W1. What are the costs associated with international trade and how do these costs arise?
2. Use economic theory to explain empirical evidence that few firms are involved in international trade and that trade is highly concentrated in a limited number of firms.
3. “Most firms tend to trade with only one country and trade only one product.” Discuss, using economic theory to support your arguments.
Guidelines for this question:
To answer this question use economic concepts and diagrammatic analysis (as appropriate). Use examples, cases and other evidence to illustrate the arguments you make.
Guidelines for Question
• Refer to the reading list posted on Canvas to inform your discussion or, better, conduct your own research!
• You need to demonstrate a clear understanding of the relevant theories – this is very important
• The use of examples/cases will help you establish a link between theoretical framework and observed evidence and illustrate the arguments and claims you make
• “Nations do not trade; it is firms that trade. The simple truth makes it clear that understanding the firm-level facts is essential to good policy making.” Mayer and Ottaviano (2007)
• Part 1. You need to think about costs specifically related to international trade not production more generally
• Transport costs and costs that arise because companies need to adapt the product to certain foreign markets (e.g. for packaging or marketing)
• What other barriers to trade exist?
• For parts 2 and 3. Be sure to provide an overview of relevant theories i.e. theories that explain international trade between firms across countries and trade patterns at the firm level
• The key is to focus on the relatively small number of firms involved in trade i.e. explaining the concentration of trade in a small number of firms
• To what extent does the % of exporters vary by home market size?
• Are firms within large free trade areas (e.g. the EU) more likely to trade internationally?
• Use diagrammes, data and real examples (make the most of the extra material available to you on Canvas but also elsewhere)
