International and EU Economics:

2. Introduction to the
Global (EU) Economy

Lecturer & tutor: Zheng Wang

Office hours: Wed 1.30-3.30pm, Wharfe 222
Email: Z.Wang@hull.ac.uk

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1. Introduction to the global economy

Different modes of globalisation

Trade in goods & services
Trade in financial assets
Migration (international movement of
workers)
FDI (international movement of
physical capital)

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Trade Flows, 2006

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Foreign Born Migrants, 2005

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FDI Flows, 2006

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Countries different engagement in world economy

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Globalisation cant be taken for granted

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History and politics in trade

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Globalisation is complex

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Central questions in international trade theory

What causes international trade?

Various theories of international trade which isolate
specific mechanisms of how international trade works
Technological differences (Ricardian model)
Endowment differences (Heckscher-Ohlin model)
Increasing returns to scale models (Krugman)
What are the welfare effects from trade?
For countries as a whole, individual groups etc.
Different types of gains from trade
What are the welfare effects of specific trade policies?
Tariffs, quotas, anti-dumping policies
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 Hall of fame of international trade theory

David Ricardo (1817)

Developed the concept of
comparative advantage (CA).
CA is the perennial insight that
trade can be beneficial even if
one country is better at
producing all goods.
Provided arguably the first
rigorous model of economics
framed in his labour theory of
value.
Marxian economic theory is
based on Ricardos labour
theory of value.

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 Hall of fame of international trade theory

John Stuart Mill (1848)

Developed the modern cost
formulation of comparative
advantage.
Established the relationship
between the terms of trade
and countries production
costs.

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 Hall of fame of international trade theory

Gottfried von Haberler

(1930)
Developed the modern
opportunity cost formulation of
comparative advantage which
freed Ricardos insight about
comparative advantage from its
labour value formulation.
Introduced the concept of a
production possibility curve
which we will use throughout
this module.
Initiated the specific factors
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 Hall of fame of international trade theory
Eli Heckscher (1919) and
Bertil Ohlin (1933)
Heckscher asked how
international trade affects factor
income and set the conceptual
foundation of the Heckscher-
Ohlin theory.
Ohlins work provided the
genesis of the Heckscher-Ohlin
model where factor endowment
differences explain trade.
Ohlin received in 1977 the Nobel
Prize for the Heckscher-Ohlin
theory.
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 Hall of fame of international trade theory

Paul Samuelson
(1930s/40s/50s)
Key architect of neoclassical
economics and the neoclassical trade
model in its mathematical
formulation.
Pioneered the 2x2x2 Heckscher-
Ohlin formulation.
Provided the rigorous analytical
formulation of the gains from trade
argument. We will study an empirical
test of the general gains from trade
formulation in this module.
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 Hall of fame of international trade theory

Paul Krugman
(1970s/80s/90s)
Key architect of the new trade
theories under increasing returns
to scale.

Founder of the new economic

geography literature based on his
monopolistic competition model.

Received the Nobel Prize in 2008

for his work on international
trade and economic geography.
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