MPE711

Global Trade
and Markets
READINGS

FACULTY OF BUSINESS AND LAW

GUIDE TO THIS READER

You will find in this document the readings that form a part of the material that complements
each weeks lecture slides. The material in this reader can never form a substitute to the
material presented during the lectures. The intent of providing you these readings is to
supplement the concepts you will learn in class with more context and examples.
You will notice that the course covers a wide range of topics; however, the core concepts will
be used repeatedly, and the emphasis of the unit will be on recognising the link between
seemingly varied topics. While some papers in this reader will contain algebra and calculus, it
is okay for you to skim over such sections.
This reader also has a useful secondary purpose in allowing you to read ahead of the lectures.
Browsing through this reader will also help you gain a wider picture of the breadth of options
available to you in choosing your research topic.
It is also advisable that at the end of each week you refer to the key concepts of the current
topic and ensure that you understand them.
I hope this unit will serve you well.

Best wishes,
Aaron Nicholas
(Aaron.Nicholas@deakin.edu.au)

TOPIC ONE: The Free-market and Comparative Advantage

___________________________________________________________________________
Readings:

McTaggart, D., C. Findlay and M. Parkin. 2010. Economics, 6th edition. Pearson.
Chapter 3
Chapter 4
Chapter 12
Chapter 13
Chapter 14
Chapter 15

___________________________________________________________________________
1: The basics of free-market economics
a) Demand and supply
What is the law of demand and supply?
When do demand and supply curves shift?
What is the difference between a movement along and a shift of the curve?
b) Elasticity
What determines the slope of demand and supply curves?
How does elasticity affect prices and quantity as a response to a curve shift?
c) Welfare and Surplus
What is efficiency?
How do we measure efficiency?
d) The efficiency of the free-market
Why is the free-market efficient?
e) The inefficiency of monopolies
Why are monopolies inefficient?
2: Introduction to comparative advantage
a) Absolute versus comparative advantage
What is the difference between absolute and comparative advantage?
Why is comparative advantage a better theory?

TOPIC TWO: Neoclassical Trade Theory

__________________________________________________________________________
Readings:

Salvatore, D. 2007. International Economics, 9th edition. Wiley. Chapter 2: 31-48.

Beveridge, T. 2013. A Primer on Macroeconomics. Business Expert Press. Chapter 8.
Link to reading on comparative advantage
__________________________________________________________________________
1. Opportunity Costs and the Production Possibility Frontier
a) What do differences in the linear, concave, and PPF curves represent?
b) What does the slope of the PPF represent?
2. Terms of trade and specialisation
a)
b)
c)
d)
e)

What are gains from specialisation?

What are terms of trade?
What is the maximum price a country is willing to pay for a good?
What is the minimum price a country is willing to sell a good at?
What determines terms of trade?

3. Factor endowments and the Hecksher-Ohlin model of trade

a) How does the H-O model of trade motivate reasons for comparative advantage?
b) What is the link between the H-O model of trade and the shape of the PPF curve?
4. Preferences and trade
a) Can countries with the same sloped PPF curves trade? Under what conditions?

TOPIC THREE: Trade Policy and Politics

___________________________________________________________________________
Readings:

Baldwin, R. 1989. The Political Economy of Trade Policy. Journal of Economic

Perspectives, 3:119-135.

___________________________________________________________________________
1. Violations of neoclassical trade theory predictions
a) According to Neoclassical trade theory, what are the main reasons that countries
trade?
b) How do we explain violations of prediction in trading patterns made by
Neoclassical trade theory?
2. Trade barriers
a) What are the differences between the VER, production subsidy and import tariff?
3. Reasons for protection
a) Why would a government adopt inefficient trade policies?
4. Coalitions and types of goods
a) What are the four types of goods generated by the characteristics of rivalry and
excludability?
b) What are the advantages and disadvantages of having larger versus smaller groups
in terms of lobbying power and coordination in influencing trade policy?
5. Trade Policy and the Prisoners Dilemma
a) What is the Prisoners Dilemma?
b) What is the most likely outcome of a single-period Prisoners Dilemma?
c) How does the Prisoners Dilemma relate to consumers and trade policy?
d) How does the Prisoners Dilemma relate to trade policy across different countries?

TOPIC FOUR: The Role of Government

___________________________________________________________________________
Readings:

Tsebelis, G. 1995. Decision Making in Political Systems: Veto Players in

Presidentialism, Parliamentarism, Multicameralism and Multipartyism. British
Journal of Political Science, 25:289-325.
Ulbrich, H. 2011. Public Finance in Theory and Practice (second edition). Taylor and
Francis. Chapter 7. Link to reading on externalities
___________________________________________________________________________
1. Political stability and the status quo
a) What is the likelihood of the status quo changing as more veto players are added
to the decision process?
b) What is the likelihood of the status quo changing as the distance between players
are reduced?
c) How do the insights from the above questions apply to democracies and
authoritarian regimes?
2. Property rights and common goods
a) What is the link between property rights and common goods?
b) What changes between the single-period versus multi-period Prisoners Dilemma?
c) Do we always need governments to intervene in cases of non-excludable goods?
d) What are the conditions under which the government should intervene?
3. Externalities
a) What are externalities and why do they justify government intervention?
b) What are the differences between positive and negative externalities in terms of
efficient output production?
4. The Pigouvian tax
a) When should a good be taxed or subsidised?
5. Coases Theorem
a) When should a good not be taxed and left to market forces even when there are
externalities?
b) What is the difference between the Coase solution and Pigouvian tax, both in
terms of feasibility and outcomes?

TOPIC FIVE: Growth and Redistribution

___________________________________________________________________________
Readings:

Ulbrich, H. 2011. Public Finance in Theory and Practice (second edition). Taylor and
Francis. Chapter 5. Link to reading on redistribution
___________________________________________________________________________
1. Solow-Swan (Neoclassical) growth model
a) What is the relationship between economic growth and the rate of economic
growth?
b) What is the role of capital and labour in explaining this relationship?
c) At equilibrium, what should be the growth rate of income and income per capita?
d) What does the Solow-Swan model have to say about economic convergence?
2. Growth and trade
a) What is the effect of growth on production?
b) What is the effect of growth on consumption?
c) What is the overall effect of growth on the quantity of trade?
d) How do large countries influence the terms of trade as they grow?
3. Efficiency, Equality and Pareto Improvements
a) What is a Pareto Improvement?
b) What type of policies result in a Pareto Improvement?
4. The government as insurance
a) How does the government act as an insurer against bad luck?
b) Why do we demand this insurance?
5. Limits on redistribution
a) What are the two main factors that limit the ability of governments to redistribute
wealth to the poor?

TOPIC SIX: Economic Transition and Privatisation

___________________________________________________________________________
Readings:

Roland, G. 2002. The Political Economy of Transition. Journal of Economic

Perspectives, 16: 29-50.
Roland, G. 1994. On the Speed and Sequencing of Privatisation and Restructuring.
The Economic Journal, 104: 1158-1168.
https://www.imf.org/external/pubs/ft/fandd/2000/09/fischer.htm

___________________________________________________________________________
1. What is transition?
a) What are the key reforms required for a country to transition into a market
economy?
b) Who wins and loses from transition?
2. The Big Bang versus the gradual approach
a) What is the logic behind the big bang approach?
b) What are the problems associated with the big bang approach?
c) What are the advantages of the gradual approach?
d) What is the endowment effect?
3. Regulation of natural monopolies
a) What are the characteristics of a natural monopoly?
b) What are the benefits of a monopoly being privately versus publicly owned?
c) What are the ways in which a private monopoly can be regulated?
4. Rent seeking
a) What is rent seeking?
b) How does deadweight loss arise from rent-seeking?

TOPIC SEVEN: Trade Reform and Development

___________________________________________________________________________
Readings:

Rodrick, D. 1992. The Limits of Trade Policy Reform in Developing Countries. The
Journal of Economic Perspectives, 6: 87-105.
Stiglitz, J. 2004. Globalization and Growth in Emerging Markets. Journal of Policy
Modeling, 26: 465-484.

___________________________________________________________________________
1. Export instability
a) What is the relationship between elasticity and export stability?
2. Trade reform and loss-aversion
a) What is the link between loss-aversion and trade reform?
3. Trade reform and the Washington Consensus
a) What is the role of the World Bank and the IMF in debt relief and the Washington
Consensus?
4. Trust and credibility
a) What does a lack of trust and credibility lead to in terms of trade liberalisation?
5. Trade theory with Imperfect Competition
a) How do local import-competing monopolies react to the removal of import
barriers?

TOPIC EIGHT: Economics of Ideas and Technology

___________________________________________________________________________
Readings:

Jones, C. 2002. The Economics of Ideas. Introduction to Economic Growth, WW

Norton & Company: 7895.
Quah, D. 1999. The Weightless Economy in Economic Development. LSE
Economics Department, Centre for Economic Performance Discussion Paper No. 417:
148. (read the first 15 pages)

___________________________________________________________________________
1. Technology and growth
a) How is technology defined and measured?
2. The characteristics of ideas-driven goods
a) What are the six primary characteristics of ideas and ideas-based goods that
differentiate them from other goods?
3. Path dependence
a) What is path dependence and what are its consequences?
4. Intellectual property rights
a) When is digital piracy efficient versus inefficient?
b) What are the benefits and costs of intellectual property rights enforcement?
5. The monopoly nature of knowledge
a) What is the relationship between ideas-driven goods, natural monopolies, and the
convergence hypothesis of growth?
6. Demand and the Weightless Economy
a) Why is demand-side economics of key importance for the success of ideas-driven
goods?

TOPIC NINE: Economics of Migration

___________________________________________________________________________
Readings:

Freeman, R. 2006. People Flows in Globalization. The Journal of Economic

Perspectives, 20: 145-170.

___________________________________________________________________________
1. The international market for labour
a) What are the conditions under which the international market for labour would be
considered efficient versus inefficient?
b) What makes labour different from capital?
2. How are Receiving Countries affected
a) Who wins, and who loses? Does elasticity matter?
b) How does this change when we also consider the market for jobs that are
complementary to the migrant sector?
3. How are Sending Countries affected
a) Who wins, and who loses? Does elasticity matter?
b) How does this change when we also consider the market for jobs that are
complementary to the migrant sector?
c) Are low or high-skilled workers more willing to migrate?
4. Brain drain and gain
a) What are the possible gains from having skilled workers leave the country?

10

The law of comparative

advantage
Dominick Salvatore
Source: Salvatore, D. (2007). The law of comparative advantage. International
Economics (9th ed., pp. 3148). Hoboken, NJ: Wiley.

The political economy of trade

policy
Robert E. Baldwin
Source: Baldwin, R. E. (1989). The political economy of trade policy. Journal of
Economic Perspectives, 3(4), 119135.

Decision making in political

systems
George Tsebelis
Source: Tsebelis, G. (1995). Decision making in political systems: Veto players in
presidentialism, parliamentarism, multicameralism and multipartyism. British Journal of
Political Science, 25(3), 289325.

The political economy of

transition
Grard Roland
Source: Roland, G. (2002). The political economy of transition. Journal of Economic
Perspectives, 16(1), 2950.

On the speed and sequencing of

privatisation and restructuring
Grard Roland
Source: Roland, G. (1994). On the speed and sequencing of privatisation and
restructuring. Economic Journal, 104, 11581168.

The limits of trade policy reform

in developing countries
Dani Rodrik
Source: Rodrik, D. (1992). The limits of trade policy reform in developing countries.
Journal of Economic Perspectives, 6(1), 87105.

Globalization and growth in

emerging markets
Joseph E. Stiglitz
Source: Stiglitz, J. E. (2004). Globalization and growth in emerging markets. Journal of
Policy Modeling, 26(4), 465484.

The economics of ideas

Charles I. Jones
Source: Jones, C. I. (2002). The economics of ideas. Introduction to economic growth
(2nd ed., pp. 7895). New York: W. W. Norton & Company.

The weightless economy in

economic development
Danny Quah
Source: Quah, D. (1999). The weightless economy in economic development (LSE
Economics Department, Centre for Economic Performance Discussion Paper No. 417,
pp. 148). Retrieved October 14, 2011 from
http://eprints.lse.ac.uk/2291/1/The_Weightless_Economy_in_Economic_Development.
pdf

People flows in globalization

Richard B. Freeman
Source: Freeman, R. B. (2006). People flows in globalization. Journal of Economic
Perspectives, 20(2), 145170.

Global Trade and Markets

Cat. No. MPE711XR1