3353: INTB The Economics of Globalization
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INTB 3353: The Economics of Globalization
MIDTERM REVIEW Dr. Amelie Carlton
Clicker Channel 63
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The Midterm is next week.
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The Midterm must be taken Tuesday, October 5th, 2010 from 8:30am-10am in 99% 180. MH
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For the Midterm, you are responsible for reading Chapters 1-8 in the textbook....
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The Midterm is 50 Multiple Choice Questions.
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Chapter 1: The United States in a Global Economy
Introduction:
International Economic Integration Elements of International Economic Integration: The Growth of World Trade Capital and Labor Mobility Three Features of Contemporary Relations Trade and Economic Growth
Chapter 2 International Economic Institutions since World War II Introduction: International Institutions and
Issues since World War II
International Institutions A Taxonomy of International Economic Institutions
The IMF, the World Bank, and the WTO
The IMF and World Bank The GATT, the Uruguay Round, and the WTO Case Study: The GATT Rounds
The Role of International Economic Institutions
The Definition of Public Goods Maintaining Order and Reducing Uncertainty Case Study: Bretton Woods
Week 2- Chapter 1 and Chapter 2
Openness Indicators Capital and Labor Mobility International Institutions Bretton Woods Conference IMF Financial Assistance Nonrival goods and services Institutions Preventing Free Riders
Openness Indicators
The index of openness is the ratio of trade to GDP
Index of Openness = (Exports +Imports)/GDP
Openness does not reveal a countrys trade policies or define its barriers to trade
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Capital and Labor Mobility Two important points regarding international capital flows: 1. Savings and investment are highly correlated 2. Technology improvements increase financial capital flows
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International Institutions
Institutions: a set of rules governing behavior, whether written or not
Formal institutions: Written sets of rules that explicitly state what is and is not allowed Informal institutions: Customs or traditions that define appropriate behavior, but without legal enforcement
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TABLE 2.1 A Taxonomy of International Economic Institutions, with Examples
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TABLE 2.1 (continued) A Taxonomy of International Economic Institutions, with Examples
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Bretton Woods Conference
Bretton Woods meetings between the Allies in July 1944 Help countries avoid the mistakes of the 1920s and 1930s
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IMF Financial Assistance
A Financial crisis occurs when a country runs out of foreign exchange reserves, which are a major currency or gold that can be used to pay for imports and international borrowings In the event of a financial crisis, Members borrow against IMF quotas IMF conditionality: Requirement (Or Change) for the borrowing member to carry out economic reforms in exchange for a loan
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Nonrival Goods and Services
Public goods are:
Nonexcludable: The normal price mechanism does not work as a way of regulating access to them Nonrival (or nondiminishable): They are not diminished or reduced by consumption
Private markets fail to supply public goods because of free riding: People have no incentive to pay for a public good because they cannot be excluded from its consumption even if they dont pay
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Institutions Preventing Free Riders
Two important functions of international economic institutions to reduce free riding are: - Maintaining order in international
economic relations - Reducing uncertainty
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2-20
Chapter 3: Comparative Advantage and the Gains from Trade
Introduction: The Gains from Trade
Adam Smith and the Attack on Economic Nationalism A Simple Model of Production and Trade Absolute Productivity Advantage and the Gains from Trade Case Study: Comparative Advantage in a Single Natural Resource The Production Possibilities Curve Relative Prices The Price Line or Trade Line The Gains from Trade Domestic Prices and the Trade Price
Comparative Productivity Advantage and the Gains from Trade
Absolute and Comparative Productivity Advantage
Gains from Trade with No Absolute Advantage Case Study: Changing Comparative Advantage in the Republic of Korea, 19602007
Comparative Advantage and Competitiveness
Chapter 4: Comparative Advantage and Factor Endowments
Introduction: The Determinants of Comparative Advantage
Modern Trade Theory The Heckscher-Ohlin (HO) Trade Model Gains from Trade in the HO Model
Trade and Income Distribution
The Stolper-Samuelson Theorem The Specific Factors Model Case Study: Winners and Losers under NAFTA
Empirical Tests of the Theory of Comparative Advantage
Extension of the Heckscher-Ohlin Model Case Study: U.S.-China Trade Foreign Trade vs. Foreign Investment Off-Shoring and Outsourcing Case Study: Off-Shoring by U.S. Multinational Corporations Migration and Trade
The Impact of Trade on Wages and Jobs
Week 3- Chapter 3 and Chapter 4
Gains from Trade Mercantilism Absolute Advantage PPC Trade Lines Absolute and Comparative Advantage The Hecksher-Ohlin Theorem The Stolper-Samuelson Theorem
Gains from Trade
The improvement in national welfare is known as the gains from trade When Economists talk about the gains from trade:
Benefits of trade outweigh the losses
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Mercantilism
In 1776, Adam Smith published the first modern statement of economic theory, An Inquiry into the Nature and Causes of the Wealth of Nations The Wealth of Nations attacked mercantilismthe system of nationalistic economics that dominated economic thought in the 1700s
Mercantilism- economic philosophy that favors strict limits on imports and strong support for exports
Smith proved wrong the belief that trade was a zero sum gamethat the gain of one nation from trade was the loss of another Voluntary exchange (trade) is a positive sum game both nations gain
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Absolute Advantage
and the Gains from Trade
Question: What happens to a country that does not have absolute productivity advantage in anything? Answer: Even if a country does not have any goods with an absolute productivity advantage, it can still benefit from trade
-The idea that nations benefit from trade has nothing to do with whether a country has an absolute advantage in producing a particular good
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Production Possibilities Curve
A production possibilities curve (PPC) shows the tradeoffs a country faces when choosing between two goods
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The Price Line or Trade Line
Autarky: The complete absence of trade; all nations can only consume the goods they produce at home Trade allows countries to raise their consumption Example:
If the opportunity cost of steel in Canada is 3 loaves of bread per ton, and in the U.S. 0.67 loaves per ton, both countries can consume more by trading Gains from trade will occur if the price of steel settles somewhere between the opportunity costs in Canada and the U.S.
3.0 (loaves/ton) >
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> 0.67 (loaves/ton)
Absolute and Comparative Productivity Advantage Absolute productivity advantage: Held by a country that produces more of a certain good per hour worked than another Comparative productivity advantage (or comparative advantage): Held by a country that has lower opportunity costs of producing a good than its trading partners do Comparative advantage allows a country that lacks absolute advantage to sell its products abroad
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Important!
The basis for free trade is the concept of comparative advantage!
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The Hecksher-Ohlin Theorem
The HO model states that a countrys factors of production (a countrys endowments of inputs) are used to make each good give rise to productivity differences between countries
Factor abundance versus factor scarcity: When a country enjoys a relative abundance of a factor, the factors relative cost is less than in countries where the factor is relatively scarce A countrys comparative advantage lies in the production of goods that use relatively abundant factors Predicts which goods will be exported.
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FIGURE 4.1 The United States Production Possibilities Curve with Increasing Costs
PPC is curved because production costs are increasing.
As with constant costs, the tradeoff between bread and steel is equal to the slope of the PPC; however, since the PPC is curved, tradeoff is different at each point of production
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The Stolper-Samuelson Theorem
Predicts the income distribution effects of trade Assumptions: Labor earns wages proportionate to its skill level Owners of capital earn profits Landowners earn rents The amount of income earned per unit of input depends on both the demand for inputs and the supply of inputs (demand for an input = derived demand) If an output is in high demand, its price is high and the inputs used to produce it receive higher returns
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The Impact of Trade on Wages and Jobs
In the short-run, trade may (1) reduce jobs in an industry that is not competitive vis--vis foreign industries and (2) increase jobs competitive in industries In the medium- and long-run, trade has very little effect on the number of jobs
The abundance or scarcity of jobs is a function of (1) labor market policies, (2) incentives to work, and (3) government macroeconomic policies
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Chapter 5: Beyond Comparative Advantage
Introduction: More Reasons to Trade Intraindustry Trade
Measures of Intraindustry Trade Characteristics of Intraindustry Trade The Gains from Intraindustry Trade Case Study: United States and Canada Trade
Trade and Geography
Geography, Transportation Costs, and Internal Economies of Scale External Economies of Scale Trade and External Economies
Industrial Policy
Industrial Policy and Market Failure Industrial Policy Tools Problems with Industrial Policies
U.S. Industrial Policies
Case Study: Subsidizing Commercial Aircraft
Chapter 6: The Theory of Tariffs and Quotas
Introduction: Tariffs and Quotas
Analysis of a Tariff Consumer and Producer Surplus Prices, Output, and Consumption Resource Allocation and Income Distribution Case Study: A Comparison of Tariff Rates Other Potential Costs Case Study: The Uruguay and Doha Rounds Types of Quotas The Effect on the Profits of Foreign Producers Hidden Forms of Protection Case Study: Intellectual Property Rights and Trade
Analysis of Quotas
Week 4- Chapter 5 and Chapter 6
Intraindustry and Interindustry Trade Characteristics of Intraindustry Trade Grubel-Lloyd Index Internal Economies of Scale Consumer and Producer Surplus Figure 6.3 The Effects of Tariffs Figure 6.4 Average Tariffs Rates
Intraindustry and Interindustry Trade
Intraindustry trade: International trade of products made within the same industry (steelfor-steel, bread-for-bread, Nokia Smartphonefor-Apple iPhone)
Intraindustry trade is growing increasingly important in international trade especially between industrial countries
Interindustry trade: International trade of products between two different industries (steelfor-bread)
5-38 Copyright 2011 Pearson AddisonWesley. All rights reserved.
Characteristics of Intraindustry Trade
Intraindustry trade:
Relies on economies of scale*
Not based on comparative advantage since it consists of the export and import of similar products
Most trade is Intraindustry trade thus economies of scale are important.
5-39 Copyright 2011 Pearson AddisonWesley. All rights reserved.
Grubel-Lloyd Index
We measure Intraindustry Trade with an Index
Grubel Lloyd (GL) index:
GLi = 1 Xi Mi Xi + Mi
If Xi (exports) = Mi( Imports) then GL = 1; then all trade is intraindustry
Many European countries and the United States have a large share of their total trade that is intraindustry
5-40 Copyright 2011 Pearson AddisonWesley. All rights reserved.
Internal Economies of Scale
One of the distinguishing characteristics of intraindustry trade is the presence of internal economies of scale with falling average costs over a relatively large range of output.
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Consumer and Producer Surplus
There are two key concepts in the analysis of the impact of tariffs Consumer surplus: value received by consumers in excess of the price they pay (can be measured only if the demand curve is known) Producer surplus: value received by producers in excess of the minimum price at which they are willing to produce (can be measured only if the supply curve is known)
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FIGURE 6.1 Consumer and Producer Surplus
CS
PS
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FIGURE 6.3 The Effects of a Tariff
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FIGURE 6.4 Average Tariff Rates, 1986-2007
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Chapter 7: Commercial Policy
Introduction: Commercial Policy and Jobs Protection in the European Union, the United States, and Japan Direct Costs and Jobs Saved in Agriculture, Clothing, and Textiles The Logic of Collective Action Case Study: Agricutural Subsidies Why Nations Protect Their Industries The Labor Argument The Infant Industry Argument The National Security Argument The Retaliation Argument Case Study: Traditional Knowledge and Intellectual Property The Politics of Protection in the United States Countervailing Duties Antidumping Duties Escape Clause Relief Section 301 and Special 301 Case Study: Economic Sanctions
Chapter 8: International Trade and Labor and Environmental Standards Introduction: Income and Standards
Setting Standards: Harmonization, Mutual Recognition, or Separate? Case Study: Income, Environment, and Society Labor Standards Defining Labor Standards Case Study: Child Labor Labor Standards and Trade Evidence of Low Standards as a Predatory Practice Case Study: The International Labor Organization Trade and the Environment Transboundary and Non-Transboundary Effects Case Study: Trade Barriers and Endangered Species Alternative to Trade Measures Labels for Exports Requiring Home Country Standards Increasing International Negotiations
Week 5- Chapter 7 and Chapter 8
Table 7.1 and National Welfare Loss Table 7.2 and Cost Per Job Saved The Logic of Collective Action Why Nations Protect Their Industries The Politics of Protection in the United States Setting Standards
CAMBRIDGE September 20, 2010
The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months
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TABLE 7.1 EU, Japanese, and U.S. Protection in Three Sectors (Mid-1990s, Millions of US$)
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TABLE 7.1 (continued) EU, Japanese, and U.S. Protection in Three Sectors (Mid-1990s, Millions of US$)
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TABLE 7.2 Jobs Saved through Tariffs and Quotas
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TABLE 7.2 (continued) Jobs Saved through Tariffs and Quotas
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The Logic of Collective Action
Given that the costs of tariffs and quotas are high to consumers, why do consumers tolerate them? Mancur Olsons Logic of Collective Action
The costs of tariffs and quotas are borne by a great many people: everyone pays a little for protection The benefits of protection is concentrated in a few industries: few benefit alot from protection Thus, there is an asymmetry in the incentives to oppose the policy: those benefiting from protection have much greater incentives than those hurt by it to lobby for it
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Why Nations Protect Their Industries: The Labor Argument The Labor Argument: Protection must be used against imports from countries where wages are much lower -Problem: Does not consider differences in productivity between different workforces: As productivity rises, so will wages
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Why Nations Protect Their Industries: The National Security Argument National Security Argument: Certain industries must be protected in order to guard national security (military security, cultural values) -Problems: (1) Vital mineral resources, for example, can be purchased cheaply abroad during peacetime; and (2) how to assess the effects of, say, U.S. television programs on Canadian culture?
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The Politics of Protection in the United States: Main Mechanisms
Protection is obtained through (1) direct action by the president (e.g., VERs) (2) four types of legal procedures
Countervailing duties Antidumping duties Escape clause relief Section 301 retaliation
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Countervailing Duties
Countervailing duty: A tariff that is granted to a U.S. industry that has been hurt by a foreign countrys subsidizing its firms
Subsidies allow foreign firms to sell their products at lower prices; countervailing duty seeks to counter the effect of the subsidy Problem: defining subsidy is subjective Uruguay Round defined subsidies as (1) a direct loan or transfer, (2) preferential tax treatment, (3) the supply of goods or services other than general infrastructure, or (4) income and price supports
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Section 301 and Special 301
Section 301: A section of the U.S. 1974 Trade Act that requires the U.S. Trade Representative (USTR) to take action against any nation that persistently engages in unfair trade practices
U.S. defines the meaning of unreasonable and unfair trade practices Action is launched by a request for negotiations with the country in question
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Section 301 and Special 301 (cont.)
Special 301: Requires the USTR to monitor property rights enforcement around the world -In 2005, the USTR surveyed 90 countries and identified 52 as lacking adequate enforcement or denying market access
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Setting Standards: Harmonization, Mutual Recognition, or Separate?
Most trade agreements and WTO commitments allow for the combination of:
Harmonization of standards: Two or more countries adopt a common set of standards Mutual recognition of standards: Countries maintain their own standards, but accept the standards of others as valid and sufficient Separate standards: Countries maintain their own standards and refuse to recognize the standards of others
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Do you have a Midterm in-class next week?
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