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International trade and investment summary 1
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International trade and investment summary Krugman, P.R., Obstfeld, M. and Melitz, M.J. (2018), International Trade. Theory and Policy, 11th edition Week 1
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CH 1 KrugmanThe United States relies less on international trade than almost any other country.
A fundamental problem in international economics is determining how to produce an
acceptable degree of harmony among the international trade and monetary policies of
different countries in the absence of a world government that tells countries what to do.
International capital markets differ in important ways from domestic capital markets. They
must cope with special regulations that many countries impose on foreign investment; they
also sometimes offer opportunities to evade regulations placed on domestic markets.
CH 2 Krugman
Gross domestic product (GDP) = measures the total value of all goods and services
produced in an economy. There is a strong empirical relationship between the size of a
country’s economy and the volume of both its imports and its exports.
gravity model of world trade:
large economies tend to spend large amounts on imports because they have
large incomes. → tend to attract large shares of other countries’ spending
because they produce a wide range of products → the trade between any two
economies is larger—the larger is either economy.
All estimated gravity models show a strong negative effect of distance on international trade;
typical estimates say that a 1 percent increase in the distance between two countries is
associated with a fall of 0.7 to 1 percent in the trade between those countries. This drop
partly reflects increased costs of transporting goods and services.
Service offshoring (outsourcing) =when a service previously done within a country is shifted
to a foreign location.
CH 3 Krugman
Comparative advantage in producing a good = if the opportunity cost of producing that good
in terms of other goods is lower in that country than it is in other countries.
Trade between two countries can benefit both countries if each country exports the goods in
which it has a comparative advantage.
Ricardian model : international trade is solely due to international differences in the
productivity of labor.
The economy will specialize in the production of cheese if the relative price of cheese
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