Learning objectives
Chapter 1 – The World Economy
To get an overview of the current state of the world economy.
To understand the distinction between real and monetary analysis, as well as between partial
equilibrium and general equilibrium analysis.
To become familiar with the World Bank’s global regions.
To identify powerful nations in terms of land area, population, and income levels.
To know the difference between gross domestic product and gross national income.
To understand the importance of correcting for price differences (purchasing power parity) when
comparing income levels between different countries.
To distinguish between developing and economically advanced countries, partially based on income
per capita levels.
To identify strong trading nations and distinguish between import and export flows.
Chapter 3 – The Balance of Payments
To know the main principles of national income accounting.
To understand why savings are equal to investments in a closed economy and how their difference is
reflected in the current account balance for an open economy.
To know that a surplus in the current account is a net capital and financial outflow.
To understand that private savings can be used for either domestic investment, acquiring foreign
wealth, or purchasing new government debt.
To understand the difficulties of comparing the economic power of firms with the economic power of
countries.
To know the Feldstein–Horioka puzzle and its relation to capital market integration.
To know the difference between endogenous and exogenous variables and to understand the basic
econometrics problems with running a regression to test a model.
Chapter 4 – Technology: the classical approach
To be able to distinguish between absolute advantages and comparative advantages.
To understand how differences in technology can be the driving force for trade flows based on
comparative advantages.
To know what a production possibility frontier is and how it relates to technology.
To be able to distinguish between an autarky equilibrium and a free trade equilibrium.
To know the principles of constant returns to scale and perfect competition.
To understand the terms of trade and the gains from trade.
To be able to empirically measure comparative advantage using the Balassa index.
To know the difference between goods and services, and to understand the changing role of
agricultural production and services production in the development process.
Chapter 5 – Technology: the neoclassical approach
To become familiar with the size of intra- and inter-regional global trade flows.
To understand the basic neoclassical production structure.
To know what isoquants are and how to minimize costs.
To understand the connections between constant returns to scale and perfect competition.
To distinguish between products based on capital intensity (capital–labor ratios).
To know and understand the four main neoclassical results (factor price equalization, Stolper–
Samuelson, Rybczynski, and Heckscher–Ohlin)
To be able to derive factor price equalization and Stolper–Samuelson with the Lerner diagram, making
use of unit value isoquants and the unit value iso-cost line
Chapter 6 – Factor abundance and trade
To understand how differences in relative factor abundance lead to trade flows.
To know and understand the Rybczynski and Heckscher–Ohlin propositions.
To know the Edgeworth box and understand the relationship between the contract curve and the
production possibility frontier.
, To understand how the Edgeworth box determines the distribution of capital and labour, which
enables us to derive the Rybczynski proposition.
To know how the marginal rate of substitution (MRS) and marginal rate of transformation (MRT) are
related to the structure of equilibrium under autarky and free trade.
To know what homothetic demand is and what it implies for the demand functions.
To be able to translate the Rybczynski proposition into Rybczynski lines in order to understand the
Heckscher–Ohlin proposition.
To become familiar with empirical tests of factor abundance (Leontief and missing trade).
Chapter 7 – Imperfect competition
To be able to identify imperfectly competitive markets.
To understand how monopoly power leads to mark-up pricing.
To understand how mark-up pricing leads to deviations between the marginal rate of substitution and
the marginal rate of transformation, and thus to sub-optimal outcomes.
To know what reaction curves are and how to derive the Cournot equilibrium.
To understand how more competitors erodes market power; international competition may thus lead
to pro-competitive gains from trade.
To understand how costly trade of identical product may nonetheless increase welfare.
Chapter 8 – Intra-industry trade
To know the difference between intra- and inter-industry trade.
To be able to measure the extent of intra-industry trade using the Grubel–Lloyd index.
To understand the relationships between increasing returns to scale and market power.
To understand the main demand structure of the Dixit–Stiglitz model.
To realize how increasing returns to scale limit the number of available varieties.
To know what monopolistic competition is and how market size determines the number of available
varieties.
To understand how trade extends the market and increases the number of varieties.
To know how trade in final goods leads to love-of-variety gains from trade (Krugman).
To know how intermediate goods trade leads to production externality gains from trade (Ethier).
Chapter 10 – Trade organizations and policy
To understand the basic developments that have led to the current international economic order.
To appreciate the role of the General Agreement on Tariffs and Trade (GATT), which later became the
World Trade Organization (WTO), in multilateral trade negotiations and understand why these
negotiations are so difficult and take so much time.
To know and understand the three main GATT/WTO principles.
To understand the size and complexity of the United Nations institutions and the role UNCTAD plays in
this framework.
To know what the OECD is and what it does.
To understand the many ways in which trade restrictions can be imposed, through tariffs, quotas,
voluntary export restraints, and so on.
To know what an effective tariff is and how it should be calculated.
To understand the basic partial equilibrium welfare effects of tariffs for consumers, producers, and the
government, both for small and large countries.
To understand the basic general equilibrium welfare effects of tariffs, how to measure opportunity
costs, and how tariffs lead to a double distortion.
To be able to derive an offer curve and to know what a trade indifference curve is.
To be able to derive the ‘optimal’ tariff rate using offer curves and to understand the damaging role of
international retaliation in determining this tariff rate.
Chapter 11 – Strategic trade policy
To have an understanding of the number of WTO trade disputes (about 20–25 per year).
To know that most disputes are about anti-dumping and countervailing duties, other issues being
safeguards and sanitary barriers.
, To know that large advanced countries and some large emerging markets are most actively involved in
trade disputes, both as respondent and as claimant.
To know that small Caribbean nations and developing nations tend to be involved in disputes as third
parties.
To understand the heterogeneity of disputes in terms of global versus partial policies, size of trade
flows involved, and the estimated changes (value and volume) of disputed new policies.
To understand how market powers affect the consequences of imposing a tariff, in particular how
raising a tariff if no goods are imported may still have negative welfare effects.
To understand why quotas are more restrictive than tariffs if firms have market power.
Chapter 13 – Heterogeneous firms
To know that in many sectors only a fraction of firms engage in trading activities.
To know that exporting firms are larger, employ more workers, use more capital, pay higher wages, use
more skilled workers, and are more productive.
To know that similar observations hold for importing firms and multinational firms.
To understand the main structure of the heterogeneous firms model in which the least productive
firms (below the viability cut-off level) exit the market.
To understand that more productive firms charge lower prices and have higher production, revenue,
and profits than less productive firms.
To understand how (costly) firm entry determines the viability cut-off level endogenously.
To understand how trade raises competition and thus increases the viability cut-off level.
To know why only the most productive firms self-select in export activities and expand production; to
understand why only the most productive exporting firms have higher profits.
To know that trade raises welfare through two novel welfare effects: (i) the least productive firms exit
the market and (ii) production volume shifts toward the most productive firms.
To know and understand the productivity ranking of firms: exiting firms—domestic firms—exporting
firms—multinational firms.
Chapter 14 – Multinational firms
To be able to distinguish between extensive and intensive margins of trade.
To understand the enormous size differences between firms in trade flows.
To know the increasingly dominant role played by multinationals in trade flows.
To understand the main stylized facts of multinationals in trade and investment flows.
To know the difference between parents and affiliates and between source and destination countries.
To understand the basic requirements of the OLI framework for becoming a multinational.
To understand how transport costs and plant-level fixed costs create a proximity–concentration trade-
off which determines how firms service foreign markets.
To understand why multinational firms are particularly active if countries are similar in size and factor
endowments and why exporting is dominant if they are very different.
To understand how differences in firm productivity creates firms that produce only for the domestic
market, firms that also export, and firms that become multinationals.
To know that empirical evidence supports the proximity–concentration trade-off.
Chapter 1 – The World Economy
To get an overview of the current state of the world economy.
To understand the distinction between real and monetary analysis, as well as between partial
equilibrium and general equilibrium analysis.
To become familiar with the World Bank’s global regions.
To identify powerful nations in terms of land area, population, and income levels.
To know the difference between gross domestic product and gross national income.
To understand the importance of correcting for price differences (purchasing power parity) when
comparing income levels between different countries.
To distinguish between developing and economically advanced countries, partially based on income
per capita levels.
To identify strong trading nations and distinguish between import and export flows.
Chapter 3 – The Balance of Payments
To know the main principles of national income accounting.
To understand why savings are equal to investments in a closed economy and how their difference is
reflected in the current account balance for an open economy.
To know that a surplus in the current account is a net capital and financial outflow.
To understand that private savings can be used for either domestic investment, acquiring foreign
wealth, or purchasing new government debt.
To understand the difficulties of comparing the economic power of firms with the economic power of
countries.
To know the Feldstein–Horioka puzzle and its relation to capital market integration.
To know the difference between endogenous and exogenous variables and to understand the basic
econometrics problems with running a regression to test a model.
Chapter 4 – Technology: the classical approach
To be able to distinguish between absolute advantages and comparative advantages.
To understand how differences in technology can be the driving force for trade flows based on
comparative advantages.
To know what a production possibility frontier is and how it relates to technology.
To be able to distinguish between an autarky equilibrium and a free trade equilibrium.
To know the principles of constant returns to scale and perfect competition.
To understand the terms of trade and the gains from trade.
To be able to empirically measure comparative advantage using the Balassa index.
To know the difference between goods and services, and to understand the changing role of
agricultural production and services production in the development process.
Chapter 5 – Technology: the neoclassical approach
To become familiar with the size of intra- and inter-regional global trade flows.
To understand the basic neoclassical production structure.
To know what isoquants are and how to minimize costs.
To understand the connections between constant returns to scale and perfect competition.
To distinguish between products based on capital intensity (capital–labor ratios).
To know and understand the four main neoclassical results (factor price equalization, Stolper–
Samuelson, Rybczynski, and Heckscher–Ohlin)
To be able to derive factor price equalization and Stolper–Samuelson with the Lerner diagram, making
use of unit value isoquants and the unit value iso-cost line
Chapter 6 – Factor abundance and trade
To understand how differences in relative factor abundance lead to trade flows.
To know and understand the Rybczynski and Heckscher–Ohlin propositions.
To know the Edgeworth box and understand the relationship between the contract curve and the
production possibility frontier.
, To understand how the Edgeworth box determines the distribution of capital and labour, which
enables us to derive the Rybczynski proposition.
To know how the marginal rate of substitution (MRS) and marginal rate of transformation (MRT) are
related to the structure of equilibrium under autarky and free trade.
To know what homothetic demand is and what it implies for the demand functions.
To be able to translate the Rybczynski proposition into Rybczynski lines in order to understand the
Heckscher–Ohlin proposition.
To become familiar with empirical tests of factor abundance (Leontief and missing trade).
Chapter 7 – Imperfect competition
To be able to identify imperfectly competitive markets.
To understand how monopoly power leads to mark-up pricing.
To understand how mark-up pricing leads to deviations between the marginal rate of substitution and
the marginal rate of transformation, and thus to sub-optimal outcomes.
To know what reaction curves are and how to derive the Cournot equilibrium.
To understand how more competitors erodes market power; international competition may thus lead
to pro-competitive gains from trade.
To understand how costly trade of identical product may nonetheless increase welfare.
Chapter 8 – Intra-industry trade
To know the difference between intra- and inter-industry trade.
To be able to measure the extent of intra-industry trade using the Grubel–Lloyd index.
To understand the relationships between increasing returns to scale and market power.
To understand the main demand structure of the Dixit–Stiglitz model.
To realize how increasing returns to scale limit the number of available varieties.
To know what monopolistic competition is and how market size determines the number of available
varieties.
To understand how trade extends the market and increases the number of varieties.
To know how trade in final goods leads to love-of-variety gains from trade (Krugman).
To know how intermediate goods trade leads to production externality gains from trade (Ethier).
Chapter 10 – Trade organizations and policy
To understand the basic developments that have led to the current international economic order.
To appreciate the role of the General Agreement on Tariffs and Trade (GATT), which later became the
World Trade Organization (WTO), in multilateral trade negotiations and understand why these
negotiations are so difficult and take so much time.
To know and understand the three main GATT/WTO principles.
To understand the size and complexity of the United Nations institutions and the role UNCTAD plays in
this framework.
To know what the OECD is and what it does.
To understand the many ways in which trade restrictions can be imposed, through tariffs, quotas,
voluntary export restraints, and so on.
To know what an effective tariff is and how it should be calculated.
To understand the basic partial equilibrium welfare effects of tariffs for consumers, producers, and the
government, both for small and large countries.
To understand the basic general equilibrium welfare effects of tariffs, how to measure opportunity
costs, and how tariffs lead to a double distortion.
To be able to derive an offer curve and to know what a trade indifference curve is.
To be able to derive the ‘optimal’ tariff rate using offer curves and to understand the damaging role of
international retaliation in determining this tariff rate.
Chapter 11 – Strategic trade policy
To have an understanding of the number of WTO trade disputes (about 20–25 per year).
To know that most disputes are about anti-dumping and countervailing duties, other issues being
safeguards and sanitary barriers.
, To know that large advanced countries and some large emerging markets are most actively involved in
trade disputes, both as respondent and as claimant.
To know that small Caribbean nations and developing nations tend to be involved in disputes as third
parties.
To understand the heterogeneity of disputes in terms of global versus partial policies, size of trade
flows involved, and the estimated changes (value and volume) of disputed new policies.
To understand how market powers affect the consequences of imposing a tariff, in particular how
raising a tariff if no goods are imported may still have negative welfare effects.
To understand why quotas are more restrictive than tariffs if firms have market power.
Chapter 13 – Heterogeneous firms
To know that in many sectors only a fraction of firms engage in trading activities.
To know that exporting firms are larger, employ more workers, use more capital, pay higher wages, use
more skilled workers, and are more productive.
To know that similar observations hold for importing firms and multinational firms.
To understand the main structure of the heterogeneous firms model in which the least productive
firms (below the viability cut-off level) exit the market.
To understand that more productive firms charge lower prices and have higher production, revenue,
and profits than less productive firms.
To understand how (costly) firm entry determines the viability cut-off level endogenously.
To understand how trade raises competition and thus increases the viability cut-off level.
To know why only the most productive firms self-select in export activities and expand production; to
understand why only the most productive exporting firms have higher profits.
To know that trade raises welfare through two novel welfare effects: (i) the least productive firms exit
the market and (ii) production volume shifts toward the most productive firms.
To know and understand the productivity ranking of firms: exiting firms—domestic firms—exporting
firms—multinational firms.
Chapter 14 – Multinational firms
To be able to distinguish between extensive and intensive margins of trade.
To understand the enormous size differences between firms in trade flows.
To know the increasingly dominant role played by multinationals in trade flows.
To understand the main stylized facts of multinationals in trade and investment flows.
To know the difference between parents and affiliates and between source and destination countries.
To understand the basic requirements of the OLI framework for becoming a multinational.
To understand how transport costs and plant-level fixed costs create a proximity–concentration trade-
off which determines how firms service foreign markets.
To understand why multinational firms are particularly active if countries are similar in size and factor
endowments and why exporting is dominant if they are very different.
To understand how differences in firm productivity creates firms that produce only for the domestic
market, firms that also export, and firms that become multinationals.
To know that empirical evidence supports the proximity–concentration trade-off.
