Midterm+Study+Guide - ARE 138 Midterm Study Guide...

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ARE 138 Midterm Study Guide International Trade in Primary Commodities I) Primary Commodities – refers to tangible commodities that are: a. Derived from the land or sea b. Unprocessed or only slightly processed c. Usually are inputs to product of other goods II) Characteristics of Primary Commodities a. Production depends on natural endowments of a region i. Ex: Land, water, wildlife, forests, mineral deposits, climate ii. These tend to be specific to certain locations iii. In Trade Theory, factors or production are generally classified as “mobile” or “immobile” 1. Mobile – where they can move place to place 2. Immobile – fixed in location iv. Market Implications 1. Production is highly regional , creating a strong impetus for trade 2. Many markets are subject to large Random Shocks b. Primary goods tend to be homogenous in nature i. Implications unbranded ii. In the absence of government intervention, these markets will tend to be highly competitive global competition on basis of price 1. Exception – some mining deposits iii. Standardized Contracts are possible – specify quantity, quality, date, price III) Why study international trade in primary goods? a. Major component of world trade – 11% of exports; 12% of imports b. Important in affecting US trade balance i. Value of US agriculture exports 10% > imports 3% ($9.2 billion surplus) ii. Value of US mineral exports 2% < imports 14% ($187.6 billion deficit) c. Localized nature of production primary goods dominate local economies of certain natives or states i. Ex: Nations in Africa top 3 commodity exports are >90% of total 1. Congo – copper; Ivory Coast – cocoa ii. Ex: Iowa – corn d. Environmental effects i. Water issues, erosion, pollution, pesticides ii. Over-fishing, extinctions iii. Deforestation mudslides iv. Global warming Modeling Trade in a Single Commodity I) Autarky – No trade a. Pmax from demand curve b. Pmin from supply curve HANDOUT 1 GRAPHS FROM LECTURE 2
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II) Export Supply and/or Import Demand Functions may be “kinked” a. Kink occurs when one of the parties drops out of the market i. When suppliers stop producing demand kinked ii. When consumers stop purchasing supply kinked b. Above Pmax Sx = Sus i. We are priced out of our own product ii. Rare in the US, but happens a lot in poverty countries where they mine for diamonds and gold b/c domestic consumers can barely afford necessities, so they don’t buy the expensive diamonds and gold c. Pmax to Pw Sx = Sus – Dus d. Pw to Pmin Dm = Dus – Sus e. Below Pmin Dmn = Dus III) Suppose the Rest of World (RoW) is “large” relative to our market a. We are a “ small country i. When a small country isn’t allowing trade, but then opens its borders, we assume that it doesn’t affect the world price (Large Country Assumption) ii. Pw = Pbarw IV) 2 “Large ” trading partners a. If trade opens Pw will lie between P1* and P2* V) Government may impose an import tariff or quota a. Common type of market intervention producers ask for protection against cheaper imports i.
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