fitted values
.2
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.
5. Who are the major trade partners
Top 10 export markets for Korea
1970
1980
1990
2000
2010
2012
Rank
Country
%
Country
%
Country
%
Country
%
Country
%
Country
%
1
U.S.
47.3
U.S.
26.3
U.S.
29.8
U.S.
21.8
China
25.1
China
24.5
2
Japan
28.1
Japan
17.4
Japan
19.4
Japan
11.9
U.S.
10.7
U.S.
10.7
3
Hong Kong
3.3
Saudi Arabia
5.4
Hong Kong
5.8
China
10.7
Japan
6.0
Japan
7.1
4
Germany
3.3
Germany
5.0
Germany
4.4
Hong Kong
6.2
Hong Kong
5.4
Hong Kong
6.0
5
Canada
2.3
Hong Kong
4.7
Singapore
2.8
Taiwan
4.7
Singapore
3.3
Singapore
4.2
6
Netherlands
1.6
Iran
3.5
U.K.
2.7
Singapore
3.3
Taiwan
3.2
Vietnam
2.9
7
U.K.
1.6
U.K.
3.3
Canada
2.7
U.K.
3.1
Germany
2.5
Taiwan
2.7
8
Vietnam
1.5
Indonesia
2.1
Taiwan
1.9
Germany
3.0
India
2.3
Indonesia
2.5
9
Singapore
1.3
Netherlands
2.0
France
1.7
Malaysia
2.0
Mexico
2.1
India
2.2
10
Sweden
0.9
Canada
2.0
Indonesia
1.7
Indonesia
2.0
Indonesia
1.9
Russia
2.0
Total
91.4
Source : KOTIS
71.6
72.9
68.8
62.4
64.8
22
5. Who are the major trade partners
Top 10 import markets for Korea
1980
1990
2000
2010
2012
Rank
Country
%
Country
%
Country
%
Country
%
Country
%
1
Japan
26.3
Japn
26.6
Japan
19.8
China
16.8
China
15.5
2
U.S
21.9
U.S
24.3
U.S
18.2
Japan
15.1
Japan
12.4
3
Saudi Arabia
14.8
Germany
4.7
China
8.0
U.S
9.5
U.S
8.3
4
Kuwait
7.9
Australia
3.7
Saudi Arabia
6.0
Saudi Arabia
6.3
Saudi Arabia
7.6
5
Australia
3.1
China
3.2
Australia
3.7
Australia
4.8
Qatar
4.9
6
Ira
2.9
Saudi Arabia
2.5
Indonesia
3.3
Germany
3.4
Australia
4.4
7
Germany
2.9
Indonesia
2.3
Malaysia
3.0
Indonesia
3.3
Kuwait
3.5
8
Malaysia
2.1
Malaysia
2.3
Arab Emirate
2.9
Arab Emirate
2.9
Germany
3.4
9
Canada
1.7
Canada
2.1
Taiwan
2.9
Qatar
2.8
Arab Emirate
2.9
10
U.K
1.4
U.K
1.8
Germany
2.9
Kuwait
2.6
Taiwan
2.7
Total
84.8
Source : KOTIS
73.4
70.8
67.4
65.8
23
5. Who are the major trade partners

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.
6. What are the Consequences (Benefits
and Costs) of Trade Policy?
■ Free trade vs. non-free trade
■ Tariff and non-tariff barriers
■ Multilateralism vs. regionalism
7. Introduction to the course
■ 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, 2013.

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 2406
7. 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
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
7. Introduction to the course
■ 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.
What is “To Study”(학문)?
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: http://cc.kangwon.ac.kr/~hhlee/
Hyun-Hoon Lee
hhlee@kangwon.ac.kr