Econ_433_s10_lec4 - Advanced International Trade Lecture 4...

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Advanced International Trade Lecture 4 Prof. Tybout January 21, 2010
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2 Lecture outline Trade theory basics Terms of trade The Ricardian model with increasing returns The specific factors model: an extreme case Relevant reading: Feenstra and Taylor, chapter 3. First homework assignment is posted; due next Tuesday, January 26.
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Terms of trade The terms of trade affect the gains from trade. If you want big gains from trade, you need a large difference between autarky prices and trading prices. Raul Prebisch and Hans Singer (early 1950s) : Terms of trade are systematically worsening for developing countries—these countries should be striving for self-sufficiency. 3
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4 Terms of trade Why expect declining terms of trade? With much of the developing world dumping primary products on world markets, there would be downward pressure on the relative price of these goods. Demand for primary products is income inelastic. Also, dropping the price of primary products doesn’t generate much extra demand, and output expansion leads to rapid decline in price. There is resistance to southern penetration of northern markets; anti-dumping laws, multi-fiber agreements, etc., keeping demand low and inelastic.
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Terms of trade Prebisch and Singer : Between 1875 and WWI, the terms of trade for developing countries fell 30 percent. numerator : the price of primary products imported by Britain, including freight costs denominator : price of manufactured products exported by Britain, exclusive of freight costs. What caused the drop in transport costs?
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This note was uploaded on 01/27/2010 for the course ECON 433 taught by Professor Staff during the Spring '08 term at Pennsylvania State University, University Park.

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Econ_433_s10_lec4 - Advanced International Trade Lecture 4...

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