Economics 514 International Economics Fall 2016 (27 September 2016 Draft) Dr. Stokes

Economics 514 International Economics Fall 2016 (27 September 2016 draft) Dr. Stokes

Houston H. Stokes

E-Mail:

Basic Texts [1] or [2] and [3]:

Either

1. International Economics,Robert Dunn & John Mutti 6th edition 2004 Routledge

A basic text that covers well the graphical analysis.

1B. A later edition International Economics Theo Eicher John Mutti Michelle Thurnovsky Routhledge 2009 can also be used

or

2. International Economics, Robert Feenstra and Alan Taylor Worth Publishers 2009

Note: [1] is more advanced. [2] has a good discussion of current economic issues that will be discussed in class.

Key More Mathematical Reference. Obtainable from Amazon.

3. . Advanced International Trade, Robert Feenstra, First Edition Princeton University Press 2004.

3B. Advanced International Trade, Robert Feenstra, Second Edition Princeton University Press 2015. Edition one has more tables and would could be used in the course in place of edition 2.

Note: Students with copies of Feenstra [3]may being them to all exams and use any information in the book or any information that they write into the book. This is in addition to the one page two sides note page. The project part of Economics 514 will use Chapter 4 of Feenstra extensively.

The lower level Feenstra-Taylor [2] book discusses much of the material in the more advanced Feenstra but using graphical methods. Dunn and Mutti is somewhat more advanced than Feenstra-Taylor[2].

Many key datasets have been collected by Feenstra and are available at:

The class web page gives extracts of these datasets that can be used with Stata and B34S.

The treatment in this text will be useful for those students wanting to do further work in Trade Theory. The level of math in this volume is higher than [1]. Many key points from this book will be covered in class. If only this book was obtained, many of the graphical analysis of the basics would not be covered.

Primary 'Classic' Reference Works:

4. International Economics, Robert Mundell, Macmillian, 1968 Available on lineat:

Also available as a link under my Data Links Page. We will be working with the chapters in this book that deal with the material in his 'Pure Theory of International Trade', American Economic Review, Vol 50 1960 pages 67-110, a classic paper

Important Survey Articles in the Handbook of International Trade Series

4. Handbook of International Economics Volumes 1,3 Chapters 1-12 in Volume 1. Note that as of this year all the Handbook of Economics are on line under Science Direct. You should download these articles and reread them as the course proceeds. As the material in Dunn and Mutti and Feenstra is mastered, these articles will make more sense. Key articles by Chapter are listed below.

5A. "The positive Theory of International Trade," by Ronald Jones and Peter Neary Chapter 1

5B. "The Normative Theory of International Trade," W. Max Corden. Chapter 2

5C. "Higher Dimensional Issues in Trade Theory," Wilfred Ethier, Chapter 3.

5D. "Testing Trade Theories and Predicting Trade Flows," Alan Deardorff, Chapter 10

5E. "Trade Policies in Developing Countries," Anne Krueger, Chapter 11

5F. "Trade Policies in Developed Countries," Robert Baldwin, Chapter 12

5G. "Increasing Returns, Imperfect Competition and the Positive Theory of International Trade," Paul Krugman, Chapter 24

5H. "Technology and Trade," Gene Gross man and Elhanan Helpman, Chapter 25

5I. "International Trade Theory: The Evidence," Edward Leamer and James Levinsohn, Chapter 26.

5J. "Estimating the Effects of Trade Policy," Robert Feenstra, Chapter 30

5K. "Regional Economic Integration," Richard Baldwin and Anthoney Venables, Chapter 31

5L."Linking the Theory with the Data: That is the Core Problem of International Economics," Edward Leamer. Chapter 67 in Handbook of Econometrics Volume 6A.

Classic Book on Less Developed Countries

6. Johnson, Economic Policies Toward Less Developed Countries, Praeger 1967. This book will be of interest to those students having an interest in development topics.

Regional Free Trade Area Proposal

7. Kosobud, R. F. & H. H. Stokes "Trade Peace in the Pacific by Means of a Free Trade Area," Journal of International Affairs, 28(1), 1974, pp 54-66. On line under my web page as paper 10.

Important Article by Feenstra and Hanson

8. Feenstra, Robert and Gorden Hanson "The Impact of Outsourcing and High-Technology Capital on Wages: Estimates for the United States 1979-1990" Quarterly Journal of Economics Vol 114 # 3 (August 1999) pp 907-940. The article is on the class ftp. It expands on what is in Feenstra [3] chapter 4.

Grading: Students will be graded on one midterm for 30%, the final for 40% the project for 30%. Students will be allowed to bring notes on two sheets into the exams as well as the Feenstra (3) Text.

Important article by Pierce and Schoot

9. Pierce, Justin and Peter Schott. “The Surprisingv Swift Decline of US Manufacturing Employment” American Economic Review 2016 106(7) 1632-1662. On Class FTP page. This paper is an alternative view to what is in Feenstra and Hanson (1999).

Purpose of the Course and necessary background: The basic purpose of this course is to introduce the student to the Pure Theory of International Trade with an emphasis on bothpolicy considerations and empirical applications of the theory. The course will emphasize the application of both mathematical and graphical methods of analysis. This course is taught at the PhD graduate level using calculus, micro economics at the level of Economics 501-502 and econometrics at the level of Economics 535. After first surveying the field and developing the relevant graphical models (See (1-2)), mathematical models are developed and discussed (See (3) and the on-line class notes which may be updated during the course.) A major objective is to see how this theory can be applied and to set the stage for students to develop future empirical research topics. The project, that starts with replication and ends with student improvements and discussion of the Feenstra outsourcing models, introduces the students to major research on an important topic. While knowledge of Stata and B34S is desirable, code scripts will be supplied to get you going. Students unfamiliar with nonlinear modeling should consult the relevant material on-line under economics 538. Students should consult the supplied "road map" frequently to understand how the various topics fit together and well as obtain an idea of future research areas.

1. Introduction

[1]Mutti & Dunn Chapter 1

[2] Feenstra-Taylor Chapters 1

[3] Feenstra Chapter 1

[5A] Jones and Neary, "The Positive Theory of International Trade"

[5B] Corden, "The Normative Theory of International Trade,"

[5L] Leamer, "Linking the Theory with the Data: That is the Core Problem of International

Economics,"

Note: The survey articles in Jones and Neary and Corden need to be read a number of times. At this stage in the course they will be hard to understand.

2. Why Nations Trade: Classical and Modern Theory?

[1] Patterns of Trade Dunn & Mutti Chapter 2

[1] Trade between dissimilar countries Dunn & Mutti Chapter 3

[2] Feenstra-Taylor Chapters 1-4

[3] Feenstra Chapters 2-3

3. Technical Concepts and the Gains From Trade- Outsourcing

[1]Trade between similar countries Dunn & Mutti Chapter 4

[2] Feenstra-Taylor Chapters 5,7

[5C] Ethier "Higher Dimensional Issues in Trade Theory"

Note: This reference extends the simple 2 by 2 models in a number of directions

[5C] Deardorff "Testing Trade Theories and Prediction Trade Flows"

Note: good reference for those wanting to do research in these areas

[5G] Krugman "Increasing Returns, Imperfect Competition and the Positive Theory of International Trade"

[3] Feenstra Chapter 4

****************

Midterm Exam # 1

****************

4. The Theory of Protection - Arguments for Protection

[1] Tariffs and other barriers to trade Dunn & Mutti Chapter 5

[1] Arguments for Protection Dunn & Mutti Chapter 6

[1] Regional Blocks: Preferential trade Liberalization

[2] Feenstra-Taylor 8 & 9

[3] Feenstra 7

[5K] Baldwin and Venables "Regional Economic Integration"

5. Commercial Policy

[1] Commercial Policy : history and recent controversies Dunn & Mutti Chapter 8

[2] Feenstra-Taylor Chapters 8-11

[5F] Baldwin "Trade Policies in Developed Countries"

[7] Kosobud, R. F. & H. H. Stokes "Trade Peace in the Pacific by Means of a Free Trade Area," Journal of International Affairs, 28(1), 1974, pp 54-66

6. General Equilibrium Approach to the Pure Theory

[4] Mundell, Chapters 1-4 In International Economics Note: This reading includes the important article "The Pure Theoryof International Trade."

7. Trade of Less Developed Countries

[1]Regional blocs and preferential trade liberalization Dunn & Mutti Chapter 7

[6]Johnson, Economic Policies Toward Less Developed Countries

8. International Mobility of Labor and the Welfare Aspects of Trade

[1]International mobility of labor and capital Chapter 9

[5D] Deardorff, "Testing Trade Theories and Predicting Trade Flows"

[5E] Krueger, "Trade Policies in Developing Countries"

[5F]Baldwin, "Trade Policies in Developed Countries"

8. Recent Developments and a discussion of empirical issues.

[1] Dunn & Mutti Chapter 20

[3] Feenstra Chapter 9

[5H] Grossman and Helpman "Technology and Trade"

[5I] Leamer and Levinsohn International Trade Theory: The Evidence

[5J] Feenstra "Estimating the Effects of Trade Policy"

***************

Final

***************

Project (For those who have the background.)

The effect of outsourcing on the relative pattern of wages is important both from a theoretical/empirical perspective and in the current political debate on the effect of the global economy on the US economy. Feenstra (2004) Chapter 4 which is partly based on and the key paper by Feenstra-Hanson [8] provide a starting point of the analysis. The class notes chapter 5 discusses some of this material and shows preliminary results that both replicate some of the findings reported in Feenstra tables 4.4 and 4.5 and suggest that there may be nonlinearities in the model not detected by Feenstra.

You are asked to attempt to replicate the results in tables 4.4 and 4.5 in Feenstra (2004) using the Stata setups provided on the class web page. Discuss the models estimated.

Next you are asked to test these models for specification problems. Note the relatively low values reported in Table 4.4 for the change in the Nonproduction Wage Share.

In models estimated without weighted least squares, listed in the assignment sheet, the is even lower! Why? Test results using random data are also shown.

Can you improve these values? Define "improve.? You should look at MARSPLINE, GAM and Projection pursuit models available in B34S. You should carefully justify your answers.

The final product should be a carefully written report of up to 20 pages of text and tables that in many cases point to possible fruitful further work.

Note: If this paper is carefully written it will be useful in both job interviews and refining your applied skills. All computer output should be placed in tables. The raw computer listings should be placed in an appendix to your report.

Computer help.

Files in the class ftp location and on smith in

/usr/local/lib/hhsfiles/

include

Feenstra_ch4.mac B34S Feenstra files. On windows copy into C:\b34slm\lib

data_Chap4.dta Stata Feenstra data files

In the class ftp location are:

run1.b34 B34S tests of unweighted model 4.4

run2.b34 B34S tests of unweighted models 4.5

Problem_4_2.do Stata tests of 4.4 model

Problem_4_3.do Stata testS of 4.5 model

Feenstra-Hanson.pdf Key QJE Article

run1.out b34s output from run1.b34

run2.out b34s output from run2.b34

After you have replicated the results in Feenstra Table 4.4 and 4.5 and estimated and reported the models without weighting what can you conclude? After running the battery of nonlinearity tests what can you conclude?

What changes do you propose in the estimated models? Why?

Stata help. The example code

stata < Problem_4_2.do > mylog

Will run Stata on smith

b34s run1

Will run b34s on smith

Example Code from run1.b34

/;

/; Uses Align to insure 447 obs

/;

b34sexec options ginclude('Feenstra_ch4.mac') member(table4_4A);

b34srun;

/; b34sexec data set dropmiss; b34srun;

b34sexec matrix;

/; call loaddata;

call get(chanwsh dlky dly dsimat1a dofsh dofsh1 htsh_exp htsh_exa

ci dhtsh );

big=

'chanwsh dlky dly dsimat1a dofsh dofsh1 htsh_exp htsh_exa ci dhtsh';

call align(argument(big));

mod4_42=' chanwsh dlky dly dsimat1a dofsh htsh_exp';

mod4_42=' chanwsh dlky dly dsimat1a dofsh htsh_exp';

mod4_43=' chanwsh dlky dly dsimat1a dofsh1 htsh_exa';

mod4_44=' chanwsh dlky dly dsimat1a ci dhtsh';

n=namelist(argument(big));

do i=1,10;

call describe(argument(n(i)) :print);

enddo;

/; call tabulate(argument(mod4_42));

/; call tabulate(argument(mod4_43));

/; call tabulate(argument(mod4_44));

call olsq( argument(mod4_42) :print :white);

call gamfit( argument(mod4_42) :print );

call marspline(argument(mod4_42) :print);

call ppreg(argument(mod4_42) :print);

call olsq( argument(mod4_43) :print :white);

call gamfit( argument(mod4_43) :print );

call marspline(argument(mod4_43) :print);

call ppreg(argument(mod4_43) :print);

call olsq( argument(mod4_44) :print :white);

call gamfit( argument(mod4_44) :print );

call marspline(argument(mod4_44) :print);

call ppreg(argument(mod4_44) :print);

b34srun;

Note: If Feenstra_ch4.mac is on your computer, unless it is in c:\b34slm\lib, do not use ginclude.

Note: The Stata code [aw=share] weights the regression including the constant by multiplying buy . What effect does this transformation have if the variables are not appropriate? Note that Rats and B34S and other software divide the right and left hand sides by .

Example code from Problem _4_2.do

set mem 300m

log using log_4_2.log,replace

use c:\feenstra_course\chap4\data_Chp4,clear

* use /usr/local/lib/hhsfiles/data_Chp4,clear

drop if year==1972|year==1987

drop if sic72==2067|sic72==2794|sic72==3483

egen wagebill=sum(pay), by(year)

gen share=pay/wagebill

sort sic72 year

by sic72: gen lagshare=share[_n-1]

gen ashare=(share+lagshare)/2

by sic72: gen lagnwsh=nwsh[_n-1]

gen chanwsh=(nwsh-lagnwsh)*100/11

gen wchanwsh=chanwsh*ashare

gen wdlky=dlky*ashare

gen wdly=dly*ashare

gen wdsimat1a=dsimat1a*ashare

gen wdsimat1b=dsimat1a*ashare

gen diffout=dsimat1a-dsimat1b

gen wdiffout=(dsimat1a-dsimat1b)*ashare

gen wcosh_exp=dofsh*ashare

gen htsh_exp=dhtsh-dofsh

gen whtsh_exp=(dhtsh-dofsh)*ashare

gen wcosh_exa=dofsh1*ashare

gen htsh_exa=dhtsh1-dofsh1

gen whtsh_exa=(dhtsh1-dofsh1)*ashare

gen wcosh=ci*ashare

gen whtsh=dhtsh*ashare

* Check with the first column of Table 4.4 *

tabstat wchanwsh wdlky wdly wdsimat1a wcosh_exp whtsh_exp wcosh_exa whtsh_exa wcosh whtsh, stats(mean)

tabstat chanwsh dlky dly dsimat1a dofsh htsh_exp dofsh1 htsh_exa ci dhtsh, stats(mean)

* Reproduce the rest of the columns in Table 4.4 *

* replicates table 4.4 col 2

regress chanwsh dlky dly dsimat1a dofsh htsh_exp [aw=ashare], cluster (sic2)

* test ols

regress chanwsh dlky dly dsimat1a dofsh htsh_exp

regress chanwsh dlky dly dsimat1a dofsh1 htsh_exa [aw=ashare], cluster (sic2)

* test ols

regress chanwsh dlky dly dsimat1a dofsh1 htsh_exa

regress chanwsh dlky dly dsimat1a ci dhtsh [aw=ashare], cluster (sic2)

* test ols

regress chanwsh dlky dly dsimat1a ci dhtsh

* To instead distinguish narrow and other outsourcing, we can reproduce column (1) of table III in Feenstra and Hanson, 1999 *

tabstat wchanwsh wdlky wdly wdsimat1b wdiffout wcosh_exp whtsh_exp wcosh_exa whtsh_exa wcosh whtsh, stats(sum)

* Reproduce the rest of the columns in Table III *

regress chanwsh dlky dly dsimat1b diffout dofsh htsh_exp [aw=ashare], cluster (sic2)

regress chanwsh dlky dly dsimat1b diffout dofsh1 htsh_exa [aw=ashare], cluster (sic2)

regress chanwsh dlky dly dsimat1b diffout ci dhtsh [aw=ashare], cluster (sic2)

log close

* clear

exit

Example Code to Test WLS with "junk" data. Test case shows how WLS can give "significant"

but misleading answers. WLS is shown with Rats and Stata. Note that Stata uses a non standard weighting system. B34S first build a random left hands side varuiable and a randon right hand sicde variable and a random vector of "weights" to forma "junk" model. Next OLS and weignted least squares are run in three software systems. The results speak for themselves.

/;

/; B34S-Stata-Rats

/;

b34sexec matrix;

* tests weighted regression ;

* illustrates how weighted least squares can give "significance";

n=10000;

k=4;

y=rn(array(n:));

w=abs(rn(array(n:)));

x=rn(array(n,k:));

/;

/; OLS Model

/;

/; quick way to go to weighted least squares assuming

/; vector or matrix input

call olsq(y x :print :savex);

ww=1./afam(sqrt(w));

%xnew=transpose(transpose(afam(%x))*ww);

%ynew=afam(%y)*ww;

call print('Weighted Least Squares':);

call olsq(%ynew %xnew :noint :print);

/; pass data to test WLS with Stata and Rats

call dmfput(y,w :file 'file_1.dmf'

:member file1

:comment 'y and w for weighted regression test'

);

call dmfput(x :file 'file_2.dmf'

:member file2

);

b34srun;

/;

/; test reading the save

/;

b34sexec data file('file_1.dmf') filef=fdmf

dmfmember(file1)

;

b34srun;

b34sexec data file('file_2.dmf') filef=fdmf

dmfmember(file2)

;

b34srun;

/;

/; Merge the two DMF files

/;

b34sexec merge

file1('file_1.dmf')

file2('file_2.dmf')

file3('file_3.dmf')

member1(file1) member2(file2) member3(file3)

outfmt=formatted

/; comment('Test of effect of Weighted Regression')

;

b34srun;

/;

/; illustrate a read of a DMF into the matrix Command

/;

b34sexec matrix;

call dmfget(:file 'file_3.dmf' :member file3 :print);

b34srun;

/;

b34sexec data file('file_3.dmf') filef=fdmf; b34srun;

/;

/; This is the best way to go

/;

b34sexec options open('statdata.do') unit(28) disp=unknown$ b34srun$

b34sexec options clean(28)$ b34srun$

b34sexec options open('stata.do') unit(29) disp=unknown$ b34srun$

b34sexec options clean(29)$ b34srun$

b34sexec pgmcall idata=28 icntrl=29$

stata$

pgmcards$

// uncomment if do not use /e

// log using stata.log, text

// describe

regress y m1*

regress y m1* [aw=1/w]

b34sreturn$

b34seend$

b34sexec options close(28); b34srun;

b34sexec options close(29); b34srun;

b34sexec options

dodos('stata /e do stata.do stata.log');

b34srun;

b34sexec options npageout

writeout('output from stata',' ',' ')

copyfout('stata.log')

dodos('erase stata.do','erase stata.log','erase statdata.do') $

b34srun$

/$ user places RATS commands between

/$ PGMCARDS$

/$ note: user RATS commands here

/$ B34SRETURN$

/$

b34sexec options open('rats.dat') unit(28) disp=unknown$ b34srun$

b34sexec options open('rats.in') unit(29) disp=unknown$ b34srun$

b34sexec options clean(28)$ b34srun$

b34sexec options clean(29)$ b34srun$

b34sexec pgmcall$

rats

pcomments('* ',

'* Data passed from B34S(r) system to RATS',

'* ',

"display @1 %dateandtime() @33 ' Rats Version ' %ratsversion()"

'* ') $

PGMCARDS$

*

linreg y

# constant m1col__1 m1col__2 m1col__3 m1col__4

linreg(spread=w) y

# constant m1col__1 m1col__2 m1col__3 m1col__4

b34sreturn$

b34srun $

b34sexec options close(28)$ b34srun$

b34sexec options close(29)$ b34srun$

b34sexec options

/$ dodos(' rats386 rats.in rats.out ')

dodos('start /w /r rats32s rats.in /run')

dounix('rats rats.in rats.out')$ B34SRUN$

b34sexec options npageout

WRITEOUT('Output from RATS',' ',' ')

COPYFOUT('rats.out')

dodos('ERASE rats.in','ERASE rats.out','ERASE rats.dat')

dounix('rm rats.in','rm rats.out','rm rats.dat')

$

Results

B34SI Matrix Command. d/m/y 15/ 8/10. h:m:s 21:18:32.

=> * TESTS WEIGHTED REGRESSION $

=> * ILLUSTRATES HOW WEIGHTED LEAST SQUARES CAN GIVE "SIGNIFICANCE"$

=> N=10000$

=> K=4$

=> Y=RN(ARRAY(N:))$

=> W=ABS(RN(ARRAY(N:)))$

=> X=RN(ARRAY(N,K:))$

=> CALL OLSQ(Y X :PRINT :SAVEX)$

Results for the OLS Model of 10,000 observations on "junk" data.

Ordinary Least Squares Estimation

Dependent variable Y

Centered R**2 1.283800318883199E-003

Adjusted R**2 8.841139958492355E-004

Residual Sum of Squares 10083.5816512905

Residual Variance 1.00886259642727